japan | industrials 450mm in 2017: huge obstacles for euvl

INDUSTRY NOTE

Japan | Industrials

Precision Equipment 17 October 2012

Precision Equipment450mm Should Come Earlier than EUVL;Benefits Shin-Etsu in the Long Run

EQU

ITY R

ESEARC

H A

SIA

Yoshihiro Azuma *Equity Analyst

+81 3 5251 6186 [email protected]

* Jefferies (Japan) Limited

Key Takeaway

We believe commercial production of 450mm wafers should come earlier thanEUVL lithography in commercial production as it is easier. Mass production of450mm wafers is likely to increase Shin-Etsu Chemical's profits in the long run.Otherwise Shin-Etsu is unlikely to mass produce 450mm, resulting in a badsituation for Intel, TSMC and Samsung.

Huge obstacles for EUVL: 1) It is extremely difficult to manufacture not only a powerfulenough light source for EUVL scanners but also other parts of EUVL scanners such as themirror. 2) Even if EUVL scanners with acceptable throughput become available, variousmaterials used in EUVL lithography, such as photomasks and photoresists, are unlikely to beready immediately after a EUVL scanner with acceptable throughput becomes available. 3)Companies must agree about how to allocate risk to realize EUVL lithography. For instance,photoresist makers and IC makers need to form some consensus, in our view (discussedlater). Semi makers will use EUVL lithography ONLY after all these 3 are satisfied, which wethink will be a huge obstacle. Today Bloomberg reported that ASML will acquire Cymer.We do not believe the reported acquisition will meaningfully shorten the time to developEUVL scanners, because a lack of R&D spending is not the main obstacle to making the lightsource.

450mm in 2017: We believe mass production of 450mm wafers will start in 2017 or later,and that Intel's capital injection into ASML shows Intel is getting more serious about 450mm.We also believe 300mm wafer prices will increase in 2014, because 1) without price hikeswafer makers have little incentive to invest in 300mm wafer capacity and 2) global utilizationof 300mm wafers will be at full capacity. In our opinion, it would be much better for Intelto make 450mm wafers available by accepting even a 50% price hike for 300mm than tonot make 450mm wafers available.

Intel must give Shin-Etsu a strong incentive: Shin-Etsu is the only company whichcan mass-produce 450mm wafers. SUMCO has the technology, but its balance sheet is tooweak for it to do so without equity financing. For Shin-Etsu investing in 450mm wafers mustbe more attractive than investing in PVC, whose risk adjusted ROI is much better than thatof wafers currently (Shin-Etsu is the most profitable PVC maker globally). Otherwise, Shin-Etsu has little incentive to use large funds to mass-produce 450mm wafers, because thenumber of potential users of 450mm is much smaller than for 300mm. We believe SUMCOis unlikely to accept a capital injection from IC makers and that SUMCO will likely issue newshares in 2013.

SPEs should be ready for 450mm by 2017: Most semiconductor equipment companieshave not been aggressively developing machines to handle 450mm, because it has beenunclear whether and when 450mm wafers will be used in mass production. It is still unclearwhether the size of the market is attractive enough, but it is becoming marginally lessunclear. We believe this equipment should be ready for mass production by 2017, becauseASML has seriously started R&D for 450mm equipment, prompting other SPEs to speed upR&D. Obstacles for 450mm are much smaller than those for EUVL.

Implications: Delays in a major generation change in lithography are likely to result inlower profitability for photoresist makers. Moreover, Tokyo Ohka decided to form a JV withSamsung to build a photoresist factory in Korea, which is likely to end up with a leakageof know-how (the reason behind our Underperform ratings for Tokyo Ohka and JSR). OurEurope Tech analyst, Lee Simpson, believes mass production of EUVL scanners is likelyto be delayed (ASML report "Slowing Down"). Also please refer to Mark Lipacis' report(Semiconductors: "Moore Stress = Structural Industry Shift").

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have aconflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investmentdecision. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 30 to 32of this report.

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(A) 450mm wafers: Can become more

bullish about Shin-Etsu in late 2013

Conclusion and risk scenario Conclusion

We believe the 300mm wafer price should increase in 2014, and thus we probably will

become more bullish about Shin-Etsu Chemical in late 2013 when a price hike becomes

more visible.

Why we keep a Hold rating, instead of a Buy

We believe Tier 2 wafer manufacturers have incentives to exit the business by selling their

semi-wafer businesses, as they are losing money or making very little profit.

Semiconductor production is likely to decline over the next 6 months, which should

increase the probability of this scenario. It is possible that another party will acquire these

Tier 2 wafer makers. The question is who.

Chart 1: Wafer companies’ OP margins: Wafer industry profitability became

too low to be sustainable

Source: Company Data

Exit of Tier 2 companies may end up in a bad situation

The best-case scenario for Shin-Etsu Chemical is that it buys them at reasonable prices,

which would bring price discipline to the industry.

The worst-case scenario is that another party such as a fund acquires them and destroys

price discipline. Unfortunately, we believe the probability for the worst-case scenario is

greater than for the best-case scenario given that Shin-Etsu does not like to pay high

premiums in a TOB and thus it is likely that another party would win out in a TOB.

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

2007 2008 2009 2010 2011

Covalent (Wafer) Wacker AG (Siltronic) MEMC

SUMCO Shinetsu (Wafer)

page 2 of 32 , Equity Analyst, +81 3 5251 6186, [email protected] Azuma

Please see important disclosure information on pages 30 - 32 of this report.

Industrials

Precision Equipment

17 October 2012

Chart 2: 300mm wafer market share

Source: Jefferies estimates

Downside limited

On the flip side, we believe downside to Shin-Etsu stock is also limited, because it is one of

the ‘safe havens’, whose guidance is unlikely to be revised down.

One risk: SUMCO accepts a capital injection from a chip maker. We believe

this is unlikely

One risk to our conclusion above is a scenario where SUMCO accepts a capital injection

from a chip maker, as ASML did. We believe SUMCO will not accept a capital injection

from chip makers because 1) such a capital injection could end up with a leakage of wafer

manufacturing know-how and lower profitability in the long run and 2) SUMCO would

worry about the potential loss of existing users. Management of SUMCO is well aware of

this risk (ASML’s case is exceptional, in our view, because ASML is so dominant that chip

makers have little choice).

What if SUMCO accepts a capital injection from chip makers? In that case,

SUMCO is likely to become only a 450mm maker, bad for chip makers

If SUMCO accepts a capital injection from chip makers, we believe Shin-Etsu is unlikely to

invest in 450mm wafer facilities. Shin-Etsu is likely to think that 450mm wafer

manufacturing will not become attractive enough to invest large sums under this scenario.

Consequently, chip makers will end up having only one vendor of 450mm wafers, which

is not in chip makers’ best interests.

If SUMCO becomes the only 450mm wafer maker in the world, we think innovation in

450mm wafers would slow, ending up with a bad situation for chip makers in the long

run. If chip makers are aware of this risk, they would accept price hikes of 300mm wafers

to make the wafer business attractive enough for Shin-Etsu and would refrain from

injecting capital into SUMCO.

Roadmap to 450mm wafers We expect the roadmap to 450mm mass production to be as follows.

1) Price hikes of 300mm in 2014 would prompt Shin-Etsu to invest in 450mm

wafer capacity, which requires large investments.

2) 450mm wafers become available in 2015 (at semi commercial production level

quantities).

3) Semiconductor equipment to handle 450mm wafers should become available in

2016.

4) Semi makers should start test runs in semi commercial lines in 2016.

Shin-Etsu

30%

SUMCO

28%

LG Siltron

15%

Wacker

13%

MEMC

11%

Covalent

3%



Industrials

Precision Equipment

17 October 2012

5) Semi makers should start using 450mm wafers in mass production in 2017 or

later.

