Mitsubishi Chemical Holdings

Asia Pacific/Japan Equity Research Major Chemicals (Chemicals/Textiles) / MARKET WEIGHT Mitsubishi Chemical Holdings Rating (from Outperform) NEUTRAL* Price (29 Aug 12, ) 315 Target price ( ) (from 470) 340¹ Chg to TP (%) 7.9 Market cap. ( bn) 464.39 (US$ 5.90) Enterprise value ( bn) 1,332.79 Number of shares (mn) 1,474.27 Free float (%) 70.0 52-week price range 559-309 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. Share price performance 800 600 400 Research Analysts Masami Sawato 813 4550 9729 masami.sawato@credit-suisse.com Price (LHS) Maiko Saito 81 3 4550 9936 maiko.saito@credit-suisse.com Rebased Rel (RHS) 200 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 The price relative chart measures performance against the TOPIX which closed at 750.03 on 29/08/12 On 29/08/12 the spot exchange rate was 78.68/US$1 160 140 120 100 80 Performance Over 1M 3M 12M Absolute (%) -5.4-6.3-41.0 Relative (%) -7.3-12.0-38.3 (4188 / 4188 JP) DOWNGRADE RATING Downgrading to NEUTRAL on sustained weakness for China s petrochemicals demand Action: We lower our TP for Mitsubishi Chemical from 470 to 340 (potential return: 7.9%) to reflect our lower forecasts and weaker sector valuations. We downgrade the stock from Outperform to NEUTRAL because upside to our TP is now less than 10%. Investment case: We had expected a recovery for China s petrochemicals demand to be a near-term catalyst, but the recovery has lagged, prompting us to lower our full-year forecasts substantially. Our forecasts are now lower than the consensus estimates. Even though shares have underperformed TOPIX by 13% over the last three months, we do not expect a rebound over the near term. We forecast significant growth for FY3/14 OP at the pharma unit, but expect only a limited contribution to EPS. Lower valuations for the sector also make Mitsubishi Chemical s valuations less appealing. We will be watching trends for 2013, when we expect the environment/alternative energy business to make a more meaningful contribution and a recovery China s petrochemicals demand is likely to develop. Changes to our forecasts: We lower our FY3/13 OP forecast from 140bn to 120bn mainly because we anticipate earnings erosion at the chemicals and polymers businesses on slumping demand in Asia. One medium-term risk is the rise of gasbased petrochemical products in the Middle East and the US, which could weaken the firm s cost competitiveness. Catalysts/risks: Catalysts: confirmation of full-scale operations at facilities for organic solar cells and GaN substrate for white LEDs using the liquid phase process; a recovery for petrochemicals demand in China. Risks: yen strengthening; weak supply demand for terephthalic acid and MMA; and competition in Li-ion battery materials. Valuation: Our 340 TP uses FY3/14E BPS of 547 ( 565 previously) and a P/B of 1.03x, the average sector-relative multiple over the last seven years. Our multiple is based on P/Bs of 0.62x for the firm and 0.6x for the sector (0.8x previously). Our TP is an implied FY3/14E P/E of 8.5x. Financial and valuation