NGK Insulators (5333 / 5333 JP)

3 December 21 Asia Pacific/Japan Equity Research Glass and Ceramics / OVERWEIGHT Rating (from Neutral) OUTPERFORM* Price (2 Dec 1, ) 1,292 Target price ( ) (from 1,35) 1,5¹ Chg to TP (%) 16.1 Market cap. ( bn) 421.96 (US$ 5.1) Enterprise value ( bn) 349.52 Number of shares (mn) 326.6 Free float (%) 15.1 52-week price range 2164-1151 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. Research Analysts Shinya Yamada 813 455 991 shinya.yamada@credit-suisse.com NGK Insulators (5333 / 5333 JP) UPGRADE RATING Upgrade to OUTPERFORM; exhaust gas filter business alone makes NGK an attractive investment Event: We upgrade our rating on NGK Insulators from Neutral to OUTPERFORM and increase our target price from 1,35 to 1,5. The rating change is largely because we expect NGK Insulators to beat the downward revision it made to guidance. Investment case: We upgrade the stock for four reasons: (1) we expect NGK to beat earnings guidance, which it has lowered; (2) we forecast stronger demand for its mainstay ceramic products as auto markets recover in China and Europe, and new emissions standards apply to construction machinery; (3) NGK has cut its projections for the power business, but we forecast a recovery in insulator demand in China from FY3/12; and (4) we believe NGK will announce plans to produce NaS batteries overseas. Our overall earnings estimates have changed only slightly because we have revised up our forecasts for ceramic products, but lowered those for the power business. We expect OP to grow a strong 32% YoY in FY3/12. Catalysts/risks: Catalysts include 3Q results confirming that earnings are ahead of target, and auto demand recovering in China and Europe key markets for NGK s exhaust gas filters. Earnings and share price risks include a struggling global auto market and a strong yen. Valuation: We base our target price on our FY3/12 EPS forecast and a P/E of 15x, the average for consensus estimates of rivals Ibiden and Johnson Matthey the world-leading catalyst manufacturer. Share price performance 4 2 Price (LHS) Rebased Rel (RHS) Dec-8 Apr-9 Aug-9 Dec-9 Apr-1 Aug-1 The price relative chart measures performance against the Japan TOPIX index which closed at 877.21 on 2/12/1 On 2/12/1 the spot exchange rate was 84.2/US$1 4 2 Performance Over 1M 3M 12M Absolute (%) 11.1-2.3-32.4 Relative (%) 1.7-8.8-33.8 Financial and valuation metrics Year 3/1A 3/11E 3/12E 3/13E Revenue ( bn) 235.5 26. 281.5 33.5 Operating profit ( bn) 23.5 33. 43.5 51. Recurring profit ( bn) 24.9 33. 44.5 52.5 Net income ( bn) 17.8 25. 32. 38. EPS ( ) 54.53 76.55 97.98 116.35 Change from previous EPS (%) n.a. 4.2 1.9.8 Consensus EPS ( ) n.a. 75.34 88.65 EPS growth (%) -27.2 4.4 28. 18.8 P/E (x) 23.7 16.9 13.2 11.1 Dividend yield 1.2 1.5 1.9 2.2 EV/EBITDA(x) 8.4 6.7 5.2 4.3 P/B (x) 1.4 1.4 1.3 1.2 ROE(%) 6.1 8.2 1. 11. Net debt/equity (%) net cash net cash net cash net cash, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