Chart 3: Assumptions for 300mm & 200mm wafers

Source: Jefferies estimates, company data

Chart 4: 300mm wafer price

Source: Jefferies estimates

Will semi makers accept price hikes for 300mm wafers that would give Shin-Etsu incentive to invest in 450mm? Yes, we believe so. Seems naïve to believe so

It seems semi makers still believe wafer makers will invest in 450mm wafer capacity

without price hikes for 300mm wafers, simply because wafer makers have been accepting

whatever semi makers demand for 30 years. In this sense, assuming semi makers will

accept 300mm wafer price hikes seems naïve.

But it should occur

However, we believe this time will be different, firstly as only several semi makers are likely

to use 450mm wafers (unlike 300mm), and secondly because no wafer makers except for

Shin-Etsu have both the cash and the technology to invest in 450mm wafers (Shin-Etsu's

position has become stronger vs semi makers).

At most only 5-6 semi makers will use 450mm wafers on a meaningful scale, and thus the

450mm wafer market size may be too small for wafer makers to make large investments.

Shin-Etsu’s incentive to invest in 450mm is much smaller than it was to invest in 300mm

wafers in 2000.

50% price hike for 300mm wafers will have small impact on semi makers

Even if we assume a 50% price hike for 300mm wafers (shipped to likely users of 450mm),

this implies a US$1bn rise in costs for the whole semi industry, which is 0.2% of the

semiconductor market. If semi makers can increase production efficiency by using 450mm

wafers, they could easily offset the price hike of 300mm wafers.

shipment (mil unit /m) 2008 2009 2010 2011 2012e 2013e 2014e

300 mm 2.7 2.6 3.5 3.8 4.2 4.6 5.1

200 mm 4.6 3.3 4.7 4.1 4.2 4.2 4.2

YoY

300 mm 14% -3% 36% 8% 10% 10% 11%

200 mm -20% -27% 42% -13% 1% 0% 0%

price of 300 mm (yoy %) -20% -45% -5% -5% -15% 0% 20%

0

20

40

60

80

100

120

140

160

180

20

06

20

07

20

08

20

09

20

10

20

11

20

12

(US$/Unit)



Industrials

Precision Equipment

17 October 2012

What would drive semi makers to crave 450mm wafers?

The outlook that semi makers could not use EUVL lithography in commercial production

by 2018 would prompt semi makers to want 450mm wafers. In other words, semi makers

would think that using 450mm wafers is a more realistic and effective way to reduce costs

than other methods. Currently, semi makers use double patterning to reduce the cost of

manufacturing. However, if they proceed to triple-patterning or quadruple-patterning,

costs would become marginally greater, making 450mm wafers more attractive.

Why we believe EUVL lithography will not be available for commercial

production until 2018?

1) Development of the scanner plasma source has been delayed. Cymer argues

that it can achieve 100W by early 2013. However, 100W was only achieved for a

very short time period. Unless it can achieve 100W continuously for 1 month or

longer, EUVL scanner throughput would be too low.

2) Even if a EUVL scanner becomes available, several materials including photo

masks and photoresists would not be ready. Mask makers and resist makers can

start full scale R&D only after a EUVL scanner with acceptable throughput

becomes available.

3) It should take some time for the business model to be established. In the current

ArF era, photoresist makers buy scanners to ensure quality. In return the price of

photoresists is high enough to offset the investment burden of resist makers.

However, it might be unrealistic for resist makers to buy EUVL scanners, given

that installing one EUVL scanner costs more than EUR100mn. Semi makers and

resist makers must determine how to share investment risk.

4) Semi makers would need more than 6 months for a test run after everything,

including EUVL scanners, photo masks, photoresists, etc., becomes available.

Consequently, we believe semi makers will not be able to use EUVL lithography for

commercial production by 2018. Technical difficulties to realize EUVL lithography are

much higher than that for realizing 450mm wafers, and thus we believe the commercial

use of 450mm wafers will come earlier than EUVL lithography.



Industrials

Precision Equipment

17 October 2012

Chart 5: What drives semi makers to crave 450mm?

Source: Jefferies

450mm wafer commercial production should start in 2017 or later Conclusion

450mm wafers should be used in commercial production in 2017 or later.

Implication

Finally, Shin-Etsu should start to enjoy the benefits of its oligopoly.

Three reasons why we think it will take a long time before mass production of 450mm

wafer are as follows.

Rationale 1: SPE not ready for 450mm for a while

Our channel checks suggest that semiconductor equipment manufacturers are not fully

prepared for 450mm wafers yet. Actually they have not even shown a clear roadmap yet.

It would be very risky and a waste of money for them to invest in R&D when it is still

unclear many semiconductor manufacturers would use 450mm wafers. If only 2 or 3

semiconductor manufacturers use 450mm wafers, the market size may not be large

enough to justify investment in making machines to handle 450mm wafers.

Semiconductor equipment makers should be ready for 450mm wafers by 2015 or later. It

seems that Intel’s capital injection for ASML prompted other SPEs to speed up R&D for

450mm equipment marginally, although the absolute pace is still very gradual.

Rationale 2: Shin-Etsu has little incentive to produce 450mm

Shin-Etsu Chemical is technologically able to mass-produce 450mm wafers. However, it

does not make economic sense to invest in 450mm wafer capacity currently, as it is

unlikely for it to be able to sell 450mm wafers at high enough prices to return its

EUVL lithography not ready for commercial production even by 2018.

Thus semi makers will crave 450mm wafers to reduce costs.

Wafer makers will NOT invest in 450mm wafers

without price hikes for 300mm wafers

300mm wafer prices should increase.

It will be beneficial for semi makers to use 450mm wafers even though

they will have to accept 300mm wafer price hikes.

Why EUVL lithography will not be ready for commercial production even by 2018?

1) Development of scanner plasma source has been delayed.

2) Even if EUVL scanners become available, several materials including

photo masks and photo resists are not ready.

Mask makers and resist makers can start full scale R&D only after

an EUVL scanner with acceptable throughput becomes available.

3) It should take some time for the business model to be established.

In the current ArF era, photo resist makers buy scanners to ensure quality.

In return the price of photo resists is high enough to offset the investment

burden of resist makers.

However, installing one EUVL scanner costs more than EUR100mn.

Semi makers and resist makers must determine how to share investment risk.

4) Semi makers would need more than 6 months for test runs after everything,

including EUVL scanners, photo masks, photo resists, etc., become available.



Industrials

Precision Equipment

17 October 2012

investment. Currently, top semiconductor manufacturers are saying ‘We will buy 450mm

wafers at 3-4x the 300mm wafer price’. However, it is unprofitable to mass-produce

450mm wafers at this selling price, unless the 300mm wafer price at least doubles.

We believe Shin-Etsu Chemical will not invest in 450mm wafers unless the 300mm wafer

price increases significantly. In our view, semiconductor manufacturers will only accept

price hikes for 300mm wafers after they start to think that methods other than using

450mm wafers (such as using EUVL) are unrealistic, too costly, or will not be available in

the next 3-4 years.

Recent change

We believe semiconductor makers have started to think in this way recently, especially

because our channel checks suggest top semi companies just started to procure 450mm

wafer related equipment in summer 2012. This is just beginning, and is definitely not a

full commitment. We believe semiconductor makers will accept price hikes for 300mm

wafers in 2014, because they will have become more determined about 450mm wafers

by then.

Rationale 3: Semi makers need a 2nd vendor of 450mm

Moreover, it is unlikely that semiconductor manufacturers will procure wafers from only 1

company. They need at least 2 vendors. However, except for Shin-Etsu Chemical, wafer

manufacturers do not have enough cash to invest in 450mm wafer capacity. In other

words, we need time for SUMCO to allow it to raise money and improve earnings in order

to be ready for a large investment.