metrics Year 3/12A 3/13E 3/14E 3/15E Revenue ( bn) 3,208.2 3,260.0 3,400.0 3,530.0 Operating profit ( bn) 130.6 120.0 180.0 200.0 Recurring profit ( bn) 133.6 108.0 170.0 190.0 Net income ( bn) 35.5 24.5 59.0 68.0 EPS ( ) 24.1 16.6 40.0 46.1 Change from previous EPS (%) n.a. -35.5-16.9-20.9 IBES Consensus EPS ( ) n.a. 19.2 37.7 46.0 EPS growth (%) -57.5-31.0 140.8 15.3 P/E (x) 18.4 19.0 7.9 6.8 Dividend yield (%) 2.3 3.8 3.8 3.8 EV/EBITDA(x) 5.8 5.2 4.1 3.7 P/B (x) 0.85 0.60 0.58 0.55 ROE(%) 4.6 3.2 7.5 8.2 Net debt/equity (%) 121.7 112.2 103.6 94.7 Source: Company data, 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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

Revising our forecasts We lower our FY3/13 OP forecast from 140bn to 120bn (guidance 160bn; I/B/E/S 124.9bn). We do this mainly because we expect earnings to weaken at the chemicals and polymers units because of demand slowdowns in Asia. Lower outlooks at the chemicals and polymers businesses are responsible for 17bn of the 20bn reduction to our forecast. The key considerations involving the petrochemicals business are lower margins on mainstay products terephthalic acid and acrylonitrile than our previous outlooks anticipated, and additional downside for earnings from lower operating rates for ethylene facilities. We forecast OP to bounce back in FY3/14, rising 50% YoY to 180bn. This is 8.4% higher than the I/B/E/S consensus ( 166.1bn). We believe the healthcare business will be the main driver in what we forecast to be a YoY rise of 60bn for OP. We forecast OP at Mitsubishi Tanabe Pharma (4508, OUTPERFORM, TP: 1,550) to rise 36.5bn, from 74.5bn in FY3/13 to 111bn in FY3/14. Our forecasts anticipate upside from stronger sales, including royalty income from Gilenya (an MS treatment the firm has licensed out) and growth for sales of Telavic (a treatment for chronic hepatitis-c) International competitiveness in polyethylene likely to decline Looking at China s imports of polyethylene by exporting nation, we see the weighting for imports from the Middle East has risen sharply to take a dominant position in the import market. Similarly, a review of figures for China s polyethylene imports for 2009 and 2011 shows us the weighting for imports from the Middle East has risen from 23.1% to 37.2% for LDPE and from 26.7% to 48.4% for HDPE. This trend did not change in January June 2012. At the same time, exports from Japan have declined sharply from 2009 to 2011, dropping 39.3% for LDPE and 39.2% for HDPE. We believe the international competitiveness of Japanese firms polyethylene is likely to decline under pressure from China s increasing imports from the Middle East, and shale gas-based products from the US. Mitsubishi Chemical is Japan s leading polyethylene firm, so we believe it is likely to see substantial impacts over the medium term. Management plans to consolidate ethylene production at the Kashima plant, but we would like to see the company restructure its operations with a greater sense of urgency. Mitsubishi Chemical Holdings (4188 / 4188 JP) 2

