SECTOR REPORT JAPAN ELECTRONIC COMPONENTS · 2016-12-08 · SECTOR REPORT JAPAN ELECTRONIC COMPONENTS 2017 recovery scenarios Electronic parts/device indices are recovering from the

JAPAN ELECTR ONIC C OMPONENTS BNP PARIBAS Masahiro Wakasugi

8 DECEMBER 2016 SECTOR REPORT

JAPAN ELECTRONIC COMPONENTS

2017 recovery scenarios

Electronic parts/device indices are recovering from the bottom As of October 2016, the inventory cycle for electronic parts/devices in the Indices of Industrial

Production was at the 11-month position in Quadrant III (QIII), representing the adjustment phase. The cycle is now poised to move from QIII to QIV. In QIV, tech stocks in the TOPIX electric appliances index tend to advance, and we could see a rally in tech stocks in 2017 barring any dramatic JPY appreciation. In January-March 2017, however, seasonal adjustments in global smartphones could have a negative impact on share prices, so we see this as a time to buy on weakness.

In passive components, we highlight ceramic conductors and inductors

Production statistics show volume and value growth in ceramic capacitors and inductors, which could benefit Murata, TDK and Taiyo Yuden. The value of resistor production has started rising y-y, which could be positive for companies like Rohm. The value of aluminium electrolytic capacitors and connectors production is also rising y-y (in JPY), reflecting favourable conditions in the electronic parts sector as a whole. We see no powerful growth drivers, but potential new fields of growth include autonomous driving and higher performance electronic equipment with artificial intelligence (AI).

Top picks are Hamamatsu Photonics and Nidec

Our top picks are Hamamatsu Photonics (HPK; BUY) and Nidec (BUY). On 25 Nov, we upgraded HPK to BUY from Hold. In contrast to other tech stocks, Jan-Mar (2Q) is HPK’s most profitable quarter, making it a good stock to buy now. Nidec looks promising, and we recommend accumulating shares on seasonal dips in price. We like Rohm as monthly sales have started to turn positive, while Murata (BUY) is of interest heading into FY3/18 now the market has priced in smartphone seasonal adjustments. Panasonic’s (6752 JP; BUY) automotive business looks attractive over the medium/long term. We also recently published on Nidec (2 Nov), Rohm (15 Nov) and Sony (29 Nov).

BNPP recommendations

Note: Priced at close of business 7/12/2016. Share prices and TPs are in listing currency. Sources: FactSet; BNP Paribas estimates

Our research is available on Thomson One, Bloomberg, TheMarkets.com, FactSet and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the back page.

PREPARED AND PUBLISHED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (JAPAN) LTD. THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. ANALYST

CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 66

Masahiro Wakasugi [email protected] +813 6377 2240

Company BBG code Share price Current Previous Current Previous %change Up/downside

Murata Manufacturing 6981 JP 15,270.00 BUY Buy 18,000.00 17,000.00 +5.9% +17.9%

Panasonic Corp 6752 JP 1,261.50 BUY Buy 1,400.00 1,400.00 +0.0% +11.0%

Hirose Electric 6806 JP 13,550.00 HOLD Hold 14,000.00 13,200.00 +6.1% +3.3%

Taiyo Yuden 6976 JP 1,254.00 HOLD Hold 1,250.00 1,000.00 +25.0% -0.3%

TDK Corp 6762 JP 8,010.00 HOLD Hold 8,000.00 6,900.00 +15.9% -0.1%

Nitto Denko 6988 JP 8,404.00 HOLD Hold 8,200.00 6,700.00 +22.4% -2.4%

Kyocera Corp 6971 JP 5,524.00 HOLD Hold 5,200.00 4,500.00 +15.6% -5.9%

Sharp Corp 6753 JP 227.00 REDUCE Reduce 113.00 96.00 +17.7% -50.2%

Rating Target price

https://eqresearch.bnpparibas.com/researchfs/CR__e510fd151b874a9e9f3fc5c364eb6872.pdf

https://eqresearch.bnpparibas.com/researchfs/CR__13118088dc9e4c22a0fc665ba3a4f4b5.pdf

https://eqresearch.bnpparibas.com/researchfs/CR__21312dcbd2734d108f1acaf0577a2bee.pdf

https://eqresearch.bnpparibas.com/researchfs/CR__65e52465509d4892a78c4f0101532d40.pdf

mailto:[email protected]

JAPAN ELECTRONIC COMPONENTS Masahiro Wakasugi

Investment thesis

BUYs: Our top picks are HPK and Nidec. We are looking for strong results from HPK in January–March (2Q FY9/17). We view Nidec as a core stock. A return to positive monthly sales at Rohm is positive. Murata is likely to see a turnaround in FY3/18. Panasonic’s automotive and B2B operations look very appealing.

HOLDs: Among HOLD-rated stocks, TDK’s earnings appear relatively good. We are also watching Taiyo Yuden’s RF business. Kyocera’s earnings recovery appears to lack vigour and we do not see the shares as having much upside.

REDUCE: We maintain our bearish stance on Sharp. The shares look overvalued. LCD panel prices may slacken from December, with the start of the off-demand season. We see substantial downside risk.

Cycle analysis

As of October, 2016, the inventory cycle for “electronic parts/devices” in the Indices of Industrial Production was at the 11-month position in Quadrant III (QIII), representing the adjustment phase. The cycle is now poised to move from QIII to QIV. In QIV, tech stocks tend to advance, which is positive. In January–March 2017, however, seasonal adjustments in global smartphones could have a negative impact on share prices.

Near and medium-term considerations

Near term: We draw attention to adjustments by North American smartphone makers in Jan–Mar. HPK tends to generate stronger earnings in Jan–Mar, which enhances its investment appeal. We favour accumulating Murata’s shares if its share price corrects. Medium/long term: Nidec is the most promising stock over the medium/long term in our view because it has a clear vision over the same horizon and is making steady progress to fulfil it. The launch of products in growing markets, such as automotive and robots, along with aggressive M&A activities should help it achieve rapid growth in pursuit of its medium/long-term goals. Those likely to benefit from megatrends in the automobile industry include Panasonic and Rohm. We think Panasonic’s rich line-up of products enhances its appeal. Murata stands to benefit from higher wireless communication speeds. It is also a potential beneficiary of automobile megatrends, enhancing its future prospects.

CONTENTS A study of industrial production indices ................................... 4

Update on METI statistics ............................................................ 7

Panasonic (6752 JP; BUY; TP: 1,400) ........................................ 13

Murata Manufacturing (6981 JP; BUY; TP: JPY18,000) .......... 19

TDK (6762 JP; HOLD; TP: JPY8,000) ........................................... 23

Hirose Electric (6806 JP; HOLD; TP: JPY14,000) ..................... 27

Kyocera (6971 JP; HOLD; TP: JPY5,200) .................................... 31

Taiyo Yuden (6976 JP; HOLD; TP: JPY1,250) ............................. 36

Nitto Denko (6988 JP; HOLD; TP: JPY8,200) ............................. 40

Sharp (6753 JP; REDUCE; TP: JPY113) ...................................... 45

Event calendar

Date Event

January 2017 The world's largest consumer electronics and consumer technology tradeshow, CES 2017 (Las Vegas)

February 2017 Release of new smartphones at Mobile World Congress (MWC) Jan-Feb 2017 Earnings results announcement by overseas makers

(Qualcomm, Broadcom, Samsung, Apple, GE, Philips etc) Monthly Japan statistics announcement by Japanese government Monthly Taiwan sales announcement by Taiwanese makers(Hon Hai,

MediaTek, etc) Monthly around 20th

Announcement on LCD panel prices and shipment by IHS

Forex sensitivity

------ Sensitivity of 1 yen

change on OP ----- OP

Name BBG code Rating USD % of OP (FY3/17E) FY3/17E

(JPY b) (%) (JPY b) Nidec 6594 JP BUY 1.10 0.8 139.0 TDK 6762 JP HOLD 1.40 1.6 89.8 Hirose 6806 JP HOLD 0.33 1.2 27.6 Rohm 6963 JP BUY 0.75 2.9 25.5 HPK * 6965 JP BUY 0.20 0.9 21.5 Kyocera 6971 JP HOLD 1.08 1.2 86.5 Taiyo Yuden 6976 JP HOLD 0.80 6.5 12.3 Murata 6981 JP BUY 3.50 1.6 214.0 Panasonic 6752 JP BUY 3.20 1.1 280.0 Sharp 6753 JP REDUCE 0.00 0.0 25.7 Sony 6758 JP HOLD 3.50 1.2 293.0 Nitto Denko 6988 JP HOLD 2.40 3.6 67.2

Note: *September year-end for HPK Sources: Companies; BNP Paribas estimates

2 BNP PARIBAS 8 DECEMBER 2016


Exhibit 1: Valuations for coverage companies

Company BBG code Price Rating TP Up/Down ---------------- P/E ---------------- --------------- P/BV --------------- ---------- EV/EBITDA -----------

7 Dec 16 side FY3/17E FY3/18E FY3/19E FY3/17E FY3/18E FY3/19E FY3/17E FY3/18E FY3/19E

(JPY) (JPY) (%) (x) (x) (x) (x) (x) (x) (x) (x) (x)

Nidec 6594 JP 10,195 BUY 12,000 20 28.7 24.3 21.8 3.5 3.2 2.9 14.6 12.5 11.0

TDK 6762 JP 7,770 HOLD 8,000 0 15.7 16.1 15.0 1.4 1.3 1.2 5.7 6.3 5.7

Hirose 6806 JP 13,450 HOLD 14,000 3 23.4 22.3 21.9 1.7 1.6 1.5 7.9 7.3 6.8

Rohm 6963 JP 6,240 BUY 7,800 21 45.0 26.8 21.2 1.0 0.9 0.9 5.9 5.1 4.4

HPK 6965 JP 2,986 BUY 3,550 18 29.7 25.8 23.4 2.6 2.5 2.3 12.1 10.7 9.5

Kyocera 6971 JP 5,439 HOLD 5,200 (6) 25.4 24.6 23.0 0.9 0.9 0.8 7.8 7.0 6.6

Taiyo Yuden 6976 JP 1,236 HOLD 1,250 0 30.8 15.7 15.0 0.9 0.9 0.9 4.1 3.5 3.3

Murata 6981 JP 14,870 BUY 18,000 18 19.7 17.0 14.9 2.4 2.2 2.0 8.6 7.3 6.4

Panasonic 6752 JP 1,206.5 BUY 1,400 11 16.3 14.8 12.0 1.6 1.5 1.4 5.1 4.7 4.1

Sharp 6753 JP 192 REDUCE 113 (50) (38.9) 72.7 65.1 6.0 5.7 5.3 13.2 9.5 9.3

Sony 6758 JP 3,160 HOLD 3,400 6 44.6 17.2 17.0 1.6 1.5 1.4 5.9 4.7 4.6

Nitto Denko 6988 JP 8,129 HOLD 8,200 (2) 27.5 21.8 19.6 2.1 2.0 1.9 9.5 8.1 7.3

Average 22.3 24.9 17.6 2.1 2.0 1.7 8.4 7.2 6.5

Note: Priced at close of business 7 December 2016 Sources: Bloomberg; BNP Paribas estimates

Exhibit 2: Revised target prices in the report

Company BBG code Rating ------Target prices------ Differences

Old New

(JPY) (JPY) (%)

Murata 6981 JP BUY 17,000 18,000 5.9

Panasonic 6752 JP BUY 1,400 1,400 0.0

Hirose 6806 JP HOLD 13,200 14,000 6.1

Taiyo Yuden 6976 JP HOLD 1,000 1,250 25.0

TDK 6762 JP HOLD 6,900 8,000 15.9

Nitto Denko 6988 JP HOLD 6,700 8,200 22.4

Kyocera 6971 JP HOLD 4,500 5,200 15.6

Sharp 6753 JP REDUCE 96 113 17.7

Source: BNP Paribas estimates



A study of industrial production indices

Inventory cycle diagram of electronic parts and devices

The Ministry of Economy, Trade and Industry (METI) released its preliminary Indices of Industrial Production report for October on 30 November (the final report is due out on 14 December). Below is an update on the industrial production indices for electronic parts and devices (seasonally adjusted indices), which are highly relevant to the companies we cover.

Exhibit 3 shows the inventory cycle diagram for “electronic parts and devices” (seasonally adjusted indices). The vertical axis indicates “y-y change in inventories” and the horizontal axis “y-y change in shipments”.

Conclusion: now at bottom of cycle: expect the cycle to enter recovery phase

Inventories of electronic parts/devices in October were down 19.2% y-y in October, while shipments were down 10.0%, placing them in QIII (adjustment phase). This signifies that companies are adjusting inventories while curbing production. Completion of inventory adjustments raises prospects that the cycle will shift to QIV (recovery phase). That could potentially lift the share price indices such as TOPIX electric appliances sector, in our view.

Exhibit 3: Inventory cycle diagram：October 2016 is a correction phase (Jan 2012-Oct 2016)

Sources: METI; BNP Paribas

(A) Comparison of quadrants and TOPIX electric appliances sector: Shift to QIV could signal share price rally

We examine the correlation between quadrant changes and share-price indices. Exhibit 4 shows the TOPIX electric appliances index and Quadrants I–IV for electronic parts/devices. October 2016 falls into Quadrant III. The sector has been in an adjustment phase for the past 11 months (strictly speaking it has been in

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

-20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Inve

ntor

y y/

y

Shipment y/y

Quadrant I

QuadrantIII

Quadrant II

QuadrantIV

Oct 16

Jan.15

Jan.13

Jan.12

Jan.16

Jan.14



Quadrant III for 10 of the last 11 months and in Quadrant II for one month). Historically, it typically moved to Quadrant IV after remaining in Quadrant III for 4–5 months. Based on this, we think a shift to Quadrant IV (recovery phase) is not far off.

Looking at the correlation with share price, there is a notable tendency for the share price to rise with the shift from Quadrant IV to Quadrant I (expanding inventory phase). This leads us to believe that a share-price rally is approaching along with the shift to Quadrant IV.

While various factors affect share prices, and the correlation between share prices and quadrants does not function every time, we think this approach could be useful in making investment decisions.

Exhibit 4: Comparison of Quadrants I-IV and TOPIX electric appliance index (Jan 2003-Oct 2016)


(B) Comparison of shipment-inventory balance and TOPIX electric appliances: balance turns positive

Exhibit 5 shows changes in the shipment-inventory balance (y-y changes in “shipments” minus y-y changes in “inventories”). The data show that as of October 2016, the shipment-inventory balance has turned positive (shipments are down 10.0% y-y, inventories down 19.2% y-y). This means that the decline in inventories is greater than the decline in shipments, evidence of progress in adjusting inventories.

Exhibit 6 compares the shipment-inventory balance for electric parts/devices with the TOPIX electric appliances index. There is an evident correlation between the two. The shipment-inventory balance has now turned positive and the TOPIX electric appliances index is similarly on an upward trend. In order for the TOPIX electric appliances sector to rise further, we believe it will be important for the shipment index to turn positive y-y (in other words, shift from Quadrant III to Quadrant IV).

600800

1,0001,2001,4001,6001,8002,0002,2002,4002,600

03.1 3 5 7 9 11

04.1 3 5 7 9 11

05.1 3 5 7 9 11

06.1 3 5 7 9 11

07.1 3 5 7 9 11

08.1 3 5 7 9 11

09.1 3 5 7 9 11

10.1 3 5 7 9 11

11.1 3 5 7 9 11

12.1 3 5 7 9 11

13.1 3 5 7 9 11

14.1 3 5 7 9 11

15.1 3 5 7 9 11

16.1 3 5 7 9

I II III IV TOPIX Electric Appliances

IIV I II I II III IV I II III IV IV III IIIIVI



Exhibit 5: Shipment-inventory balance turned positive Exhibit 6: Correlation between TOPIX electric appliance index

and shipment-inventory balance

Sources: METI; BNP Paribas Sources: METI; BNP Paribas

(50)(40)(30)(20)(10)

01020304050

03.1

04.1

05.1

06.1

07.1

08.1

09.1

10.1

11.1

12.1

13.1

14.1

15.1

16.1

(%)

Shipment-inventory balance turns positive

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

2,500

(50)(40)(30)(20)(10)

01020304050

03.1

04.1

05.1

06.1

07.1

08.1

09.1

10.1

11.1

12.1

13.1

14.1

15.1

16.1

(index)(%) Shipment-inventory balance (LHS)

TOPIX electric appliance index (RHS)



Update on METI statistics

We also update production volumes and value for major (domestically produced) electronic parts in METI’s Production Statistics. We report on five main product groups: 1) ceramic capacitors (MLCC), 2) inductors, 3) aluminium electrolytic capacitors, 4) resistors, and 5) connectors.

1) Ceramic capacitors (MLCCs)

METI’s production statistics show a 10.6% y-y increase in volume and 11.5% decline in value for ceramic capacitors (MLCC) in September 2016. For volume, the figure was negative in September 2015 (down 0.7% y-y), but in September this year, it was in positive territory (+10.6% y-y). Regarding value, the trend has been downward since the recent peak (+39.8% y-y) in December 2014. In September 2015, value was trending positively (+8.0% y-y), but a year later in September 2016, the trend was negative (−11.5%).

In September 2016, the average selling price (ASP) for a ceramic capacitor was JPY0.37. ASP rose JPY0.19 to around JPY0.51 in March 2015 from around JPY0.32 in January 2012, but since then, it has trended downward. A year ago, in September 2015, the ASP was around JPY0.46, but in September 2016, it was around JPY0.36.

The main conceivable reasons for the ASP decline are: 1) weak global demand for high-end smartphones, 2) expansion of middle/low-end smartphones mainly in emerging countries, such as China and India, and 3) negative impact of the strong JPY on production value.

Exhibit 7: Ceramic capacitors: y-y volume (left) & value (middle) changes and ASP (right)


Ceramic capacitor production volume (absolute volume) has been growing. In September 2016, monthly production volume was roughly 92.2b units. This exceeds the most recent peak of roughly 83.3b units/month in September 2015, so production updating the peak.

Recently its production value (absolute amount) has also been on the rise, growing to roughly JPY34.3b/month in September 2016. This is lower than the year-earlier figure of roughly JPY38.7b/month in September 2015, but as the data show, the value of production has recently turned upward.

-0.7% 10.6%

(30)

(20)

(10)

0

10

20

30

40

Jan-

07Au

g-07

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-1

0Fe

b-11

Sep-

11Ap

r-12

Nov

-12

Jun-

13Ja

n-14

Aug-

14M

ar-1

5O

ct-1

5M

ay-1

6

(%) Ceramic Capacitor Volume y/y

39.8%

8.0%

-11.5%

(50) (40) (30) (20) (10) 0

10 20 30 40 50

Jan-

07Au

g-07

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-1

0Fe

b-11

Sep-

11Ap

r-12

Nov

-12

Jun-

13Ja

n-14

Aug-

14M

ar-1

5O

ct-1

5M

ay-1

6(%) Ceramic Capacitor Value y/y

0.32

0.510.46

0.37

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15Ju

l-15

Jan-

16Ju

l-16

(JPY) Ceramic Capacitor ASP

+0.19



Exhibit 8: Ceramic capacitors: volume (left) & value (right)


Ceramic capacitors sales: market share comparison

We update market share comparisons for ceramic capacitors. The companies are Murata, TDK, Taiyo Yuden, Kyocera and Samsung Electro-Mechanics (SEMCO: 009150 KS) (we estimate the combined global market share of the above five companies at around 80–90%, so the comparison is useful, in our view). We base the sales data primarily on information disclosed by the companies, but the figures for TDK and Kyocera include some or our estimates.

Exhibit 9 shows the market shares of each of the above six companies after indexing their (estimated) combined sales to 100%. The graph tells us the following.

1 Murata’s share continues to trend up gradually

2 Taiyo Yuden’s share has risen slightly in the past two quarters (2Q16, 3Q16)

3 TDK’s share has remained largely flat in the past year (4Q15 – 3Q16)

4 Kyocera’s share remains flat at a low level

Exhibit 9: Ceramic capacitors sales share comparison

Note: Sales data include BNP Paribas estimates for TDK and Kyocera. For forex rates, we use average rates for the quarter. Sources: Companies; Bloomberg; BNP Paribas estimates

24,234

83,338

92,185

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000Ja

n-06

Aug-

06M

ar-0

7O

ct-0

7M

ay-0

8D

ec-0

8Ju

l-09

Feb-

10Se

p-10

Apr-1

1N

ov-1

1Ju

n-12

Jan-

13Au

g-13

Mar

-14

Oct

-14

May

-15

Dec

-15

Jul-1

6

(unit m) Ceramic capacitor absolute volume

11,147

38,73534,282

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Jan-

07Au

g-07

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-1

0Fe

b-11

Sep-

11Ap

r-12

Nov

-12

Jun-

13Ja

n-14

Aug-

14M

ar-1

5O

ct-1

5M

ay-1

6

(JPY m) Ceramic capacitor absolute value

05

101520253035404550

C3Q

09C

4Q09

C1Q

10C

2Q10

C3Q

10C

4Q10

C1Q

11C

2Q11

C3Q

11C

4Q11

C1Q

12C

Q2'

12C

3Q12

C4Q

12C

1Q13

C2Q

13C

3Q13

C4Q

13C

1Q14

C2Q

14C

3Q14

C4Q

14C

1Q15

C2Q

15C

3Q15

C4Q

15C

1Q16

C2Q

16C

3Q16

(%) Murata SEMCO Taiyo Yuden

TDK Yageo Kyocera



2) Inductors

The METI statistics show a 32.7% y-y increase in volume and 5.6% decline in value for inductors in September 2016. Volume growth has fallen from a peak of 84.4% y-y in February 2015 to 32.7% in September 2016, but this is still a relatively high rate of growth. The value of production grew 22.2% y-y in September 2015, but was negative (−5.6% y-y) a year later in September 2016. In recent years, however, negative y-y value growth has rapidly been followed by a turnaround to positive growth, highlighting the importance of monitoring trends.

ASP has essentially remained on a downtrend. One likely reason for this is growth in demand for RF inductors, which have relatively low unit prices. In September 2016, the ASP was around JPY0.57, representing a slight recovery from around JPY0.50 in December 2015.

Exhibit 10: Inductors: y-y volume (left) & value (middle) changes and ASP (right)


Inductor production volume (absolute volume) is growing. In September 2016, it stood at roughly 10.3b units/month, topping the 10b mark. This is 40% higher than the roughly 7.5b/month figure for January 2016. The record so far is roughly 10.8b/month in October 2015. Attention now focuses on whether this record will be broken.

Inductor production value (absolute amount) is also on the rise. In September 2016, it was around JPY5.9b/month and has been climbing since bottoming at around JPY4.1b in February 2016. As with volume, the production value increased to roughly JPY6.3b/month at the peak in October 2015.