It is also possible that Intel, TSMC or Samsung Electronics form JVs with wafer

manufacturers other than Shin-Etsu to make 450mm wafers. We believe SUMCO has the

technology to make 450mm wafers.

SUMCO unlikely to accept money from chip makers. If SUMCO does, this could

be very bad for the industry.

However, we believe SUMCO will not accept a capital injection from chip makers because

1) such a capital injection could end up with a leakage of wafer manufacturing know-how

and lower profitability in the long run and 2) SUMCO would worry about the potential

loss of existing users. If SUMCO accept Intel’s money for example, other chip makers are

likely to be reluctant to buy wafers from SUMCO. SUMCO knows this risk, and thus

SUMCO is unlikely to accept chip makers’ money. In fact, the JV between Samsung

Electronics and Wacker to make 300mm wafer has not been that successful.

Overall, our sense is that commercial production of 450mm wafers should start in 2017 or

later.



Industrials

Precision Equipment

17 October 2012

(B) Photoresists: Bearish about JSR and

Tokyo Ohka Delays in generation change likely to lower profitability of resist makers

Delays in EUVL lithography would be negative for photoresist makers. Actually, other

makers have been catching up with JSR for the past 2 years, mainly because technology

migration has slowed down. We believe that the average selling price of photoresists is

likely to decline in the future because product upgrades will be only minor in the next 3-4

years.

Chart 6: Market share of ArF photoresist


Korean companies likely to enter semi photoresist market in 3 years

We believe the profitability of semiconductor photoresist manufacturing will fall over the

next three years, given that there could be leakage of know-how to Korean companies.

Tokyo Ohka has announced that it will form a JV with Samsung group to manufacture ArF

photoresist. We believe it will be difficult for Tokyo Ohka to prevent the leakage of know-

how for photoresist manufacturing after it forms a JV with Samsung (005930 KS,

KRW1,330,000, NC) and builds a factory in Korea (1st factory outside of Japan owned by a

top 3 resist maker). This implies that semiconductor photoresists should become more of

a commodity, and that the profitability of both Tokyo Ohka and JSR would fall.

Barriers not high enough to prevent entry

Based on our channel checks for photoresists, we conclude that it will not be difficult for

Korean material manufacturers to copy the raw materials for photoresists. We believe the

Samsung group will have the know-how to make photoresists following its JV with Tokyo

Ohka.

The JV is likely to make EUVL resists, a negative move for the resist industry

Currently this JV plans to make ArF and KrF photoresists. But we believe the JV will try to

make EUVL photoresists in the future, especially because the business risk of EUVL

photoresistx is too large for Tokyo Ohka to bear, considering Tokyo Ohka’s financial

strength. However, we believe it could be disastrous for the resist industry if the JV starts

producing EUVL photoresists, because the know-how for most cutting edge technologies

could be leaked to chip makers. Besides, forming a JV with Samsung is likely to end up as

a bad situation for Tokyo Ohka itself.



Industrials

Precision Equipment

17 October 2012

JV could end up negative for Tokyo Ohka itself

It would become more difficult for Tokyo Ohka to sell photoresists to chip makers other

than Samsung in the future, because other chipmakers might worry about the leakage of

their know-how to Samsung. We have already seen a similar situation in silicon wafers

(non-Samsung chip makers prefer not to buy wafers from Samsung Siltronic Wacker, a JV

between Wacker and Samsung).

Can we expect a positive effect from multiple patterning?

Some may argue delays in the generation change to EUVL are positive for resist makers,

because the amount of photoresists used in multiple patterning is larger than for single

patterning. Chip makers are likely to use multiple patterning more in the next 3-4 years in

order to shrink chips by using immersion ArF (current generation) scanners. We agree

multiple patterning itself is positive for the resist industry. However, we believe the degree

of this positive effect is not strong enough to offset the negative effects mentioned above.



Industrials

Precision Equipment

17 October 2012

(C) Obstacles for EUVL lithography

(1) Obstacles to making scanners Light source

It is very difficult to make a powerful enough light source for EUVL scanners. Without a

powerful enough light, scanner throughput becomes too low for commercial use. Cymer

argues it can generate a strong enough light. But throughput cannot become high

enough unless the light source generates at least 60W/hour (preferably 100W/h) for long

periods of time (like 1 month) without shutting down to cool down.

Obstacles other than the light source

Some investors assume that Intel will only be able to start to use EUVL steppers in

commercial production if Cymer makes a powerful enough light source. However, we

believe the reality is totally different. Even if Cymer makes a powerful enough light source,

there are several other very difficult obstacles in making EUVL steppers with acceptable

performance, such as producing the mirror and making super precise alignment.

Substrate of mirror

We visited an optical glass company which is researching and developing the base

material (Ultra Low Expansion glass) for mirrors for EUVL (extreme ultraviolet lithography)

steppers. According to the company, it will be very difficult to make mirrors for EUVL

steppers. We heard a similar story from another company which is carrying out similar

R&D. Nobody even knows what kind of material to use to make the mirror. Without the

mirror EUVL steppers do not work.

Making super precise alignment would be another obstacle, especially if scanner makers

use twin stages.

(2) Obstacles to making materials for EUVL lithography Even if EUVL scanners become available, chip makers cannot use EUVL lithography

without the necessary materials. There could be many obstacles in realizing EUVL

lithography, such as photoresists, photo masks, and pellicles.

Photoresists

Full scale R&D of photoresists can start ONLY after EUVL steppers with acceptable

throughput become available (as explained below), implying that photoresists should

become ready probably 1 year after EUVL scanners with acceptable throughput become

available.

Photo masks

Full scale R&D of photo masks should start only after EUVL steppers with acceptable

throughput become available. It seems unclear about what kind of material to use as

substrates for photo masks. Major substrate manufacturers are very sensitive to ROI for

investment, and thus it is unlikely that they will start full scale R&D before it becomes

clearer that EUVL lithography would be realized soon.

(3) Non-technological obstacles for EUVL One example of non-technological obstacle

As discussed above, photoresist makers will probably have to buy EUVL scanners to mass-

produce EUVL resists. Currently, photoresist makers are conducting R&D by borrowing

EUVL steppers from independent institutions. However, this R&D is just to select the raw

material for photoresists. But in order to make EUVL photoresists they must test sample

photoresists on a real commercial line. A laboratory test does not work here, because

nobody can predict what would occur on wafers in the real mass production process.

Photoresist makers must use very similar lines to chip makers’ real lines (same masks,



Industrials

Precision Equipment

17 October 2012

same process materials, same process machines) to check whether their photoresist works

under the actual process. It would be unrealistic for resist makers to rent a stepper (they

cannot use very similar processes if they rent scanners) in order to guarantee the quality

of their products.

Resist makers likely to end up buying scanners reluctantly

Consequently, photoresist makers would probably end up buying an EUVL stepper

reluctantly. This implies photoresist makers must buy EUVL steppers once ASML makes

one with acceptable throughput.

Business risk for EUVL photoresist manufacturing is high

However, EUVL steppers are expensive. It would cost more than ¥15bn to install one

stepper and build supporting facilities (clean room, water, and electricity, among others).

Besides, the running cost of one EUVL stepper would be more than ¥1bn per year. Even if

one spends this huge amount as a fixed cost, revenue may end up being zero if the

company loses out on R&D competition, especially because the number of potential users

is at most 3-4. The probability that revenue would end up being zero is not small, given

that only two-three chip-makers should use EUVL lithography. Hence, the business risk for

EUVL resists is high.

