WASEDA Hirota Seminar Research

Enterprise for analysis: Daikin Industries, Ltd.

Code: 6367 Stock price (September, 3rd

, 2012): ¥ 2067 Rating: “BUY”

Target stock price: ¥ 2790

1. Investment Summary

The target stock price of Daikin Industries, Ltd. was estimated at ¥ 2790 by using the Discounted Cash Flow method

(hereafter, DCF method). It is 32.61% higher than current stock prices ¥ 2067. Thus the investment recommendation of

Daikin is "BUY". There are two main reasons of our rating. First, Daikin’s top-level energy-saving technology has

potential for increasing market share in the developed and emerging countries because consciousness about

energy-saving is increasing all over the world after the Great East Japan Earthquake. Second, Dakin is growing very

much in China market by sales strategy and high-quality service which Daikin acquired for over 80 years. Therefore the

best practice in China can be applied in emerging markets and it is possible to expand their sales especially in emerging

markets in the future.

2. Company Overview

Daikin is a Japanese air-conditioning maker. Since becoming the first in Japan to manufacture packaged

air-conditioning systems, in 1951, it has expanded its business all over the world. At of the end of March 2011, the net

sales were 1,200 billion yen and the operating income was 80 billion yen, which was ranked first in the world (Exhibit

1). Not only air-conditioning business, Daikin does 3 other businesses. The followings are outline of businesses of

Daikin.

Air-Conditioning

“Air-conditioning” is a core business which covers 85%of its net sales (Exhibit 2). Daikin has spread comfortable

living. This is based on their high technologies and polite services. It has grown up as the world’s sole and the

largest manufacturer which creates from refrigerants to air-conditionings.

Chemicals

Chemicals business consists in 11% of the net sales of Daikin. Daikin’s business ranges from research to

commercialization. It specializes in fluorinated refrigerants, and this company offers a lineup of more than 1,800

fluorine compounds.

Other Businesses

In addition to the two businesses above, Daikin engages in Oil Hydraulics and Defense. Both of their net sales

account for about 4% of Daikin.

3. Characteristics of the Business of Daikin

Energy-saving Technologies

Daikin emphasizes energy-saving technology such as heat pump, inverter and reluctance DC. 80% of energy-saving

efficiency depends on compressor which is the motor of air-conditioning and they are technology about compressor.

Above all, inverter is remarkable. Inverter is a system which control revolution of compressor automatically. It can

always keep room temperature at preset temperature so electricity consumption is reduced by 30% and energy

efficiency is increased. In Japan, all air-conditioning have inverter, but air-conditioning with inverter is about 10%

abroad (Exhibit 3). Environmental consideration is global task and energy-saving technology of Daikin including

inverter will be needed in the world.

Sales Network Strategy

Daikin has own outlet stores around the world. Main sales of air-conditioning have been occupied by sales through

them. There are employees who have immense knowledge and high technique in all outlet stores. Therefore Daikin can

provide customized products and service for customers. In addition, these outlet stores can quickly deal with an

air-conditioning problem which needs to be solved as soon as possible. This high quality service which other companies

can’t is one of the most important reasons why air-conditioning business of Daikin can steadily expand their sales.

M&A

A CEO of Daikin says “Daikin aims at Global No.1 Company on entire air-conditioning business”. Through M&A,

the company aims to improve the manufacture technologies and sales network that Daikin doesn’t have. Daikin carry

on M&A in order to enter new market such as developed countries or North America. The recent M&A which Daikin

did were the acquisition with OYL in Malaysia, AIRFEL A.S. in Turkey, and Goodman Global Group in USA.

From acquisition of OYL, Daikin gained the large-scale air-conditioning system for the big institutions and the skill

of manufacturing low price home air-conditionings. In addition to the new system and skill, by combining with the

remote surveillance skill and accuracy of the maintenance, Daikin will be able to respond to the new needs. As for the

East Asia area, Daikin merged with AIRFEL A.S. since they expected a growth of Turkish market and

the other surrounding Asian markets. The aim of the acquisition of Goodman Global is to increase share

on the home air-conditioning market in US although American household market uses duct type.

Daikin is good at manufacturing ductless air-conditioning. By acquiring productive skills and the sales

network of Goodman, Daikin expects increasing sales on the Americas.