Exhibit 11: Inductors: volume (left) & value (right)


84.4%

32.7%

(50)

(30)

(10)

10

30

50

70

90

Feb-

08Au

g-08

Feb-

09Au

g-09

Feb-

10Au

g-10

Feb-

11Au

g-11

Feb-

12Au

g-12

Feb-

13Au

g-13

Feb-

14Au

g-14

Feb-

15Au

g-15

Feb-

16Au

g-16

(%) Inductor Volume y/y

22.2%

-5.6%

(50) (40) (30) (20) (10) 0

10 20 30 40 50

Jan-

07Au

g-07

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-1

0Fe

b-11

Sep-

11Ap

r-12

Nov

-12

Jun-

13Ja

n-14

Aug-

14M

ar-1

5O

ct-1

5M

ay-1

6

(%) Inductor Value y/y

1.52

0.50

0.57

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

(JPY) Inductor ASP

949

10,836

7,533

10,251

0

2,000

4,000

6,000

8,000

10,000

12,000

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

(unit m) Inductor Volume

1,381

6,256

4,149

5,871

1000

2000

3000

4000

5000

6000

7000

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

(JPY m) Inductor Value



3) Aluminum electrolytic capacitors

Production volume for aluminium electrolytic capacitors increased 14.1% and value 15.9% y-y in September 2016. In September 2015, volume was down 8.5% y-y and value down 9.1%. Both volume and value have recovered to positive y-y growth in September 2016.

ASP for aluminium electrolytic capacitors has been on the rise. In September 2016, ASP was around JPY11.81, representing a 27% increase over the bottom of around JPY9.28 recorded in March 2012. ASP went as high as roughly JPY12.25 in April 2015, so interest now focuses on whether this peak will be exceeded.

Exhibit 12: Aluminum electrolytic capacitors: y-y volume (left) & value (middle) changes and ASP (right)


The production volume (absolute volume) for aluminium electrolytic capacitors has been flat in recent years. In September 2016, volume stood at 980m units/month. The September figure represents a 22% increase from 800m units/month in January 2016. However, production volume has fallen sharply from the levels of 2006–2008. The likely main reasons for this are: 1) the market for PCs, where there is significant use of aluminium electrolytic capacitors, has been shrinking as the markets for tablets and smartphones, which use far fewer, have been growing; 2) aluminium electrolytic capacitors are being replaced by ceramic capacitors.

As with volume, production value (absolute amount) has also been flat. However, the recent trend in 2016 has been upward, with value growing to roughly JPY11.6b/month in September 2016 from around JPY9.4b in January 2016, a 23% increase.

Exhibit 13: Aluminum electrolytic capacitors: volume (left) & value (right)


-8.5%

14.1%

(50) (40) (30) (20) (10) 0

10 20 30 40 50

Jan-

07Au

g-07

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-1

0Fe

b-11

Sep-

11Ap

r-12

Nov

-12

Jun-

13Ja

n-14

Aug-

14M

ar-1

5O

ct-1

5M

ay-1

6

(%) AL electrolytic capacitor volume y/y

-9.1%

15.9%

(50) (40) (30) (20) (10)

0 10 20 30 40 50

Jan-

07Au

g-07

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-1

0Fe

b-11

Sep-

11Ap

r-12

Nov

-12

Jun-

13Ja

n-14

Aug-

14M

ar-1

5O

ct-1

5M

ay-1

6

(%) AL electrolytic capacitor value y/y

9.28

12.25 11.81

8

9

10

11

12

13

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

(JPY) AL electrolytic capacitor ASP

802

981

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

(unit m) AL electrolytic capacitor volume

9,425

11,586

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

(JPY m) AL electrolytic capacitor value



4) Resistors

Resistor production volume was up 16.2% and value up 4.3% y-y in September 2016. Volume recovered from negative growth (−6.2%) in January 2016 to positive territory in August. Growth continued in September, reaching double digits y-y. Value growth also turned around from −9.5% in January 2016 to +4.3% in September. However, the figures fluctuate markedly from month to month, so we find it important to monitor trends carefully.

The ASP for resistors was around JPY0.63 in September 2016. Demand has been increasing for use in high-end products to meet requirements for smaller sizes and higher reliability, a likely reason for rising ASP.

Exhibit 14: Resistors: y-y volume (left) & value (middle) changes and ASP (right)


Resistor production volume (absolute volume) has been flat in recent years, but the figure of roughly 12.6b units/month in September 2016 was 30% higher than the 9.7b units/month recorded in January 2013. Value (absolute amount) has also been flat in recent years, but stood at roughly JPY7.9b/month in September 2016, some 25% higher than the roughly JPY6.4b/month recorded in January 2013.

Exhibit 15: Resistors: volume (left) & value (right)


-6.2%

16.2%

(35)

(25)

(15)

(5)

5

15

25

Jan-

07Au

g-07

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-1

0Fe

b-11

Sep-

11Ap

r-12

Nov

-12

Jun-

13Ja

n-14

Aug-

14M

ar-1

5O

ct-1

5M

ay-1

6

(%) Registor volume y/y

-9.5%

4.3%

(20)

(15)

(10)

(5)

0

5

10

15

20

Jan-

07Au

g-07

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-1

0Fe

b-11

Sep-

11Ap

r-12

Nov

-12

Jun-

13Ja

n-14

Aug-

14M

ar-1

5O

ct-1

5M

ay-1

6

(%) Registor value y/y

0.41

0.78

0.63

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

(JPY) Registor ASP

8,8929,739

12,626

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

(unit m) Registor volume

4,746

6,362

7,938

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

(JPY m) Registor value



5) Connectors

Connector production volume was up 12.0% and value up 2.5% y-y in September 2016. Volume recovered to positive growth from the most recent bottom of −15.5% y-y in December 2015. The recent value figures show an up-and-down pattern on a y-y basis. The ASP in September 2016 was roughly JPY11.7, representing a 19% decline from the roughly JPY14.5 recorded in December 2015. The question is whether ASP will stop declining.

Exhibit 16: Connectors: y-y volume (left) & value (middle) changes and ASP (right)


Connector production volume (absolute volume) has been generally flat in recent years. In September 2016, it stood at roughly 3.0b units/month. However, September’s figure of around 3.0b units/month is 43% higher than the roughly 2.1b units/month recorded in December 2015.

Production value (absolute amount) has also been flat in recent years. In September 2016, it stood at around JPY35.0b/month, but this was roughly 30% up from JPY26.9b/month in January 2016.

Exhibit 17: Connectors: volume (left) & value (right)


-15.5%

12.0%

(30)

(20)

(10)

0

10

20

30

40

Jan-

07Au

g-07

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-1

0Fe

b-11

Sep-

11Ap

r-12

Nov

-12

Jun-

13Ja

n-14

Aug-

14M

ar-1

5O

ct-1

5M

ay-1

6

(%) Connector volume y/y

-34.2%

2.5%

(40)

(30)

(20)

(10)

0

10

20

30

40

Jan-

07Au

g-07

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-1

0Fe

b-11

Sep-

11Ap

r-12

Nov

-12

Jun-

13Ja

n-14

Aug-

14M

ar-1

5O

ct-1

5M

ay-1

6

(%) Connector value y/y

14.5

11.7

1011121314151617181920

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

(JPY) Connector ASP

2,090

2,997

1,000

1,500

2,000

2,500

3,000

3,500

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

(m) Connector volume

26,936

35,072

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

(JPY m) Connector value



Panasonic (6752 JP; BUY; TP: 1,400)

Forecast revisions

1) Lower FY3/17 OP forecast to JPY280.0b from JPY310.0b

Our FY3/17 forecasts are: sales JPY7.2284t (−5% y-y), OP JPY280.0b (+22%) and NI JPY179.9b (+13%). Our full-year FX assumptions are JPY106.8/USD and JPY116.5/EUR (for 3Q JPY107/USD, JPY115/EUR; for 4Q JPY110/USD, JPY115/EUR). Our previous forecasts were: sales JPY7.4184t, OP JPY310.0b and NI JPY170.7b. Our previous FX assumptions were JPY102/USD and JPY113/EUR.

Exhibit 18: Panasonic earnings forecasts (FY basis)

FY3/16 --------------FY3/17E-------------- --------------FY3/18E-------------- --------------FY3/19E-------------- FY3/17E

(JPY b) A Old New Old New Old New Guidance

Sales 7,626.3 7,418.4 7,228.4 7,663.0 7,464.9 8,218.0 7,972.1 7,200

Change (y-y %) 1 (3) (5) 3 3 7 7 (6)

OP 230.3 310.0 280.0 365.0 335.0 438.1 400.0 245.0

Change (y-y %) (45) 35 22 18 20 20 19 6

OPM (%) 3.0 4.2 3.9 4.8 4.5 5.3 5.0 3.4

PBT 228.3 306.5 278.4 360.3 330.5 434.9 397.0 240.0

Change (y-y %) 5 34 22 18 19 21 20 5

NI 159.6 170.7 179.9 196.2 197.5 257.9 244.7 120.0

Change (y-y %) (17) 7 13 15 10 31 24 (25)

Diluted EPS (JPY) 68.9 73.6 77.5 84.6 85.1 111.1 105.4 51.7

Change (y-y %) (17) 7 12 15 10 31 24 (25)

JPY/USD 120.0 102.0 106.8 100.0 110.0 100.0 110.0 103.0

JPY/EUR 133.0 113.0 116.5 110.0 115.0 110.0 115.0 114.0

Sources: Panasonic; BNP Paribas estimates (IFRS)

Key takeaways from results

Panasonic plans to move fully to IFRS accounting from FY3/18 and has disclosed IFRS-based guidance for FY3/17. Also, the company will release data using both IFRS and US accounting standards for quarterly results in FY3/17. That said, for results released in FY3/17 to date, Panasonic has persisted in using US accounting standards and has disclosed only key categories, including sales, OP and NI on an IFRS basis for reference (details of non-operating profit, tax expenses, etc., were not disclosed on an IFRS basis). Our full-year forecasts are based on IFRS standards (in line with guidance) but we urge caution as we are now in a transitional phase and it is difficult to make accurate analysis of comparisons with earlier results, year-earlier forecast comparisons and details of non-operating profit and tax expenses.

Guidance cut

On 31 Oct, Panasonic lowered its guidance (IFRS) to sales of JPY7.2t, OP JPY245.0b and NI JPY120.0b (based on JPY103/USD and JPY114/EUR). If all currencies were to move in synch with the USD, every JPY1/USD appreciation of the JPY would have a JPY3.2b negative impact on annual OP (previously a JPY1.5b negative impact on annual OP). Panasonic’s previous guidance was: sales JPY7.6t, OP JPY310.0b and NI JPY145.0b (based on JPY115/USD and JPY125/EUR).

The segmental breakdown of the JPY65.0b OP guidance reduction is as follows: 1) appliances (AP) +JPY6.0b, 2) eco solutions (ES) −JPY11.0b, 3) AVC networks (AVC) −JPY9.0b, 4) automotive and industrial systems (AIS) −JPY7.0b, 5) others no change, 6) eliminations and adjustments −JPY44.0b. Panasonic raised its projection for AP, but lowered those for ES, AVC, AIS and eliminations/adjustments. The JPY44.0b cut for eliminations/adjustments was notably large.



Panasonic explained the factors behind the reduced OP guidance as follows: 1) FX impact −JPY41.0b, 2) reduction in real sales −JPY12.0b, and 3) fixed costs and others −JPY12.0b. It said the FX impact exceeded its previous assumptions.

Exhibit 19: Comparison of new and old guidance: substantial revision of eliminations/adjustments

Exhibit 20: Comparison of new and old guidance: FX impact significant

Sources: Panasonic; BNP Paribas Sources: Panasonic; BNP Paribas

Comparison of guidance and BNP Paribas forecasts

Our OP estimate is JPY280.0b, roughly JPY35.0b higher than Panasonic’s JPY245.0b guidance. The JPY35.0b difference breaks down as follows: 1) actual business roughly JPY15.0b (of which FX accounts for around JPY12.0b) and 2) eliminations/adjustments roughly JPY20.0b. The JPY15.0b difference related to the actual business breaks down as follows by segment: a) AP +JPY7.0b, b) ES −JPY10.0b, c) AVC +JPY10.0b, d) AIS +JPY8.0b, e) others zero. The largest difference relates to eliminations/adjustments, for which we think guidance is a little too conservative. We expect the final figure to exceed the company’s projection by JPY20.0b.

Exhibit 21: Comparison of guidance and BNP Paribas forecasts

Exhibit 22: Breakdown for comparison of guidance and BNP Paribas forecasts

Sources: Panasonic; BNP Paribas estimates Sources: Panasonic; BNP Paribas estimates

Comparison with previous forecast

Our revised forecast is around JPY30.0b lower than our previous forecast. By segment, this breaks down as follows: 1) AP −JPY3.0b (assumption of weaker JPY compared to previously has a slightly negative impact), 2) ES −JPY1.0b (to reflect slowdown in solar business and assumption of weaker JPY), 3) AVC −JPY14.0b (to reflect poor performance in businesses other than avionics), 4) AIS +JPY12.0b (change in assumption for weaker JPY is positive), 5) eliminations/adjustments −JPY24.0b (this reduction is based on the company’s revision).

97 90 59

100

5

-41

310

10379

5093

5

-85

245

(150)

(100)

(50)

0

50

100

150

200

250

300

350

AP ES AVC AIS Others adj. Total

(JPY b) Old CE New CE310

245

-41

-12-12

150170190210230250270290310330

Old

CoE

FX im

pact

Rea

l sal

esde

clin

e

Fixe

d co

sts

and

othe

rs

New

CoE

(JPY b)

Large forex impact

103 79 50

93

(85)

245

110 69 60

101

(65)

280

(150)

(100)

(50)

0

50

100

150

200

250

300


(JPY b) FY3/17E (C) FY3/17E (BNP)

7

(10)

10 8

20

35

(15)(10)(5)05

10152025303540


(JPY b)



Exhibit 23: FY3/17E positive/negative factors by segment

Positive factors Negative factors Net (y-y)

AP White goods still strong in Japan and Asia Conditions still tough for vending machine business Positive

Positive contribution from Hussmann acquisition Slightly positive impact by FX ES Slightly positive impact by FX Conditions still tough for solar Negative

Costs of up-front investment in housing business AVC Profitability improving overall Sales of fixed-line phones/faxes declining Negative

Avionics still strong Impact from the Kumamoto earthquake (imaging) Demand for security cameras expanding Large negative impact by FX AIS Business for Tesla is steadily expanding Costs of up-front investment in automotive business Slightly negative

Automotive business orders are steadily expanding Rechargeable batteries and LCD panels for ICT are weak

Large negative impact by FX


2) Reduce FY3/18 OP forecast to JPY335.0b from JPY365.0b

Our new FY3/18 forecasts are: sales JPY7.4649t (+3% y-y), OP JPY335.0b (+20%) and NI JPY197.5b (+10%). FX assumptions are JPY110/USD and JPY115/EUR. Our previous forecasts were: sales JPY7.663t, OP JPY365.0b and NI JPY196.2b. Our FX assumptions were JPY100/USD and JPY110/EUR.

We lower our FY3/18 OP forecast to reflect the JPY30.0b cut to our FY3/17 OP estimate, but our views regarding FY3/18 OP are largely unchanged. We believe FY3/18 OP will increase JPY55b over FY3/17 though we think uncertainties over the macro-economic environment and Panasonic’s main battlegrounds, including automotive, housing and white goods are likely to linger. We think lower fixed costs could provide a potential boost to OP in FY3/18. In FY3/17 we expect fixed costs could increase JPY65b y-y and squeeze OP; in FY3/18 they should at least no longer pressure OP and conversely could have a positive impact if fixed costs decline.

We expect OP to grow JPY55.0b y-y. The main segmental breakdown is as follows: 1) AP +JPY5.0b, 2) ES +JPY5.0b, 3) AVC +JPY5.0b, 4) AIS +JPY20.0b, 5) others no change, 6) adjustments +JPY20.0b.

Projected profit growth is greatest for AIS as we expect sales growth for automotive businesses to start to accelerate from 2HFY3/18 and forward investment should start to decline, rather than increase expected in FY3/17, so profit growth is likely to be relatively high. We look for ES to generate profit growth despite continuing risks for the solar battery business, as forward investment in the housing-related business should have run its course. We forecast that avionics will remain firm in the AVC segment, and that B2B business in the US and Japan will drive profit growth. We look for the strong performance in AP in FY3/17 to continue in FY3/18.



Exhibit 24: OP comparisons (FY3/17E and FY3/18E) Exhibit 25: Changes in FY3/18E OP by segment

Sources: Panasonic; BNP Paribas estimates Sources: Panasonic; BNP Paribas estimates

Exhibit 26: FY3/18E positive/negative factors by segment

Positive factors Negative factors Net (y-y)

AP White goods remains strong in Japan and Asia TV-related concerns abate, but risks by no means zero Slightly positive

Food distribution a new growth driver ES Moderate recovery in housing market as a whole Solar battery business gives no reason to be optimistic Positive

Potential expansion in age-free and Asian businesses (However hope is that there is at least no further deterioration)

Declining up-front investment

AVC Avionics remains strong Sales of fixed-line phones/faxes declining Slightly positive

Hopes for B2B business in US and Japan AIS Accelerated growth for automotive business from 2H ICT-related business risks need monitoring Positive

(Growth by safety, comfort, environment) (Rechargeable batteries, LCD panels, semiconductors, etc.)

Tesla Model 3 starts to contribute


Exhibit 27: Panasonic consensus comparisons: Awaiting post-IFRS forecasts

----------- BNPP ----------- ------- Consensus -------- ------------ % Diff ------------

FY3/17E FY3/18E FY3/17E FY3/18E FY3/17E FY3/18E

OP (JPY b) 280.0 335.0 303.1 355.9 (7.6) (5.9)

EPS (JPY) 77.5 85.1 68.7 80.8 12.7 5.3

Sources: Bloomberg consensus estimates; BNP Paribas estimates

11069 60

101

5

-65

280

11574 65

121

5

-45

335

(100)

(50)

0

50

100

150

200

250

300

350

400


(JPY b) FY3/17E FY3/18E

5

5

5

20

0

20

0 5 10 15 20 25

AP

ES

AVC

AIS

Others

adj.

(JPY b)

AP ES AVC AIS Others adj.



Exhibit 28: Panasonic earnings forecast by segment (based on IFRS excluding actual FY3/16 figures) FY3/16 -----------------------FY3/17E----------------------- --------------------FY3/17E-------------------- ---------------------FY3/18E---------------------

1Q 2Q 3Q 4Q y-y y-y y-y y-y

Sales (JPY b) A A A E E Old New (%) (JPY b) Old New (%) (JPY b)

Appliance 2,269 616.3 568.8 605.3 494.7 2,370 2,285 0.7 15.7 2,416 2,330 1.9 44.5 Eco Solutions 1,611 350.2 375.7 405.8 424.3 1,583 1,556 (3.4) (54.8) 1,623 1,595 2.5 39.4 AVC Networks 1,170 249.9 242.5 266.3 299.9 1,134 1,059 (9.5) (111.2) 1,177 1,099 3.8 40.3 AIS 2,709 617.4 633.0 622.5 619.6 2,568 2,492 (8.0) (216.1) 2,691 2,611 4.7 118.3 Others 661 117.0 144.5 130.9 238.9 679 631 (4.6) (30.1) 698 649 2.8 17.8 Eliminations (866) (176.0) (199.5) (219.0) (200.5) (915) (795) - 71.3 (942) (819) 3.0 (23.9) TOTAL sales 7,554 1,774.8 1,765.0 1,811.7 1,876.9 7,418 7,228 (4.3) (325.3) 7,663 7,465 3.3 236.5

Change (y-y %) (2) (6) (8) (5) 0 (3) (5) 3 3 Change (q-q %) - (1) 3 4 OP (JPY b) Appliance 72.2 44.4 27.1 33.9 4.6 113.0 110.0 52.4 37.8 113.8 115.0 4.5 5.0 Eco Solutions 78.4 5.0 15.9 24.3 23.8 70.0 69.0 (12.0) (9.4) 83.1 74.0 7.2 5.0 AVC Networks 74.7 12.9 12.8 14.6 19.7 74.0 60.0 (19.7) (14.7) 83.5 65.0 8.3 5.0 AIS 102.7 18.2 46.9 18.7 17.2 89.0 101.0 (1.7) (1.7) 122.8 121.0 19.8 20.0 Others 16.1 (3.5) 4.1 1.3 3.1 5.0 5.0 (68.9) (11.1) 4.8 5.0 0.0 0.0 Eliminations 71.6 (5.2) (0.5) (10.0) (49.3) (41.0) (65.0) - (136.6) (43.0) (45.0) (30.8) 20.0 TOTAL OP 415.7 71.8 106.3 82.9 19.0 310.0 280.0 (32.6) (135.7) 365.0 335.0 19.6 55.0

Change (y-y %) 9 (7) (18) (31) (80) 35 22 18 20 Change (q-q %) - 48 (22) (77) OPM (%) (%pt) (%pt) Appliance 3.2 7.2 4.8 5.6 0.9 4.8 4.8 1.6 4.7 4.9 0.1 Eco Solutions 4.9 1.4 4.2 6.0 5.6 4.4 4.4 (0.4) 5.1 4.6 0.2 AVC Networks 6.4 5.2 5.3 5.5 6.6 6.5 5.7 (0.7) 7.1 5.9 0.2 AIS 3. 2.9 7.4 3.0 2.8 3.5 4.1 0.3 4.6 4.6 0.6 Others 2.4 (3.0) 2.8 1.0 1.3 0.7 0.8 (1.6) 0.7 0.8 0.0 Total OPM 5.5 4.0 6.0 4.6 1.0 4.2 3.9 (1.6) 4.8 4.5 0.6

Sources: Panasonic; BNP Paribas estimates (IFRS)

Target price revision

Leave target price at JPY1,400

We leave our target price for Panasonic at JPY1,400. This is still based on a P/E of 16.0x FY3/18E (16.0x is the historical two-year consensus P/E). Although we lower our OP forecast based on actual results in 1H FY3/17, we cut our FY3/18 tax rate estimate to 34% from 36%. We also slightly reduce our estimate for income from minority interests, leaving our EPS forecast largely unchanged (minor EPS revision to JPY85.1 from JPY84.6).

We believe that Panasonic is one of the few stocks poised to benefit from all three automotive megatrends of “environmental regulations/emissions restrictions”, “introduction of safety functions” and “fully autonomous cars”. In an environment where market growth seems unlikely for PCs, TVs and smartphones, we believe that Panasonic can generate steady medium and long-term profit growth from automotive businesses, avionics and food distribution. Hence, we maintain our BUY rating.

Exhibit 29: Panasonic - consensus P/E (FY1) historical average

Exhibit 30: Panasonic - consensus P/E (FY2) historical average

FY1 1Y 2Y 3Y 4Y 5Y

(x) (x) (x) (x) (x)

Average 14.0 16.0 17.7 18.5 19.4

Stdev 1.7 2.7 4.0 4.9 5.7

Ave +1 Stdev 15.8 18.6 21.6 23.4 25.0

Ave -1 Stdev 12.3 13.3 13.7 13.6 13.7

Z-Score 0.9 (0.2) (0.5) (0.6) (0.7)

FY2 1Y 2Y 3Y 4Y 5Y

(x) (x) (x) (x) (x)

Average 11.5 13.2 14.7 16.1 15.8

Stdev 1.1 2.3 4.0 4.5 4.4

Ave +1 Stdev 12.6 15.6 18.8 20.6 20.1

Ave -1 Stdev 10.4 10.9 10.7 11.6 11.4

Z-Score 2.4 0.4 (0.1) (0.4) (0.4)

Sources: Bloomberg consensus estimates; BNP Paribas Sources: Bloomberg consensus estimates; BNP Paribas



Risks

Downside risks for Panasonic include, (1) a slowdown in automobile demand, (2) delays in restructuring TVs and semiconductors, and (3) negative impact on profit from sharp depreciation of emerging country currencies. Assuming other currencies track in line with the USD, a JPY1 rise against the USD would shave some JPY3.2b off OP (according to Panasonic). Depreciation of EM currencies (isolated weakness) would be negative.