How to allocate business risk among the food chain is a headache

In the ArF photoresist business, photoresist makers buy scanners to guarantee the quality

of resists (high marginal profit with high investment for resist makers). However, it is not

clear whether this business model will work for EUVL or not, given that fixed costs for

EUVL are 3x higher than for ArF.

JV unlikely to be a good solution

Semiconductor makers and photoresist makers must agree how to allocate business risk

among themselves. One way of absorbing business risk would be to form a JV with a chip

maker, or accept money from a chip maker. But as we discussed above forming a JV is

unlikely to be good solution for photoresist makers, and thus we believe Shin-Etsu and JSR

will not form JVs with chip makers to make photoresists.

This is just one example of the non-technological obstacles. Probably there are many

more obstacles that we have not even noticed.

Table 1: Valuation & Target Price

Stock

Price

Target

Price

EPS

(¥)

P/E

(X)

P/B

(X)

ROE

(%)

EV/EBITDA

(X)

Mkt Cap

(¥bn)

Div. Yield

(%)

Ticker Name Rating 10/16 F12e F13e F12e F13e F11a F12e F12e F13e 10/16 F10a

3405 KURARAY HOLD ¥901 ¥1,000 78.9 91.9 11.4 9.8 0.9 7.5% 2.9 2.9 313.8 4.4%

3436 SUMCO UNDERPERFORM ¥537 ¥500 15.5 66.0 NM 8.1 1.4 3.2% 4.9 2.3 138.4 0.0%

4004 Showa

Denko

HOLD ¥121 ¥130 9.4 10.7 12.8 11.2 0.7 4.7% 5.3 5.3 181.1 2.5%

4021 Nissan

Chem

NC ¥920 NC 11.9 12.7 77.3 72.4 1.3 9.8% 6.0 5.6 156.5 2.6%

4043 TOKUYAMA UNDERPERFORM ¥159 ¥120 6.9 2.6 23.1 61.5 0.3 1.0% 4.5 4.2 63.3 3.8%

4063 Shin-Etsu HOLD ¥4,565 ¥4,150 247.3 294.4 18.5 15.5 1.3 7.2% 7.0 5.9 1,938.3 2.4%

4185 JSR UNDERPERFORM ¥1,281 ¥1,150 107.8 114.0 11.9 11.2 1.0 9.3% 3.8 3.6 309.0 2.9%

4186 TOKYO

OHKA

UNDERPERFORM ¥1,639 ¥1,300 115.5 113.3 14.2 14.5 0.6 4.3% 2.1 -0.1 74.6 2.3%

4203 SUMITOMO

BAKE

NC ¥284 NC 27.2 32.9 10.4 8.6 0.6 5.4% 3.3 2.8 68.4 4.4%

4205 ZEON HOLD ¥565 ¥650 77.9 82.2 7.3 6.9 0.9 13.6% 3.7 3.4 143.3 1.8%

4217 Hitachi

Chem

BUY ¥1,052 ¥1,500 84.0 117.6 12.5 8.9 0.7 6.2% 2.7 2.2 228.7 3.4%

4901 Fuji Film UNDERPERFORM ¥1,352 ¥1,000 107.9 132.9 12.5 10.2 0.5 3.0% 3.1 2.7 627.6 3.0%

7751 CANON Hold ¥2,520 ¥2,600 202.4 203.2 12.5 12.4 1.2 9.6% 3.3 3.3 2,951.3 4.8%

4902 KONICA

MINOLTA

Hold ¥568 ¥500 47.5 51.5 12.0 11.0 0.9 5.8% 2.9 3.0 301.2 2.6%

Source: Jefferies estimates, company data, Bloomberg. Note: BPS=net assets – intangible assets – minority interest



Industrials

Precision Equipment

17 October 2012

Related Notes

Shin-Etsu Chemical (4063 JP) ‚Consolidation the Focus; Bear Scenario More Likely;

450mm Wafer 10-yr Roadmap‛

JSR Corporation (4185 JP) ‚Photoresist Business Should Face Tougher Competition; Rating

to Underperform‛

Precision Equipment ‚Obstacles for EUVL‛

Sumco (3436 JP) ‚Q2 Results Were Disappointing, But We Highly Appreciate New CEO’s

Strategy‛

Sumco (3436 JP) ‚Downgrade to Underperform: Recovery Likely to be Slower than

Expected‛

Semiconductors ‚Moore Stress = Structural Industry Shift‛ Mark Lipacis

ASML Hlding (ASML NA) ‚Slowing Down‛ Lee Simpson

Micron Tech (MU) ‚Beneficiary of Moore Stress? Analyst Day Takeaways‛ Sundeep Bajikar

Table 2: Shin-Etsu P&L

Unit : ¥billion Full Year

FY2011 FY2012E FY2013E FY2014E

P/L

Sales 1,047.7 1,045.0 1,100.0 1,120.0

Gross Profit 249.1 275.0 295.0 325.0

SG&A 99.5 115.0 115.0 115.0

Operating Income 149.6 160.0 180.0 210.0

Non-Operating Profit 24.9 16.0 16.0 16.0

Interest Received 3.0 3.0 3.0 3.0

Divided Received 1.5 1.5 1.5 1.5

Non-Operating Expense 9.3 8.0 8.0 8.0

Interest Expense 0.5 0.2 0.2 0.2

Recurring Income 165.2 168.0 188.0 218.0

Ex. Profit 5.5 0.0 0.0 0.0

Ex. Loss 16.1 0.0 0.0 0.0

Profit before Tax 154.7 168.0 188.0 218.0

Tax 54.2 63.0 63.0 74.0

Tax Rate 33% 38% 34% 34%

Net Income 100.6 105.0 125.0 144.0

EBITDA 232.5 252.0 276.0 320.0

Capex 87.2 80.0 100.0 120.0

Depreciation 82.9 92.0 96.0 110.0

R&D 35.7 35.7 35.7 35.7




Industrials

Precision Equipment

17 October 2012

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Table 3: Shin-Etsu Divisional Sales & OP