3 December 21 1. Investment rating We upgrade our rating on NGK Insulators from Neutral to OUTPERFORM and increase our target price from 1,35 to 1,5. We upgrade the stock for the following four reasons: (1) We expect the company to outperform its earnings projections, which it has revised down. (2) Demand is likely to grow for mainstay ceramic products as auto markets recover in China and Europe, and new emissions standards are applied to construction machinery. (3) In the power business, where the company has lowered projections, we expect insulator demand to pick up in China from FY3/12. (4) We look for management to announce overseas production plans for NaS batteries. Reason (1): NGK Insulators revised down its projections for the power business when announcing 1H FY3/11 results, and lowered FY3/11 OP guidance from 34bn to 3bn, which sent the share price sharply lower. We believe a strong performance by the ceramic products business is likely to result in overall OP of 33bn, close to the company s original target. Investors are likely to return to the stock if it turns out that the downward revision was unnecessary. Reason (2): NGK s share price is closely correlated with auto markets in China and Europe (Figures 1 2) because ceramic products make the largest contribution to OP. The correlation with these markets stems from China s position as the world s largest market for gasoline-engine vehicles and Europe s position as the world s largest market for diesel-engine vehicles. Auto sales have been falling in Europe since Germany ended its cash-for-clunkers incentives in winter 29, but we expect sales to normalize in 211. In China, inventory adjustments took place in 1H 21, but the market has started to recover as they take effect. We expect stricter emissions standards to push up demand for exhaust gas filters across all markets. In 211, European emission standards Euro 5 are set to fully apply to the European passenger car market, while new regulations will apply to off-road vehicles including construction machinery in Japan, the US and Europe. Figure 1: Growth in auto sales volume in China and NGK Insulator s relative share price (%) 14 12 YoY % (LHS) 3M MA (LHS) NGK's relative share price (RHS) (1/4=1) 14 13 1 8 6 4 2-2 -4 7/1 7/5 7/9 8/1 8/5 8/9 9/1 9/5 9/9 1/1 1/5 1/9 12 11 1 9 8 7 6 5 Source: Thomson Reuters NGK Insulators (5333 / 5333 JP) 2

3 December 21 Figure 2: Growth in passenger vehicle sales volume in Europe and NGK Insulator s relative share price (%) 4 3 2 1 YoY % (LHS) 3M MA (LHS) NGK's relative share price (RHS) (1/4=1) 14 13 12 11 1 (1) (2) (3) 7/1 7/5 7/9 8/1 8/5 8/9 9/1 9/5 9/9 1/1 1/5 1/9 9 8 7 6 5 Source: Thomson Reuters Reason (3): NGK Insulators lowered its earnings projections partly because of the 21 decline in Chinese investment in power generation. However, we expect investment to pick up from 211, which will be the first year of China s next five-year plan. Reason (4): The company cut its sales target for NaS batteries substantially, and we see little prospect for a recovery in demand in the near term if the yen remains strong. However, if there is little change in the yen exchange rate, this could encourage management to commit to setting up overseas production plants. We believe an announcement along these lines would likely reignite interest in NaS batteries, an NGK business in which investors seem to have lost interest. Comparing NGK Insulators on a P/E basis with the two direct rivals to its mainstay ceramic products business is a good way of valuing the company, in our view. The two rivals are Ibiden and Johnson Matthey the world s leading maker of exhaust emission catalysts. Historically, the three stocks have traded on similar P/Es (Figure 3), but NGK Insulators is currently trading on the lowest multiple, based on FY3/12 EPS estimates. We therefore see upside potential as its share price strongly lags those of its two rivals (Figures 4 5). Figure 3: P/E trends ( ) 7 6 Johnson Matthey Ibiden NGK Insulators 5 4 3 2 1 /4 1/4 2/4 3/4 4/4 5/4 6/4 7/4 8/4 9/4 1/4 11/4E Source: Thomson Reuters, Bloomberg consensus, Credit Suisse estimates NGK Insulators (5333 / 5333 JP) 3

3 December 21 Figure 4: Share prices (5/1=1) 6 5 Johnson Matthey Ibiden NGK Insulators 4 3 2 1 5/1 5/7 6/1 6/7 7/1 7/7 8/1 8/7 9/1 9/7 1/1 1/7 Source: Thomson Reuters Figure 5: NGK Insulators share price performance relative to Ibiden 13 12 11 1 9 8 Source: Thomson Reuters 7 9/1 9/3 9/5 9/7 9/9 9/11 1/1 1/3 1/5 1/7 1/9 1/11 NGK Insulators (5333 / 5333 JP) 4