Tie-up with Gree Electronics

In 2008, Daikin tied up with Gree Electronics, and entrusted manufacturing of the home air-conditionings. Through

this tie-up, Daikin reinforced a capability of manufacturing for the low-priced home air-conditionings, on the other

hand, Daikin taught Gree their inverter technologies which are the most advanced in the world.

To flow out an inverter technology which is an overwhelming strength of Daikin can be considered as a risk since it

shakes Daikin as world’s best of air-conditioning business.

However, the flowing out of the inverter technology in to China also gave Daikin a chance to change world market into

advantageous market by making inverter air-conditioning as a global standard instead of the expensive product. Daikin

got advantage to low-price air-conditioning by tie-up with Gree as Daikin is increasing the shares in the Indian and

Chinese markets.

4. Trend of Air-conditioning Market

Japanese Market

The scale of Air-conditioning market is estimated at approximately 9.3 million-units. It is estimated that the average

growth rate of the market in the past 5years is 0.2%. Due to the widespread possession of air-conditioning among the

nation at 90%, the domestic market, therefore, has reached a plateau. It is expected that people would replace their

current air-conditionings to energy efficient air-conditionings. This is because the nation has increased their

consciousness on energy-saving after the Great East Japan Earthquake. The domestic market, however, is less likely to

experience a huge expansion because of the expected decrease in the economic scale due to the low birthrate and aging

population.

Overseas market

The scale of Air-conditioning market is increasing due to the rapid economic growth in the newly industrialized

countries. It is estimated that the average market growth of the past 5years is 10%. It is clear, therefore, that emerging

markets are growing. The middle class in Asia has been increasing dramatically, from the population of 140 million in

1990, to 900 million in 2008 (Exhibit 4). Together with the increase in population, the issues on environment and

energy resource is rising. Getting this, China, for instance, have enforced regulations on energy-saving in 2005. Since

the foreign countries are also increasing the consciousness on energy-saving, it can be expected that eco-friendly

air-conditioning market will grow. It is also important for air-conditioning maker to offer cheaper-price products to the

volume zone of emerging markets.

5. Future Prospect

Domestic market

In domestic market, Daikin bland has been infiltrated strongly and there has already been a strong customer base.

Daikin has many original technologies like “humidifying system” and “Streamer Technology” which other companies

do not have. Therefore, it is strongly possible to increase Daikin’s market presentation. However, Japanese economic is

sure to shrink due to “low birthrate and aging” and “population decrease”. Considering these conditions, it can be

predicted that net sales of Daikin will remain unchanged.

Development Countries

In the early stages of entering development countries’ market, Daikin’s strategy was to sell only high-price high-value

added products to escape price competition and not to disgrace the bland image. This strategy has been very successful

in China. While other companies absorbed their vitality by price competition, Daikin was able to steadily gain profit by

high-price products. However, recently Daikin entered market of low-price products by means of cooperating with

Gree Electoric Appliance. Thus, Daikin can expand sales in developing countries dealing with various markets from

low-price to high-price.

North and South America Market:

This is the second largest market next to China. Daikin which adopts ductless-type air-conditioning has failed

twice in this market because duct-type is standard. However, it is possible to offer duct-type air-conditioning by

M&A strategies (as referred to above). Moreover, Daikin can increase market share by energy-saving technology

(ex, Inverter technology) because air-conditioning in this market has no inverter.

6. Analysis of Financial Statement

Gross margin is higher than other competitors (Exhibit 8). This becomes possible by producing high-quality

air-conditioning at low cost. However, indexes of the profitability are lower than other competitors (Exhibit 10, 11), so

it is necessary for Daikin to improve profitability.

1. Future Net Sales

As referred to above, Daikin has three divisions. In what follows, future net sales of each division are estimated.

(ⅰ) Air-conditioning division

In regard to future net sales of air-conditioning division, the sales are estimated by each region, which are Japan, Asia,

Europe, America and others (including Oceania, Middle and near East, Africa).

It is based on Purchasing Power Parity GDP published by IMF (International Monetary Fund). The reason of using

GDP to estimate future net sales is that there is a high correlation between Daikin’s net sales and GDP in each region.

(Exhibit 7) Calculating correlation coefficient of each region from 1999 to 2010, all coefficient of correlations were

more than 80%. The reason why we can get high coefficient of correlations is that the demand of air-conditioning as a

kind of luxurious products increases, as people become richer in connection with economic development. It is

forecasted that economy of developing countries like China and other Asian countries continue to expand continuously.

Therefore, it can be predicted that future net sales of air-conditioning division keep on increasing.