Figure 1: Mitsubishi Chemical Holdings (4188) Forecasts summary Sales Operating profit Recurring profit Net profit EPS bn YoY (%) bn YoY (%) bn YoY (%) bn YoY (%) YoY (%) Consolidated 11/3 A 3,166.8 25.9 226.5 241.4 223.9 279.6 83.6 551.3 56.7 506.0 12/3 A 3,208.2 1.3 130.6-42.3 133.6-40.3 35.5-57.5 24.1-57.5 13/3 CS E (new) 3,260.0 1.6 120.0-8.1 108.0-19.2 24.5-31.0 16.6-31.0 (prev) 3,350.0 4.4 140.0 7.2 128.0-4.2 38.0 7.1 25.8 7.1 CoE 3,450.0 7.5 160.0 22.5 148.0 10.8 50.0 40.9 33.9 40.8 Shikiho 3,400.0 6.0 150.0 14.9 138.0 3.3 45.0 26.8 30.5 26.7 IBES E 3,271.4 2.0 124.9-4.3 - - 29.4-17.2 19.2-20.1 14/3 CS E (new) 3,400.0 4.3 180.0 50.0 170.0 57.4 59.0 140.8 40.0 140.8 (prev) 3,470.0 3.6 200.0 42.9 190.0 48.4 71.0 86.8 48.2 86.8 IBES E 3,394.4 3.8 166.1 33.0 - - 54.6 85.8 37.7 95.8 15/3 CS E (new) 3,530.0 3.8 200.0 11.1 190.0 11.8 68.0 15.3 46.1 15.3 (prev) 3,600.0 3.7 230.0 15.0 220.0 15.8 86.0 21.1 58.3 21.1 IBES E 3,455.2 1.8 183.7 10.6 - - 67.1 22.9 46.0 22.2 Source: Company data, Shikiho, I/B/E/S, Credit Suisse estimates Mitsubishi Chemical Holdings (4188 / 4188 JP) 3

Figure 2: : Mitsubishi Chemical Holdings (4188) Consolidated income statement ( bn) Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13E Mar-14E Mar-15E By segment Sales Electronics applications 167.3 152.4 133.8 135.0 160.0 195.0 Designed materials 436.8 657.6 699.9 720.0 755.0 780.0 Health care 504.4 504.9 502.5 533.0 560.0 590.0 Chemicals 785.7 895.4 1,007.5 910.0 935.0 950.0 Polymers 479.1 731.2 658.6 752.0 775.0 795.0 Other 141.8 225.3 205.9 210.0 215.0 220.0 Total 2,929.8 2,909.0 2,515.1 3,166.8 3,208.2 3,260.0 3,400.0 3,530.0 Operating profits Electronics applications -1.4 1.0-5.3 0.0 3.0 5.0 Designed materials 13.3 36.5 23.1 26.0 31.0 35.0 Health care 71.0 85.1 76.4 79.0 116.0 125.0 Chemicals 6.9 53.0 14.9 4.0 13.0 15.0 Polymers -22.5 55.0 23.8 15.0 20.0 22.0 Other 6.2 4.5 6.1 4.0 5.0 6.0 Corporate -7.4-8.6-8.3-8.0-8.0-8.0 Total 125.0 8.2 66.3 226.5 130.6 120.0 180.0 200.0 OP Margins (%) Electronics applications -0.8 0.6-4.0 0.0 1.9 2.6 Designed materials 3.1 5.5 3.3 3.6 4.1 4.5 Health care 14.1 16.9 15.2 14.8 20.7 21.2 Chemicals 0.9 5.9 1.5 0.4 1.4 1.6 Polymers -4.7 7.5 3.6 2.0 2.6 2.8 Other 4.4 2.0 3.0 1.9 2.3 2.7 Total 4.3 0.3 2.6 7.2 4.1 3.7 5.3 5.7 P/L Statement Sales 2,929.8 2,909.0 2,515.1 3,166.8 3,208.2 3,260.0 3,400.0 3,530.0 CoGS 2,358.5 2,412.8 1,953.9 2,379.6 2,508.0 2,560.0 2,615.0 2,700.0 Gross profit 571.3 496.2 561.1 787.1 700.2 700.0 785.0 830.0 SG&A 446.3 488.0 494.8 560.6 569.6 580.0 605.0 630.0 Operating profit 125.0 8.2 66.3 226.5 130.6 120.0 180.0 200.0 Net interest -6.4-3.2-6.4-8.9-6.6-8.0-8.0-8.0 Equity method investment P/L 8.1-5.1 6.5 15.1 14.9 10.0 12.0 12.0 Net other non-op. 2.1-1.8-7.4-8.8-5.3-14.0-14.0-14.0 Recurring profit 128.9-1.9 59.0 223.9 133.6 108.0 170.0 190.0 Net extraordinaries 88.9-42.1-15.7-54.3-6.1-22.0-12.0-12.0 Pretax profit 217.8-44.0 43.3 169.6 127.5 86.0 158.0 178.0 Taxes 46.0 12.4 10.5 47.0 53.1 28.5 53.0 60.0 Minorities 7.7 10.8 20.0 39.0 38.9 33.0 46.0 50.0 Net profit 164.1-67.2 12.8 83.6 35.5 24.5 59.0 68.0 Source: Company data, Credit Suisse estimates Mitsubishi Chemical Holdings (4188 / 4188 JP) 4