Unit : % Full Year

FY2011 FY2012E FY2013E FY2014E

Divisional Sales

PVC/Chlor-Alkali 324 340 360 370

Silicones 135 130 140 140

Specialty Chemicals 87 90 90 90

Semiconductor Silicon 230 215 230 230

Electronics & Functional Materials 178 200 210 220

Diversified 94 70 70 70

Total 1,048 1,045 1,100 1,120

Divisional OP


Silicones 34 34 36 36



Electronics & Functional Materials 38 40 43 45

Diversified 5 4 4 4

Adjustment 0 0 0 0

Total 150 160 180 210

Divisional D & A


Silicones 8 8 9 10



Electronics & Functional Materials 14 14

Diversified 4 4 4 4

Adjustment 0 0 0 0

Total 83 92 96 110

Divisional Capex


Silicones 14 5 20 10



Electronics & Functional Materials 15 15

Diversified 3 3 3 3

Total 87 80 100 120




Industrials

Precision Equipment

17 October 2012

Table 4: Shin-Etsu Margin analysis

Full Year

FY2011 FY2012E FY2013E FY2014E

Margin Analysis

Gross Profit / Sales 24.1% 23.8% 26.3% 26.8%

SG&A/Sales 10.0% 9.5% 11.0% 10.5%

Operating Income/ Sales 14.3% 15.3% 16.4%

Reccuring Profit/Sales 15.2% 15.8% 16.1% 17.1%

EBITDA/Sales 23.0% 22.2% 24.1% 25.1%

Depreciation/Sales 8.9% 7.9% 8.8% 8.7%

Capex/Sales 16.1% 8.3% 7.7% 9.1%

R&D/Sales 3.5% 3.4% 3.4% 3.2%

Profitability Analysis

ROA 8.4% 8.8% 9.7% 10.9%

Operating Profit / Sales 15.3% 16.4% 18.8%

Sales / Total Assets 58.7% 57.7% 59.5% 58.0%

ROE 7.1% 7.2% 8.5% 9.3%

Net Profit / Sales 9.6% 10.0% 11.4% 12.9%


Total Assets / Equity 121.4% 121.1% 118.7% 118.1%




Industrials

Precision Equipment

17 October 2012

Table 5: Shin-Etsu B/S


FY2011 FY2012E FY2013E FY2014E

B/S

Current Assets 942.2 993.1 1,072.4 1,157.4

Cash & Equivalents 241.4 366.8 416.1 501.2

Security 89.3 89.3 89.3 89.3

Account Revievable 264.3 200.0 210.0 210.0

Inventories 260.3 250.0 270.0 270.0

Other 87.0 87.0 87.0 87.0

Non-Current Assets 867.6 855.6 859.6 869.6

Tangible Assets 598.6 586.6 590.6 600.6

Intangible Assets 13.6 13.6 13.6 13.6

Investment & Other 255.5 255.5 255.5 255.5

Total Assets 1,809.8 1,848.7 1,932.0 2,027.0

Current Liabilities 247.4 225.2 230.2 232.2

Account Payable 109.4 101.0 106.0 108.0

Short Term Debt 13.9 0.0 0.0 0.0

Other 124.20 124.20 124.20 124.20

L/T Liabilities 67.8 66.4 66.4 66.4

Long Term debt 1.5 0.0 0.0 0.0

Other 66.37 66.37 66.37 66.37

Total Liabilities 315.3 291.6 296.6 298.6

Shareholders’ Equity 1,642.4 1,704.9 1,783.2 1,876.2

Valuation and Translation Difference -185.5 -185.5 -185.5 -185.5

Minority Interest 37.7 37.7 37.7 37.7

Net Assets 1,494.6 1,557.1 1,635.4 1,728.5

Total Liabilities & Net Assets 1,809.8 1,848.7 1,932.0 2,027.0

Turn Over Analysis

Account Receivable 3.96 5.23 5.24 5.33

Inventory 4.02 4.18 4.07 4.15

Account Payable 9.58 10.35 10.38 10.37

% of Total Assets

Current Assets 0.52 0.54 0.56 0.57


Tangible Assets 0.33 0.32 0.31 0.30

Total debt 0.01 0.00 0.00 0.00

Net Assets 0.83 0.84 0.85 0.85




Industrials

Precision Equipment

17 October 2012

Table 6: Shin-Etsu Cash Flow


FY2011 FY2012E FY2013E FY2014E

Cash Flow

Pretax Income 100.6 105.0 125.0 144.0

Depreciation 82.9 92.0 96.0 110.0

Equity in earnings of affiliates -15.7 -7.0 -7.0 -7.0

Change in WC -77.0 66.2 -25.0 2.0

Other 5.7 0.0 0.0 0.0

Cash flow from Operation 96.6 256.2 189.0 249.0

CAPEX -80.3 -80.0 -100.0 -120.0

Other -8.9 0.0 0.0 0.0

Cash flow from Investment -89.2 -80.0 -100.0 -120.0

FCF 7.4 176.2 89.0 129.0

Change in Debt 0.0 -15.3 0.0 0.0

Issue of Shares 0.0 0.0 0.0 0.0

Dividend paiid -42.5 -42.5 -46.7 -51.0

Other 0.3 0.0 0.0 0.0

Cash flow from Financiong -42.2 -57.8 -46.7 -51.0


Table 7: Shin-Etsu Per Share Analysis

Unit : ¥

FY2011 FY2012E FY2013E FY2014E

Per Share Analysis

Share Out. (Mil Share) 424.6 424.6 424.6 424.6

EPS 237 247 294 339

DPS 100 100 110 120

BPS 3,423 3,481 3,666 3,885

Sales / Share 2,467.6 2,461.2 2,590.7 2,637.8

EBITDA / Share 547.6 593.5 650.0 753.7

FCF / Share 17.4 415.0 209.6 303.8

Debt Analysis

Total Debt (¥billion) 15.32 0.00 0.00 0.00

Net Debt (¥billion) -315.38 -456.13 -505.42 -590.47

Total Debt /Equity 0.0 0.0 0.0 0.0

Net Debt/Equity -0.2 -0.3 -0.3 -0.3

Tota Debt/EBITDA 0.0 0.0 0.0 0.0

Net Debt/EBITDA NM NM NM NM

Interest Rate 3% NM NM NM

Interest Coverage Ratio 319.6 840.0 940.0 1090.0




Industrials

Precision Equipment

17 October 2012

Table 8: Shin-Etsu Quarterly P&L

Unit : ¥billion FY2011 FY2012E

Q1 Q2 Q3 Q4 Q1 Q2E Q3E Q4E

Quarterly PL

Sales 250.0 271.3 270.1 256.3 266.5 253.5 266.0 259.0

Operating Income 40.0 40.4 37.2 32.0 40.3 42.7 40.0 37.0

Recurring Income 42.2 42.1 41.1 39.8 41.0 45.0 40.5 36.5

Net Income 23.8 27.2 24.6 25.0 26.6 27.4 26.5 19.5

EBITDA 58.8 61.1 59.5 53.1 59.0 69.0 63.0 61.0

% of Sales/Revenues

Operating Profit 16% 15% 14% 12% 15% 17% 15% 14%

Net Income 10% 10% 9% 10% 10% 11% 10% 8%

EBITDA 24% 23% 22% 21% 22% 27% 24% 24%

Divisional Sales

PVC/Chlor-Alkali 67.5 92.7 87.0 76.9 85.5 84.5 85.0 85.0

Silicones 35.5 34.9 31.7 33.3 32.3 32.7 33.0 32.0

Specialty Chemicals 20.8 21.5 22.7 22.2 21.5 23.5 22.0 23.0

Semiconductor Silicon 66.2 57.9 57.2 48.3 54.4 50.6 56.0 54.0

Electronics & Functional

Materials

36.0 40.5 48.6 52.7 52.1 47.9 50.0 50.0

Diversified 24.0 23.9 22.9 22.8 20.8 14.2 20.0 15.0

Total 250.0 271.3 270.1 256.3 266.5 253.5 266.0 259.0

Divisional OP

PVC/Chlor-Alkali 6.1 7.3 7.0 3.3 9.9 11.1 9.5 9.5

Silicones 9.2 8.2 7.1 9.2 7.5 9.5 8.5 8.5

Specialty Chemicals 3.5 3.5 3.5 4.2 3.9 4.1 3.0 3.0