(ⅱ)Chemicals and other divisions

In regard to future net sales of chemicals and other divisions, it can be predicted that net sales will increase following

the past trend, because it is expected that demand increases steadily in the future.

8. Valuation

DCF(Discounted Cash Flow) Model：The target stock price was estimated by discounting the future operating free

cash flow of ten years and continuation value with WACC (Weighted Average Cost of Capital:4.10%). As a result of it,

the target stock price is estimated to be 2790 yen. Hence, the target stock price is cheaper than the stock price of 2067

yen (September, 3rd

, 2012) and investment recommendation is “BUY”.

9. Risk Factors

Key Person Risk：The CEO Inoue has a strong influence on the management of Daikin. Therefore, in case the CEO of

Inoue won’t be able to manage, this will have harmful effects on Inoue.

Running off Technology Risk: In 2008, Daikin offer red the inverter technology (energy-saving technology) to Gree

Electric Appliances Inc. when Daikin affiliated with Gree Electric Appliances Inc.. If Daikin wouldn’t develop new

technological innovation in the future, it would be possible to decrease their sales.

APPENDIX

Exhibit 1: World Air-conditioning Net Sales Rankings

Ranking Company Country Total Sales(billon yen)

1 Daikin Japan 1200

2 Gree electric appliance China 950

3 Midea China 800

4 Carrier United States 700

5 York International United States 650

6 Trane United States 620

Notes: Taken from the "Nikkei Newspaper (August, 29th, 2012)"

Exhibit 2: Net Sales Component (Mar, 2012)

Exhibit 3 Inverter market

Exhibit 4

Exhibit 5: Coefficient of Correlations between GDP and Net Sales of Daikin

Exhibit 6: Future Net Sales of Air-Conditioning Business

Europa 91.7%

China 97.5%

Asia 93.8%

Oceania 92.9%

Middle and near east 87.3%

Africa 86.6%

America 84.0%

220000

555,112

856,589

990,415

0

200000

400000

600000

800000

1000000

1200000

2001 2009 2015 2020

Population of Middle-Income Group（ thousand）

Future Net Sales (million yen)

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Air-conditioning 1,282,844 1,334,010 1,389,075 1,451,257 1,506,644 1,565,855 1,629,202 1,697,028 1,769,702 1,847,629

Chemistry 146,817 154,254 162,069 170,279 178,905 187,968 197,491 207,496 218,007 229,051Others 43,628 45,098 46,618 48,189 49,813 51,492 53,227 55,021 56,875 58,791

Net Sales 1,473,289 1,533,362 1,597,762 1,669,725 1,735,362 1,805,315 1,879,920 1,959,544 2,044,583 2,135,472

Exhibit 7: Future Net Sales of Daikin

Exhibit 8 Exhibit 9

Exhibit 10 Exhibit 11

Figure 1: Balance Sheet (million yen)

2005 2006 2007 2008 2009 2010 2011 2012

Condenced　Consolidated Balance SheetAssetｓ

Cash and time deposit 41,842 55,462 83,917 111,656 105,241 160,038 167,718 135,648 Funds surplus　Accounts recievable trade 135,765 147,131 209,668 226,193 178,248 181,137 198,920 209,076　Securities 14,004 0 0 0 0 0 0 0　Inventries 140,087 146,824 212,239 236,553 216,643 185,163 201,771 243,598　Defferd tax assets 15,084 14,869 12,702 13,365 9,781 10,564 9,725 9,380　Others 18,522 23,743 19,032 22,868 21,920 20,229 20,978 31,345

Total current assets 365,304 388,029 537,558 610,635 531,833 557,131 599,112 629,047

　 Total tangible assets 170,209 196,485 238,319 243,142 243,082 234,650 214,007 224,357

　　Goodwill 7,738 6,707 210,505 200,733 193,404 182,867 170,561 166,276　　Others 5,739 6,925 7,629 7,125 9,400 9,436 8,466 14,210　 Total intangible assets 13,477 13,632 218,134 207,859 202,804 192,303 179,028 180,486

　　(Investment in securities) 56,699 108,182 137,930 121,254 97,546 124,896 105,897 88,901　　(Long-term loans recievable) 1,370 1,280 1,153 938 1,135 1,134 975 779　 Total investments and other assets 66,605 118,294 167,351 148,457 139,696 155,570 140,358 126,673