Figure 3: Mitsubishi Chemical Holdings (4188) Consolidated balance sheet and cash flow statement ( bn) Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13E Mar-14E Mar-15E Balance Sheet Current assets 1,325.0 1,324.7 1,369.1 1,396.7 1,377.7 1,555.7 1,570.6 1,593.5 Cash & marketable securities 116.1 251.5 178.9 215.0 161.1 163.7 170.8 177.3 Receivables 599.9 499.7 595.7 597.2 593.4 602.9 628.8 652.9 Inventories 427.1 463.3 474.7 485.1 516.1 524.4 547.0 567.9 Other 181.9 110.1 119.9 99.4 107.1 264.6 224.1 195.4 Fixed assets 1,440.9 1,416.2 1,986.0 1,897.4 1,796.2 1,567.3 1,586.6 1,605.8 Tangible fixed assets 852.8 834.0 1,167.1 1,088.4 1,032.7 805.2 810.2 816.2 Intangibles 119.2 113.3 214.3 226.8 208.2 197.8 187.9 178.5 Investments 468.8 468.9 604.5 582.1 555.3 564.3 588.6 611.1 Total assets 2,765.8 2,740.9 3,355.1 3,294.0 3,174.0 3,123.0 3,157.3 3,199.2 Payables 435.1 368.0 370.8 378.4 411.3 417.9 435.9 452.5 Interest-bearing debt 822.5 1,033.2 1,454.1 1,304.6 1,164.5 1,097.1 1,072.1 1,047.1 Bonds & CBs (incl. Short term) 349.4 330.2 355.1 255.0 255.0 255.0 255.0 255.0 Long-term and current debt 421.6 598.0 974.0 929.5 869.1 802.1 777.1 752.1 Other 412.3 399.5 497.3 497.0 453.2 453.2 453.2 453.2 Total liabilities 1,669.9 1,800.8 2,322.2 2,180.0 2,029.0 1,968.3 1,961.2 1,952.9 Equity 827.8 669.0 673.6 758.2 770.7 773.7 807.4 849.9 Minorities 267.3 270.3 358.6 355.1 373.6 381.0 388.7 396.4 Total liabilities/equity 2,765.8 2,740.9 3,355.1 3,294.0 3,174.0 3,123.0 3,157.3 3,199.2 Cash flow Net profits 164.1-67.2 12.8 83.6 35.5 24.5 59.0 68.0 Depreciation 102.2 119.2 129.6 148.7 145.7 136.0 140.0 144.0 Increase/ decrease of working capital 85.3 3.0 104.6 4.3 38.0 38.0 38.0 38.0 Other -195.4 21.1-130.9 52.3-1.2-15.0-15.0-15.0 Operating cash flow 156.2 76.1 116.1 288.9 218.0 107.5 146.0 159.0 Capex -170.1-139.0-119.0-117.8-116.1-140.0-145.0-150.0 Other -7.9-50.2-208.0 16.7 52.7-10.0-10.0-10.0 Investment cash flow -178.0-189.2-327.0-101.1-63.4-150.0-155.0-160.0 Dividend to be paid -19.3-22.0-16.5-11.8-14.7-14.7-17.7-17.7 Other 90.1 201.5 110.9-137.7-149.4 54.0 54.0 54.0 Financial cash flow 70.9 179.5 94.4-149.5-164.1 39.3 36.3 36.3 Free cash flow -21.8-113.1-210.9 187.8 154.6-42.5-9.0-1.0 Valuations EPS ( ) 119.2-48.8 9.4 56.7 24.1 16.6 40.0 46.1 BPS ( ) 601.5 486.1 491.0 514.3 522.8 524.8 547.6 576.5 CFPS ( ) 193.5 37.8 103.8 157.5 122.9 108.9 135.0 143.8 Dividend per share ( ) 16.0 12.0 8.0 10.0 10.0 12.0 12.0 12.0 Dividend payout (%) 13.4-85.5 17.6 41.5 72.2 30.0 26.0 PER (x) High (x) 9.8-51.4 11.3 25.4 26.8 11.1 9.6 Low (x) 5.2-31.4 7.0 17.2 19.4 8.1 7.0 PBR (x) High (x) 2.0 1.6 1.0 1.2 1.2 0.8 0.8 0.8 Low (x) 1.0 0.6 0.6 0.8 0.8 0.6 0.6 0.6 PCFR (x) High (x) 6.1 20.1 4.6 4.1 5.0 4.1 3.3 3.1 Low (x) 3.2 7.9 2.8 2.5 3.4 3.0 2.4 2.2 EV/EBITDA (x) 8.5 11.8 9.2 4.9 6.4 5.9 4.6 4.2 Market cap 1,235.3 727.3 531.6 765.9 756.3 566.1 566.1 566.1 Net debt 706.4 781.7 1,275.3 1,089.6 1,003.4 933.4 901.4 869.8 EBITDA 227.2 127.4 195.9 375.2 276.3 256.0 320.0 344.0 Dividend yield 1.8 2.3 2.1 