Semiconductor Silicon 10.4 10.6 9.5 3.8 6.6 6.4 8.0 7.0


Materials

9.2 9.5 9.2 10.2 10.4 10.6 10.0 9.0

Diversified 1.7 1.0 1.0 1.3 1.8 1.2 1.0 0.0

Total 40.0 40.4 37.2 32.0 40.3 42.7 40.0 37.0

Divisional OP margin

PVC/Chlor-Alkali 9.0% 7.9% 8.0% 4.3% 11.5% 13.2% 11.2% 11.2%

Silicones 25.8% 23.6% 22.4% 27.5% 23.1% 29.1% 25.8% 26.6%

Specialty Chemicals 16.8% 16.5% 15.3% 18.9% 18.3% 17.3% 13.6% 13.0%

Semiconductor Silicon 15.8% 18.4% 16.6% 7.8% 12.1% 12.6% 14.3% 13.0%


Materials

25.6% 23.5% 19.0% 19.4% 20.0% 22.1% 20.0% 18.0%

Diversified 7.1% 4.3% 4.2% 5.8% 8.5% 8.6% 5.0% 0.0%

Total 16.0% 14.9% 13.8% 12.5% 15.1% 16.8% 15.0% 14.3%




Industrials

Precision Equipment

17 October 2012

Table 9: SUMCO P&L

Unit : ¥bn

FY2011 FY2012E FY2013E FY2014E

P/L

Sales 247.2 217.0 225.0 260.0


Non-Operating Profit 1.5 1.5


Non-Operating Expense 4.5 6.5


Recurring Income -5.7 13.0 37.0 55.0

Ex. Profit 10.0 1.5 1.0 1.0

Ex. Loss 59.9 8.0 8.0 8.0

Profit before Tax -55.9 5.5 28.0 45.0

Tax 28.4 1.5 11.0 19.0

Tax Rate -50.9% 27.3% 39.3% 42.2%

Net Income -84.4 4.0 17.0 26.0

EBITDA 52.3 52.4 66.7 92.7

Capex 35.0 15.0 17.0 50.0

Depreciation 54.7 36.7 26.7 32.7


Table 10: SUMCO Cash Flow

Unit : ¥bn

FY2011 FY2012E FY2013E FY2014E

Cash Flow

Pretax Income -84.4 4.0 17.0 26.0

Depreciation 54.7 36.7 26.7 32.7

Change in WC 12.0 13.3 1.5 -8.2

Other 0.0 5.0 5.0 5.0

Cash flow from Operation 58.9 50.2 55.5

CAPEX -35.0 -15.0 -17.0 -50.0

Other 0.0 0.0 0.0 0.0

Cash flow from Investment -15.0 -17.0 -50.0

FCF -52.7 43.9 33.2 5.5

Change in Debt 52.7 -43.9 -33.2 -5.5


Dividend paiid 0.0 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0

Cash flow from Financing -43.9 -33.2 -5.5




Industrials

Precision Equipment

17 October 2012

Table 11: SUMCO Per Share Analysis

Unit : ¥

FY2011 FY2012E FY2013E FY2014E

Per Share Analysis

Share Out. (mn share) 257.7 257.7 257.7

EPS -327.33 15.52 65.96 100.87

DPS 0.0 0.0 0.0 0.0

BPS 424.5 440.0 505.9 606.8

Debt Analysis


Net Debt (¥billion) 179.1 225.2 192.0 186.5


Net Debt/Equity 1.4 1.8 1.4 1.1

Tota Debt/EBITDA 4.5 5.2 3.6 2.5

Net Debt/EBITDA 3.4 4.3 2.9 2.0


Table 12: SUMCO Quarterly P&L

Unit : ¥bn FY2011 FY2012

Q1 Q2 Q3 Q4 Q1 Q2 Q3E Q4E

Quarterly PL

Sales 65.7 69.2 62.3 49.9 52.8 55.9 55.0 53.3

Operating Income 1.9 3.5 1.0 -5.4 2.9 4.0 5.0 4.1

Non-Operating Expense 0.8 -0.1 0.2 0.5 0.4 0.4 0.4 0.5

Recurring Income 0.2 1.3 -0.3 -6.9 1.9 3.4 4.3 3.4

Net Income -2.0 0.6 -0.7 -82.3 2.1 2.8 3.6 -4.6

Depreciation 1.2 0.6 0.6 0.9 0.1 0.1 0.1 0.0

EBITDA 3.2 4.1 1.6 -4.5 3.0 4.1 5.1 4.1

% of Sales/Revenues

Operating Profit 3% 5% 2% -11% 6% 7% 9% 8%

Net Income -3% 1% -1% -165% 4% 5% 7% -9%

EBITDA 5% 6% 3% -9% 6% 7% 9% 8%




Industrials

Precision Equipment

17 October 2012

Table 13: SUMCO B/S

Unit : ¥bn

FY2011 FY2012E FY2013E FY2014E

B/S

Current Assets 172.2 146.4 143.3 152.6

Cash 56.8 48.4 48.4 48.4

Securities 0.0 0.0 0.0 0.0

Account Revievable 43.7 38.4 39.8 46.0

Inventories 60.9 48.9 44.4 47.5

Other 10.8 10.8 10.8 10.8


Tangible Assets 239.3 220.3 213.3 233.3

Goodwill 27.5 24.8 22.1 19.4

Other 5.3 5.3 5.3 5.3


Total Assets 543.3 490.8 473.1 494.6


Account Payable 20.6 16.6 15.0 16.1

Short Term Debt 97.7 97.7 97.7 97.7

Other 24.6 24.6 24.6 24.6

L/T Liabilities 271.2 227.3 194.1 188.6

Long Term debt 219.9 175.9 142.7 137.2

Other 51.4 51.4 51.4 51.4


Shareholders’ Equity 120.7 113.4 130.4 156.4


Net Assets 129.2 124.7 141.7 167.7

Total Liabilities & Net Assets 490.8 473.1 494.6

Turn Over Analysis


Inventory 4.1 4.4 5.1 5.5


% of Total Assets

Current Assets 32% 30% 30% 31%

Non-Current Assets 68% 70% 70% 69%

Tangible Assets 44% 45% 45% 47%

Total debt 43% 56% 51% 47%

Net Assets 24% 25% 30% 34%




Industrials

Precision Equipment

17 October 2012

Table 14: JSR P&L


FY3/12 FY3/13E FY3/14E FY3/15E

P/L

Sales 349.9 370.0 380.0 396.0


Non-Operating Profit 6.9 6.5 5.5 5.5


Divided Received 0.4 0.4 0.0 0.0

Equity in earnings of affiliates 4.7 5.0 4.0 4.0

Non-Operating Expense 1.3 1.5 1.5 1.5



Ex. Profit 4.3 0.0 0.0 0.0

Ex. Loss 4.6 2.0 2.0 2.0


Tax 14.8 12.0 11.0 12.0

Tax Rate 36% 32% 29% 29%

Net Income 26.4 26.0 27.5 29.0

EBITDA 60.4 62.1 64.7 69.7

Capex 19.7 24.0 23.0 30.0

Depreciation 17.8 20.0 22.5 25.0

R&D 21.0 22.0 26.0 28.0


Table 15: JSR Divisional Sale & OP

Unit : ¥billion, % Full Year

FY3/12 FY3/13E FY3/14E FY3/15E

Divisional Sales

Elastomer 180.8 200.0 203.0 214.0

Plastics 51.2 52.0 52.0 52.0

Fine & Other 117.9 118.0 125.0 130.0

Total 349.9 370.0 380.0 396.0

Divisional OP

Elastomer 19.4 19.0 19.0 20.5

Plastics 2.1 1.5 1.5 1.5

Fine & Other 14.5 14.5 16.0 17.0

Total 36.0 35.0 36.5 39.0

Divisional OP Margin

Elastomer 11% 10% 9% 10%

Plastics 4% 3% 3% 3%

Fine & Other 12% 12% 13% 13%

Total 10% 9% 10% 10%

Divisional D & A

Elastomer 8.4 8.2 8.5 9.0

Plastics 1.3 1.0 1.0 1.0

Fine & Other 8.1 10.8 13.0 15.0

Total 17.8 20.0 22.5 25.0

Divisional Capex

Elastomer 9.6 10.0 6.0 10.0

Plastics 1.0 1.0 1.0 1.0

Fine & Other 9.1 13.0 16.0 19.0

Total 19.7 24.0 23.0 30.0




Industrials

Precision Equipment

17 October 2012

Table 16: JSR Margin analysis

Unit : % Full Year

FY3/12 FY3/13E FY3/14E FY3/15E

Margin Analysis

Gross Profit / Sales 26% 24% 24% 24%

SG&A/Sales 15% 15% 15% 14%

Operating Income/ Sales 10% 9% 10% 10%

Recurring Profit/Sales 12% 11% 11% 11%

EBITDA/Sales 17% 17% 17% 18%

Depreciation/Sales 5% 5% 6% 6%