Total f ixed assets 250,291 328,411 623,805 599,458 585,583 582,524 533,394 531,516

Total assets 615,596 716,440 1,161,363 1,210,093 1,117,417 1,139,655 1,132,506 1,160,564

Liabilities　Accounts payable trade 78,066 84,252 121,827 128,198 80,138 97,733 116,905 110,108　Short-term lones payable 95,644 113,687 376,783 131,950 194,879 86,730 73,977 90,448 New borrowing　Current portion of lon-term debt 13,838 3,278 10,755 8,810 29,418 13,381 2,321 57,289 Accrued amount payable 28,635 29,785 74,267 56,661 48,028 48,954 50,214 52,586　Income tax repayable 9,488 7,644 13,581 13,531 8,742 8,114 11,856 9,835　Others 42,625 45,834 41,163 73,886 67,919 66,621 72,539 76,073Total current liabilities 268,296 284,480 638,376 413,036 429,124 321,533 327,812 396,339

Bonds payable 20,000 20,000 20,000 20,000 0 100,000 100,000 100,000　Long-term loans payable 36,961 36,030 48,535 196,166 190,778 196,208 192,849 138,108 Allowances of the nature of liability 4,553 5,072 5,159 4,291 3,939 4,469 3,941 2,015 Defferd tax liabilities 4,834 18,531 24,971 7,129 1,266 2,648 2,459 4,327　Others 603 565 14,370 9,484 7,824 4,736 4,517 3,853Total f ixed liabilities 66,951 80,198 113,035 237,070 203,807 308,061 303,766 248,303

Total liabilities 335,247 364,678 751,411 650,106 632,931 629,594 631,578 644,643

Net assets 　　Common Stocks 28,023 28,023 28,023 85,032 85,032 85,032 85,032 85,032　　Capital surplus 25,971 25,969 25,968 82,977 82,977 82,977 82,977 82,977　　Legal reserve of retaind earnings 213,275 247,278 285,937 351,499 366,836 375,952 385,760 415,231 Other capital surplus 0 0 0 0 0 0 0 0　　Treasury stocks -1,348 -1,550 -2,367 -3,500 -4,743 -5,528 -5,472 -6,960　Owner's equity 265,921 299,720 337,561 516,008 530,102 538,433 548,297 576,280

Valuation and conversion adjustments 5,793 40,803 59,980 29,632 -58,415 -42,255 -60,421 -73,971 Owned capital 271,714 340,523 397,541 545,640 471,687 496,178 487,876 502,309

　Share warrants 0 0 219 521 764 1,014 1,293 1,500　Minority stockholder's equity 8,633 11,238 12,191 13,823 12,035 12,867 11,759 12,110

Total net assets 280,347 351,761 409,951 559,984 484,486 510,059 500,928 515,919

Total liabilities and net assets 615,596 716,440 1,161,363 1,210,093 1,117,417 1,139,655 1,132,506 1,160,564

Figure 2: Income Statement (million yen)

Consolidated prof it and loss statement 2005 2006 2007 2008 2009 2010 2011 2012Net sales 729,413 792,836 911,749 1,291,081 1,202,419 1,023,964 1,160,330 1,218,700

Cost of sales 473,124 522,931 599,060 849,532 838,759 704,663 798,666 846,799Gross prof it 256,289 269,905 312,688 441,548 363,660 319,300 361,664 371,901

Selling, general and administrative expenses 196,083 203,358 231,934 313,450 302,265 275,263 286,209 290,709Operating income 60,205 66,547 80,754 128,098 61,394 44,037 75,455 81,192

　　Interest incomes 691 1,324 1,518 2,640 2,378 2,206 2,359 2,971 Dividends received 450 726 1,105 1,927 2,195 1,726 1,796 1,904　 Others 8958 6233 4272 5365 4800 6689 5771 6572Non-operating incomes 10,099 8,283 6,895 9,934 9,374 10,623 9,927 11,449

　Interest payed 5,076 5,117 6,065 10,159 7,032 6,718 6,230 6,136　Others 2442 1560 3299 6163 11728 4174 4350 4749Non-operating expense 7,518 6,677 9,364 16,324 18,761 10,893 10,581 10,886

Ordinary income 62,787 68,152 78,285 121,708 52,007 43,768 74,800 81,756

Extraordinary profit 1,040 2,696 6,000 34 3 27 474 1,506Extraordinary loss 716 3,838 1,158 3,606 6,036 5,784 29,566 2,694Net incomebefore income tax 63,110 67,010 83,127 118,136 45,973 38,011 45,708 80,568