3 December 21 2. Earnings trends and business structure NGK Insulators main earnings driver is its ceramic products division (Figure 6). There were high expectations for its power business, particularly NaS batteries, but so far the business has made little contribution to profit. We believe overall OP is recovering from a bottom in FY3/1. Consistently high profits have placed the company in a cash-rich position, with cash and deposits exceeding borrowings (Figure 7). The company is likely to continue to raise dividend payments each year, from 16/share in FY3/1 to 2 in FY3/11 (in line with its forecast), 24 in FY3/12 and 28 in FY3/13. Sales are split almost evenly between Japan and the rest of the world (Figure 8). Overseas sales are highest in Asia, followed by Europe, North America and other regions. The profit contribution from overseas subsidiaries is growing each year, resulting in a steady decline in effective tax rate each year because overseas corporate tax rates are lower than in Japan. Also, some plants such as the silicon carbide diesel particulate filter plant in Poland benefit from tax breaks (Figures 9 1). The profit contribution from the company s overseas operations looks set to continue rising, which should continue to lower the effective tax rate, and thereby have a positive knock-on effect on net profit. Figure 6: NGK Insulators OP ( mn) 8, 7, 6, 5, Electronics business Engineering business Ceramics products business Power business 4, 3, 2, 1, -1, 3/2 3/4 3/6 3/8 3/1 3/12 予 E, Credit Suisse estimates Figure 7: Net debt ( mn) 8, 6, 4, 2, -2, -4, -6, -8, -1, -12, 3/ 3/2 3/4 3/6 3/8 3/1 3/12 予 E NGK Insulators (5333 / 5333 JP) 5

3 December 21 Figure 8: Sales by region (FY3/1) Others 9% Asia 16% Japan 49% Europe 14% North America 12% Figure 9: Effective tax rate falls as OP contribution from overseas subsidiaries grows 6% 55% 5% 45% 4% 35% 3% 25% 2% Effective tax rate (LHS) Share of OP from foreign subsidiaries (RHS) 3/3 3/4 3/5 3/6 3/7 3/8 3/9 3/1 4% 35% 3% 25% 2% 15% 1% 5% % Figure 1: Effective tax rate (%) 7 6 5 4 3 2 1 6/1Q 6/3Q 7/1Q 7/3Q 8/1Q 8/3Q 9/1Q 9/3Q 1/1Q NGK Insulators (5333 / 5333 JP) 6

3 December 21 3: Quarterly earnings and full-year guidance revisions NGK Insulators quarterly OP was on an upward trend through 1Q (Apr Jun), but then swung to a QoQ decline in 2Q (Figure 11). Significant losses in the power business were the main factor, with the ceramics and electronics business showing continued improvement (Figures 12 14). The company lowered its full-year OP guidance by 4bn, from 34bn to 3bn. This reflected a 1.5bn downward revision in the outlook for the power business (from a gain of 7bn to a loss of 3.5bn), a 5.5bn upward revision for ceramics (from 19bn to 24.5bn), and a 1bn upward revision for electronics (from 8bn to 9bn). The company s outlook for the ceramic products business is conservative, in our view, with the business posting OP of 15.4bn in 1H, yet revised guidance for 2H still calling for a 41% HoH decline to 9.1bn. We see considerable room for upward revision. Orders backlog is growing, suggesting that 2H results will likely exceed target (Figure 15). The electronics business remains fairly strong as well, but orders in the power business have slowed since Abu Dhabi s Water & Electricity Authority ordered 3 megawatts of NaS battery units in August 29. Figure 11: NGK Insulators OP and operating margin (%) ( mn) 25 25, 2 15 1 5-5 Operating profit (RHS) OP margin (LHS) -1 4/1Q 4/4Q 5/3Q 6/2Q 7/1Q 7/4Q 8/3Q 9/2Q 1/1Q 2, 15, 1, 5, -5, -1, Figure 12: Power business OP and operating margin (%) 2 15 1 5-5 -1-15 -2-25 Operating profit (RHS) OP margin (LHS) -3 4/1Q 4/4Q 5/3Q 6/2Q 7/1Q 7/4Q 8/3Q 9/2Q 1/1Q ( mn) 4, 3, 2, 1, -1, -2, -3, -4, -5, -6, NGK Insulators (5333 / 5333 JP) 7