Exhibit 31: Panasonic - consensus P/E (FY1) trend Exhibit 32: Panasonic - consensus P/E (FY2) trend


Exhibit 33: Panasonic - consensus EV/EBITDA (FY1) trend Exhibit 34: Panasonic - consensus EV/EBITDA (FY2) trend


Exhibit 35: Panasonic - consensus ROE (FY1) and P/BV trends Exhibit 36: TOPIX and Panasonic consensus P/E (FY1) trends


1012141618202224262830

Apr-0

5N

ov-0

5Ju

n-06

Jan-

07Au

g-07

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-1

0Fe

b-11

Sep-

11Ap

r-12

Nov

-12

Jun-

13Ja

n-14

Aug-

14M

ar-1

5O

ct-1

5M

ay-1

6

(x)

5

10

15

20

25

30

Apr-0

5N

ov-0

5Ju

n-06

Jan-

07Au

g-07

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-1

0Fe

b-11

Sep-

11Ap

r-12

Nov

-12

Jun-

13Ja

n-14

Aug-

14M

ar-1

5O

ct-1

5M

ay-1

6

(x)

3

4

5

6

7

8

9

10

Jul-0

5Fe

b-06

Sep-

06Ap

r-07

Nov

-07

Jun-

08Ja

n-09

Aug-

09M

ar-1

0O

ct-1

0M

ay-1

1D

ec-1

1Ju

l-12

Feb-

13Se

p-13

Apr-1

4N

ov-1

4Ju

n-15

Jan-

16Au

g-16

(x)

3

4

5

6

7

8

9

Jul-0

5Fe

b-06

Sep-

06Ap

r-07

Nov

-07

Jun-

08Ja

n-09

Aug-

09M

ar-1

0O

ct-1

0M

ay-1

1D

ec-1

1Ju

l-12

Feb-

13Se

p-13

Apr-1

4N

ov-1

4Ju

n-15

Jan-

16Au

g-16

(x)

(10)

(5)

0

5

10

15

0.50.70.91.11.31.51.71.92.12.32.5

Jul-0

5D

ec-0

5M

ay-0

6O

ct-0

6M

ar-0

7Au

g-07

Jan-

08Ju

n-08

Nov

-08

Apr-0

9Se

p-09

Feb-

10Ju

l-10

Dec

-10

May

-11

Oct

-11

Mar

-12

Aug-

12Ja

n-13

Jun-

13N

ov-1

3Ap

r-14

Sep-

14Fe

b-15

Jul-1

5D

ec-1

5M

ay-1

6O

ct-1

6

(%)(x) P/BV (LHS) Cons. ROE FY1 (RHS)

1012141618202224262830

Jul-0

5Fe

b-06

Sep-

06Ap

r-07

Nov

-07

Jun-

08Ja

n-09

Aug-

09M

ar-1

0O

ct-1

0M

ay-1

1D

ec-1

1Ju

l-12

Feb-

13Se

p-13

Apr-1

4N

ov-1

4Ju

n-15

Jan-

16Au

g-16

(x) TPX P/E (FY1) Panasonic P/E (FY1)



Murata Manufacturing (6981 JP; BUY; TP: JPY18,000)

Forecast revisions

1) Raise FY3/17 OP forecast to JPY214.0b from JPY210.0b

Our FY3/17 forecasts are: sales JPY1.1395t (−6% y-y), OP JPY214.0b (−22%) and NI JPY164.7b (−19%). Our FX assumption for 3Q is JPY107/USD (previously JPY100/USD). From 4Q we assume JPY110/USD, representing a JPY10/USD depreciation against our previous JPY100/USD assumption (making the full-year average for FY3/17 JPY106.9/USD). Our previous FY3/17 forecasts were: sales JPY1.0939t, OP JPY210.0b and NI JPY159.0b. Our previous full-year FX assumption was JPY102.1/USD.

Murata lowered its FY3/17 guidance, projecting sales of JPY1.115t (−8% y-y), OP of JPY200.0b (−27%) and NI of JPY156.0b (−23%) (based on JPY100/USD in 2H and JPY102.7/USD for full year). The company ascribed the guidance reduction to 1) the persistently strong JPY, and 2) declines in product prices. Its previous full-year guidance for FY3/17 was: sales JPY1.225t, OP JPY240.0b and NI JPY178.0b (based on JPY110/USD).

BNP Paribas forecasts: full-year OP JPY14.0b higher than guidance

Our new OP forecast is JPY14.0b higher than Murata’s revised OP guidance. The main factor is FX, accounting for roughly JPY14.9b (Murata’s 2H assumption is JPY100/USD, our assumption is JPY108.5/USD). Nearly all of the difference between our OP estimate and company guidance can be explained in terms of differences in FX assumptions. Considering recent FX levels, we believe Murata’s OP is set to outperform guidance, which should be reassuring for its share price.

Quarterly forecasts: JPY61.0b in 3Q

Our OP estimate for 3Q is JPY61.0b (previously JPY59.0b) and 4Q estimate JPY44.5b (previously JPY42.4b). Actual 1Q OP was JPY48.7b and 2Q OP JPY59.8b. Earnings in 3Q are supported by a weaker JPY, which we estimate to have a 2% q-q positive impact on OP growth. Assuming the JPY continues to depreciate in 4Q and there are no drastic adjustments as there were in 4Q FY3/16, we expect quarterly OP to grow 11% y-y.

BNP Paribas forecasts: factors contributing to upward revision

We raise our OP forecast by roughly JPY4.0b. The details are: 1) roughly JPY17.0b upward revision to reflect revised FX assumptions, and 2) roughly JPY13.0b downward revision relating to the actual business. However, there are no additional adverse factors affecting the actual business; and the main reason for reducing our forecast is to correct our previous forecast that might have been somewhat overoptimistic. Moreover, the JPY is currently weaker than our 2H assumption of JPY108.5/USD, which is slightly positive for Murata given its high FX sensitivity.

Exhibit 37: Murata Manufacturing earnings forecasts (FY basis)

(JPY m) FY3/16 ------------- FY3/17E ------------- ------------- FY3/18E ------------- ------------- FY3/19E ------------- FY3/17E

A Old New Old New Old New Guidance

Sales 1,210,841 1,093,925 1,139,450 1,157,200 1,341,590 1,222,300 1,425,670 1,115,000

Change (y-y %) 16 (10) (6) 6 18 6 6 (8)

OP 275,406 210,000 214,000 241,000 254,640 270,200 290,170 200,000

Change (y-y %) 28 (24) (22) 15 19 12 14 (27)

OPM 22.7 19.2 18.8 20.8 19.0 22.1 20.4 17.9%

PBT 279,173 212,300 216,330 244,000 257,530 273,900 293,510 203,000

Change (y-y %) 17 (24) (23) 15 19 12 14 (27)

NI 203,776 159,000 164,660 180,600 190,570 202,700 217,200 156,000

Change (y-y %) 22 (22) (19) 14 16 12 14 (23)

Diluted EPS (JPY) 962.6 748.6 775.2 850.3 897.2 954.3 1,022.6 -

Change (y-y %) 22 (22) (19) 14 16 12 14 -

JPY/USD 120.1 102.1 106.9 100.0 110.0 100.0 110.0 102.7

Sources: Murata Manufacturing; BNP Paribas estimates



2) Forecast JPY254.6b OP in FY3/18

Our new FY3/18 forecasts are: sales JPY1.3416t (+18% y-y), OP JPY254.6b (+19%) and NI JPY190.6b (+16%). We revise our FX assumption to JPY110/USD from JPY100/USD. Our previous forecasts were: sales JPY1.1572t, OP JPY241.0b and NI JPY180.6b.

Forecast JPY40.6b OP growth y-y

We forecast y-y OP growth of JPY40.6b (+19% y-y). The segmental breakdown is: 1) components +JPY28.8b, 2) modules +JPY17.9b, 3) rechargeable batteries (lithium ion batteries) −JPY5.0b, 4) others/adjustments −JPY1.1b. In the components segment, we expect MLCCs, inductors, noise-suppression products and SAW devices to drive earnings growth. In the modules segment, Murata lost market share in FY3/17, but we expect some recovery of market share in FY3/18 and believe it can achieve earnings growth.

We expect the rechargeable battery business that Murata acquired from Sony (6758 JP; HOLD; CP: JPY3,199) to post a deficit of JPY5.0b in FY3/18, the first full year following the acquisition. Murata intends to boost the OPM of this business to double digits eventually. For now, the plan is to make use of Murata’s distribution channels to expand sales of batteries for use in mobile products and later to expand sales to industrial users. In the medium/long term, successful development of all-solid batteries could contribute significantly to earnings, so we plan to monitor progress in R&D carefully.

Raise OP forecast by JPY13.6b

We raise our OP forecast by JPY13.6b from our previous JPY241.0b figure (based on JPY100/USD). By segment, this breaks down approximately as follows: 1) components +JPY11.1b, 2) modules +JPY9.7b, 3) rechargeable battery business acquired from Sony −JPY5.0b, 4) others/adjustments −JPY2.1b (because of rounding, aggregation of these figures may not equal the total). In Exhibit 38, the rechargeable battery business acquired from Sony is shown as the “lithium-ion battery segment” from FY3/18.



Exhibit 38: Murata Manufacturing earnings forecast by segment

FY3/16 --------------------FY3/17E-------------------- --------------------FY3/17E-------------------- --------------------FY3/18E--------------------

E E y-y y-y E E y-y y-y

Sales (JPY b) A 1QA 2QA 3QE 4QE Old New (%) (JPY b) Old New (%) (JPY b)

Component 760.2 179.9 196.8 198.2 189.6 732.7 764.5 1 4.3 770.3 825.0 8 60.5

Capacitor 367.3 84.3 93.1 100.1 94.1 346.8 371.6 1 4.3 361.6 397.2 7 25.6

Piezo electric 161.9 44.8 44.4 42.4 40.3 177.5 171.9 6 10.0 191.5 188.6 10 16.7

Other component 231.0 50.8 59.3 55.7 55.1 208.3 220.9 (4) (10.0) 217.2 239.2 8 18.3

Module product 446.8 80.3 103.5 104.4 84.0 357.4 372.1 (17) (74.7) 382.8 415.7 12 43.5

Communication 395.2 69.2 92.0 92.9 72.0 311.3 326.1 (17) (69.1) 335.7 366.7 12 40.6

Power source 51.7 11.1 11.5 11.5 11.9 46.1 46.0 (11) (5.6) 47.1 49.0 6 3.0

Lithium-ion battery 0.0 98.0 - 98.0

Others 3.8 0.8 0.7 0.7 0.7 4.0 2.9 (24) (0.9) 4.1 2.9 2 0.1

Total 1,210.8 260.9 301.0 303.3 274.2 1,093.9 1,139.5 (6) (71.4) 1,157.2 1,341.6 18 202.2

Change (y-y %) 16 (7) (9) (11) 5 (10) (6) 6 18

Change (q-q %) 0 15 1 (10)

OP (JPY b)

Component 262.6 51.3 58.5 59.1 49.2 212.1 218.1 (17) (44.5) 235.9 247.0 13 28.8

Module product 51.9 6.4 11.3 11.6 5.1 34.7 34.4 (34) (17.5) 42.6 52.3 52 17.9

Lithium-ion battery 0.0 (5.0) - -5.0

Others 5.1 1.4 1.2 1.3 1.2 5.6 5.1 0 0.0 5.7 5.2 3 0.2

eliminations (44.2) (10.4) (11.2) (11.0) (11.0) (42.4) (43.6) (1) 0.6 (43.3) (44.9) 3 (1.3)

Total 275.4 48.7 59.8 61.0 44.5 210.0 214.0 (22) (61.4) 241.0 254.6 19 40.6

Change (y-y %) 28 (24) (32) (27) 11 (24) (22) 15 19

Change (q-q %) 22 23 2 (27)

OPM (%) (%pt) (%pt)

Component 34.5 28.5 29.7 29.8 26.0 29.0 28.5 (6.0) 30.6 29.9 1.4

Module product 11.6 8.0 10.9 11.1 6.0 9.7 9.2 (2.4) 11.1 12.6 3.3

Lithium-ion battery 0.0 (5.1) (5.1)

Others 132.4 176.6 169.2 185.7 171.4 140.1 175.7 43.4 141.5 177.5 1.7

Total 22.7 18.7 19.9 20.1 16.2 19.2 18.8 (4.0) 20.8 19.0 0.2

Sources: Murata Manufacturing; BNP Paribas estimates

Exhibit 39: Murata Manufacturing consensus comparisons

----------- BNPP ----------- -------- Consensus -------- ------------ % Diff ------------


OP (JPY b) 214.0 254.6 214.6 238.8 (0.3) 6.6

EPS (JPY) 775.2 897.2 755.1 837.5 2.7 7.1



Raise target price to JPY18,000 from JPY17,000

We raise our target price to JPY18,000 from JPY17,000. We continue to base our target price on a P/E of 20x FY3/18E (20x is the historical five-year consensus P/E average).

For the reasons listed below, we believe Murata’s earnings have medium/long-term growth potential and thus reiterate our BUY rating.

1 Murata is highly competitive in various key components needed to lift mobile data transmission speed to 1Gbps (1,000Mbps) from the current 300–400Mbps towards 2020;

2 Automobile megatrends (environmental/fuel economy regulations, safety regulations, fully autonomous driving) are likely to boost sales of sensors, passive components, RF components and modules;



3 Sales of Murata’s highly competitive MLCCs, noise-suppression products and RF-related products are poised to grow in fields such as IoT, machine-to-machine (M2M) and deep learning.

Exhibit 40: Murata Manufacturing consensus P/E (FY1) average and standard deviation

Exhibit 41: Murata Manufacturing consensus P/E (FY2) average and standard deviation

Con. P/E (FY1) 1Y 2Y 3Y 4Y 5Y

Avg. 15.8 18.0 18.9 19.8 20.3

Std Dev. 2.1 3.0 3.1 4.2 4.2

Avg + 1 Std Dev. 17.9 21.0 22.0 24.0 24.5

Avg - 1 Std Dev. 13.7 14.9 15.9 15.6 16.0

Z scores 1.7 0.5 0.2 (0.1) (0.2)


Avg. 14.6 16.4 17.2 17.6 17.5

Std Dev. 1.8 2.6 2.6 2.5 2.6

Avg + 1 Std Dev. 16.3 19.0 19.8 20.1 20.1

Avg - 1 Std Dev. 12.8 13.8 14.6 15.1 14.9

Z scores 1.3 0.2 (0.1) (0.3) (0.3)


Exhibit 42: Murata Manufacturing consensus P/E (FY1): undervalued

Exhibit 43: Murata Manufacturing consensus P/E (FY2): undervalued

Source: Bloomberg consensus estimates Source: Bloomberg consensus estimates

Exhibit 44: Murata Manufacturing consensus ROE and P/BV Exhibit 45: Murata Manufacturing consensus EV/EBITDA (FY1)

Source: Bloomberg consensus estimates Source: Bloomberg consensus estimates

Risks

Downside risks for Murata include (1) delays in the shift to 4G in emerging countries, (2) delays in the transition to LTE-Advanced in China, (3) late introduction of technology to achieve 1Gbps communication speed in advanced countries and (4) sharp yen appreciation. (1) to (3) above, in particular, could result in supply-demand deterioration for related products and a risk of negative impact on prices. Forex sensitivity provides a +JPY3.5b boost to annual OP for every one yen weakness relative to the USD.

12

14

16

18

20

22

24

26

Jan.

03 Jul

Jan.

04 Jul

Jan.

05 Jul

Jan.

06 Jul

Jan.

07 Jul

Jan.

08 Jul

Jan.

09 Jul

Jan.

10 Jul

Jan.

11 Jul

Jan.

12 Jul

Jan.

13 Jul

Jan.

14 Jul

Jan.

15 Jul

Jan.

16 Jul

(x)

11

13

15

17

19

21

23

25

27

Jan.

03 Jul

Jan.

04 Jul

Jan.

05 Jul

Jan.

06 Jul

Jan.

07 Jul

Jan.

08 Jul

Jan.

09 Jul

Jan.

10 Jul

Jan.

11 Jul

Jan.

12 Jul

Jan.

13 Jul

Jan.

14 Jul

Jan.

15 Jul

Jan.

16 Jul

(x)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

(5)

0

5

10

15

20

Jan.

06 Jul

Jan.

07 Jul

Jan.

08 Jul

Jan.

09 Jul

Jan.

10 Jul

Jan.

11 Jul

Jan.

12 Jul

Jan.

13 Jul

Jan.

14 Jul

Jan.

15 Jul

Jan.

16 Jul

(x)(%) Cons. ROE (LHS) PBR (RHS)

23456789

101112

Jan.

06 Jul

Jan.

07 Jul

Jan.

08 Jul

Jan.

09 Jul

Jan.

10 Jul

Jan.

11 Jul

Jan.

12 Jul

Jan.

13 Jul

Jan.

14 Jul

Jan.

15 Jul

Jan.

16 Jul

(x) Cons. EV/EBITDA



TDK (6762 JP; HOLD; TP: JPY8,000)

Forecast revisions

1) FY3/17: raise OP estimate to JPY89.8b from JPY80.8b

Our new FY3/17 forecasts are: sales JPY1.1599t (+1% y-y), OP JPY89.8b (−4%) and NI JPY65.5b (+1%). We revise our FX assumptions to JPY107/USD in 3Q and JPY110/USD in 4Q (previously JPY100/USD). We assume the average full-year rate of JPY107/USD (previously JPY102/USD). Our previous forecasts were: sales JPY1.1443t, OP JPY80.8b and NI JPY59.6b.

Full-year OP guidance raised to JPY76.0b

When releasing its 1H results, TDK raised its FY3/17 full-year OP guidance by JPY2.0b to JPY76.0b from JPY74.0b. It also revised its FX assumption from 2H to JPY100/USD (previously JPY110/USD). The company’s full-year average rate, therefore, could be calculated to JPY103/USD. Despite assuming the JPY would be JPY10/USD stronger in 2H, the company raised its OP target, reflecting the confidence it has in its business environment.

Raise OP estimate by JPY9.0b

We previously estimated full-year OP at JPY80.8b, but now raise this by JPY9.0b, broken down mainly as follows: 1) positive impact of revised FX assumption +JPY7.0b (JPY5/USD × JPY1.4b sensitivity), and 2) higher forecast for the actual business +JPY2.0b. As was evident from TDK’s 1H results, the business of supplying lithium ion batteries (LiB) for smartphones is strong, while the HDD head business appears to be outperforming previous forecasts fuelled by the strong HDD market.

Exhibit 46: TDK earnings forecasts (FY basis)

(JPY m) FY3/16 ---------------FY3/17E--------------- ---------------FY3/18E--------------- ---------------FY3/19E--------------- FY3/17E


Sales 1,152,255 1,144,269 1,159,881 1,018,000 1,048,500 1,030,100 1,064,000 1,140,000

Change (y-y %) 6 (1) 1 (11) (10) 1 1 (1)

OP 93,414 80,760 89,790 74,510 86,370 78,230 91,450 76,000

Change (y-y %) 29 (14) (4) (8) (4) 5 6 (19)

OPM (%) 8.1 7.1 7.7 7.3 8.2 7.6 8.6 6.7

PBT 91,839 83,000 89,976 76,800 88,800 81,700 95,000 75,000

Change (y-y %) 23 (10) (2) (7) (1) 6 7 (18)

NI 64,828 59,600 65,500 55,000 63,900 58,600 68,400 52,000

Change (y-y %) 31 (8) 1 (8) (2) 7 7 (20)

Diluted EPS (JPY) 504.7 464.7 510.7 428.8 498.2 456.9 533.3 412.2

Change (y-y %) 34 (8) 1 (8) (2) 7 7 (18)

JPY/USD 120 102 107 100 110 100 110 103

Sources: TDK; BNP Paribas estimates

One-off profit from carve-out of RF business not included

In January 2016, TDK announced plans to carve out its RF business, resulting in one-off profit. In our 4 March report When will the correction end?, we estimated one-off profit at the OP level in the range of JPY137b–JPY199b. However, the actual amount is unknown and it is unclear when (in which quarter) the company will book the profit, so we still do not include this profit in our forecasts.

On 18 June, The Nikkei newspaper reported that TDK was likely to book a JPY130b gain in FY3/17 on the sale of its RF component business. TDK had already announced the possibility of booking a gain from this sale, but it responded to The Nikkei’s reported figure of JPY130b with a press release (on 20 June) saying, “This is not something that has been announced by TDK… …We intend to make a proper disclosure of this matter when details become clear.”


https://eqresearch.bnpparibas.com/researchfs/SRF__d90e38eddafe4994a98dc0b7f82d3fed.pdf


Exhibit 47: TDK earnings forecast by segment

FY3/16 --------------------FY3/17E-------------------- --------------------FY3/17E-------------------- --------------------FY3/18E--------------------

1Q 2Q 3Q 4Q FY E y-y y-y FY E y-y y-y


Passive Components 575.7 137.7 144.0 146.1 129.2 558.6 557.0 (3) (18.8) 422.1 423.5 (24) (133.5)

Capacitors 150.4 34.4 33.7 33.9 33.3 135.4 135.4 (10) (15.0) 136.3 136.7 1 1.4

Inductive devices 149.2 35.7 35.5 35.8 34.3 142.4 141.3 (5) (7.9) 143.0 142.4 1 1.0

Others 276.1 67.6 74.8 76.4 61.5 280.9 280.3 2 4.2 142.7 144.4 (48) (135.9)

Magnetic Application 315.3 82.4 83.9 88.0 82.8 325.8 337.1 7 21.8 318.6 342.9 2 5.8

Recording devices 219.8 61.0 62.3 66.9 60.8 235.8 250.9 14 31.1 226.0 254.1 1 3.2

Others 95.5 21.4 21.6 21.2 22.0 89.9 86.2 (10) (9.3) 92.6 88.8 3 2.6

Film Application 222.4 51.8 65.2 71.0 49.0 231.6 237.0 7 14.7 248.9 253.5 7 16.5

Others 38.8 6.9 7.3 6.5 8.0 28.4 28.7 (26) (10.1) 28.4 28.7 0 0.0

Total 1,152.3 278.8 300.4 311.7 269.0 1,144.3 1,159.9 1 7.6 1,018.0 1,048.5 (10) (111.4)

Change (y-y %) 6.4 (0.3) (2.5) 3.3 2.3 (0.7) 0.7 (11.0) (9.6)

Change (q-q %) 6.0 7.8 3.8 (13.7)

OP (JPY b)

Passive Components 66.4 16.0 20.7 21.5 16.2 66.5 74.4 12 8.0 51.3 50.6 (32) (23.8)

Magnetic Application 13.2 1.7 2.4 1.6 0.2 7.1 5.9 (55) (7.3) 10.4 17.0 187 11.1

Film Application 36.4 7.1 13.0 15.1 7.4 35.7 42.5 17 6.2 40.1 51.4 21 8.9

Others 1.9 (1.4) (2.0) (1.9) (1.5) (2.2) (6.7) - (8.6) (0.9) (6.6) - 0.1

Adjustment (24.4) (6.9) (6.3) -6.5 (6.6) (26.4) (26.3) - (1.9) (26.5) (26.0) - 0.3

Total 93.4 16.5 27.8 29.8 15.7 80.8 89.8 (4) (3.6) 74.5 86.4 (4) (3.4)

Change (y-y %) 28.9 (9.0) 1.4 (1.8) (10.4) (13.5) (3.9) (7.7) (3.8)

Change (q-q %) (5.9) 68.5 7.0 (47.2)

OPM (%) (%pt) (%pt)

Passive Components 11.5 11.6 14.4 14.7 12.5 11.9 13.3 1.8 12.2 11.9 (1.4)

Magnetic Application 4.2 2.1 2.8 1.8 0.2 2.2 1.8 (2.4) 3.3 5.0 3.2

Film Application 16.4 13.6 20.0 21.2 15.0 15.4 17.9 1.6 16.1 20.3 2.3

Other 4.8 (19.6) (26.8) (29.2) (18.8) (7.8) (23.4) (28.2) (3.0) (23.0) 0.4

Total 8.1 5.9 9.3 9.5 5.8 7.1 7.7 (0.4) 7.3 8.2 0.5

Sources: TDK; BNP Paribas estimates

2) FY3/18: raise OP forecast to JPY86.4b from JPY74.5b

From FY3/18, the sales and OP of the carved-out RF business will no longer be included in consolidated results. We also need to consider the negative impact of the steadily diminishing HDD head and HDD suspension businesses.