Corporate, inhabitant and enterprise taxes

Total income tax 21,977 24,242 34,790 40,126 21,189 15,913 22,067 35,948 Corporate, inhabitant and enterprise taxes 23,836 23,936 28,984 35,413 21,391 16,512 28,913 26,152　Corporate tax adjustments -1,859 306 5,806 1,193 -202 -599 -6,846 9,795Net i ncome before minori ty shareholder's prof i t 41,133 42,768 48,337 78,010 24,784 22,098 23,641 44,620

Minority shareholder's profit 3,051 2,622 2,918 3,185 3,029 2,707 3,768 3,447Net income 38,083 40,145 45,419 74,822 21,755 19,390 19,872 41,171

Cash f low statement 2005 2006 2007 2008 2009 2010 2011 2012Net income 38083 40145 45419 74822 21755 19390 19872 41171Depreciation 22,164 28,360 32,925 39,022 44,811 40,311 39,869 38,379Accounts recievable trade -18898 -11366 -62537 -16525 47945 -2889 -17783 -10156Securities -12474 14004 0 0 0 0 0 0Inventries -30289 -6737 -65415 -24314 19910 31480 -16608 -41827Defferd tax assets -1870 215 2167 -663 3584 -783 839 345Defferd tax liabilities 457 13,697 6,440 -17,842 -5,863 1,382 -189 1,868Others (current assets) -114 -5221 4711 -3836 948 1691 -749 -10367Accounts recievable trade 7,885 6,186 37,575 6,371 -48,060 17,595 19,172 -6,797Accrued amount payable -5,221 1,150 44,482 -17,606 -8,633 926 1,260 2,372Income tax repayable 1,651 -1,844 5,937 -50 -4,789 -628 3,742 -2,021Allowances of the nature of liability 11 519 87 -868 -352 530 -528 -1,926Operating cash f low 1385 79108 51791 38511 71256 109005 48897 11041

Total tangible assets -20421 -26277 -41833 -4821 60 8432 20643 -10349Total intangible fixed assets -2710 -155 -204502 10275 5055 10501 13275 -1458Total investments and other assets -2802 -51689 -49057 18894 8761 -15874 15212 13685Depreciation -22,164 -28,360 -32,925 -39,022 -44,811 -40,311 -39,869 -38,379Investing cash f low -48097 -106481 -328317 -14674 -30935 -37252 9261 -36501

Free cash f low -46712 -27373 -276526 23837 40321 71753 58158 -25460

Short-term loans 23,303 18,043 263,096 -244,833 62,929 -108,149 -12,753 16,471Current portion of long-term debt -2,842 -10,560 7,477 -1,945 20,608 -16,037 -11,060 54,968Others (current liabilities) 19,510 3,209 -4,671 32,723 -5,967 -1,298 5,918 3,534Bonds payable -10,000 0 0 0 -20,000 100,000 0 0Long-term loans 7,035 -931 12,505 147,631 -5,388 5,430 -3,359 -54,741Others (fixed liabilities) -380 -38 13,805 -4,886 -1,660 -3,088 -219 -664Common Stocks 0 0 0 57,009 0 0 0 0Capital surplus 2 -2 -1 57,009 0 0 0 0Legal reserve of retaind earnings 729 -352 604 1,841 4,673 -937 436 -1,221Other capital surplus 0 0 0 0 0 0 0 0Treasury stocks -239 -202 -817 -1,133 -1,243 -785 56 -1,488Valuation and conversion adjustments 3,850 35,010 19,177 -30,348 -88,047 16,160 -18,166 -13,550Share warrants 0 0 219 302 243 250 279 207Minority stockholder's equity 1,775 2,605 953 1,632 -1,788 832 -1,108 351Dividends paid -4,739 -5,790 -7,364 -11,101 -11,091 -9,337 -10,500 -10,479Financial cash f low 38,004 40,992 304,983 3,901 -46,731 -16,959 -50,476 -6,612

Decrease and i ncrease i n cash and time depos i t -8,708 13,619 28,457 27,738 -6,410 54,794 7,682 -32,072

Cash and time deposit at beginneing of the year 50,547 41,842 55,462 83,917 111,656 105,241 160,038 167,718Cash and time deposit at end of the year 41,839 55,461 83,919 111,655 105,246 160,035 167,720 135,646