3 December 21 Figure 13: Ceramic products business OP and operating margin (%) ( mn) 35 3 25 2 15 1 5-5 -1 Operating profit (RHS) OP margin (LHS) -15 4/1Q 4/4Q 5/3Q 6/2Q 7/1Q 7/4Q 8/3Q 9/2Q 1/1Q 14, 12, 1, 8, 6, 4, 2, -2, -4, -6, Figure 14: Electronics business OP and operating margin (%) ( mn) 5 5, 4 3 2 1-1 -2-3 Operating profit (RHS) -4 OP margin (LHS) -5 4/1Q 4/4Q 5/3Q 6/2Q 7/1Q 7/4Q 8/3Q 9/2Q 1/1Q Figure 15: Ceramic products business sales, orders, orders backlog ( mn) 4, 35, 3, 25, 2, 15, 1, 5, Orders backlog Sales Orders received 4, 3, 2, 1, -1, -2, -3, -4, -5, 9/1Q 9/2Q 9/3Q 9/4Q 1/1Q 1/2Q NGK Insulators (5333 / 5333 JP) 8

3 December 21 Figure 16: Electronics business sales, orders, orders backlog ( mn) 18, 16, 14, 12, 1, 8, 6, 4, 2, Orders backlog Sales Orders received 9/1Q 9/2Q 9/3Q 9/4Q 1/1Q 1/2Q Figure 17: Power business sales, orders, orders backlog ( mn) 9, 8, 7, 6, 5, 4, 3, 2, 1, Orders backlog Sales Orders received 9/1Q 9/2Q 9/3Q 9/4Q 1/1Q 1/2Q NGK Insulators (5333 / 5333 JP) 9

3 December 21 4: Ceramics business The company s mainline ceramics business is set to see a jump in sales next year as a string of new exhaust emission standards come into effect. In Europe, Euro 5 standards for passenger cars will be fully implemented in 211, and new standards for off-road vehicles (construction equipment, agricultural equipment, etc.) are also in the works for Japan, the US and Europe (Figure 18). These new regulations should be a positive catalyst for the company s exhaust gas filters business. Figure 18: Schedule of exhaust emission standards Japan 24 25 26 27 28 29 21 211 212 213 214 215 New short New long term Post new long term term Passenger car US Tier2/Bin#8 Tier2/Bin#5 Europe Euro III Euro IV Euro V Euro VI Japan New short term New long term Post new long term Autotruck US US '4 US '7 US '1 Europe Euro III Euro IV Euro V Euro VI Japan Tier 4a level Tier 4b level Off-Road car For construction/ farming etc. US Tier 4a Tier 4b Europe Step-3 Step-4 We also expect growth in the auto markets of emerging economies to become a demand driver for exhaust gas filters (Figures 19 2). With emissions standards lax in many developing countries, there is considerable potential for growth in these markets. In China, for example, the Euro 4 regulations current in advanced nations have been implemented in the country s 13 largest cities in 21 and will be expanded to all cities beginning in 215, while the penetration rate of exhaust gas filters meeting advanced country standards remains an estimated 8%. This points to significant room for growth, suggesting the exhaust gas filter market in China is likely to grow at a higher rate than the Chinese auto market as a whole. China s next five-year plan, beginning in 211, is expected to emphasize environmental protection measures, and this regulatory tightening trend should be a positive for the exhaust gas filter market. Figure 19: Emerging economies to overtake advanced countries in size of auto markets (Mn unit) 5 45 4 35 Japan, US and Europe auto market (LHS) Other developing countries auto market (LHS) Japan, US and Europe YoY% (RHS) Other developing countries YoY% (RHS) 2% 15% 1% 3 25 2 15 1 5-25 26 27 28 29 21E 211E 212E 213E 5% % -5% -1% -15% Source: Polk, CSM, JD Power, Credit Suisse estimates NGK Insulators (5333 / 5333 JP) 1