Capex/Sales 6% 6% 6% 8%

R&D/Sales 6% 6% 7% 7%


ROA 9.2% 8.1% 8.4% 8.5%

Operating Profit / Sales 10.3% 9.5% 9.6% 9.8%


ROE 10.0% 9.2% 9.1% 9.0%

Net Profit / Sales 7.5% 7.0% 7.2% 7.3%




Table 17: JSR Cash Flow


FY3/12 FY3/13E FY3/14E FY3/15E

Cash Flow

Pretax Income 31.0 28.0 29.5 31.0

Depreciation 17.8 20.0 22.5 25.0


Change in WC -5.4 -4.1 -2.0 -3.2

Other -9.7 0.0 0.0 0.0


CAPEX -19.7 -24.0 -23.0 -30.0

Other -1.4 0.0 0.0 0.0


FCF 7.9 14.9 23.0 18.8

Change in Debt 0.1 -14.9 -23.0 -18.8


Dividend paid -7.7 -8.7 -8.9 -9.2

Other 0.0 0.0 0.0 0.0

Cash flow from Financing -7.7 -23.6 -31.9 -28.0




Industrials

Precision Equipment

17 October 2012

Table 18: JSR Per share analysis

Unit : ¥ Full Year

FY3/12 FY3/13E FY3/14E FY3/15E

Per Share Analysis


EPS 109.47 107.78 113.99 120.21

DPS 32.0 36.0 37.0 38.0

BPS 1,164.6 1,258.5 1,343.8 1,434.3

Sales / Share 1,450.6 1,533.7 1,575.2 1,641.5

EBITDA / Share 250.5 257.6 268.3 289.0

FCF / Share 32.5 61.8 95.3 77.9

Dividend / Share 32.0 36.0 37.0 38.0

Debt Analysis


Net Debt (¥billion) -74.8 -102.1 -119.1 -134.0


Net Debt/Equity -0.3 -0.3 -0.4 -0.4

Total Debt/EBITDA 0.3 0.0 0.0 0.0


Interest Rate 1% NA NA NA





Industrials

Precision Equipment

17 October 2012

Table 19: JSR B/S


FY3/12 FY3/13E FY3/14E FY3/15E

B/S

Current Assets 292.4 292.7 314.4 335.3



Inventories 64.9 69.0 71.0 73.0

Other 48.3 27.3 27.3 27.3





Total Assets 430.7 434.9 457.2 483.0




Other 31.6 21.0 21.0 21.0

L/T Liabilities 18.5 22.0 22.0 22.0


Other 18.5 22.0 22.0 22.0



Net Assets 284.3 303.6 324.2 346.0

Total Liabilities & Net Assets 430.7 434.9 457.2 483.0

Turn Over Analysis


Inventory 5.39 5.36 5.35 5.42


% of Total Assets

Current Assets 67.9% 67.3% 68.8% 69.4%

Non-Current Assets 32.1% 32.7% 31.2% 30.6%

Tangible Assets 18.7% 19.4% 18.6% 18.6%

Total debt 3.5% 0.1% 0.0% 0.0%

Net Assets 66.0% 69.8% 70.9% 71.6%




Industrials

Precision Equipment

17 October 2012

Table 20: JSR Quarterly P&L

Unit : ¥billion FY3/12 FY3/13


Quarterly PL

Sales 84.4 86.0 89.0 90.6 93.0 94.0 91.5 91.5

Operating Income 9.2 10.2 9.6 6.9 8.7 9.8 8.5 8.0


Net Income 5.4 6.2 7.3 7.5 6.8 6.8 6.2 6.2

% of Sales/Revenues

Operating Profit 11% 12% 11% 8% 9% 10% 9% 9%

Net Income 6% 7% 8% 8% 7% 7% 7% 7%

EBITDA 16% 17% 16% 13% 14% 0% 0% 0%

Divisional Sales

Elastomer 42.0 44.3 44.9 49.7 49.5 49.5 50.5 50.5

Plastics 11.7 12.2 13.9 13.5 13.2 12.8 13.0 13.0

Fine & Other 30.7 29.5 30.2 27.5 30.3 31.7 28.0 28.0

Total 84.4 86.0 89.0 90.7 93.0 94.0 91.5 91.5

Divisional OP

Elastomer 5.2 5.1 4.6 4.4 4.4 5.1 4.8 4.7

Plastics 0.1 0.5 1.1 0.4 0.5 0.3 0.2 0.5

Fine & Other 3.9 4.6 3.9 2.1 3.8 4.4 3.5 2.8

Total 9.2 10.2 9.6 6.9 8.7 9.8 8.5 8.0


Elastomer 12.5% 11.6% 10.2% 8.8% 8.9% 10.3% 9.5% 9.3%

Plastics 0.9% 3.9% 8.0% 3.3% 3.7% 2.5% 1.5% 3.8%

Fine & Other 12.6% 15.6% 12.9% 7.5% 12.6% 13.8% 12.5% 10.0%

Total 10.9% 11.9% 10.8% 7.6% 9.4% 10.4% 9.3% 8.7%


Table 21: Tokyo Ohka P&L


FY3/12 FY3/13E FY3/14E FY3/15E

P/L

Sales 80.0 80.0 81.0 85.0

COGS 55.0 53.5 54.2 57.7

SG&A 18.9 18.5 19.0 19.0



Ex. Profit 0.0 0.1 0.1 0.1

Ex. Loss 0.3 0.5 0.5 0.5


Tax 2.5 3.2 3.1 3.3

Tax Rate 38% 37% 37% 37%

Net Income 3.8 5.2 5.1 5.4

EBITDA 10.1 12.1 11.8 12.5

Capex 3.3 3.8 4.0 5.0

Depreciation 4.0 4.1 4.0 4.2

R&D 6.2 7.0 7.0 7.0




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Precision Equipment

17 October 2012

Table 22: Tokyo Ohka Divisional Sales & OP


FY3/12 FY3/13E FY3/14E FY3/15E

Divisional Sales

Material business 66.6 72.0 76.0 80.0

Electronic Materials 43.2 50.0 50.0 50.0

High Purity Chemicals 22.8 25.0 25.0 25.0

Printing Materials

Others 0.1 1.0 1.0 1.0

Equipment business 13.4 8.0 5.0 5.0

Total 80.0 80.0 81.0 85.0

Divisional OP

Material business 8.3 10.6 11.0 11.5

Equipment business 0.9 0.6 0.0 0.0

Corporate -3.1 -3.2 -3.2 -3.2

Total 6.1 8.0 7.8 8.3

Divisional D & A

Total 4.0 4.1 4.0 4.2

Divisional Capex

Total 3.3 3.8 4.0 5.0


Table 23: Tokyo Ohka Margin Analysis

Unit : % Full Year

FY3/12 FY3/13E FY3/14E FY3/15E

Margin Analysis

SG&A/Sales 24% 23% 23% 22%

Operating Income/ Sales 8% 10% 10% 10%

Recurring Profit/Sales 9% 11% 11% 11%

EBITDA/Sales 13% 15% 15% 15%

Depreciation/Sales 5% 5% 5% 5%

Capex/Sales 4% 5% 5% 6%

R&D/Sales 8% 9% 9% 8%


ROA 4.1% 5.8% 6.2% 6.5%

Operating Profit / Sales 7.6% 10.0% 9.6% 9.8%


ROE 3.3% 4.4% 4.2% 4.3%

Net Profit / Sales 4.8% 6.5% 6.3% 6.4%






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17 October 2012

Table 24: Tokyo Ohka Cash Flow


FY3/12 FY3/13E FY3/14E FY3/15E

Cash Flow

Pretax Income 3.8 5.2 5.1 5.4

Depreciation 4.0 4.1 4.0 4.2


Change in WC 9.0 0.0 -0.3 -1.2

Other -4.9 0.0 0.0 0.0


CAPEX -3.1 -3.8 -4.0 -5.0

Other -15.4 0.0 0.0 0.0


FCF -6.6 5.2 4.5 3.1

Change in Debt 0.0 0.0 0.0 0.0


Dividend paid 0.0 -1.8 -1.8 -1.8

Other 0.0 1.8 1.8 1.8

Cash flow from Financing 0.0 0.0 0.0 0.0


Table 25: Tokyo Ohka Per Share Analysis

Unit : ¥ Full Year

FY3/12 FY3/13E FY3/14E FY3/15E

Per Share Analysis


EPS 85.4 115.5 113.3 120.0

DPS 38.0 40.0 40.0 40.0

BPS 2,675.9 2,732.8 2,806.1 2,886.1

Sales / Share 1,790.2 1,777.6 1,799.8 1,888.7

EBITDA / Share 226.2 268.9 262.2 277.7

FCF / Share -148.6 115.6 100.0 68.8

Dividend / Share 38.0 40.0 40.0 40.0

Debt Analysis


Net Debt (¥billion) -49.5 -37.8 -40.7 -41.9


Net Debt/Equity -0.4 -0.3 -0.3 -0.3

Total Debt/EBITDA 0.1 0.0 0.0 0.0