Figure 3: Cash Flow Statement

Figure 4: Future Balance Sheet (million yen)

Condenced　Consolidated Balance Sheet 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Assetｓ

Cash and time deposit 135648 135418 140491 146083 152275 158916 166334 173154 182486 192567 203464 Funds surplus 32985 58586 81694 102035 120387 135267 152988 158869 162018 162162　Accounts recievable trade 209076 256908 266533 277142 288889 301489 315562 328499 346204 365330 386002　Securities 0 0 0 0 0 0 0 0 0 0 0　Inventries 243598 266185 276157 287150 299322 312376 326957 340362 358706 378522 399941　Defferd tax assets 9380　Others 31345 32744 33970 35323 36820 38426 40219 41868 44125 46562 49197

Total current assets 629047 724240 775736 827392 879340 931594 984339 1036871 1090389 1145000 1200765

　 Total tangible assets 224357 314933 326731 339738 354138 369583 386835 402694 424397 447843 473184

　　Goodwill 166276 115074 115074 115074 115074 115074 115074 115074 115074 115074 115074　　Others 14210 11544 11977 12453 12981 13547 14180 14761 15557 16416 17345　 Total intangible assets 180486 126618 127050 127527 128055 128621 129254 129835 130630 131490 132419

　　(Investment in securities) 88901 136941 142071 147726 153988 160704 168205 175101 184538 194733 205752　　(Long-term loans recievable) 779 2092 2170 2256 2352 2455 2569 2675 2819 2974 3143　 Total investments and other assets 126673 172435 178895 186016 193900 202357 211803 220486 232370 245207 259082

Total f ixed assets 531516 613986 632677 653281 676093 700562 727891 753016 787397 824540 864685

Total assets 1160564 1338226 1408413 1480673 1555434 1632156 1712230 1789887 1877787 1969540 2065450

Liabilities　Accounts payable trade 110108 144991 150422 156410 163040 170151 178093 185394 195386 206180 217847　Short-term lones payable 90448 198913 206365 214580 223675 233430 244326 254343 268051 282860 298865 New borrowing 0 0 0 0 0 0 0 0 0 0　Current portion of lon-term debt 57289 57289 57289 57289 57289 57289 57289 57289 57289 57289 57289 Accrued amount payable 52586 68571 71140 73972 77107 80470 84226 87680 92405 97510 103028　Income tax repayable 9835　Others 76073 76073 78923 82065 85543 89274 93441 97272 102515 108178 114299Total current liabilities 396339 545837 564139 584316 606654 630614 657376 681979 715646 752017 791328

Bonds payable 100000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000　Long-term loans payable 138108 138108 138108 138108 138108 138108 138108 138108 138108 138108 138108 Allowances of the nature of liability 2015 6877 7135 7419 7733 8071 8447 8794 9267 9779 10333 Defferd tax liabilities 4327　Others 3853 3853 3853 3853 3853 3853 3853 3853 3853 3853 3853Total f ixed liabilities 248303 163838 164096 164380 164694 165032 165408 165755 166228 166740 167294

Total liabilities 644643 709676 728235 748695 771349 795646 822784 847733 881875 918758 958622

Net assets 　　Common Stocks 85032 85032 85032 85032 85032 85032 85032 85032 85032 85032 85032

　　Capital surplus 82977 82977 82977 82977 82977 82977 82977 82977 82977 82977 82977

　　Legal reserve of retaind earnings 415231 456364 502494 548699 595103 641712 688705 735405 782979 831483 880972 Other capital surplus 0 0 0 0 0 0 0 0 0 0 0　　Treasury stocks -6960 -3340 -3340 -3340 -3340 -3340 -3340 -3340 -3340 -3340 -3340　Owner's equity 576280 621033 667163 713368 759772 806381 853374 900074 947648 996152 1045642

Valuation and conversion adjustments -73971 -10063 -10063 -10063 -10063 -10063 -10063 -10063 -10063 -10063 -10063 Owned capital 502309 610970 657100 703305 749708 796318 843311 890011 937585 986089 1035578

　Share warrants 1500 531 531 531 531 531 531 531 531 531 531　Minority stockholder's equity 12110 17050 22547 28142 33846 39661 45604 51612 57796 64162 70719

Total net assets 515919 628551 680178 731978 784085 836510 889446 942154 995912 1050783 1106828