3 December 21 Figure 2: Auto markets in emerging economies boost earnings growth potential (Mn unit) 9 8 7 6 5 4 3 2 1 - Others Japan N. America W. Europe Share of the others in auto sales (RHS) 25 26 27 28 29 21E 211E 212E 213E 6% 55% 5% 45% 4% 35% 3% Source: Polk, CSM, JD Power, Credit Suisse estimates This move toward regulatory tightening in emerging markets should also work to the advantage of existing exhaust gas filters makers Corning and NGK. This is because where emissions standards are lax, high-precision filters are unnecessary, leaving an opening for low-end products from local makers. The fact that NGK s market share has jumped in response to the introduction of Euro 5 standards in China s 13 largest cities offers clear evidence of how tighter regulations boost demand for high-end filters (Figure 21). Figure 21: NGK Insulators market share in China (%) 6 5 4 Market share in China Market share in the market consists of Chinese local auto makers 3 2 1 28 29 21E Source: Credit Suisse estimates The rare earth supply problem could also work to NGK s advantage. Auto makers have reduced the volume of high-cost catalysts they use by adding cerium oxide to catalysts such as platinum used to purify exhaust. However, China s curtailment of rare earth exports has raised concerns about procurement of cerium oxide, which in turn is driving a sharp rise in cerium prices (Figure 22). If this problem persists, auto makers may be forced to reduce their usage of cerium oxide and raise the amount of expensive catalysts such as platinum they use, driving a sharp increase in the cost of catalyzed exhaust gas filters. The way around this dilemma is to make the filter walls thinner, thus shortening the time needed to achieve catalyst operating temperatures. We believe such a shift to thinner wall construction would further boost the advantage held by NGK and Corning, leading to both a shakeout of local makers and an improvement in margins. We will closely monitor developments in this regard. NGK Insulators (5333 / 5333 JP) 11

3 December 21 Figure 22: Cerium price ($/Kg) 5. 45. 4. 35. 3. 25. 2. 15. 1. 5. Source: Rare Metal News. 5/1 5/7 6/1 6/7 7/1 7/7 8/1 8/7 9/1 9/7 1/1 1/7 We expect the European auto market to improve in 211 (Figure 23). The market this year has undergone a negative backlash coming off the expiration of German cash-for-clunkers incentives at end-29, but the cycling through of this effect in 211 should pave the way for a recovery. With Euro 5 standards for passenger cars set to become fully effective in 211, we expect a rise in the diesel particulate filter (DPF) attach rate and full implementation of regulations governing commercial vehicles in 212 to drive the penetration rate to 1% (Figure 24). Figure 23: European automobile market (Mn unit) 25 2 15 1 5 Auto sales in Europe (LHS) YoY% (RHS) 25 26 27 28 29 21E 211E 212E 213E 8% 6% 4% 2% % -2% -4% -6% -8% -1% -12% -14% Source: Polk, CSM, JD Power, Credit Suisse estimates NGK Insulators (5333 / 5333 JP) 12

3 December 21 Figure 24: Diesel particulate filters penetration rate in European market (%) 12 1 1%! 8 6 4 2 26 27 28 29 21E 211E 212E 213E Source: Credit Suisse estimates Given the outlook for a recovery in the Chinese and European automobile markets and introduction of new regulations, we expect sales of automotive exhaust catalyst carriers to continue to expand (Figure 25). Our OP forecasts for NGK s ceramics business are 27.5bn in FY3/11 (guidance: 24.5bn), 32bn in FY3/12 and 37.2bn in FY3/13. Figure 25: Auto exhaust catalyst carrier sales ( mn) 14, 12, Honeycomb Cordierite DPF, large carrier SiC-DPF 1, 8, 6, 4, 2, FY5 FY6 FY7 FY8 FY9 FY1 E FY11 E FY12 E, Credit Suisse estimates NGK Insulators (5333 / 5333 JP) 13

3 December 21 5: Electric power-related business The company cut its outlook for the power business by 1.5bn, from a gain of 7bn to a loss of 3.5bn, to factor in reduced assumptions for NaS batteries and its insulator business in China. Its revised OP forecast reflects downward revisions of 5.5bn for NaS batteries (on a 14bn cut in the sales outlook) and 5bn for the China insulator business (on a 5bn sales cut) (Figures 26 27). The reduced outlook for NaS battery orders owes to a postponement of orders by Electricite de France due to financial issues and a slump in domestic wind-power generation projects. Sales from already received orders for the Abu Dhabi project are being booked at a steady pace. Figure 26: NaS battery sales, OP, operating margin ( mn) 2, 4% 15, 1, 2% 5, % -5, -1, -15, -2, -25, -3, Sales (LHS) Operating profit (LHS) OP margin (RHS) 3/3 3/5 3/7 3/9 3/11 予 E 3/13 予 E -2% -4% -6%, Credit Suisse estimates Figure 27: Insulator sales in China ( mn) 16, 14, 12, 1, 8, 6, 4, 2, 3/8 3/9 3/1 3/11 予 E 3/12 予 E 3/13 予 E, Credit Suisse estimates The fact that management s profit revisions were on par with its sales revisions suggests that it expects output reduction losses stemming from the sharp cut in its production projection (due to wasted raw materials and personnel put in place in anticipation of an expansion in output). However, even if sales remain the same, these output reduction losses can be expected to decline in FY3/12, so we expect losses in this business to begin to narrow in FY3/12. We note that in response to cancellations from some users, the company also booked a 1.3bn allowance for sales returns at the SG&A costs line. The reversal of this allowance should also help lift earnings in FY3/12. We expect the power business to swing from a loss of 3.5bn in FY3/11 to a profit of 1.5bn in FY3/12. NGK Insulators (5333 / 5333 JP) 14