Our FY3/18 forecasts are: sales JPY1.0485t (−10% y-y), OP JPY86.4b (−4%) and NI JPY63.9b (−2%). We revise our FX assumption to JPY110/USD from JPY100/USD. Our previous forecasts were: sales JPY1.018t, OP JPY74.5b and NI JPY55.0b.

FY3/18 OP forecasts by segment

We forecast a JPY3.4b decline (−4% y-y) in FY3/18 OP. At the segmental level, the main changes are: 1) passive components −JPY23.8b, 2) magnetic application products +JPY11.1b, 3) film application products +JPY8.9b, and 4) others/adjustments +JPY400m.

With the carve-out of the RF business, we believe total OP is likely to decline y-y. It will be important for the company to make use of the cash generated from the carve-out of the RF business to nurture its next growth business and/or acquire a promising business via an M&A deal.



Raise OP forecast by JPY11.9b

Our change to FY3/18E OP implies a JPY11.9b upward revision from JPY74.5b previously. The main segmental breakdown is as follows: 1) passive components −JPY700m, 2) magnetic application products +JPY6.6b, 3) film application products +JPY11.2b, and 4) others/adjustments −JPY5.3b. We raise our forecast for magnetic application products to reflect the current robust HDD market. We also expect the solid performance of the LiB business in FY3/17 to continue into FY3/18 and raise our forecasts accordingly.

Exhibit 48: TDK consensus comparisons



OP (JPY b) 89.8 86.4 101.7 80.2 (11.7) 7.7

EPS (JPY) 510.7 498.2 566.3 454.0 (9.8) 9.7




We raise our target price for TDK to JPY8,000 from JPY6,900. We continue to base our target price on a P/E of 16x FY3/18E (16x is equal to the historical four-year average consensus P/E). The revised target price reflects our hiked earnings forecast.

For several years now TDK has been striving to improve the performance of its loss-making power supply and magnet businesses. Recently, these loss-making businesses appear poised to swing to the black. Other potential positives include announcement of a medium-term plan, TMR sensors and other new products, innovative manufacturing using Industry 4.0 and collaboration with other companies. We believe the market is likely to take an increasingly favourable view of TDK in the medium/long term.

Exhibit 49: TDK consensus historical P/E (FY1) Exhibit 50: TDK consensus historical P/E (FY2)


Avg. 12.2 15.0 15.5 16.4 15.7

Std Dev. 3.2 4.1 3.9 4.1 4.4

Avg + 1 Std Dev. 15.4 19.1 19.4 20.5 20.1

Avg - 1 Std Dev. 9.0 10.8 11.6 12.3 11.2

Z scores 1.1 0.2 0.0 (0.2) 0.0


Avg. 12.9 14.0 14.3 14.1 13.3

Std Dev. 2.9 2.6 2.4 2.2 2.7

Avg + 1 Std Dev. 15.8 16.6 16.7 16.3 16.0

Avg - 1 Std Dev. 10.0 11.3 11.9 11.8 10.7

Z scores 1.1 0.8 0.7 0.9 1.0


Exhibit 51: TDK consensus P/E trends (FY1) Exhibit 52: TDK consensus P/E trends (FY2)


5

10

15

20

25

Jan-

03Se

p-03

May

-04

Jan-

05Se

p-05

May

-06

Jan-

07Se

p-07

May

-08

Jan-

09Se

p-09

May

-10

Jan-

11Se

p-11

May

-12

Jan-

13Se

p-13

May

-14

Jan-

15Se

p-15

May

-16

(x) Consensus P/E FY1

5

10

15

20

25

Jan-

03Se

p-03

May

-04

Jan-

05Se

p-05

May

-06

Jan-

07Se

p-07

May

-08

Jan-

09Se

p-09

May

-10

Jan-

11Se

p-11

May

-12

Jan-

13Se

p-13

May

-14

Jan-

15Se

p-15

May

-16

(x) Consensus P/E FY2



Exhibit 53: TDK P/BV trends Exhibit 54: TDK Consensus EV/EBITDA trends (FY1)


Risks

Downside risks include 1) near-term correction in automobile market, 2) slow rate of adopting lithium polymer batteries for use in smartphones, 3) unexpectedly severe correction in HDD market, and 4) rapid JPY appreciation. Every JPY1/USD depreciation/appreciation has a JPY1.4b positive/negative impact on TDK’s annual OP, according to TDK. Upside risks are the opposite of 1) to 4) above.

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

Jan-

03Se

p-03

May

-04

Jan-

05Se

p-05

May

-06

Jan-

07Se

p-07

May

-08

Jan-

09Se

p-09

May

-10

Jan-

11Se

p-11

May

-12

Jan-

13Se

p-13

May

-14

Jan-

15Se

p-15

May

-16

(x)

2

3

4

5

6

7

8

9

10

Jun-

05Ja

n-06

Aug-

06M

ar-0

7O

ct-0

7M

ay-0

8D

ec-0

8Ju

l-09

Feb-

10Se

p-10

Apr-1

1N

ov-1

1Ju

n-12

Jan-

13Au

g-13

Mar

-14

Oct

-14

May

-15

Dec

-15

Jul-1

6

(x) Consensus EV/EBITDA (FY1)



Hirose Electric (6806 JP; HOLD; TP: JPY14,000)

Forecast revisions


Our new FY3/17 forecasts are: sales JPY115.3b (−4% y-y), OP JPY27.6b (−4%) and NI JPY20.5b (−3% y-y). Our FX assumption for 3Q is JPY107/USD (previously JPY100/USD). We revise our FX assumption from 4Q to JPY110/USD, estimating the JPY will be JPY10/USD weaker than our previous JPY100/USD assumption. Our average full-year FX assumption for FY3/17 is JPY106.9/USD (previously JPY102.0/USD). Our previous forecasts were: sales JPY109.7b, OP JPY26.7b and NI JPY20.3b.

Comparison of old and new forecasts

We raise our previous OP forecast of JPY26.7b (based on JPY102.0/USD) by roughly JPY900m, the main factors being 1) revised FX assumption roughly +JPY1.6b (expect JPY to be JPY5/USD weaker than originally estimated; every JPY1/USD change has a JPY330m impact on annual OP), 2) downward revision of the actual business (excluding FX impact) roughly −JPY700m. In view of the somewhat weak sales of smartphones by Hirose’s main customers, we lower our OP forecast for the actual business.

OP guidance left at JPY27.0b

On 31 October, Hirose revised its FX assumption for 2H to JPY102.5/USD (from JPY105/USD), but left its guidance unchanged at sales of JPY112.0b (−7% y-y), OP JPY27.0b (−6%) and NI JPY19.5b (−8%) (its full-year FX assumption is JPY103.9/USD).

Comparison of our forecasts and guidance

Our OP forecast is JPY27.6b, JPY600m higher than Hirose’s JPY27.0b guidance (based on JPY103.9/USD). The difference in FX assumptions has a positive impact of around JPY1.0b (JPY3/year difference), while the difference in views of the actual business (excluding FX effects) has a negative impact of around JPY400m.

Exhibit 55: Hirose Electric earnings forecasts (FY basis)

FY3/16 ------------FY3/17E------------ ------------FY3/18E------------ ------------FY3/19E------------ FY3/17E

(JPY m) A Old New Old New Old New Guidance

Sales 120,284 109,700 115,300 112,200 118,100 115,500 121,700 112,000

Change (y-y %) (4) (9) (4) 2 2 3 3 (7)

OP 28,794 26,650 27,580 27,340 28,970 28,040 29,480 27,000

Change (y-y %) (12) (7) (4) 3 5 3 2 (6)

OPM (%) 23.9 24.3 23.9 24.4 24.5 24.3 24.2 24.1

NI 21,104 20,300 20,500 20,900 21,500 21,400 21,900 19,500

Change (y-y %) (8) (4) (3) 3 5 2 2 (8)

EPS (JPY) 596.0 573.5 579.2 590.5 607.4 604.6 618.7 -

Change (y-y %) (12) (4) (3) 3 5 2 2 -

JPY/USD 120.1 102.0 106.9 100.0 110.0 100.0 110.0 103.9

Sources: Hirose Electric; BNP Paribas estimates

Quarterly forecasts: estimate 3Q OP at JPY6.9b

We estimate 3Q FY3/17 OP at JPY6.9b (previously JPY6.6b) and 4Q OP at JPY6.4b (previously JPY6.0b), compared to actual 1Q OP of JPY7.1b (−3% y-y) and 2Q OP of JPY7.2b (−9%). Seasonal factors usually depress earnings from 2Q into 3Q, but because of our revised FX assumption in 3Q to JPY107/USD (from JPY100/USD), we expect the dip in OP from 2Q into 3Q to be relatively mild.



Exhibit 56: Hirose Electric earnings forecast by segment

FY3/16 --------------------FY3/17E--------------------- --------------------FY3/17E--------------------- --------------------FY3/18E---------------------

A E E y-y y-y E E y-y y-y

(JPY m) FY 1QA 2QA 3QE 4QE Old New (%) (JPY b) Old New (%) (JPY b)

Multi-pin connectors 98,555 22,893 25,039 25,009 24,246 90,893 97,188 (1.4) (1,367) 92,964 99,548 2.4 2,360

Coaxial connectors 13,829 2,902 3,157 3,153 3,057 11,522 12,269 (11.3) (1,560) 11,784 12,567 2.4 298

Others 7,900 1,843 1,340 1,338 1,298 7,317 5,819 (26.3) (2,081) 7,484 5,960 2.4 141

Total Sales 120,284 27,640 29,535 29,500 28,600 109,700 115,300 (4.1) (4,984) 112,200 118,100 2.4 2,800

Change (y-y %) (4.3) (8.5) (4.8) (4.0) 1.0 (8.8) (4.1) 2.3 2.4

Change (q-q %) (2.4) 6.9 (0.1) (3.1)

Total OP 28,794 7,104 7,185 6,910 6,380 26,650 27,580 (4.2) (1,214) 27,340 28,970 5.0 1,390

Change (y-y %) (11.6) (3.4) (9.1) (10.2) 9.3 (7.4) (4.2) 2.6 5.0

Change (q-q %) 21.7 1.1 (3.8) (7.7)

(%pt) (%pt)

Total OPM (%) 23.9 25.7 24.3 23.4 22.3 24.3 23.9 0.0 24.4 24.5 0.6

Sources: Hirose Electric; BNP Paribas estimates


Our new FY3/18 forecasts are: sales JPY118.1b (+2% y-y), OP JPY29.0b (+5% y-y) and NI JPY21.5b (+5% y-y). We revise our FY3/18 FX assumption to JPY110/USD from JPY100/USD. Our previous forecasts were: sales JPY112.2b, OP JPY27.3b and NI JPY20.9b.

Forecast roughly JPY1.4b y-y OP growth

We forecast roughly JPY1.4b OP growth (+5% y-y) in FY3/18. The main sources of growth are likely to be 1) FX difference +JPY1.0b y-y (JPY roughly JPY3/USD weaker annually) and 2) OP increase of JPY400m from stable growth of the actual business.

Raise forecast by roughly JPY1.7b

We raise our previous OP forecast of JPY27.3b (based on JPY100/USD) by around JPY1.7b, broken down mainly as follows: 1) revised FX assumption roughly +JPY3.3b (assume JPY10/USD weaker JPY annually), and 2) reduction of roughly JPY1.6b in forecast for the actual business, excluding FX impact. The reason for lowering our forecast for the actual business is that we do not expect complete recovery in FY3/18 from the impact of reduced smartphone shipments by Hirose’s customers in FY3/17.

Exhibit 57: Hirose Electric consensus comparisons



OP (JPY b) 27.6 29.0 27.4 27.5 0.6 5.5

EPS (JPY) 579.2 607.4 566.9 578.3 2.2 5.0




We raise our target price for Hirose to JPY14,000 from JPY13,200. The new target price is based on a P/E of 23x FY3/18E (as before, we use the historical three-year Bloomberg consensus average P/E). With only four months left in FY3/17, we switch our reference year to FY3/18 from FY3/17. The slight increase in our earnings forecast also has an upward effect to our target price.

As of end-FY3/16, Hirose had net cash equal to roughly 40% of its market capitalisation, and its shares tend to trade at a fairly high P/E. In light of the current



economic environment, however, further upward movement will be hard to achieve, in our view. At the same time, we believe there is little downside risk because of the company’s ample cash position and ongoing share buybacks. We thus maintain our HOLD rating.

Exhibit 58: Hirose Electric consensus P/E (FY1) Exhibit 59: Hirose Electric consensus P/E (FY2)


Exhibit 60: Hirose Electric consensus P/E (FY1) average, standard deviation

Exhibit 61: Hirose Electric consensus P/E (FY2) average, standard deviation

FY1 1Y 2Y 3Y 4Y 5Y

Average 23.0 23.2 22.7 23.1 22.7

Std Dev. 1.6 1.7 1.9 2.0 2.1

Ave +1 Std Dev. 24.6 24.9 24.6 25.1 24.9

Ave -1 Std Dev. 21.4 21.5 20.8 21.1 20.6

FY2 1Y 2Y 3Y 4Y 5Y

Average 22.5 22.5 21.8 22.3 21.8

Std Dev. 1.2 1.7 2.0 2.0 2.3

Ave +1 Std Dev. 23.7 24.2 23.8 24.3 24.1

Ave -1 Std Dev. 21.3 20.8 19.8 20.3 19.5


Exhibit 62: Hirose Electric consensus P/E (FY1) excluding cash

Exhibit 63: Hirose Electric consensus P/E (FY2) excluding cash


15

17

19

21

23

25

27

29

Jan-

05Au

g-05

Mar

-06

Oct

-06

May

-07

Dec

-07

Jul-0

8Fe

b-09

Sep-

09Ap

r-10

Nov

-10

Jun-

11Ja

n-12

Aug-

12M

ar-1

3O

ct-1

3M

ay-1

4D

ec-1

4Ju

l-15

Feb-

16Se

p-16

(x) Con.P/E(FY1)

15

17

19

21

23

25

27

29

Jan-

05Au

g-05

Mar

-06

Oct

-06

May

-07

Dec

-07

Jul-0

8Fe

b-09

Sep-

09Ap

r-10

Nov

-10

Jun-

11Ja

n-12

Aug-

12M

ar-1

3O

ct-1

3M

ay-1

4D

ec-1

4Ju

l-15

Feb-

16Se

p-16

(x) Con. P/E (FY2)

68

101214161820222426

Jan-

05Au

g-05

Mar

-06

Oct

-06

May

-07

Dec

-07

Jul-0

8Fe

b-09

Sep-

09Ap

r-10

Nov

-10

Jun-

11Ja

n-12

Aug-

12M

ar-1

3O

ct-1

3M

ay-1

4D

ec-1

4Ju

l-15

Feb-

16Se

p-16

(x) Consensus P/E (FY1, excluding cash)

68

101214161820222426

Jan-

05Au

g-05

Mar

-06

Oct

-06

May

-07

Dec

-07

Jul-0

8Fe

b-09

Sep-

09Ap

r-10

Nov

-10

Jun-

11Ja

n-12

Aug-

12M

ar-1

3O

ct-1

3M

ay-1

4D

ec-1

4Ju

l-15

Feb-

16Se

p-16

(x) Consensus P/E (FY2, excluding cash)



Exhibit 64: Hirose Electric historical P/BV and consensus ROE Exhibit 65: Hirose Electric consensus EV/EBITDA (FY1)


Risks

Downside risks for Hirose Electric are: 1) slowing sales at customer companies, 2) a delayed uptake of Hirose’s products by the automotive and industrial machinery companies it is focusing on, and 3) rapid yen appreciation. Every JPY1/USD depreciation boosts Hirose’s annual OP by JPY330m according to management. Upside risks are the converse of downside risks.

23456789101112

0.70.91.11.31.51.71.92.12.32.52.7

Jan-

05Au

g-05

Mar

-06

Oct

-06

May

-07

Dec

-07

Jul-0

8Fe

b-09

Sep-

09Ap

r-10

Nov

-10

Jun-

11Ja

n-12

Aug-

12M

ar-1

3O

ct-1

3M

ay-1

4D

ec-1

4Ju

l-15

Feb-

16Se

p-16

(%)(x) P/B (LHS) Cons. ROE (RHS)

456789

1011121314

Jan-

05Au

g-05

Mar

-06

Oct

-06

May

-07

Dec

-07

Jul-0

8Fe

b-09

Sep-

09Ap

r-10

Nov

-10

Jun-

11Ja

n-12

Aug-

12M

ar-1

3O

ct-1

3M

ay-1

4D

ec-1

4Ju

l-15

Feb-

16Se

p-16

(x) Con. EV/EBITDA (FY1)



Kyocera (6971 JP; HOLD; TP: JPY5,200)

Forecast revisions

1) Projecting JPY90.2b in FY3/17 BP (JPY86.5b in OP)

We project JPY 1.3793t in sales (-7% y-y), JPY86.5b in OP (-7%), JPY90.2b in business profit (BP; -15%), and JPY80b in NI (-27%) for FY3/17. Our forex assumptions are JPY107/USD and JPY115/EUR in 3Q and JPY110/USD and JPY115/EUR in 4Q, and these levels put FY3/17 average rates at JPY106.8/USD and JPY116.5/EUR.

Kyocera maintained term-start guidance of JPY 1.52t in sales (+3% y-y), JPY110b in OP (+19%), JPY120.2b in BP (+13%), and JPY85b in NI (-22%). It adjusted 2H forex assumptions from JPY105/USD and JPY115/EUR to JPY102/USD and JPY112/EUR (Management’s FY3/17 forex assumptions are JPY104/USD and JPY115/EUR).

Our previous forecasts were JPY1.4061t in sales, JPY85.9b in OP, JPY86b in BP, and JPY76.6b in NI using forex assumptions of JPY102/USD and JPY113/EUR (2H at JPY100/USD and JPY110/EUR).

Raising our business profit forecast by JPY4.2b from JPY86b to JPY90.2b

We raise our FY3/17 business profit forecast by JPY4.2b from JPY86b to JPY90.2b. The segment breakdown of the net JPY4.2b addition consists of the following adjustments: 1) –JPY1b for components business (mainly electronic devices and applied ceramic products), 2) –JPY1.6b for telecommunications equipment, 3) +JPY4.6b for information equipment, and 4) +JPY2.2b for others. We reflect stronger 2Q results than we had expected as primary boosts to information equipment and others, and assume continuation of relatively upbeat trends in 2H.

Our business profit forecast is JPY30b below guidance

We expect business profit to miss guidance (JPY120.2b) by JPY30b in our new forecast of JPY90.2b. Main differences by segment are 1) components business at about –JPY26.3b, 2) equipment business at around –JPY5.3b, and 3) others at about +JPY1.6b. We have a bearish view of electronic devices in components business and telecommunications equipment (smartphones) in equipment business.

Exhibit 66: Kyocera earnings forecasts (FY basis) (JPY m) FY3/16 --------------FY3/17E-------------- --------------FY3/18E-------------- --------------FY3/19E-------------- FY3/17E


Sales 1,479,627 1,406,085 1,379,343 1,411,400 1,385,400 1,425,800 1,400,100 1,520,000

Change (y-y %) (3) (5) (7) 0 0 1 1 3

OP 92,656 85,900 86,500 92,700 95,000 97,300 101,200 110,000

Change (y-y %) (1) (7) (7) 8 10 5 7 19

OPM (%) 6.3 6.1 6.3 6.6 6.9 6.8 7.2 7.2

PBT 145,583 113,700 114,400 121,700 124,500 128,000 132,500 130,000

Change (y-y %) 19 (22) (21) 7 9 5 6 (11)

PBT margin (%) 9.8 8.1 8.3 8.6 9.0 9.0 9.5 8.6

NI 109,047 76,600 80,003 80,600 82,500 84,900 88,100 85,000

Change (y-y %) (6) (30) (27) 5 3 5 7 (22)

EPS (JPY) 297.2 208.8 217.9 219.7 224.7 231.5 240.0 -

Change (y-y %) (6) (30) (27) 5 3 5 7 -

JPY/USD 120.0 102.0 106.8 100.0 110.0 100.0 110.0 104.0

JPY/EUR 133.0 113.0 116.5 110.0 115.0 110.0 115.0 115.0

Sources: Kyocera Corp; BNP Paribas estimates

2) Expecting JPY100b in business profit (JPY95b in OP) for FY3/18

We expect JPY1.3854t in sales (0% y-y), JPY95b in OP (+10%), JPY100b in business profit (+11%), and JPY82.5b in NI (+3%) for FY3/18. Our forex assumptions are JPY110/USD and JPY115/EUR. Our JPY95b OP forecast is not that robust in



light of FY3/14’s JPY120.6b, FY3/15’s JPY93.4b, and FY3/16’s JPY92.7b, and we anticipate a fairly slow earnings recovery pace.

Our previous FY3/18 forecasts were JPY1.4114t in sales, JPY92.7b in OP, JPY97.4b in business profit, and JPY80.6b in NI based on forex rates of JPY100/USD and JPY110/EUR. We lifted our FY3/18 business profit forecast by JPY2.6b, including the impact of our higher FY3/17E business profit.

Segment changes are 1) components business at –JPY3.3b (lowered), 2) equipment business at +JPY3.8b (lowered telecommunications equipment (smartphones), raised information equipment), and 3) others business at +JPY2.2b (raised).

Anticipated 11% y-y increase not a robust recovery

We forecast a JPY9.9b (11%) y-y increase in business profit in FY3/18 with segment mainly breaks down to 1) components business at +JPY7.4b, 2) telecommunications equipment at +JPY1.9b (smaller loss), 3) information equipment at +JPY200m, and 4) others at +JPY300m (note that the total value does not match because of rounding).

We do not expect much impact y-y from forex rates. Anticipated changes from FY3/17 to FY3/18 are JPY106.8/USD to JPY110/USD and JPY116.5/EUR to JPY115/EUR. These levels work out to +JPY2.1b y-y on a net basis with impacts of roughly +JPY3.5b for the JPY/USD and –JPY1.4b for the JPY/EUR due to modest yen appreciation.