Total liabilities and net assets 1160564 1338226 1408413 1480673 1555434 1632156 1712230 1789887 1877787 1969540 2065450

Figure 5: Future Cash Flow Statement (million yen)

Cash f low statement 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Net income 41,171 52,892 58,855 59,900 61,073 62,260 63,634 64,327 66,207 68,163 70,197Depreciation 38,379 35,827 51,443 53,371 55,495 57,847 60,370 63,188 65,779 69,324 73,154Accounts recievable trade -10,156 -47,832 -9,624 -10,610 -11,747 -12,600 -14,073 -12,938 -17,704 -19,126 -20,672Securities 0 0 0 0 0 0 0 0 0 0 0Inventries -41,827 -22,587 -9,972 -10,993 -12,171 -13,055 -14,581 -13,405 -18,344 -19,817 -21,418Defferd tax assets 345 9,380 0 0 0 0 0 0 0 0 0Defferd tax liabilities 1,868 -4,327 0 0 0 0 0 0 0 0 0Others (current assets) -10,367 -1,399 -1,227 -1,352 -1,497 -1,606 -1,794 -1,649 -2,256 -2,438 -2,635Accounts recievable trade -6,797 34,883 5,432 5,988 6,630 7,111 7,942 7,302 9,992 10,794 11,667Accrued amount payable 2,372 15,985 2,569 2,832 3,135 3,363 3,756 3,453 4,725 5,105 5,518Income tax repayable -2,021 -9,835 0 0 0 0 0 0 0 0 0Allowances of the nature of liability -1,926 4,862 258 284 314 337 377 346 474 512 553Operating cash f low 11,041 67,849 97,734 99,419 101,232 103,658 105,632 110,625 108,872 112,518 116,363

Total tangible assets -10,349 -90,579 -11,798 -13,006 -14,400 -15,445 -17,251 -15,860 -21,703 -23,446 -25,341Total intangible fixed assets -1,458 53,868 -432 -477 -528 -566 -632 -581 -796 -859 -929Total investments and other assets 13,685 -45,762 -6,460 -7,121 -7,885 -8,457 -9,446 -8,684 -11,883 -12,837 -13,875Depreciation -38,379 -35,827 -51,443 -53,371 -55,495 -57,847 -60,370 -63,188 -65,779 -69,324 -73,154Investing cash f low -36,501 -118,300 -70,134 -73,975 -78,308 -82,316 -87,700 -88,313 -100,161 -106,467 -113,298

Free cash f low -25,460 -50,451 27,600 25,444 22,924 21,342 17,932 22,312 8,712 6,051 3,065

Short-term loans 16,471 108,465 7,452 8,215 9,095 9,755 10,896 10,017 13,708 14,809 16,005Current portion of long-term debt 54,968 0 0 0 0 0 0 0 0 0 0Others (current liabilities) 3,534 0 2,850 3,142 3,478 3,731 4,167 3,831 5,242 5,663 6,121Bonds payable 0 -85,000 0 0 0 0 0 0 0 0 0Long-term loans -54,741 0 0 0 0 0 0 0 0 0 0Others (fixed liabilities) -664 0 0 0 0 0 0 0 0 0 0Common Stocks 0 0 0 0 0 0 0 0 0 0 0Capital surplus 0 0 0 0 0 0 0 0 0 0 0Legal reserve of retaind earnings -1,221 0 0 0 0 0 0 0 0 0 0Other capital surplus 0 0 0 0 0 0 0 0 0 0 0Treasury stocks -1,488 3,620 0 0 0 0 0 0 0 0 0Valuation and conversion adjustments -13,550 63,908 0 0 0 0 0 0 0 0 0Share warrants 207 -969 0 0 0 0 0 0 0 0 0Minority stockholder's equity 351 4,940 5,497 5,595 5,704 5,815 5,943 6,008 6,184 6,366 6,556Dividends paid -10,479 -11,760 -12,725 -13,695 -14,669 -15,650 -16,641 -17,627 -18,632 -19,659 -20,708Financial cash f low -6,612 78,878 3,073 3,257 3,608 3,651 4,366 2,229 6,501 7,179 7,975

Decrease and i ncrease i n cash and time depos i t -32,072 32,754 30,674 28,701 26,533 24,993 22,298 24,541 15,213 13,230 11,040

Cash and time deposit at beginneing of the year 167,718 135,648 135,418 140,491 146,083 152,275 158,916 166,334 173,154 182,486 192,567