3 December 21 With the yen trading below 9/$, it is difficult for the NaS battery business to turn a profit on exports, so management is now considering building a factory overseas. An overseas plant producing exhaust gas filters and insulators could help resurrect the NaS battery business by boosting its ability to withstand yen appreciation. We expect the company to announce plans for such an overseas factory sometime within the next 12 months. Figure 28: NGK Insulators earnings forecast summary Sales Operating profit Recurring profit Net profit EPS bn YoY (%) bn YoY (%) bn YoY (%) bn YoY (%) YoY (%) Consolidated 1/3 A 235.5-13.8 23.5-28.5 24.9-21.1 17.8-27.2 54.5-27.2 11/3 CS E (new) 26. 1.4 33. 4.7 33. 32.8 25. 4.4 76.5 4.4 (prev) 27. 14.7 33.5 42.8 33.5 34.8 24. 34.8 73.5 34.8 CoE 255. 8.3 3. 27.9 3. 2.7 23.5 32. 72. 31.9 IBES E 258.2 9.7 32.9 4.2 - - 24.3 36.4 74.4 36.4 12/3 CS E (new) 281.5 8.3 43.5 31.8 44.5 34.8 32. 28. 98. 28. (prev) 296.7 9.9 43.9 31. 43.9 31. 31.4 3.8 96.1 3.8 IBES E 284. 1. 41.5 26.3 - - 28.3 16.4 86.6 16.4 13/3 CS E (new) 33.5 7.8 51. 17.2 52.5 18. 38. 18.8 116.4 18.8 (prev) 32.1 7.9 52.7 2. 52.7 2. 37.7 2.1 115.4 2.1 IBES E 32.9 6.7 48.8 17.4 - - 33.8 19.6 13.5 19.6, I/B/E/S, Credit Suisse estimates Figure 29: Valuations 7/3 8/3 9/3 1/3 11/3E 12/3E 13/3E Share price ( ) 2,43 1,764 1,55 1,97 1,292 1,292 1,292 EPS ( ) 87.2 136.4 73.7 54.5 76.5 98. 116.4 P/E (x) 27.9 12.9 2.4 35. 16.9 13.2 11.1 CFPS ( ) 157.8 214.3 155.2 112.5 134.7 165.3 185.2 P/CF (x) 15.4 8.2 9.7 17. 9.6 7.8 7. EV ( mn) 815,274 536,358 442,58 558,287 349,517 337,355 312,5 EBITDA ( mn) 75,797 95,637 59,46 42,385 52, 65,5 73,5 EV/EBITDA (x) 1.8 5.6 7.5 13.2 6.7 5.2 4.3 BPS ( ) 845.2 943.8 868.7 927.7 938.4 1,12.1 1,1.1 P/B (x) 2.9 1.9 1.7 2.1 1.4 1.3 1.2, Credit Suisse estimates Figure 3: Segment results and forecasts ( mn) 7/3 8/3 9/3 1/3 11/3E 12/3E 13/3E Sales Power business 75,79 81,299 82,95 87,251 76, 82, 87, Ceramic products business 126,428 162,28 13,71 11,692 122, 135,5 149,5 Engineering business 45,288 44,57 - - - - - Electronics business 73,323 77,52 59,594 46,97 62, 64, 67, Total 32,119 364,888 273,211 235,489 26, 281,5 33,5 Operating profit Power business 6,412 8,725 7,581 7,974-3,5 1,5 2,5 Ceramic products business 31,29 43,815 22,169 13,175 27,5 32, 37,2 Engineering business 1,453 3,29 - - - - - Electronics business 13,76 13,5 3,31 2,288 9, 1, 11,3 Eliminations 45 127 28 - - - - Total 52,17 69,377 32,89 23,439 33, 43,5 51, Operating margin Power business 8.5% 1.7% 9.1% 9.1% -4.6% 1.8% 2.9% Ceramic products business 24.5% 27.% 17.% 13.% 22.5% 23.6% 24.9% Engineering business 3.2% 7.3% - - - - - Electronics business 17.8% 17.4% 5.1% 4.9% 14.5% 15.6% 16.9% Total 16.2% 19.% 12.% 1.% 12.7% 15.5% 16.8%, Credit Suisse estimates NGK Insulators (5333 / 5333 JP) 15