1.9 1.9 3.1 3.1 3.1 ROE (%) 21.3-9.0 1.9 11.7 4.6 3.2 7.5 8.2 Sales/net profits (%) 5.6-2.3 0.5 2.6 1.1 0.8 1.7 1.9 Total assets turnover (x) 1.1 1.1 0.7 1.0 1.0 1.0 1.1 1.1 Financial levelege 3.3 4.1 5.0 4.3 4.1 4.0 3.9 3.8 ROCE(%) 19.3-5.3 2.6 9.3 4.5 3.5 6.4 6.9 Profit before interests after tax 179.4-53.5 25.9 99.8 51.3 40.5 75.0 84.0 Capital in use 927.3 1,018.0 986.5 1,073.4 1,129.5 1,149.8 1,175.4 1,221.2 Shareholders' equity/total assets (%) 29.9 24.4 20.1 23.0 24.3 24.8 25.6 26.6 D/E ratio (x) 1.0 1.5 2.2 1.7 1.5 1.4 1.3 1.2 Net D/E ratio (x) 0.9 1.2 1.9 1.4 1.3 1.2 1.1 1.0 OP/interest costs (x) 8.2 0.6 5.1 14.0 8.3 7.5 11.3 12.5 Source: Company data, Credit Suisse estimates Mitsubishi Chemical Holdings (4188 / 4188 JP) 5

Companies Mentioned (Price as of 30 Aug 12) Mitsubishi Chemical Holdings (4188, 311, NEUTRAL, TP 340, MARKET WEIGHT) Mitsubishi Tanabe Pharma (4508, 1,170, OUTPERFORM, TP 1,550, UNDERWEIGHT) Disclosure Appendix Important Global Disclosures Masami Sawato & Maiko Saito each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her 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 4188 4188 Closing Target Price Price Initiation/ 894 Date ( ) ( ) Rating Assumption 794 8-Oct-09 365 380 30-Nov-09 314 330 694 4-Mar-10 433 600 O 11-Nov-10 453 690 594 600 9-Feb-11 607 850 1-Aug-11 598 900 494 29-Nov-11 440 730 O 394 18-Jan-12 430 550 380 2-Mar-12 464 510 294 330 8-Jun-12 329 470 690 850 900 730 550 510 470 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 10-15% (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 ±10-15%) over the next 12 months. Underperform (U): The stock s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29 th May 2009, 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, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **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 20% 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 500 in the U.S.) over the next 12 months. Mitsubishi Chemical Holdings (4188 / 4188 JP) 6

Credit Suisse s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 45% (52% banking clients) Neutral/Hold* 42% (49% banking clients) Underperform/Sell* 11% (39% 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 (4188) Method: Our 340 target price for Mitsubishi Chemical Holdings uses FY3/14E BPS of 547 ( 565 previously) and a P/B of 1.03x, the average sector-relative multiple of the last seven years. Our multiple is based on P/Bs of 0.62x for the firm and 0.6x for the sector (0.8x previously). Our TP is an implied FY3/14E P/E of 8.5x. Risks: Risks to our 340 target price for Mitsubishi Chemical Holdings include: upside -- confirmation of full-scale operations at facilities for organic solar cells and GaN substrate for white LEDs using the liquid phase process; a recovery for petrochemicals demand in China; downside -- yen strengthening; weak supply-demand for terephthalic acid and MMA; and competition in Li-ion battery materials. 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 (4188) within the past 12 months. 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