Cash and time deposit at end of the year 135,646 168,402 166,091 169,191 172,616 177,268 181,214 190,875 188,367 195,716 203,607

Figure 6: Valuation Sheet (million yen)

Figure 7: Multiple analysis

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Air-conditioning 1282844 1334010 1389075 1451257 1506644 1565855 1629202 1697028 1769702 1847629Chemistry 146817 154254 162069 170279 178905 187968 197491 207496 218007 229051Others 43628 45098 46618 48189 49813 51492 53227 55021 56875 58791Net Sales 1,473,289 1,533,362 1,597,762 1,669,725 1,735,362 1,805,315 1,879,920 1,959,544 2,044,583 2,135,472

Cost of sales 950,946 986,571 1,025,843 1,069,325 1,115,963 1,168,053 1,215,942 1,281,474 1,352,270 1,428,787Selling, general and administrative expenses 360,879 367,281 384,534 403,604 424,191 447,095 469,203 497,738 528,704 562,320EBITA 161,463 179,511 187,385 196,796 195,209 190,167 194,775 180,331 163,610 144,365

Tax rate 40.70% 40.70% 40.70% 40.70% 40.70% 40.70% 40.70% 40.70% 40.70% 40.70%NOPLAT 95748 106450 111119 116700 115759 112769 115502 106936 97021 85608

Depreciation 35,827 51,443 53,371 55,495 57,847 60,370 63,188 65,779 69,324 73,154Gross cash f low 131,574 157893.5 164490.051 172195.2 173606.3 173139.2 178690 172715.1 166344.7 158,762

Change in net working capital 35,537 14,165 15,615 17,289 18,543 20,712 19,041 26,056 28,149 30,424Capital Investment 126,403 63,242 66,377 69,895 73,293 77,622 79,048 87,482 92,770 98,495Aggregate investment 161,940 77,406 81,992 87,184 91,836 98,333 98,089 113,538 120,919 128,918Operating free cash f low -30,366 80,487 82,498 85,011 81,770 74,806 80,601 59,177 45,426 29,844

Discount rate 1.041 1.084 1.128 1.175 1.223 1.273 1.325 1.380 1.436 1.495Present value -29168 74266 73120 72376 66872 58765 60821 42894 31628 19960

Total present value 471533

Tarminal growth rate 1.00%

Discount rate 1.557 Risk free rate 0.78%

Continuious value 617567 Risk premium 5.04%

β 1.13

Enterprise value 1089100 Cost of debt 1.59%

Cost of equity 6.47%

Non-enterprise 126,673 Tax rate 40.70%

Corporate value 1,215,773 Debt 385,845

Total net assets 515,919

Debt 385,845 After-tax WACC 4.10%

Minority shareholder's profit 12,110

Shareholder's equity 817,818

Shares issued 293113973Target stock price 2790

Target pricePER 856PBR 2871PSR 1381

PCFR 105EBITDA 1738EV/EBIT 570

EV/EBITDA 979

EV/Sales 449

MultipleRange105 <Target price< 2871

（million yen） TOSHIBA FUJITSU GENERAL MITSUBISHI ELECTEONICS DaikinSales 6,398,505 182,105 3,645,331 1160330EBITA 487,484 11,496 323,266 91807

Depreciation 259,604 3,442 105,280 39869EBITDA 297,977 13,647 319,473 101291

Net income 137,845 4,848 124,525 19872CF 258,840 5,709 472,067 167295

TOSHIBA FUJITSU GENERAL MITSUBISHI ELECTEONICS DaikinStock price 363 626 731 2319

Shares issued 4237602026 109277299 2147201551 293113973Market capitalization 1538250 68408 1569604 679731

Liabilities with interest 1081306 26847 484352 369147Cash and cash equivalents 258840 5709 472067 167718

Net debt 822466 21138 12285 201429EV 2360716 89546 1581889 881160

Total net assets 1179616 29472 1109025 500928

TOSHIBA FUJITSU GENERAL MITSUBISHI ELECTEONICS AveragePER 11.16 14.11 12.60 12.62PBR 1.30 2.32 1.42 1.68PSR 0.24 0.38 0.43 0.35PCFR 0.17 0.08 0.30 0.18

EBITDA 5.16 5.01 4.91 5.03EV/EBIT 4.84 7.79 4.89 5.84

EV/EBITDA 7.92 6.56 4.95 6.48

EV/Sales 0.37 0.49 0.43 0.43