Exhibit 67: Kyocera business profit forecasts by segment

FY3/16 -------------------FY3/17E-------------------- -------------------FY3/17E-------------------- -------------------FY3/18E--------------------

FY 1Q 2Q 3Q 4Q y-y y-y y-y y-y

Sales (JPY b) A A A E E Old New (%) (JPY b) Old New (%) (JPY b) Components 849.8 189.3 207.7 211.0 215.5 815.3 823.5 (3) (26.3) 820.5 831.0 1 7.5 Fine Ceramic Parts 95.1 22.5 24.2 24.2 25.6 94.2 96.6 2 1.5 96.5 99.1 3 2.6 Semiconductor Parts 216.3 56.0 61.3 60.3 57.5 227.3 235.1 9 18.9 232.4 242.2 3 7.1 Applied Ceramics 247.5 45.6 52.3 56.2 63.0 224.9 217.1 (12) (30.4) 220.6 212.2 (2) (4.9) Electronic Device 290.9 65.2 69.8 70.3 69.4 269.0 274.6 (6) (16.3) 271.1 277.4 1 2.8 Equipment 507.3 109.1 103.2 119.7 128.5 483.7 460.4 (9) (46.9) 483.2 457.8 (1) (2.6) Telecom 171.0 34.1 30.7 40.9 42.1 157.2 147.9 (14) (23.1) 154.1 143.5 (3) (4.4) Information 336.3 74.9 72.5 78.7 86.4 326.5 312.5 (7) (23.8) 329.1 314.3 1 1.8 Others 167.8 30.8 33.3 31.0 39.5 142.8 134.6 (20) (33.2) 144.3 136.8 2 2.1 Eliminations (45.2) (9.2) (10.9) (9.5) (9.5) (35.7) (39.1) (14) 6.1 (36.6) (40.1) 3 (1.0) TOTAL 1,479.6 320.0 333.3 352.1 374.0 1,406.1 1,379.3 (7) (100.3) 1,411.4 1,385.4 0 6.1

Change (y-y %) (3) (6) (13) (5) (3) (5) (7) 0 0 Change (q-q %) (17) 4 6 6

Business profit (JPY b) Components 72.0 13.7 18.6 20.1 20.4 73.7 72.7 1 0.7 83.4 80.1 10 7.4 Fine Ceramic Parts 15.7 2.4 3.8 4.0 4.4 13.1 14.5 (8) (1.2) 14.6 15.2 4 0.6 Semiconductor Parts 28.9 4.6 5.4 6.6 5.7 20.7 22.3 (23) (6.7) 22.5 26.3 18 4.0 Applied Ceramics 16.4 1.5 4.1 3.8 5.1 14.5 14.6 (11) (1.8) 18.6 17.0 16 2.4 Electronic Device 11.0 5.2 5.3 5.6 5.2 25.4 21.3 94 10.3 27.6 21.6 1 0.3 Equipment 15.2 0.3 5.4 7.6 8.6 18.8 21.9 44 6.7 20.2 24.0 10 2.1 Telecom (4.6) (5.6) (1.6) 0.5 (0.5) (5.6) (7.2) - (2.6) (4.4) (5.2) - 1.9 Information 27.1 5.9 7.0 7.1 9.1 24.4 29.0 7 1.9 24.6 29.2 1 0.2 Others 11.6 (2.6) (0.3) (1.5) 0.0 (6.6) (4.4) - (16.0) (6.2) (4.1) - 0.3 TOTAL 106.2 11.4 23.6 26.2 29.0 86.0 90.2 (15) (16.0) 97.4 100.0 11 9.9

Change (y-y %) (2) (69) (25) 222 0 (19) (15) 13 11 Change (q-q %) (61) 107 11 11

BP margin (%) (%pt) (%pt) Components 8.5 7.2 8.9 9.5 9.5 9.0 8.8 0.4 10.2 9.6 0.8 Fine Ceramic Parts 16.6 10.5 15.6 16.5 17.2 13.9 15.1 (1.5) 15.2 15.3 0.3 Semiconductor Parts 13.4 8.2 8.8 11.0 9.9 9.1 9.5 (3.9) 9.7 10.9 1.4 Applied Ceramics 6.6 3.3 7.9 6.8 8.1 6.4 6.7 0.1 8.4 8.0 1.3 Electronic Device 3.8 8.0 7.6 8.0 7.5 9.5 7.8 4.0 10.2 7.8 0.0 Equipment 3.0 0.3 5.2 6.3 6.7 3.9 4.7 1.8 4.2 5.2 0.5 Telecom (2.7) (16.3) (5.2) 1.2 (1.2) (3.6) (4.8) (2.2) (2.9) (3.6) 1.2 Information 8.1 7.8 9.7 9.0 10.5 7.5 9.3 1.2 7.5 9.3 0.0 Others 6.9 (8.3) (1.0) (4.8) 0.0 (4.6) (3.3) (10.2) (4.3) (3.0) 0.3 TOTAL 7.2 3.6 7.1 7.4 7.7 6.1 6.5 (0.6) 6.9 7.2 0.7

Note: Business profit equals to OP which does not include headquarters income and equity investment gains/losses, adjustments and eliminations Sources: Kyocera Corp; BNP Paribas estimates

Exhibit 68: Kyocera consensus comparisons

----------- BNPP ----------- -------- Consensus ------- ----------- % Diff ------------


OP (JPY b) 86.5 95.0 84.7 92.1 2.1 3.1

EPS (JPY) 217.9 224.7 202.3 214.7 7.7 4.7


Increasing our target price from JPY4,500 to JPY5,200

We increase our target price from JPY4,500 to JPY5,200 due to revision of the valuation approach from FY3/18E 0.7x P/B to FY3/18E 23x P/E. Our target 23x P/E factors in consensus P/E averages of 22.9x for the past year.

We switched our valuation from P/E to P/B to clarify the downside level for Kyocera shares when we downgraded our rating to REDUCE on 20 July 2016. We return our target valuation to P/E this time due to our view that Kyocera’s earnings have modestly stabilized, including support from yen depreciation, and that the shares are not necessarily facing further decline in downside pricing.



However, we do not see evidence of a robust earnings recovery and hence are not expecting strong profit growth over the medium/longer term. We think the shares do not offer much upside based on the prospect of ROE staying below COE.

Exhibit 69: Kyocera consensus P/E (FY1) Exhibit 70: Kyocera consensus P/E (FY2)


Exhibit 71: Kyocera consensus P/E (FY1) average and standard deviation

Exhibit 72: Kyocera consensus P/E (FY1) average and standard deviation


Avg. 22.9 22.1 21.2 21.0 19.9

Std Dev. 1.6 1.9 2.1 2.2 3.1

Avg + 1 Std Dev. 24.5 24.0 23.3 23.2 22.9

Avg - 1 Std Dev. 21.3 20.2 19.1 18.7 16.8

Z scores 1.4 1.6 1.9 1.9 1.7


Avg. 21.3 20.8 19.9 19.1 18.0

Std Dev. 1.6 1.7 2.0 2.3 3.0

Avg + 1 Std Dev. 22.8 22.5 21.8 21.3 21.0

Avg - 1 Std Dev. 19.7 19.2 17.9 16.8 15.0

Z scores 1.9 2.1 2.3 2.3 2.1


Exhibit 73: Kyocera historical P/BV, consensus ROE Exhibit 74: Kyocera consensus EV/EBITDA

Sources: Kyocera; Bloomberg consensus estimates Source: Bloomberg consensus estimates

1012141618202224262830

Jan-

03Se

p-03

May

-04

Jan-

05Se

p-05

May

-06

Jan-

07Se

p-07

May

-08

Jan-

09Se

p-09

May

-10

Jan-

11Se

p-11

May

-12

Jan-

13Se

p-13

May

-14

Jan-

15Se

p-15

May

-16

(x) Consensus P/E (FY1)

1012141618202224262830

Jan-

03Se

p-03

May

-04

Jan-

05Se

p-05

May

-06

Jan-

07Se

p-07

May

-08

Jan-

09Se

p-09

May

-10

Jan-

11Se

p-11

May

-12

Jan-

13Se

p-13

May

-14

Jan-

15Se

p-15

May

-16


0

1

2

3

4

5

6

7

8

9

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Jan-

03O

ct-0

3Ju

l-04

Apr-0

5Ja

n-06

Oct

-06

Jul-0

7Ap

r-08

Jan-

09O

ct-0

9Ju

l-10

Apr-1

1Ja

n-12

Oct

-12

Jul-1

3Ap

r-14

Jan-

15O

ct-1

5Ju

l-16

(%)(x) P/BV (LHS) ROE (RHS)

3

4

5

6

7

8

9

10

11

12

May

-05

Dec

-05

Jul-0

6Fe

b-07

Sep-

07Ap

r-08

Nov

-08

Jun-

09Ja

n-10

Aug-

10M

ar-1

1O

ct-1

1M

ay-1

2D

ec-1

2Ju

l-13

Feb-

14Se

p-14

Apr-1

5N

ov-1

5Ju

n-16

(x) Cons. EV/EBITDA (FY1)



Exhibit 75: Forex sensitivity matrix (FY3/17E OP) Exhibit 76: Changes in forex sensitivity matrix (FY3/17E OP)

(JPY b) ---------------------------------------USD---------------------------------------

87 95 100 105 106.8 110 115 120

-----

-----

-----

----

-Eur

o----

----

-----

-----

--

105 62.8 68.2 73.6 75.5 79.0 84.4 89.8

110 67.6 73.0 78.4 80.3 83.8 89.2 94.6

115 72.4 77.8 83.2 85.1 88.6 94.0 99.4

116.5 73.8 79.2 84.6 86.5 90.0 95.4 100.8

120 77.2 82.6 88.0 89.9 93.4 98.8 104.2

125 82.0 87.4 92.8 94.7 98.2 103.6 109.0

130 86.8 92.2 97.6 99.5 103.0 108.4 113.8

(%) ---------------------------------------USD---------------------------------------

95 100 105 106.8 110 115 120

-----

-----

-----

----

-Eur

o----

----

-----

-----

--

105 (27) (21) (15) (13) (9) (2) 4

110 (22) (16) (9) (7) (3) 3 9

115 (16) (10) (4) (2) 2 9 15

116.5 (15) (8) (2) 0 4 10 17

120 (11) (5) 2 4 8 14 20

125 (5) 1 7 9 13 20 26

130 0 7 13 15 19 25 32

Sources: Kyocera Corp; BNP Paribas estimates Sources: Kyocera Corp; BNP Paribas estimates

Exhibit 77: Forex sensitivity matrix (FY3/18E OP) Exhibit 78: Changes in forex sensitivity matrix (FY3/18E OP)

(JPY b) ---------------------------------------USD---------------------------------------

95 95 100 105 110 115 120 125

-----

-----

-----

----

-Eur

o----

----

-----

-----

--

100 64.4 69.8 75.2 80.6 86.0 91.4 96.8

105 69.2 74.6 80.0 85.4 90.8 96.2 101.6

110 74.0 79.4 84.8 90.2 95.6 101.0 106.4

115 78.8 84.2 89.6 95.0 100.4 105.8 111.2

120 83.6 89.0 94.4 99.8 105.2 110.6 116.0

125 88.4 93.8 99.2 104.6 110.0 115.4 120.8

130 93.2 98.6 104.0 109.4 114.8 120.2 125.6

(%) ---------------------------------------USD---------------------------------------

91.4 95 100 105 110 115 120 125

-----

-----

-----

----

-Eur

o----

----

-----

-----

--

100 (32) (27) (21) (15) (9) (4) 2

105 (27) (21) (16) (10) (4) 1 7

110 (22) (16) (11) (5) 1 6 12

115 (17) (11) (6) 0 6 11 17

120 (12) (6) (1) 5 11 16 22

125 (7) (1) 4 10 16 21 27

130 (2) 4 9 15 21 27 32

Sources: Kyocera Corp; BNP Paribas estimates Sources: Kyocera Corp; BNP Paribas estimates

Risks

Main upside risks are 1) activist investors owning Kyocera shares, 2) more progress with smartphone structural reforms than anticipated, 3) a larger rise in demand for the components business than expected, 4) rapid yen depreciation (for forex sensitivity, every JPY1/USD change impacts Kyocera’s annual OP by JPY1.08b and every JPY1/EUR change impacts annual OP by JPY960m according to management. Yen weakness is positive.) and 5) enhanced shareholder returns. Downside risks are opposite cases of upside risks.



Taiyo Yuden (6976 JP; HOLD; TP: JPY1,250)

Forecast revisions

1) Expecting JPY12.3b in FY3/17 OP

We expect JPY228.2b in sales (-5% y-y), JPY12.3b in OP (-47%), and JPY5.2b in NI (-65%) for FY3/17. Our forex assumptions are JPY107/USD in 3Q FY3/17 and JPY110/USD in 4Q. We shifted the USDJPY rate toward yen depreciation (vs. JPY100/USD previously) due to recent weakening of the yen (our FY3/17 average rate comes to about JPY107.8/USD because of the JPY107/USD rate in 1H).

Taiyo Yuden maintained its existing FY3/17 guidance of JPY225b in sales (-6% y-y), JPY10b in OP (-57%), and JPY3b in NI (-80%), and the company’s 2H forex assumption is JPY102/USD (this puts the full-year rate calculated at JPY104.6 because of 1H’s JPY107.19).

Yen sensitivity is estimated at a positive OP impact of JPY800m annually from depreciation of the yen by JPY1 against the USD. This means that a single-yen shift has a large 8% (JPY800m) impact versus OP guidance, and we thus think it is important to closely monitor the forex trend. We intend to assess the forex impact along with Asian currency movements and Taiyo Yuden’s product pricing strategy.

Increasing our FY3/17 OP forecast by JPY3.7b from JPY8.7b

We increase our FY3/17 OP forecast by JPY3.7b from JPY8.7b previously. Main segment revisions are 1) capacitors at +JPY1.6b, 2) ferrite devices at +JPY1.3b, 3) compound devices at +JPY300m, and 4) others at +JPY500m.

Upside from our USDJPY rate assumption revisions from JPY100 to JPY107 for 3Q and JPY100 to JPY110 for 4Q amounts to JPY1.4b in 3Q and JPY2b in 4Q and hence a combined JPY3.4b in 2H. While it is not easy to give a segment breakdown of forex impact, we think the segment upward revisions largely reflect forex additions.

Forex effect accounts for almost all discrepancy between our forecast and guidance

We forecast JPY12.3b in FY3/17 OP, beating guidance (JPY10b) by JPY2.3b. Our JPY107.8 USDJPY assumption implies roughly JPY3 in yen weakness versus the plan’s JPY104.6, and this difference works out to around JPY2.4b (roughly JPY3 weaker JPY x JPY800m in forex sensitivity). We think discrepancy in OP between our forecast and guidance can be almost entirely explained by the difference in the forex assumption.

Exhibit 79: Taiyo Yuden earnings forecasts (FY basis)

FY3/16 ------------FY3/17E------------ ------------FY3/18E------------ ------------FY3/19E------------ FY3/17E

(JPY m) A Old New Old New Old New Guidance

Sales 240,385 218,800 228,232 225,600 235,900 232,500 242,700 225,000

Change (y-y %) 6 (9) (5) 3 3 3 3 (6)

OP 23,370 8,670 12,330 12,010 16,750 13,390 17,460 10,000

Change (y-y %) 78 (63) (47) 39 36 11 4 (57)

OPM (%) 9.7 4.0 5.4 5.3 7.1 5.8 7.2 4.4

RP 22,263 7,500 10,000 12,200 16,700 13,500 17,400 7,500

Change (y-y %) 42 (66) (55) 63 67 11 4 (66)

NI 14,751 4,200 5,200 7,600 10,200 8,400 10,700 3,000

Change (y-y %) 35 (72) (65) 81 96 11 5 (80)

Diluted EPS (JPY) 115.5 32.9 40.7 59.5 79.9 65.8 83.8 -

Change (y-y %) 35 (72) (65) 81 96 11 5 -

JPY/USD 120.8 102.7 107.8 100.0 110.0 100.0 110.0 104.6

Sources: Taiyo Yuden; BNP Paribas estimates



2) Lifting our FY3/18 OP forecast from JPY12b to JPY16.8b

We forecast JPY235.9b in sales (+3% y-y), JPY16.8b in OP (+36%), and JPY10.2b in NI (+96%) for FY3/18 using a JPY110 rate for the USDJPY. Our previous forecasts were JPY225.6b in sales, JPY12b in OP, and JPY7.6b in NI with a JPY100/USD forex rate.

We lifted our OP forecast JPY4.8b from JPY12b to JPY16.8b with additions roughly break down to 1) JPY1.8b for capacitors, 2) JPY1.8b for ferrite devices, and 3) JPY1.1b for integrated module & devices.

We revised our USDJPY rate assumption from JPY100 to JPY110. The profit boost from the assumption change works out to JPY8b (JPY800m x JPY10) using the formula disclosed by Taiyo Yuden. However, we only incorporate about JPY4b, or roughly half, because of 1) uncertainty related to fluctuation of other currencies (besides the USD), particularly Asian currencies, and 2) the possibility of resorting to price reductions in a weak-yen phase.

Exhibit 81: Taiyo Yuden consensus comparisons: Bloomberg’s sell-side forecasts may be slightly delayed and may not represent accurate market consensus

------------BNPP------------ -----------Consensus----------- --------------% Diff--------------


OP (JPY b) 12.3 16.8 10.3 12.0 19.2 39.8

EPS (JPY) 40.7 79.9 37.7 62.4 8.0 28.0




We increase our target price from JPY1,000 to JPY1,250 to reflect upward revisions to our earnings forecasts. We keep our previous method of FY3/18E 16x P/E (past three-year average BBG consensus P/E). We maintain our HOLD rating.

Most positive on Taiyo Yuden amongst companies with HOLD rating

We take a bullish view on the RF components market, one of the mainstay product areas for Taiyo Yuden. As discussed in our November 2015 report entitled Wireless communication key in 2016 and our February 2016 report entitled Is visibility really increasing?, in order to achieve faster wireless communications speeds, we expect 1) carrier aggregation, 2) the introduction of ultra-high bands, and 3) the introduction

Exhibit 80: Taiyo Yuden earnings forecast by segment

FY3/16 -----------------FY3/17E----------------- -----------------FY3/17E----------------- ----------------FY3/18E-----------------



Capacitor 123.7 27.0 30.1 30.6 26.9 108.7 114.6 (7) (9.1) 111.0 118.0 3 3.4

Ferrite 46.5 9.2 11.6 11.0 9.9 41.4 41.7 (10) (4.8) 43.1 42.9 3 1.2

Integrated Module & Device 57.7 15.9 16.5 16.6 17.6 63.1 66.5 15 8.8 65.9 69.5 5 3.0

Other components 12.6 1.4 1.4 1.4 1.3 5.5 5.5 (56) (7.1) 5.5 5.5 0 0.0

Total sales 240.4 53.5 59.6 59.6 55.6 218.8 228.2 (5) (12.2) 225.6 235.9 3 7.7

Change (y-y %) 6 (5) (9) (7) 2 (9) (5) 3 3

Change (q-q %) (2) 11 0 (7)

Total OP (JPY b) 23.4 2.1 3.2 3.9 3.1 8.7 12.3 (47) (11.0) 12.0 16.8 36 4.4

Change (y-y %) 78 (59) (65) (43) 35 (63) (47) 39 36

Change (q-q %) (10) 55 22 (20)

(%pt) (%pt)

Total OPM (%) 9.7 3.9 5.4 6.6 5.6 4.0 5.4 (4.3) 5.3 7.1 1.7

Sources: Taiyo Yuden; BNP Paribas estimates


https://eqresearch.bnpparibas.com/researchfs/SRF__32b0f2d2cd9a40cea2e261545d654056.pdf

https://eqresearch.bnpparibas.com/researchfs/SRF__32b0f2d2cd9a40cea2e261545d654056.pdf

https://eqresearch.bnpparibas.com/researchfs/CR__4377fbb075904daeb4afcaa00c54e85b.pdf

https://eqresearch.bnpparibas.com/researchfs/CR__4377fbb075904daeb4afcaa00c54e85b.pdf


of technologies like MIMO. All of the technologies needed are likely to feature greater use of RF components.

Taiyo Yuden’s product line-up includes FBAR filters as well as SAW filters and duplexers. FBAR filters have high value-add and are frequently used in technologically difficult applications with close WiFi and cellular wavebands. We expect Taiyo Yuden’s RF components business to benefit from the move to increase wireless communications speeds from the current 300Mbps to 1Gbps going into 2020. We therefore take a relatively positive view on Taiyo Yuden amongst the companies with a HOLD rating.

Exhibit 82: Taiyo Yuden consensus P/E (FY1) Exhibit 83: Taiyo Yuden consensus P/E (FY2)


Exhibit 84: Taiyo Yuden average and standard deviation for consensus P/E (FY1)

Exhibit 85: Taiyo Yuden average and standard deviation for consensus P/E (FY2)

FY1 1Y 2Y 3Y 4Y 5Y

Avg. 13.9 16.4 16.3 16.4 16.8

Std Dev 3.7 4.6 3.9 4.0 4.2

Avg + 1Std Dev 17.7 21.0 20.2 20.4 21.0

Avg - 1Std Dev 10.2 11.8 12.4 12.4 12.7

Z-score (0.8) (1.2) (1.4) (1.4) (1.4)

FY2 1Y 2Y 3Y 4Y 5Y

Avg. 11.8 13.3 13.3 13.6 13.6

Std Dev 2.1 2.5 2.1 2.4 2.6

Avg + 1Std Dev 13.9 15.8 15.4 16.0 16.3

Avg - 1Std Dev 9.7 10.9 11.1 11.2 11.0

Z-score 9.0 7.1 8.2 7.2 6.5


Exhibit 86: Taiyo Yuden historical P/BV and ROE Exhibit 87: Taiyo Yuden consensus EV/EBITDA (FY1)

Sources: Taiyo Yuden; Bloomberg consensus estimates; BNP Paribas Sources: Bloomberg consensus estimates; BNP Paribas

5

10

15

20

25

30

35

40

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16


8

10

12

14

16

18

20

22

24

26

Jan-

06Au

g-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9Fe

b-10

Sep-

10Ap

r-11

Nov

-11

Jun-

12Ja

n-13

Aug-

13M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

(x) Consensus P/E(FY2)

(25)

(20)

(15)

(10)

(5)

0

5

10

15

0.0

0.5

1.0

1.5

2.0

2.5

Jan-

05Se

p-05

May

-06

Jan-

07Se

p-07

May

-08

Jan-

09Se

p-09

May

-10

Jan-

11Se

p-11

May

-12

Jan-

13Se

p-13

May

-14

Jan-

15Se

p-15

May

-16

(%)(x) P/BV (LHS) ROE (RHS)

2

3

4

5

6

7

8

9

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15Ju

l-15

Jan-

16Ju

l-16

(x) Consensus EV/EBITDA (FY1)



Risks

Downside risks for Taiyo Yuden are: 1) inventory adjustments by North American and Chinese smartphone makers; 2) falling prices due to slowing demand or oversupply; and 3) rapid JPY appreciation.

Upside risks include: 1) unexpectedly sharp growth in smartphone demand in North America and China; 2) stabilisation of prices due to a tightening supply/demand and 3) rapid JPY depreciation.

Every 1JPY/USD depreciation has a JPY800m positive impact on annual OP, according to management.