3 December 21 Companies Mentioned (Price as of 2 Dec 1) Corning Incorporated (GLW, $18.4) Ibiden (462, 2,418, OUTPERFORM [V], TP 4,2, MARKET WEIGHT) Johnson Matthey (JMAT.L, 1832. p) NGK Insulators (5333, 1,292, OUTPERFORM, TP 1,5, OVERWEIGHT) Disclosure Appendix Important Global Disclosures I, Shinya Yamada, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for 5333 5333 Closing Target Price Price Initiation/ Date ( ) ( ) Rating Assumption 4-Dec-7 322 46 5-Mar-8 215 354 3-Jun-8 1937 36 28-Aug-8 1325 228 5-Dec-8 864 14 22-Jan-9 172 136 31-Mar-9 155 N 2-Jun-9 1719 188 15-Sep-9 22 192 3-Nov-9 1897 181 31-Mar-1 197 16 U 17-Jun-1 161 135 21-Jul-1 1322 N 46 426 376 326 276 226 176 126 76 354 36 228 14136 188 192 N 181 16 U 135 N 4-Dec-7 4-Feb-8 4-Apr-8 4-Jun-8 4-Aug-8 4-Oct-8 4-Dec -8 4-Feb-9 4-Apr-9 4-Jun-9 4-Aug-9 4-Oct-9 4-Dec-9 4-Feb-1 4-Apr-1 4-Jun-1 4-Aug-1 4-Oct-1 Closing Price Target Price Initiation/Assumption Rating O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts stock ratings are defined as follows: Outperform (O): The stock s total return is expected to outperform the relevant benchmark* by at least 1-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock s total return is expected to be in line with the relevant benchmark* (range of ±1-15%) over the next 12 months. Underperform (U): The stock s total return is expected to underperform the relevant benchmark* by 1-15% or more over the next 12 months. *Relevant benchmark by region: As of 29 th May 29, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks a 22% and a 12% threshold replace the 1-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts perceived risk. The 22% and 12% thresholds replace the +1-15% and -1-15% levels in the Neutral stock rating definition, respectively, subject to analysts perceived risk. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 2% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts coverage universe weightings are distinct from analysts stock ratings and are based on the expected performance of an analyst s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 5 in the U.S.) over the next 12 months. NGK Insulators (5333 / 5333 JP) 16

3 December 21 Credit Suisse s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 45% (61% banking clients) Neutral/Hold* 41% (6% banking clients) Underperform/Sell* 12% (53% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (5333) Method: Our 1,5 target price for NGK Insulators is based on an FY3/12E P/E of 15x (EPS 97.98), referring to Bloomberg consensus valuations for industry rivals Ibiden (462) and Johnson Matthey (JMAT.L). Risks: Risks that may impede achievement of our 1,5 target price for NGK Insulators are: sluggish auto sales in the world and strong yen in foreign exchange rate. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (5333) within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. Credit Suisse Securities (Europe) Limited acts as broker to JMAT.L. The following disclosed European company/ies have estimates that comply with IFRS: JMAT.L. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. To the extent this is a report authored in whole or in part by a non-u.s. analyst and is made available in the U.S., the following are important disclosures regarding any non-u.s. analyst contributors: The non-u.s. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-u.s. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Shinya Yamada, non-u.s. analyst, is a research analyst employed by Credit Suisse Securities (Japan) Limited. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.creditsuisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page. NGK Insulators (5333 / 5333 JP) 17

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