Interest Rate NM NM NM NM





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17 October 2012

Table 26: Tokyo Ohka B/S


FY3/12 FY3/13E FY3/14E FY3/15E

B/S

Current Assets 83.0 69.6 72.9 75.7



Inventories 11.7 11.7 11.8 12.4

Other 1.1 1.1 1.1 1.1





Total Assets 138.8 125.1 128.4 132.0




Other 13.9 -2.6 -2.6 -2.6

L/T Liabilities 2.6 2.1 2.1 2.1


Other 2.1 2.1 2.1 2.1



Net Assets 119.6 123.0 126.3 129.9

Total Liabilities & Net Assets 138.8 125.1 128.4 132.0

Turn Over Analysis


Inventory 6.87 6.87 6.87 6.87

Account Payable 31.23 30.77 31.15 32.69

% of Total Assets

Current Assets 60% 56% 57% 57%

Non-Current Assets 42% 46% 45% 45%

Tangible Assets 0% 0% 0% 0%

Total debt 14% 2% 2% 2%

Net Assets 86% 98% 98% 98%




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Precision Equipment

17 October 2012

Table 27: Tokyo Ohka Quarterly P&L

Unit : ¥billion FY3/12 FY3/13


Quarterly PL

Sales 19.4 21.6 19.6 19.5 16.9 22.1 20.5 20.5

Operating Income 2.1 2.0 2.3 -0.3 2.1 1.9 2.2 1.8


Net Income 1.3 1.2 1.2 0.2 1.2 1.4 0.0 2.6

Depreciation 1.0 1.1 1.1 0.8 0.0 0.0 0.0 0.0

EBITDA 3.1 3.1 3.4 0.6 2.1 1.9 2.2 1.8

% of Sales/Revenues

Operating Profit 11% 9% 12% -1% 12% 9% 11% 9%

Net Income 7% 5% 6% 1% 7% 6% 0% 13%

EBITDA 16% 14% 17% 3% 12% 9% 11% 9%

Divisional Sales

Material business 17.5 17.0 16.8 16.9 16.5 19.0 18.5 18.0

Equipment business 2.0 4.5 2.8 4.1 0.3 3.2 2.0 2.5

Total 19.4 21.6 19.6 19.5 16.9 22.1 20.5 20.5

Divisional OP

Material business 3.0 2.3 2.6 0.4 2.9 2.3 2.8 2.6

Equipment business -0.2 0.5 0.5 0.2 -0.2 0.6 0.1 0.1

Corporate -0.7 -0.8 -0.8 -0.9 -0.7 -0.9 -0.7 -0.9

Total 2.1 2.0 2.3 -0.3 2.1 1.9 2.2 1.8


Material business 17.1% 13.4% 15.4% 2.6% 17.8% 11.9% 15.1% 14.4%

Equipment business -8.7% 10.1% 16.2% 3.8% -52.5% 18.3% 5.0% 4.0%

Total 10.8% 9.1% 11.5% -1.3% 12.2% 8.8% 10.7% 8.8%




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17 October 2012

Analyst CertificationI, Yoshihiro Azuma, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Yoshihiro Azuma is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies & Company, Inc. andis not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies & Company, Inc., a FINRAmember firm, and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subjectcompany, public appearances and trading securities held by a research analyst.

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Meanings of Jefferies RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more withina 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock priceconsistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperformrated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions onthe investment merits of the company are provided.

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Conviction List Methodology

1. The aim of the conviction list is to publicise the best individual stock ideas from Jefferies Global Research2. Only stocks with a Buy rating are allowed to be included in the recommended list.3. Stocks are screened for minimum market capitalisation and adequate daily turnover. Furthermore, a valuation, correlation and style screen

is used to ensure a well-diversified portfolio.4. Stocks are sorted to a maximum of 30 stocks with the maximum country exposure at around 50%. Limits are also imposed on a sector basis.5. Once a month, analysts are invited to recommend their best ideas. Analysts’ stock selection can be based on one or more of the following:

non-Consensus investment view, difference in earnings relative to Consensus, valuation methodology, target upside/downside % relativeto the current stock price. These are then assessed against existing holdings to ensure consistency. Stocks that have either reached theirtarget price, been downgraded over the course of the month or where a more suitable candidate has been found are removed.

6. All stocks are inserted at the last closing price and removed at the last closing price. There are no changes to the conviction list duringthe month.

7. Performance is calculated in US dollars on an equally weighted basis and is compared to MSCI World AC US$.8. The conviction list is published once a month whilst global equity markets are closed.9. Transaction fees are not included.

10. All corporate actions are taken into account.

Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of



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the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• ASML Holding NV (ASML NA: €41.32, HOLD)• Canon Inc. (7751 JP: ¥2,542, HOLD)• FUJIFILM Holdings Corporation (4901 JP: ¥1,384, UNDERPERFORM)• Hitachi Chemical Company, Ltd. (4217 JP: ¥1,053, BUY)• Intel Corporation (INTC: $22.35, HOLD)• JSR Corporation (4185 JP: ¥1,319, UNDERPERFORM)• Konica Minolta Holdings Inc. (4902 JP: ¥576, HOLD)• Kuraray Co., Ltd. (3405 JP: ¥907, HOLD)• MEMC Electronic Materials, Inc. (WFR: $2.45, HOLD)• Micron Technology, Inc. (MU: $5.78, BUY)• Shin-Etsu Chemical (4063 JP: ¥4,560, HOLD)• Showa Denko K. K. (4004 JP: ¥120, HOLD)• SUMCO (3436 JP: ¥537, UNDERPERFORM)• Tokuyama Corporation (4043 JP: ¥158, UNDERPERFORM)• Tokyo Ohka Kogyo Co., Ltd. (4186 JP: ¥1,640, UNDERPERFORM)• Zeon Corporation (4205 JP: ¥562, HOLD)

Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 748 47.73% 116 15.51%HOLD 703 44.86% 78 11.10%UNDERPERFORM 116 7.40% 0 0.00%

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