Nitto Denko (6988 JP; HOLD; TP: JPY8,200)

Forecast revisions

1) Projecting JPY67.2b in FY3/17 OP

We project JPY729.5b in sales (-8% y-y), JPY67.2b in OP (-34%), and JPY50b in NI (-39%) for FY3/17. Our USDJPY assumptions are JPY107 in 3Q and JPY110 in 4Q, and these levels put the FY3/17 average rate at JPY107.7.

Our previous forecasts were JPY731.8b in sales, JPY72.3b in OP, and JPY54.2b in NI based on a USDJPY rate of JPY100 from 2Q and a JPY102.8 FY3/17 average. The revision shifts FY3/17 USDJPY by JPY4.9 toward a weaker yen.

Expecting FY3/17 OP to miss guidance by JPY2.8b

Nitto Denko lowered its FY3/17 OP guidance from JPY90b (based on JPY110/USD) to JPY70b (JPY106) at the 1H results announcement. Our OP forecast is JPY2.8b less than guidance. Major segment discrepancies are 1) optronics at –JPY2.9b, 2) industrial tape at –JPY1.2b, 3) medical & membrane at +JPY1b, and 4) others and adjustments at +JPY300m. We think fundamentals in touch-panel ITO films, LCD polarizer films included in optronics products are sluggish considering weak 1H results and reduced OP guidance.

The difference in forex assumptions (our outlook expects about JPY1.75 more in yen depreciation than guidance) works out to a roughly +JPY4.2b impact on OP (JPY1.75 x JPY2.4b). We think forex effect will boost the company’s three main segments OP – industrial tape, optronics, and medical & membrane. However, we find OP guidance overly bullish because our forecast is less than the plan target even though we assume a weaker yen.

Lowering our FY3/17 OP forecast by about JPY5b from JPY72.3b

We lower our FY3/17 OP forecast by about JPY5b from JPY72.3b (note that values do not match owing to the rounding effect). Key revisions are 1) industrial tape at +JPY300m, 2) optronics at –JPY3.5b, 3) medical & membrane at +JPY2.1b, and 4) others and adjustments at –JPY3.9b.

2) Increasing our FY3/18 OP forecast from JPY78.5b to JPY82.2b

Our FY3/18 forecasts are JPY759.9b in sales (+4% y-y), JPY82.2b in OP (+22%), and JPY63b in NI (+26%). We changed the USDJPY assumption from JPY100 to JPY110. We previously projected JPY750.2b in sales, JPY78.5b in OP, and JPY60.9b in NI.

Exhibit 88: Nitto Denko earnings forecasts (FY basis)

(JPY m) FY3/16 ------- FY3/17E ------- ------- FY3/18E ------- ------- FY3/19E ------- FY3/17E


Sales 793,054 731,811 729,478 750,200 759,900 769,000 795,600 720,000

Change (y-y %) (4) (8) (8) 3 4 3 5 (9)

OP 102,397 72,300 67,200 78,500 82,200 80,100 91,600 70,000

Change (y-y %) (4) (29) (34) 9 22 2 11 (32)

OPM (%) 12.9 9.9 9.2 10.5 10.8 10.4 11.5 9.7

RP 102,000 71,770 66,810 78,500 82,200 80,200 91,700 -

Change (y-y %) (4) (30) (35) 9 23 2 12 -

NI 81,683 54,200 50,000 60,900 63,000 62,200 70,300 50,000

Change (y-y %) 5 (34) (39) 12 26 2 12 (39)

Diluted EPS (JPY) 494.6 330.4 305.3 371.2 384.7 379.2 429.3 -

Change (y-y %) 5 (33) (38) 12 26 2 12 -

JPY/USD 108.6 102.8 107.7 100.0 110.0 100.0 110.0 106.0

Sources: Nitto Denko; BNP Paribas estimates



We raised our FY3/18 OP forecast by JPY3.8b with a breakdown in segment revisions of 1) industrial tape at –JPY300m, 2) optronics at +JPY800m, and 3) medical & membrane at +JPY3.3b.

Just at the forex level, our revision of the USDJPY rate by JPY10 in favor of a weaker yen from JPY100 to JPY110 indicates a JPY24b profit boost (JPY10 x JPY2.4b) by simple calculation. However, we think fundamentals are sluggish as seen in the 1H FY3/17 results and downward revision of guidance. Our JPY3.8b upward revision hence is smaller than the positive impact of the forex change (JPY24b).

Increasing our FY3/18 OP forecast by JPY3.7b from previous JPY78.5b

We project a JPY15b y-y increase in FY3/18 OP on gains of 1) JPY2.1b in industrial tape, 2) JPY5.5b in optronics, 3) JPY2.1b in medical & membrane, and 4) JPY5.4b in corporate and eliminations.

In optronics, we expect a decline in demand for LCD polarizer films used in smartphones because of growth in OLED displays, but expanded adoption of touch films for OLED smartphones. We project a profit setback of about JPY500m y-y in polarizer films, but an increase of roughly JPY5b in ITO films (XY axis and Z axis products). We do not anticipate much of a sales drop in OLED polarizer film, even if a single film replaces previous use of two films, owing to an increase in inch size. We think the shift from LDCs to OLEDs by North American smartphones has positive implications for Nitto Denko because touch panels change from in-cell to out-cell.

We forecast sales and profit increases in the medical & membrane segment thanks to upbeat consignment production business for nucleic acid drugs. We also expect higher sales and profits in industrial tape primarily driven by automotive tapes and OLED production equipment filters. Our estimated JPY5.4b y-y improvement in corporate and eliminations mainly reflects a drop in forex losses from the level expected in FY3/17.

Exhibit 89: Nitto Denko earnings forecast by segment FY3/16 -------------------FY3/17E------------------- --------------------FY3/17E-------------------- --------------------FY3/18E--------------------


Sales (JPY b) A A A E E Old New (%) (JPY b) Old New (%) (JPY b) 1. Industrial Tape 322.2 72.2 76.7 81.1 77.1 316.2 307.1 (4.7) (15.1) 328.8 320.5 4.4 13.4 2. Optronics 455.8 89.3 104.0 108.9 91.3 386.0 393.6 (13.6) (62.2) 390.0 408.5 3.8 14.8

Info. Fine materials 380.8 73.9 87.7 91.9 74.3 318.6 327.8 (13.9) (53.0) 321.9 341.1 4.0 13.2 Flexible printed circuits 51.5 9.7 10.4 10.5 10.0 42.2 40.6 (21.2) (10.9) 42.2 41.2 1.5 0.6

Processing materials 23.5 5.7 6.0 6.5 7.0 25.2 25.2 7.1 1.7 25.9 26.1 3.9 1.0 3. Medical & Membrane 53.4 13.8 14.3 15.2 16.4 60.6 59.7 11.8 6.3 63.3 62.8 5.2 3.1

Medical products 24.0 6.8 7.8 7.9 8.4 30.4 31.0 29.2 7.0 32.2 33.2 7.0 2.2 Membrane products 29.4 7.0 6.5 7.3 8.0 30.2 28.7 (2.3) (0.7) 31.1 29.6 3.2 0.9

Elimination & Corporate (38.3) (6.9) (8.4) (8.0) (7.5) (30.9) (30.8) - 7.5 (31.9) (31.8) - (0.9) Total 793.1 168.4 186.6 197.2 177.3 731.8 729.5 (8.0) (63.6) 750.2 759.9 4.2 30.4

Change (y-y %) (4) (17) (12) (5) 4 (8) (8) 3 4 Change (q-q %) (1) 11 6 (10)

OP (JPY b) 1. Industrial Tape 28.6 5.3 6.1 8.5 6.9 26.6 26.8 (6.2) (1.8) 29.3 28.9 7.7 2.1 2. Optronics 65.4 4.7 9.6 11.6 5.1 34.6 31.1 (52.5) (34.4) 35.7 36.6 17.7 5.5 3. Medical & Membrane 11.2 4.3 4.0 4.5 5.2 15.8 18.0 60.7 6.8 16.8 20.0 11.5 2.1 Elimination & Corporate (2.8) (2.5) (2.2) (2.0) (2.0) (4.7) (8.7) - (5.8) (3.3) (3.3) - 5.4 Total 102.4 11.7 17.6 22.6 15.3 72.3 67.2 (34.4) (35.2) 78.5 82.2 22.3 15.0

Change (y-y %) (4) (56) (48) (23) 19 (29) (34) 9 22 Change (q-q %) (8) 49 29 (32)

OPM (%) (%pt) (%pt) 1. Industrial Tape 8.9 7.3 8.0 10.5 9.0 8.4 8.7 (0.1) 8.9 9.0 0.3 2. Optronics 14.4 5.3 9.2 10.7 5.6 9.0 7.9 (6.5) 9.2 9.0 1.1 3. Medical & Membrane 20.9 30.9 28.2 29.4 31.7 26.1 30.1 9.1 26.5 31.9 1.8 Total 12.9 7.0 9.4 11.5 8.6 9.9 9.2 (3.7) 10.5 10.8 1.6

Sources: Nitto Denko; BNP Paribas estimates



Exhibit 90: Nitto Denko consensus comparisons

-----------BNPP----------- ----------Consensus---------- -------------% Diff-------------


OP (JPY b) 67.2 82.2 71.6 83.1 (6.2) (1.1)

EPS (JPY) 305.3 384.7 329.7 384.6 (7.4) 0.0




We raise our target price from JPY6,700 (FY3/18E 18x P/E) to JPY8,200. The new target price includes about JPY1,200 in estimated new drug value added to the JPY7,000 obtained by applying 18x P/E to our FY3/18 EPS forecast.

Our target 18x P/E is set refering to the past average consensus P/E plus one standard deviation for the past year (18.5x), past three years (18.0x) and past five years (17.9x), just as previously. We reflect a modestly high multiple given recent data. We maintain our HOLD rating due to the small disparity between our target price and the current share price.

Estimated new drug value

Nitto Denko announced on November 11 that it had entered a licensing agreement granting Bristol-Myers Squibb (BMS) exclusive worldwide rights to develop drugs for treatment of non-alcoholic steatohepatitis (NASH) and cirrhosis due to NASH.

Under the terms of the deal, Nitto Denko will receive an upfront payment of USD100m (JPY10.5b at JPY105/USD). We think the USD100m indicates large expectations for the liver cirrhosis drug at BMS which will be responsible for development, manufacture and sell the drug. Nitto Denko will also receive clinical and regulatory milestone payments, and royalties and sales-based milestone payments if the drug comes to market.

It is unclear how much profit Nitto Denko might obtain from this new drug due to the lack of detailed disclosure of the contract. We estimate equity value of the new drug based on certain assumptions. Our estimate uses five variables: 1) number of patients a year, 2) annual medical costs per patient, 3) Nitto Denko’s royalties (commissions), 4) P/E multiple, and 5) success probability of new drug approvals.

1 Number of patients a year: Nitto Denko estimates 3-4m people in the US suffer from severe NASH, and about 6m people worldwide. It is hard to accurately forecast how many patients will take the new drug per year so we use a range of 300,000 to 2m people, and 500,000 people for our per share value estimate. The development of drugs to treat hepatitis C in recent years is a potential risk to changes in number of patients.

2 Annual medical costs per patient: We cannot calculate medical costs because there is currently no drug that treats liver cirrhosis. Nitto Denko has presented a treatment cost of more than JPY2m per patient a year as reference data. We assume a range of JPY300,000 to JPY2m per patient a year in light of recent medical cost curtailment and drug price revision activities in recent years, and JPY700,000 per patient a year for our per share value estimate (we assume moderately low treatment costs due to risk of drug price revision since a treatment price at the same level as hepatitis does not provide medical cost savings).

3 Nitto Denko’s royalties (commissions): We assume a format in which Nitto Denko receives a certain percentage of BMS sales. Our estimates use a royalty range of 5% to 15%, and 10% for our per share value estimate.

4 P/E multiple: We calculate the value per share by obtaining EPS from Nitto Denko’s OP and applying a P/E multiple. We use a range of 15x to 25x, and 18x, the same as our overall target P/E, for our per share value estimate.



5 Success probability: The new drug for liver cirrhosis has completed Phase Ib/II tests and is currently moving to Phase IIb. The probability of successfully completing all testing phases after Phase IIb is around 25% (according to calculation by Nature Biotechnology). Success probability rises with the passage of each phase, and it is possible to factor in 100% of potential value upon receiving final approval. We adopt a range of 20% to 100% for success probability, and 40% in our per share value estimate on the basis of a moderately high probability of success for the new drug.

We start with a market size for the new drug (roughly equal to BMS sales) of JPY350b per year using 500,000 patients per year and JPY700,000 in annual treatment fees (Exhibit 91). Nitto Denko sales work out to JPY35b in the case of a 10% royalty (Exhibit 92). We view royalty sales as roughly equal to OP, and this amount corresponds to JPY150 in EPS. The value per share is about JPY2,700 using 18x P/E (Exhibit 93). We apply the 40% success probability to obtain the JPY1,080 in value currently factored in per share (Exhibit 94). (The full JPY2,700 could be added if confidence in success is 100%.)

In addition, Nitto Denko is developing new drugs for pulmonary fibrosis and other organ fibrosis, in addition to liber cirrhosis, and has been commenting optimistically about future development activities. It is also working on new drugs for liver cancer (as an advanced stage of liver cirrhosis) and lung cancer. We hence think investors might factor more value than JPY1,080 into the share price. New drugs for treatment of other illnesses besides liver cirrhosis are still in early stages, and this makes it difficult to accurately project their value. We set the value of these other drugs at 10% of the JPY1,080 (JPY108) in our estimate. We thus incorporate a value of about JPY1,200 per share, which combines JPY1,080 for the new liver cirrhosis drug and JPY108 for other drugs, as the total value of new drugs (Exhibit 94).

Exhibit 91: Estimated size of the market for cirrhosis drugs (JPY b)

Exhibit 92: Nitto Denko’s sales = OP (JPY b)

------ Annual treatment costs (JPY m/year) ------

0.3 0.5 0.7 1.0 2.0

Annual patients 0.1 25 50 70 100 200

(m/year) 0.3 75 150 210 300 600

0.5 125 250 350 500 1,000

1.0 250 500 700 1,000 2,000

2.0 500 1,000 1,400 2,000 4,000

-------------- Market size (JPY b/year) -------------

125 250 350 500 1,000

Royalty 5.0% 6.3 12.5 17.5 25.0 50.0

7.5% 9.4 18.8 26.3 37.5 75.0

10.0% 12.5 25.0 35.0 50.0 100.0

12.5% 15.6 31.3 43.8 62.5 125.0

15.0% 18.8 37.5 52.5 75.0 150.0

Sources: Nitto Denko; BNP Paribas estimates Sources: Nitto Denko; BNP Paribas estimates

Exhibit 93: New drug value per share (JPY) Exhibit 94: New drug value factored into our target price

(JPY)

Market size (JPY b/year)

125 250 350 500 1,000

P/E 15 810 1,610 2,250 3,220 6,430

(x) 16 860 1,720 2,400 3,430 6,850

18 970 1,930 2,700 3,860 7,710

20 1,080 2,150 3,000 4,290 8,570

25 1,340 2,680 3,750 5,360 10,710

Liver cirrhosis Others Total

Success rate 20 540 54 600

(%) 30 810 81 900

40 1,080 108 1,200

50 1,350 135 1,500

70 1,890 189 2,100

100 2,700 270 3,000

Sources: Nitto Denko; BNP Paribas estimates Sources: Nitto Denko; BNP Paribas estimates

Exhibit 95: Nitto Denko consensus P/E (FY1) average, standard deviation

Exhibit 96: Nitto Denko consensus P/E (FY2) average, standard deviation

1Y 2Y 3Y 4Y 5Y

Avg. 15.6 16.1 15.9 15.9 15.3

Std Dev. 2.8 2.3 2.1 2.3 2.6

Avg + 1 Std Dev. 18.5 18.4 18.0 18.2 17.9

Avg - 1 Std Dev. 12.8 13.8 13.8 13.7 12.8

1Y 2Y 3Y 4Y 5Y

Avg. 14.6 14.8 14.5 14.2 13.5

Std Dev. 2.0 1.6 1.6 1.6 2.0

Avg + 1 Std Dev. 16.6 16.5 16.0 15.8 15.5

Avg - 1 Std Dev. 12.6 13.2 12.9 12.5 11.6




Exhibit 97: Nitto Denko consensus P/E historical trends (FY1) Exhibit 98: Nitto Denko consensus P/E historical trends (FY2)


Exhibit 99: Nitto Denko historical P/BV and ROE trends Exhibit 100: Nitto Denko consensus historical EV/EBITDA

trend (FY1)


Risks

Upside risks for Nitto Denko include: 1) the LCD business recovering more than expected; 2) greater-than-expected uptake of thin-film polarizer; 3) greater-than-expected ITO-film improvement; 4) approval for the cirrhosis of the liver drug; and 5) rapid JPY depreciation.

Downside risks include: 1) the LCD business deteriorating more than anticipated; 2) thin-film polarizer gaining less adoption than expected; 3) ITO-film sales deteriorating more than expected; 4) rejection of the cirrhosis of the liver drug; and 5) rapid JPY appreciation.

Each JPY1 movement against the USD has an around JPY2.4b positive/negative impact on annual OP according to management.

9

11

13

15

17

19

21

23

25

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15Ju

l-15

Jan-

16Ju

l-16

(x) Cons. P/E FY1

7

9

11

13

15

17

19

21

23

25

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15Ju

l-15

Jan-

16Ju

l-16

(x) Cons. P/E (FY2)

02468101214161820

0.5

1.0

1.5

2.0

2.5

3.0

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15

(%)(x) P/BV (actual, LHS) ROE FY1 (RHS)

2

3

4

5

6

7

8

9

10

Jul-0

5Ja

n-06

Jul-0

6Ja

n-07

Jul-0

7Ja

n-08

Jul-0

8Ja

n-09

Jul-0

9Ja

n-10

Jul-1

0Ja

n-11

Jul-1

1Ja

n-12

Jul-1

2Ja

n-13

Jul-1

3Ja

n-14

Jul-1

4Ja

n-15

Jul-1

5Ja

n-16

Jul-1

6

(x) Cons. EV/EBITDA (FY1)



Sharp (6753 JP; REDUCE; TP: JPY113)

Forecast revisions

1）Decreasing our FY3/17 OP forecast from JPY33.0b to JPY25.7b

We forecast JPY1.9881t in sales (-19% y-y), JPY25.7b in OP (vs. a JPY162b loss in FY3/16), and a JPY41.8b net loss (vs. a JPY256b loss) for FY3/17. Our forex assumptions are JPY107/USD and JPY15/EUR in 3Q and JPY110/USD and JPY115/EUR in 4Q and FY3/17 average rates of JPY106.4/USD and JPY115.8/EUR. Our previous forecasts were JPY2.0088t in sales, JPY33b in OP, and a JPY152b net loss (based on JPY101.8/USD and JPY112.6/EUR rate assumptions).

Announced OP guidance of JPY25.7b

Sharp presented FY3/17 guidance at the 1H results announcement. It is aiming for JPY2t in sales JPY25.7b in OP, and a JPY41.8b net loss. While Sharp expects to restore an operating profit at JPY25.7b, it still guides for a net loss. The 2H guidance works out to JPY25.6b in OP and JPY3.6b in NI.

Our forecasts on par with guidance

We set our FY3/17 OP and NI forecasts at the same levels as guidance. Sharp booked a JPY2.5b operating loss in 1Q, but achieved a profit of JPY2.6b in 2Q. We think it is capable of attaining the roughly JPY25.6b in OP guidance for 2H. However, we believe the level of JPY25b per half fiscal year is still low, as explained below, and is not enough to lift the share price.

Lowered our OP forecast by JPY7.3b from the previous level

We lowered our OP forecast by JPY7.3b from JPY33b to JPY25.7b. We cannot make segment-level comparisons with our previous view because Sharp altered its segments. The USDJPY rate is a neutral factor for OP and hence did not consider any impact. The EURJPY, meanwhile, has a JPY300m impact from a single-yen change (with yen depreciation as a positive factor), and the rate adjustment adds about JPY960m to annual OP (about JPY3.2/EUR x JPY300m).

Exhibit 101: Sharp earnings forecasts (FY basis) (JPY b) FY3/16E ------------FY3/17E------------ ------------FY3/18E------------ ------------FY3/19E------------ FY3/17E


Sales 2461.6 2008.8 1988.1 2018.3 2006.3 2031.0 1987.4 2000.0

Change (y-y %) (12) (18) (19) 0 1 1 (1) (19)

OP (162.0) 33.0 25.7 48.5 49.0 50.1 52.2 25.7

Change (y-y %) NA NA NA 47 91 3 7 NA

OPM (%) (6.6) 1.6 1.3 2.4 2.4 2.5 2.6 1.3

RP (192.5) (2.7) (16.3) 33.2 33.3 35.2 36.8 (16.3)

Change (y-y %) NA NA NA NA NA 6% 11% NA

NI (256.0) (15.2) (41.8) 22.3 22.4 24.4 25.0 (41.8)


Diluted EPS (JPY) (151.4) (2.0) (5.8) 3.0 3.1 3.2 3.5 -


JPY/USD 119.2 101.8 106.4 100.0 110.0 100.0 110.0 103.2

JPY/EUR 131.1 112.6 115.8 110.0 115.0 110.0 115.0 113.8

ROE (%) - -12.1% -36.9% 7.3% 8.0% 7.6% 8.4% NA

Note: Our ROE estimates are calculated on the assumption that preferred stocks will be converted to common stock. They do not match with ROE figures in B/S on the back of the report. Sources: Sharp; BNP Paribas estimates



2) Lifting our FY3/18 OP forecast from JPY48.5b to JPY49b

Our FY3/18 forecasts are JPY2.0063t in sales (+1% y-y), JPY49b in OP (+91%), and JPY22.4b in NI (vs. an estimated JPY41.8b loss in FY3/17). We revised our forex assumptions from JPY100 to JPY110 for the USDJPY and JPY110 to JPY115 for the EURJPY. We previously projected JPY2.0183t in sales, JPY48.5b in OP, and JPY22.3b in NI.

We increased our overall OP forecast by JPY500m from the previous level. While this is not a major change from our previous view, we expect a large y-y profit gain in FY3/18 thanks to restructuring reforms led by Hon Hai. We cannot compare our previous and new forecasts because of segment changes. Yet the y-y differences are 1) IoT at –JPY800m (due to peaking out of the smartphone business), 2) health and environment at +JPY300m (as cost savings led by Hon Hai offset negative impact from yen depreciation), 3) business solutions at –JPY500m (OPM is already at above 9% in FY3/17, and we think further improvement is difficult), 4) camera modules at +JPY1.7b (recovering from a loss to a modest profit), 5) electronic devices at –JPY800m (needs time to restore competitiveness), 6) energy at +JPY6.1b (earnings are moving upward thanks to reform efforts by Hon Hai), 7) display devices at +JPY17.1b (cost savings from Hon Hai-led restructuring), and 8)

Exhibit 102: Sharp earnings forecast by segment FY3/16 -------------- FY3/17E ------------ ------------------ FY3/17E ---------------- ------------------ FY3/18E ----------------



1. IoT communications 197.4 35.2 37.1 34.5 39.1 140.4 145.8 (26.1) (51.5) 137.6 142.9 (2.0) (2.9)

2. Health & environment systems 298.0 67.8 71.2 72.5 72.0 303.2 283.6 (4.9) (14.5) 303.2 283.6 0.0 0.0

3. Business Solution 355.1 77.5 82.1 84.4 90.2 327.3 334.2 (5.9) (20.9) 332.4 339.3 1.5 5.1

4. Camera module 355.1 32.6 51.1 70.5 42.6 NA 196.7 (44.6) (158.4) NA 212.3 7.9 15.6

5. Electronic components & devices 244.8 42.3 51.1 54.4 40.4 NA 188.2 (23.1) (56.6) NA 178.8 (5.0) (9.4)

6. Energy Solution 156.8 21.8 30.4 27.6 37.0 115.8 116.8 (25.5) (40.0) 113.6 114.7 (1.9) (2.2)

7. Display devices 1,086.5 167.1 190.4 236.8 196.5 NA 790.8 (27.2) (295.7) NA 803.7 1.6 12.9

Adjustment (122.7) (21.3) (17.0) (15.0) (15.0) (106.3) (68.3) (44.3) 54.4 (107.4) (69.0) 1.0 (0.7)

TOTAL SALES 2,461.6 423.4 496.3 565.6 502.8 2,008.8 1,988.1 (19.2) (473.5) 2,018.3 2,006.3 0.9 18.2

Change (y-y %) (12) (32) (25) (15) (3) (19) 1

Change (q-q %) (18) 17 14 (11)

OP (JPY b)

1. IoT communications 14.4 2.0 4.1 3.6 2.0 10.1 11.7 (18.9) (2.7) 9.9 10.8 (7.3) (0.8)

2. Health & environment systems 11.6 6.5 6.6 6.9 6.5 18.3 26.5 128.2 14.9 17.0 26.7 0.9 0.3

3. Business Solution 35.7 5.9 5.3 5.9 8.1 30.0 25.2 (29.3) (10.5) 30.4 24.7 (2.0) (0.5)

4. Camera module 9.1 0.1 (1.2) 0.7 (0.2) NA (0.6) (106.7) (9.7) NA 1.1 (273.7) 1.7

5. Electronic components & devices (7.6) 0.3 (0.6) 1.6 0.0 NA 1.3 (117.5) 8.9 NA 0.5 (61.8) (0.8)

6. Energy Solution (18.3) (6.3) 1.5 0.0 1.9 (5.3) (2.9) (83.9) 15.4 1.0 3.2 (207.7) 6.1

7. Display devices (177.1) (6.8) (7.8) 2.0 (3.0) NA (15.6) (91.2) 161.5 NA 1.5 (109.6) 17.1

Adjustment (29.8) (4.4) (5.0) (5.0) (5.4) (21.0) (19.8) (33.4) 10.0 (21.2) (19.5) (1.7) 0.3

TOTAL OP (162.0) (2.5) 2.6 15.8 9.9 33.0 25.7 (115.9) 187.7 48.5 49.0 90.7 23.3

Change (y-y %) NA NA (28) NA NA NA 91

Change (q-q %) NA NA 507 (37)

OPM (%) (%pt) (%pt)

1. IoT communications 7.3 5.7 11.1 10.5 5.0 7.2 8.0 0.7 7.2 7.6 (0.4)

2. Health & environment systems 3.9 9.6 9.3 9.5 9.0 6.0 9.3 5.4 5.6 9.4 0.1

3. Business Solution 10.1 7.6 6.5 7.0 9.0 9.2 7.5 (2.5) 9.2 7.3 (0.3)

4. Camera module 2.6 0.3 (2.3) 1.0 (0.5) NA (0.3) (2.9) NA 0.5 0.8

5. Electronic components & devices (3.1) 0.7 (1.2) 3.0 0.0 NA 0.7 3.8 NA 0.3 (0.4)

6. Energy Solution (11.7) (28.9) 4.9 0.0 5.0 (4.6) (2.5) 9.1 0.8 2.8 5.3

7. Display devices (16.3) (4.1) (4.1) 0.8 (1.5) NA (2.0) 14.3 NA 0.2 2.2

TOTAL OPM (6.6) (0.6) 0.5 2.8 2.0 1.6 1.3 7.9 2.4 2.4 1.1

Sources: Sharp; BNP Paribas estimates



adjustments at +JPY300m (note that the combined figure does not match due to rounding).

Focus on restructuring reforms and synergies, though possibility of a tough path

Sharp presented a restructuring policy at the results briefing in May 2016 with the following three core components: 1) optimizing business resources, 2) conducting responsible business promotion operations that accelerate revitalization, and 3) establishing a personnel system that rewards results. These changes have the potential to lower costs and support an earnings recovery in main businesses.

Though facing a tough path

While personnel cutbacks reduce costs, they also weaken the organization and can result in outflow of talented people. It is difficult to expand sales amid shrinkage of personnel. These changes can also weaken employee morale throughout the organization. We expect challenges in the effort to lay seeds for future growth and restore a growth trajectory at the same time as improving income in businesses facing very difficult conditions, such as display devices.

Comparison with the consensus: not that valuable

Sharp’s earnings are fairly low, and we do not see much value in comparison with the Bloomberg consensus. We advise using this value just as a reference point.

Exhibit 103: Sharp consensus comparisons

---------- BNPP ---------- --------- Consensus --------- ------------ % Diff ------------


OP (JPY b) 25.7 49.0 24.0 48.4 6.9 1.3

EPS (JPY) -5.8 3.1 -10.2 2.5 (42.6) 22.5



Increase our target price from JPY96 to JPY113

We increase our target price from JPY96 to JPY113 (using FY3/18E 8.0x EV/EBITDA). We previously used FY3/18E 7.0x EV/EBITDA (consensus average for the past two years). Sharp’s share price has been climbing recently on expectations for a positive effect from the capital alliance with Hon Hai, and valuation is rising. The past two-year EV/EBITDA average has improved from about 7x previously to around 8x. We thus raise our target valuation from 7x to 8x.

Exhibit 104: Fair value calculation by EV/EBITDA multiples

----------------------------------------EV/EBITDA (x)----------------------------------------

5.0 6.0 7.0 8.0 9.0 10.0

FY3/17E Fair value (JPY) 37 49 61 73 85 97

Up/down side (%) (67) (57) (46) (35) (25) (14)

FY3/18E Fair value (JPY) 63 80 96 113 130 146

Up/down side (%) (44) (30) (15) 0 15 29


Estimate of share volume: large dilution impact

We review our estimate of Sharp’s share volume. The number of issued shares rose from 1.69b at end-FY3/16 to 4.97b at end-1H FY3/17. We use 7.16b shares as share volume adjusted for potential shares, assuming conversion of preferred shares to ordinary shares. The 7.16b shares consist of 1) 4.97b shares from end-1H FY3/17, 2) around 1.05b shares from conversion of preferred shares held by banks to ordinary shares (at the conversion prices of JPY190 (based on closing price on 2 December), and 3) 1.14b shares from conversion of preferred shares held by Hon Hai to ordinary shares.



Exhibit 105: Assumptions regarding number of shares: revised to 7.16b from 4.97b as including potential shares


Highly overvalued on P/E: implies OP at around JPY116b necessary

We think Sharp shares are highly overvalued at our JPY113 target price in terms of P/E. A JPY113 price works out to an expensive 36x our FY3/18 EPS forecast. We project JPY49b in FY3/18 OP, but believe Sharp would need even higher profit in order to offer P/E appeal as undervalued.

The past-year average consensus P/E for the TOPIX electric equipment index is about 18x, and we estimate that Sharp needs roughly JPY10.6 EPS and about JPY75b NI to achieve an 18x P/E at the JPY190 closing price of 2 December. This implies about JPY116b in pretax profit (assuming a tax rate of around 35%). We conclude that Sharp must book roughly JPY116b in OP (assuming zero non-operating income). We believe Sharp shares are trading expensively because the company needs to increase OP by 2.3 times from the JPY49b level we expect in FY3/18.

Overvalued on P/B too

Our JPY113 target price works out to a P/B of 3.0x on our FY3/17 forecast and 2.8x on our FY3/18 forecast. Our FY3/18 ROE forecast of 8.0% factors in improved earnings, and gives a theoretical target P/B of about 1.33x even at a 6.0% CoE. The fair share price is about JPY53 at this level (JPY40 FY3/18 BVPS forecast x 1.33x).

Net asset value less than the amount raised with preferred shares

The above-mentioned BVPS forecasts assume conversion of preferred shares to ordinary shares. Prior to actual conversion to ordinary shares, however, we expect the company to disclose BVPS that excludes all preferred shares. Sharp raised a total of JPY300b via preferred shares with JPY200b from the banking syndicate and JPY100b from Hon Hai. Around JPY265b in net asset value at end-1H FY3/17, meanwhile, is less than the total amount raised via the preferred shares. BVPS excluding preferred shares hence is negative, which we think highlights Sharp’s weak position.

Sharp shares are currently trading well above our target price because of expectations for restructuring under the Hon Hai Group and other factors. However, we think the shares are highly overvalued at this point in terms of EV/EBITDA, P/E, P/B, and other valuation indicators. We maintain our REDUCE rating.

4.97

1.05

1.14

7.16

0

1

2

3

4

5

6

7

8

Number of shares atend 1H FY3/17

Preferred shares forbanks

Preferred shares forHonhai

Total number ofshares includingpotential shares

(b shares)



Exhibit 106: Sharp consensus EV/EBITDA (FY2) Exhibit 107: Sharp consensus EV/EBITDA (FY1)


Exhibit 108: Sharp consensus EV/EBITDA (FY2) historical average

Exhibit 109: Sharp consensus P/E (FY2) historical trends: P/E not functioning recently

EV/EBITDA 1Y 2Y 3Y 4Y 5Y 7Y

FY2 (x) (x) (x) (x) (x) (x)

Avg. 9.3 8.3 7.5 7.3 6.9 6.2

Std Dev 1.7 1.8 1.9 1.7 1.7 1.8

Avg + 1 Std Dev 11.1 10.1 9.3 8.9 8.6 8.0

Avg - 1Std Dev 7.6 6.5 5.6 5.6 5.5 4.5


Risks

Upside risks include 1) increase in Sharp’s share of displays used in Chinese and North American smartphones, 2) growth in solar power generation business overseas, 3) improved profitability in TV and communication businesses, and 4) rapid depreciation of the JPY versus the EUR.

4

6

8

10

12

14

Jul-1

2O

ct-1

2Ja

n-13

Apr-1

3Ju

l-13

Oct

-13

Jan-

14Ap

r-14

Jul-1

4O

ct-1

4Ja

n-15

Apr-1

5Ju

l-15

Oct

-15

Jan-

16Ap

r-16

Jul-1

6O

ct-1

6

(x)

-1 SD

Avg

+1 SD

2

4

6

8

10

12

14

16

Jul-0

5Fe

b-06

Sep-

06Ap

r-07

Nov

-07

Jun-

08Ja

n-09

Aug-

09M

ar-1

0O

ct-1

0M

ay-1

1D

ec-1

1Ju

l-12

Feb-

13Se

p-13

Apr-1

4N

ov-1

4Ju

n-15

Jan-

16Au

g-16

(x)

-1 SD

Avg

+1 SD

5

10

15

20

25

30

Jan-

05Au

g-05

Mar

-06

Oct

-06

May

-07

Dec

-07

Jul-0

8Fe

b-09

Sep-

09Ap

r-10

Nov

-10

Jun-

11Ja

n-12

Aug-

12M

ar-1

3O

ct-1

3M

ay-1

4D

ec-1

4Ju

l-15

Feb-

16Se

p-16

(x)



Financial statementsPanasonic Corp

Profit and Loss (JPY b) Year Ending Mar 2015A 2016A 2017E 2018E 2019E

Revenue 7,715.0 7,553.7 7,228.4 7,464.9 7,972.1

Cost of sales (incl depreciation) (5,527.2) (5,340.0) (5,275.7) (5,400.6) (5,725.3)

Gross profit 2,187.8 2,213.7 1,952.7 2,064.3 2,246.7

SG&A (1,805.9) (1,798.0) (1,672.7) (1,729.3) (1,846.7)

R&D 0.0 0.0 0.0 0.0 0.0

Operating profit 381.9 415.7 280.0 335.0 400.0

Interest and dividends received 16.4 20.5 18.0 20.0 21.4

Associates 0.0 0.0 0.0 0.0 0.0

Other non-operating income 0.0 0.0 0.0 0.0 0.0

Interest paid (17.6) (17.0) (14.5) (14.5) (14.5)

Other non-operating expenses (198.3) (202.2) (5.1) (10.0) (9.9)

Extraordinary gains 0.0 0.0 0.0 0.0 0.0

Extraordinary losses 0.0 0.0 0.0 0.0 0.0

Pre-tax profit 182.5 217.0 278.4 330.5 397.0

Tax (2.0) (14.5) (77.9) (112.4) (131.0)

Minorities* (16.9) (21.8) (20.6) (20.6) (21.2)

Net profit 179.5 193.3 179.9 197.5 244.7

EBITDA (operating profit + depreciation) 668.4 690.5 570.0 618.7 710.9

Per share (JPY)

Reported EPS 77.6 83.4 77.5 85.1 105.4

DPS 18.0 25.0 30.0 32.0 34.0

Growth

Revenue (%) (0.3) (2.1) (4.3) 3.3 6.8

EBITDA (%) 14.5 3.3 (17.4) 8.5 14.9

Operating profit (%) 25.2 8.8 (32.6) 19.6 19.4

Recurring profit (%) - - - - -

EPS (%) 49.0 7.4 (7.1) 9.8 23.9

Operating performance

Gross margin inc depreciation (%) 24.6 25.7 23.0 23.9 24.3

EBITDA margin (%) 8.7 9.1 7.9 8.3 8.9

Operating profit margin (%) 5.0 5.5 3.9 4.5 5.0

Net margin (%) 2.3 2.6 2.5 2.6 3.1

Effective tax rate (%) 1.1 6.7 28.0 34.0 33.0

Dividend payout on net profit (%) 23.2 30.0 38.7 37.6 32.3

Interest cover (x) 1.9 2.1 170.0 74.3 131.0

Inventory days 50.0 51.9 51.2 49.7 49.3

Debtor days 47.3 43.9 40.7 39.2 38.5

Creditor days 63.4 65.8 63.8 61.9 61.4

Operating ROIC (%) 35.1 38.8 20.2 21.1 23.8

ROIC (%) 17.0 17.6 9.0 9.7 11.3

ROE (%) 10.6 11.0 10.2 10.4 12.0

ROA (%) 7.0 6.9 3.6 3.8 4.5

*Pre exceptional pre-goodwill and fully diluted

Revenue By Division (JPY b) 2015A 2016A 2017E 2018E 2019E

Appliance 1,769.7 2,269.4 2,285.1 2,329.5 2,446.0

Eco Solutions 1,666.0 1,610.8 1,556.0 1,595.4 1,675.2

AVC Networks 1,154.3 1,169.8 1,058.6 1,099.0 1,153.9

AIS 2,782.5 2,708.6 2,492.5 2,610.8 2,871.8

Others 764.5 661.4 631.3 649.0 668.5

Eliminations (422.0) (866.3) (795.0) (818.9) (843.4)

* Net profit for US GAAP. Source: Panasonic Corp, BNP Paribas estimates



Financial statementsPanasonic Corp

Cash Flow (JPY b) Year Ending Mar 2015A 2016A 2017E 2018E 2019EPre-tax profit* 182.5 217.0 278.4 330.5 397.0Tax paid 2.0 14.5 77.9 112.4 131.0Depreciation 286.5 274.8 290.0 283.7 310.9Working capital 0.0 0.0 0.0 0.0 0.0Other 20.5 (107.7) (128.4) (244.7) (304.8)Operating cash flow 491.5 398.7 517.9 481.8 534.0Capital expenditure (226.7) (248.8) (345.0) (335.9) (358.7)Other 88.7 (25.5) 0.0 0.0 0.0Investing cash flow (138.0) (274.3) (345.0) (335.9) (358.7)Free cash flow 353.5 124.4 172.9 145.9 175.3Change in debt 0.0 0.0 0.0 0.0 0.0Dividends paid (59.2) (64.4) (57.9) (69.6) (74.3)Net buybacks 0.0 0.0 0.0 0.0 0.0Equity issued 0.0 0.0 0.0 0.0 0.0Other 316.8 (243.6) 0.0 0.0 0.0Financing cash flow 257.6 (308.0) (57.9) (69.6) (74.3)Gross change in cash 687.9 (266.1) 115.0 76.3 101.0Other adjustments 18.5 (18.3) 0.0 0.0 0.0Change in cash 706.4 (284.5) 115.0 76.3 101.0

Per share (JPY)Operating cash flow per share 212.6 171.8 221.7 205.9 227.8FCF per share 152.9 53.7 74.5 62.8 75.5

Balance Sheet (JPY b) 2015A 2016A 2017E 2018E 2019ECash & equivalents 1,298.9 1,014.4 1,129.4 1,205.6 1,306.7A/c receivable 992.1 823.6 788.1 813.9 869.2Inventories 762.7 756.4 723.9 747.6 798.3Other 359.1 459.9 459.9 459.9 459.9Current assets 3,412.7 3,054.4 3,101.3 3,227.0 3,434.1Tangible fixed assets 1,374.8 1,301.2 1,356.2 1,408.4 1,456.3Intangible fixed assets 0.0 0.0 0.0 0.0 0.0Investments and other assets 1,169.4 1,241.4 1,241.4 1,241.4 1,241.4Total assets 5,956.9 5,597.0 5,698.9 5,876.9 6,131.8A/c payable 983.3 942.2 901.7 931.2 994.4Short term debt 260.5 21.7 21.7 21.7 21.7Other (1,489.0) (1,416.9) (1,416.9) (1,416.9) (1,416.9)Current liabilities 2,732.8 2,380.9 2,340.3 2,369.8 2,433.1Long term debt 712.4 704.2 704.2 704.2 704.2Other 519.2 657.6 657.6 657.6 657.6Long-term liabilities 1,231.6 1,361.8 1,361.8 1,361.8 1,361.8Total liabilities 3,964.4 3,742.7 3,702.1 3,731.6 3,794.9Common equity 1,823.3 1,705.1 1,827.0 1,954.9 2,125.3Preferred equity 0.0 0.0 0.0 0.0 0.0Minorities etc 169.3 149.3 169.8 190.4 211.6Net Assets 1,992.6 1,854.3 1,996.8 2,145.3 2,337.0Liabilities & net assets 5,956.9 5,597.0 5,698.9 5,876.9 6,131.8*includes convertibles and preferred stock which is being treated as debt

Per share (JPY)Book value per share 789 735 782 835 907Tangible book value per share 789 735 782 835 907

Financial strengthNet debt/equity (%) (16.4) (15.6) (20.2) (22.4) (24.9)Net debt/total assets (%) (5.5) (5.2) (7.1) (8.2) (9.5)Current ratio (x) 1.2 1.3 1.3 1.4 1.4CF interest cover (x) 2.8 1.6 106.0 33.4 58.4

Valuation 2015A 2016A 2017E 2018E 2019EP/E (x) * 16.2 15.1 16.3 14.8 12.0P/E @ target price (x) * 18.0 16.8 18.1 16.5 13.3Reported P/E (x) 16.2 15.1 16.3 14.8 12.0Dividend yield (%) 1.4 2.0 2.4 2.5 2.7P/CF (x) 5.9 7.3 5.7 6.1 5.5P/FCF (x) 8.3 23.5 16.9 20.1 16.7Price/book (x) 1.6 1.7 1.6 1.5 1.4Price/tangible book (x) 1.6 1.7 1.6 1.5 1.4EV/EBITDA (x) 4.1 4.0 4.8 4.3 3.6EV/EBITDA @ target price (x) 4.6 4.5 5.3 4.8 4.1EV/invested capital (x) 1.3 1.3 1.2 1.1 1.1

** Pre exceptional & pre-goodwill and fully diluted

* Net profit for US GAAP. Source: Panasonic Corp, BNP Paribas estimates



Financial statementsSharp Corp


Revenue 2,786.3 2,461.6 1,988.1 2,006.3 1,987.4


Gross profit 388.5 233.3 359.1 385.9 386.0

SG&A (436.6) (395.3) (333.4) (336.9) (333.8)

R&D 0.0 0.0 0.0 0.0 0.0

Operating profit (48.1) (162.0) 25.7 49.0 52.2


Associates 0.0 0.0 0.0 0.0 0.0


Interest paid (23.2) (18.7) (15.4) (16.0) (16.0)

Other non-operating expenses (26.9) - (27.6) (1.6) (1.3)

Recurring profit (96.5) (192.5) (16.3) 33.3 36.8

Extraordinary gains - - - - -

Extraordinary losses - - - - -

Pre-tax profit (188.8) (231.1) (25.3) 33.3 36.8

Tax (31.4) (22.1) (13.7) (8.3) (9.2)

Minorities* (2.1) (2.8) (2.7) (2.6) (2.7)

Net profit (222.3) (256.0) (41.8) 22.4 25.0

EBITDA (operating profit + depreciation) 61.3 (85.2) 85.7 119.2 121.8

Per share (JPY)

Reported EPS (131.5) (151.4) (5.8) 3.1 3.5

DPS 0.0 0.0 0.0 0.0 0.0

Growth

Revenue (%) (4.8) (11.7) (19.2) 0.9 (0.9)

EBITDA (%) (73.6) n/m n/m 39.1 2.1

Operating profit (%) n/m n/m n/m 90.7 6.5

Recurring profit (%) n/m n/m n/m n/m 10.8

EPS (%) n/m n/m n/m n/m 11.7



EBITDA margin (%) 2.2 (3.5) 4.3 5.9 6.1

Operating profit margin (%) (1.7) (6.6) 1.3 2.4 2.6

Net margin (%) (4.7) (8.8) (1.6) 1.1 1.3

Effective tax rate (%) - - - 25.0 25.0


Interest cover (x) n/a n/a 0.6 3.1 3.4

Inventory days 48.2 42.8 37.3 33.7 34.1

Debtor days 55.5 52.0 47.7 42.4 42.8

Creditor days 47.7 44.8 43.0 38.8 39.3

Operating ROIC (%) (8.4) (39.7) 12.4 10.8 11.5

ROIC (%) (5.9) (21.7) 5.0 4.6 4.9

ROE (%) (115.4) (204.9) (10.1) 4.7 5.0

ROA (%) (3.4) (9.6) 1.8 1.8 1.9



IoT communications - - 145.8 142.9 140.1

Health & environment systems - - 283.6 283.6 292.1

Business Solution - - 334.2 339.3 349.5

Camera module - - 196.7 212.3 212.3

Electronic components & devices - - 188.2 178.8 169.8

Energy Solution - - 116.8 114.7 120.4

Display devices - - 790.8 803.7 772.9

Adjustment - - (68.3) (69.0) (69.7)

* Net profit for US GAAP. Source: Sharp Corp, BNP Paribas estimates



Financial statementsSharp Corp

Cash Flow (JPY b) Year Ending Mar 2015A 2016A 2017E 2018E 2019EPre-tax profit* (188.8) (231.1) (25.3) 33.3 36.8Tax paid 31.4 22.1 13.7 8.3 9.2Depreciation 109.3 76.7 60.0 70.2 69.6Working capital 0.0 0.0 0.0 0.0 0.0Other 65.4 113.5 22.4 (18.5) (16.4)Operating cash flow 17.3 (18.9) 70.8 93.3 99.2Capital expenditure (62.6) (45.2) (150.0) (70.2) (69.6)Other - - - - -Investing cash flow (16.0) (40.5) (150.0) (70.2) (69.6)Free cash flow 1.3 (59.4) (79.2) 23.0 29.6Change in debt 0.0 0.0 0.0 0.0 0.0Dividends paid 0.0 0.0 0.0 0.0 0.0Net buybacks - - - - -Equity issued 0.0 0.0 0.0 0.0 0.0Other (136.1) (15.4) 354.1 (5.4) (5.4)Financing cash flow (136.1) (15.4) 354.1 (5.4) (5.4)Gross change in cash (118.4) (82.7) 274.9 17.6 24.2Other adjustments (2.7) 99.6 0.0 0.0 0.0Change in cash (121.1) 16.9 274.9 17.6 24.2

Per share (JPY)Operating cash flow per share 10.3 16.0 5.7 7.7 8.4FCF per share 0.8 (35.1) (11.1) 3.2 4.1

Balance Sheet (JPY b) 2015A 2016A 2017E 2018E 2019ECash & equivalents 258.5 275.4 550.3 567.9 592.1A/c receivable 414.0 287.3 232.0 234.1 231.9Inventories 338.3 184.3 148.9 150.2 148.8Other 288.4 219.0 219.0 219.0 219.0Current assets 1,299.2 966.0 1,150.1 1,171.2 1,191.8Tangible fixed assets 400.6 351.2 441.2 441.2 441.2Intangible fixed assets 42.6 41.7 41.7 41.7 41.7Investments and other assets 219.6 436.8 411.8 411.8 411.8Total assets 1,961.9 1,795.7 2,044.8 2,066.0 2,086.6A/c payable 334.5 212.6 171.7 173.2 171.6Short term debt 840.0 632.6 632.6 632.6 632.6Other (512.4) (529.7) (529.7) (529.7) (529.7)Current liabilities 1,687.0 1,374.9 1,334.0 1,335.5 1,333.9Long term debt 53.5 40.3 40.3 40.3 40.3Other 177.0 186.8 186.8 186.8 186.8Long-term liabilities 230.4 227.0 227.0 227.0 227.0Total liabilities 1,917.4 1,601.9 1,561.0 1,562.6 1,560.9Common equity 30.2 182.0 469.3 486.2 505.8Preferred equity 0.0 0.0 0.0 0.0 0.0Minorities etc 14.3 11.8 14.6 17.1 19.8Net Assets 44.5 193.8 483.8 503.4 525.6Liabilities & net assets 1,961.9 1,795.7 2,044.8 2,066.0 2,086.6*includes convertibles and preferred stock which is being treated as debt

Per share (JPY)Book value per share 18 (155) 38 40 43Tangible book value per share (7) (119) 34 37 39

Financial strengthNet debt/equity (%) 1,426.5 205.1 25.3 20.8 15.4Net debt/total assets (%) 32.4 22.1 6.0 5.1 3.9Current ratio (x) 0.8 0.7 0.9 0.9 0.9CF interest cover (x) 1.0 n/a n/a 2.5 2.9

Valuation 2015A 2016A 2017E 2018E 2019EP/E (x) * n/a n/a n/a 72.7 65.1P/E @ target price (x) * (1.5) (0.9) (24.7) 36.2 32.4Reported P/E (x) n/a n/a n/a 72.7 65.1Dividend yield (%) 0.0 0.0 0.0 0.0 0.0P/CF (x) 22.1 (20.3) 23.0 17.4 16.4P/FCF (x) 296.1 (6.5) (20.5) 70.6 54.9Price/book (x) 12.7 (1.5) 6.0 5.7 5.3Price/tangible book (x) (30.9) (1.9) 6.6 6.2 5.8EV/EBITDA (x) 16.9 (1.7) 34.7 24.2 22.9EV/EBITDA @ target price (x) 13.7 (3.2) 18.1 12.6 11.8EV/invested capital (x) 1.2 0.2 3.7 3.6 3.5


* Net profit for US GAAP. Source: Sharp Corp, BNP Paribas estimates



Financial statementsTDK Corp


Revenue 1,082.6 1,152.3 1,159.9 1,048.5 1,064.0

Cost of sales (incl depreciation) (802.2) (831.1) (841.3) (755.6) (763.5)

Gross profit 280.3 321.1 318.6 292.9 300.5

SG&A (207.9) (227.7) (228.8) (206.5) (209.1)

R&D 0.0 0.0 0.0 0.0 0.0



Associates 0.0 0.0 0.0 0.0 0.0

Other non-operating income (1.8) (2.4) 0.0 0.0 0.0

Interest paid (3.0) (3.1) (3.5) (1.7) (1.7)

Other non-operating expenses 2.8 (0.6) (0.1) (0.0) 0.0



Pre-tax profit 74.5 91.8 90.0 88.7 95.0

Tax (21.7) (25.2) (23.6) (24.0) (25.7)

Minorities* (3.3) (1.8) (0.9) (0.9) (1.0)

Net profit 49.4 64.8 65.5 63.9 68.4


Per share (JPY)

Reported EPS 378.0 504.7 510.7 498.2 533.3

DPS 90.0 120.0 140.0 160.0 160.0

Growth

Revenue (%) 10.0 6.4 0.7 (9.6) 1.5

EBITDA (%) 27.8 15.7 4.6 (1.6) 5.2

Operating profit (%) 97.9 28.9 (3.9) (3.8) 5.9


EPS (%) 212.5 33.5 1.2 (2.4) 7.0



EBITDA margin (%) 14.1 15.3 15.9 17.3 18.0


Net margin (%) 4.6 5.6 5.6 6.1 6.4



Interest cover (x) n/a 59.3 n/a n/a n/a

Inventory days 65.4 67.7 68.4 72.7 68.9

Debtor days 74.9 73.5 71.4 75.5 71.1

Creditor days 47.2 49.2 43.5 40.3 38.2

Operating ROIC (%) 8.4 10.1 8.8 7.8 8.2

ROIC (%) 6.1 7.5 6.8 6.1 6.4

ROE (%) 7.2 9.2 9.4 8.6 8.7

ROA (%) 3.9 4.7 4.5 4.2 4.4



Industrial Equipment etc. - 0.2 - - -

ICT (HDD heads & Suspensions) - 0.2 - - -

ICT - 0.4 - - -

Automobiles - 0.2 - - -

Others - 0.1 - - -

* Net profit for US GAAP. Source: TDK Corp, BNP Paribas estimates



Financial statementsTDK Corp

Cash Flow (JPY b) Year Ending Mar 2015A 2016A 2017E 2018E 2019EPre-tax profit* 74.5 91.8 90.0 88.7 95.0Tax paid 21.7 25.2 23.6 24.0 25.7Depreciation 80.2 83.2 95.0 95.5 99.9Working capital 0.0 0.0 0.0 0.0 0.0Other (3.3) (55.5) (47.2) (47.9) (51.3)Operating cash flow 142.9 151.6 133.9 188.9 165.2Capital expenditure (102.5) (150.0) (200.0) (110.0) (115.0)Other (24.8) 9.4 0.0 0.0 0.0Investing cash flow (127.3) (140.6) (200.0) (110.0) (115.0)Free cash flow 15.5 11.0 (66.1) 78.9 50.2Change in debt 0.0 0.0 0.0 0.0 0.0Dividends paid (10.1) (13.9) (18.0) (20.5) (20.5)Net buybacks 0.0 0.0 0.0 0.0 0.0Equity issued 0.0 0.0 0.0 0.0 0.0Other (25.2) 43.2 0.0 0.0 0.0Financing cash flow (35.2) 29.3 (18.0) (20.5) (20.5)Gross change in cash 14.3 20.4 (84.0) 58.4 29.7Other adjustments 1.3 (1.3) 0.0 0.0 0.0Change in cash 15.6 19.1 (84.0) 58.4 29.7

Per share (JPY)Operating cash flow per share 1,134.9 1,202.2 1,065.8 1,509.2 1,319.7FCF per share 118.8 85.5 (515.3) 615.6 391.6

Balance Sheet (JPY b) 2015A 2016A 2017E 2018E 2019ECash & equivalents 266.4 285.5 201.4 259.8 289.6A/c receivable 238.1 226.2 227.7 205.8 208.9Inventories 151.0 157.1 158.2 143.0 145.1Other 84.7 72.2 72.2 72.2 72.2Current assets 740.2 741.0 659.5 680.9 715.7Tangible fixed assets 427.3 487.6 592.6 607.1 622.3Intangible fixed assets 0.0 0.0 0.0 0.0 0.0Investments and other assets 236.8 222.0 222.0 222.0 222.0Total assets 1,404.3 1,450.6 1,474.1 1,509.9 1,560.0A/c payable 111.6 112.7 87.7 79.3 80.5Short term debt 136.8 194.9 194.9 194.9 194.9Other (139.4) (143.7) (143.7) (143.7) (143.7)Current liabilities 387.9 451.2 426.3 417.9 419.1Long term debt 131.5 140.8 140.8 140.8 140.8Other 126.9 173.9 173.9 173.9 173.9Long-term liabilities 258.4 314.7 314.7 314.7 314.7Total liabilities 646.3 766.0 741.0 732.6 733.8Common equity 738.9 675.4 722.9 766.3 814.2Preferred equity 0.0 0.0 0.0 0.0 0.0Minorities etc 19.1 9.3 10.1 11.1 12.0Net Assets 758.0 684.6 733.1 777.4 826.2Liabilities & net assets 1,404.3 1,450.6 1,474.1 1,509.9 1,560.0*includes convertibles and preferred stock which is being treated as debt

Per share (JPY)Book value per share 5,870 5,357 5,754 6,121 6,503Tangible book value per share 5,870 5,357 5,754 6,121 6,503

Financial strengthNet debt/equity (%) 0.3 7.3 18.3 9.8 5.6Net debt/total assets (%) 0.1 3.5 9.1 5.0 3.0Current ratio (x) 1.9 1.6 1.5 1.6 1.7CF interest cover (x) n/a 8.0 356.3 n/a n/a

Valuation 2015A 2016A 2017E 2018E 2019EP/E (x) * 21.2 15.9 15.7 16.1 15.0P/E @ target price (x) * 21.2 15.9 15.7 16.1 15.0Reported P/E (x) 21.2 15.9 15.7 16.1 15.0Dividend yield (%) 1.1 1.5 1.7 2.0 2.0P/CF (x) 6.0 7.1 6.4 6.4 6.1P/FCF (x) 67.4 93.7 (15.5) 13.0 20.5Price/book (x) 1.4 1.5 1.4 1.3 1.2Price/tangible book (x) 1.4 1.5 1.4 1.3 1.2EV/EBITDA (x) 6.7 6.1 6.2 6.0 5.5EV/EBITDA @ target price (x) 6.7 6.0 6.2 6.0 5.5EV/invested capital (x) 1.2 1.2 1.1 1.1 1.0


* Net profit for US GAAP. Source: TDK Corp, BNP Paribas estimates



Financial statementsHirose Electric


Revenue 125.7 120.3 115.3 118.1 121.7


Gross profit 56.6 54.4 52.4 54.4 55.7

SG&A (24.0) (25.7) (24.8) (25.4) (26.2)

R&D 0.0 0.0 0.0 0.0 0.0



Associates 0.0 0.0 0.0 0.0 0.0


Interest paid 0.0 0.0 0.0 0.0 0.0

Other non-operating expenses 0.5 0.5 0.0 (0.0) 0.0

Recurring profit 35.0 30.5 28.6 30.0 30.6


Extraordinary losses (0.3) (0.3) 0.0 0.0 0.0

Pre-tax profit 34.7 30.5 28.6 30.0 30.6

Tax (11.6) (9.4) (8.1) (8.5) (8.7)

Minorities* (0.1) 0.0 0.0 0.0 0.0

Net profit 22.9 21.1 20.5 21.5 21.9


Per share (JPY)

Reported EPS 674.2 596.0 579.2 607.4 618.7

DPS 230.0 240.0 240.0 250.0 260.0

Growth

Revenue (%) 0.6 (4.3) (4.1) 2.4 3.0

EBITDA (%) (0.9) (7.6) (12.7) 5.8 4.5

Operating profit (%) (1.3) (11.6) (4.2) 5.0 1.8

Recurring profit (%) 10.1 (12.7) (6.2) 4.9 1.8

EPS (%) 3.3 (11.6) (2.8) 4.9 1.9



EBITDA margin (%) 34.7 33.5 30.5 31.5 31.9


Net margin (%) 18.5 17.5 17.8 18.2 18.0



Interest cover (x) n/a n/a n/a n/a n/a

Inventory days 46.3 47.9 46.3 45.3 44.9

Debtor days 87.1 87.8 84.8 82.0 81.7

Creditor days 60.4 63.1 59.6 53.9 53.4

Operating ROIC (%) 39.5 34.3 32.9 31.1 28.9

ROIC (%) 18.1 17.9 18.9 18.7 18.0

ROE (%) 8.4 7.4 7.0 7.1 6.9

ROA (%) 7.0 6.3 6.1 6.2 6.1



Multi-pin connectors 101.4 98.6 97.2 99.5 102.6

Coaxial connectors 16.2 13.8 12.3 12.6 13.0

Others 8.1 7.9 5.8 6.0 6.1

* Net profit for US GAAP. Source: Hirose Electric, BNP Paribas estimates



Financial statementsHirose Electric

Cash Flow (JPY b) Year Ending Mar 2015A 2016A 2017E 2018E 2019EPre-tax profit* 34.7 30.5 28.6 30.0 30.6Tax paid 11.6 9.4 8.1 8.5 8.7Depreciation 11.0 11.5 7.6 8.2 9.4Working capital 0.0 0.0 0.0 0.0 0.0Other (23.8) (19.3) (16.3) (17.1) (17.4)Operating cash flow 31.8 36.0 27.6 29.1 30.5Capital expenditure (11.8) (12.0) (14.0) (14.0) (15.0)Other (4.4) 14.6 0.0 0.0 0.0Investing cash flow (16.2) 2.6 (14.0) (14.0) (15.0)Free cash flow 15.6 38.7 13.6 15.1 15.5Change in debt 0.0 0.0 0.0 0.0 0.0Dividends paid (7.7) (8.2) (8.4) (8.7) (9.1)Net buybacks 0.0 0.0 0.0 0.0 0.0Equity issued 0.0 0.0 0.0 0.0 0.0Other (4.8) (9.7) 0.0 0.0 0.0Financing cash flow (12.4) (17.9) (8.4) (8.7) (9.1)Gross change in cash 5.8 18.7 5.2 6.4 6.4Other adjustments 11.4 (0.5) 0.0 0.0 0.0Change in cash 17.2 18.2 5.2 6.4 6.4

Per share (JPY)Operating cash flow per share 909.6 990.3 759.3 801.1 839.0FCF per share 457.6 1,091.8 384.8 427.7 438.5

Balance Sheet (JPY b) 2015A 2016A 2017E 2018E 2019ECash & equivalents 173.8 192.0 197.2 203.6 210.0A/c receivable 30.6 27.3 26.2 26.8 27.7Inventories 9.1 8.2 7.8 8.0 8.2Other 7.9 7.9 7.9 7.9 7.9Current assets 221.4 235.3 239.1 246.3 253.8Tangible fixed assets 36.3 36.7 43.1 48.9 54.5Intangible fixed assets 1.4 1.3 1.3 1.3 1.3Investments and other assets 60.6 43.2 43.2 43.2 43.2Total assets 319.7 316.6 326.7 339.7 352.8A/c payable 11.5 11.2 9.3 9.5 9.8Short term debt 0.0 0.0 0.0 0.0 0.0Other (12.8) (12.2) (12.2) (12.2) (12.2)Current liabilities 24.3 23.5 21.5 21.7 22.0Long term debt 0.0 0.0 0.0 0.0 0.0Other 7.0 7.3 7.3 7.3 7.3Long-term liabilities 7.0 7.3 7.3 7.3 7.3Total liabilities 31.4 30.8 28.8 29.0 29.3Common equity 288.1 285.5 297.6 310.3 323.1Preferred equity 0.0 0.0 0.0 0.0 0.0Minorities etc 0.0 0.0 0.0 0.0 0.0Net Assets 288.1 285.5 297.6 310.3 323.1Liabilities & net assets 319.7 316.6 326.7 339.7 352.8*includes convertibles and preferred stock which is being treated as debt


Financial strengthNet debt/equity (%) (60.3) (67.2) (66.3) (65.6) (65.0)Net debt/total assets (%) (54.4) (60.6) (60.3) (59.9) (59.5)Current ratio (x) 9.1 10.0 11.1 11.3 11.5CF interest cover (x) n/a n/a n/a n/a n/a



* Net profit for US GAAP. Source: Hirose Electric, BNP Paribas estimates



Financial statementsKyocera Corp


Revenue 1,526.5 1,479.6 1,379.3 1,385.4 1,400.1


Gross profit 389.4 386.2 357.8 367.5 376.5

SG&A (296.0) (293.5) (271.3) (272.5) (275.3)

R&D 0.0 0.0 0.0 0.0 0.0



Associates 0.0 0.0 0.0 0.0 0.0


Interest paid (1.7) (1.8) (2.4) (1.9) (1.9)

Other non-operating expenses 0.0 0.0 0.0 0.0 0.0



Pre-tax profit 121.9 145.6 114.4 124.5 132.5

Tax 3.4 (31.4) (30.0) (37.4) (39.7)

Minorities* (9.4) (5.1) (4.3) (4.5) (4.6)

Net profit 115.9 109.0 80.0 82.5 88.1


Per share (JPY)

Reported EPS 315.8 297.2 217.9 224.7 240.0

DPS 100.0 100.0 100.0 110.0 120.0

Growth

Revenue (%) 5.5 (3.1) (6.8) 0.4 1.1

EBITDA (%) (15.4) 1.7 (2.8) 6.8 3.4

Operating profit (%) (22.5) (0.8) (6.6) 9.8 6.5


EPS (%) 30.6 (5.9) (26.7) 3.1 6.8



EBITDA margin (%) 10.9 11.4 11.9 12.7 13.0


Net margin (%) 7.6 7.4 5.8 6.0 6.3

Effective tax rate (%) (2.8) 21.6 26.2 30.1 30.0



Inventory days 110.8 113.9 113.2 109.8 110.1

Debtor days 71.5 75.0 74.0 71.2 71.0

Creditor days 38.9 39.3 43.9 46.8 46.9

Operating ROIC (%) 13.2 10.4 10.4 11.6 12.2

ROIC (%) 5.1 3.5 3.2 3.4 3.6

ROE (%) 5.6 4.8 3.5 3.6 3.7

ROA (%) 3.4 2.4 2.0 2.1 2.2


* Net profit for US GAAP. Source: Kyocera Corp, BNP Paribas estimates



Financial statementsKyocera Corp

Cash Flow (JPY b) Year Ending Mar 2015A 2016A 2017E 2018E 2019EPre-tax profit* 121.9 145.6 114.4 124.5 132.5Tax paid (3.4) 31.4 30.0 37.4 39.7Depreciation 73.0 76.6 78.0 80.7 80.5Working capital 0.0 0.0 0.0 0.0 0.0Other (0.5) (111.4) (60.1) (74.9) (79.5)Operating cash flow 130.8 194.0 218.8 165.7 168.5Capital expenditure (56.7) (68.9) (87.0) (80.0) (85.0)Other (36.9) (37.9) 0.0 0.0 0.0Investing cash flow (93.6) (106.8) (87.0) (80.0) (85.0)Free cash flow 37.2 87.2 131.8 85.7 83.5Change in debt 0.0 0.0 0.0 0.0 0.0Dividends paid (32.7) (43.9) (36.7) (40.4) (44.1)Net buybacks 0.0 0.0 0.0 0.0 0.0Equity issued 0.0 0.0 0.0 0.0 0.0Other (7.3) (6.7) 0.0 0.0 0.0Financing cash flow (40.0) (50.6) (36.7) (40.4) (44.1)Gross change in cash 16.2 22.7 95.1 45.3 39.4Other adjustments 3.4 35.6 0.0 0.0 0.0Change in cash 19.6 58.2 95.1 45.3 39.4


Balance Sheet (JPY b) 2015A 2016A 2017E 2018E 2019ECash & equivalents 631.0 689.2 784.2 829.6 869.0A/c receivable 318.5 289.3 269.7 270.9 273.7Inventories 354.5 327.9 305.7 307.0 310.3Other 153.5 128.4 93.4 93.4 93.4Current assets 1,457.5 1,434.8 1,453.0 1,500.8 1,546.4Tangible fixed assets 261.5 264.5 273.5 272.8 277.3Intangible fixed assets 56.6 59.1 59.1 59.1 59.1Investments and other assets 1,245.5 1,336.7 1,336.7 1,336.7 1,336.7Total assets 3,021.2 3,095.0 3,122.3 3,169.4 3,219.5A/c payable 119.7 115.6 130.3 130.9 132.3Short term debt 13.6 13.6 13.6 13.6 13.6Other (223.0) (238.5) (238.5) (238.5) (238.5)Current liabilities 356.3 367.8 382.5 383.1 384.5Long term debt 17.9 18.1 18.1 18.1 18.1Other 343.4 335.3 335.3 335.3 335.3Long-term liabilities 361.3 353.5 353.5 353.5 353.5Total liabilities 717.6 721.3 736.0 736.5 737.9Common equity 2,215.3 2,284.3 2,292.6 2,334.7 2,378.7Preferred equity 0.0 0.0 0.0 0.0 0.0Minorities etc 88.3 89.5 93.8 98.2 102.8Net Assets 2,303.6 2,373.8 2,386.3 2,432.9 2,481.6Liabilities & net assets 3,021.2 3,095.0 3,122.3 3,169.4 3,219.5*includes convertibles and preferred stock which is being treated as debt





* Net profit for US GAAP. Source: Kyocera Corp, BNP Paribas estimates



Financial statementsTaiyo Yuden


Revenue 227.1 240.4 228.2 235.9 242.7


Gross profit 52.7 63.4 50.4 56.1 57.9

SG&A (39.6) (40.0) (38.0) (39.3) (40.5)

R&D 0.0 0.0 0.0 0.0 0.0



Associates 0.0 0.0 0.0 0.0 0.0


Interest paid (0.3) (0.3) (0.3) (0.3) (0.3)

Other non-operating expenses 0.3 (1.2) (2.3) (0.0) (0.0)

Recurring profit 15.7 22.3 10.0 16.7 17.4


Extraordinary losses (0.9) (4.2) (1.5) (1.0) (1.0)

Pre-tax profit 14.9 18.3 8.6 15.7 16.4

Tax (3.9) (3.6) (3.4) (5.5) (5.7)

Minorities* 0.1 (0.1) 0.0 0.0 0.0

Net profit 10.9 14.8 5.2 10.2 10.7


Per share (JPY)

Reported EPS 85.5 115.5 40.7 79.9 83.8

DPS 10.0 15.0 20.0 25.0 30.0

Growth

Revenue (%) 9.1 5.9 (5.1) 3.4 2.9

EBITDA (%) 8.9 34.8 (20.8) 14.5 3.1


Recurring profit (%) 28.4 42.2 (55.1) 67.0 4.2

EPS (%) 47.2 35.1 (64.7) 96.2 4.9



EBITDA margin (%) 15.4 19.6 16.4 18.1 18.2


Net margin (%) 5.1 7.8 2.9 4.7 4.8



Interest cover (x) n/a 21.1 5.3 335.0 291.0

Inventory days 85.5 95.7 97.4 95.4 95.7

Debtor days 79.4 80.1 77.6 74.3 74.5

Creditor days 44.5 48.8 46.6 45.5 45.6

Operating ROIC (%) 6.7 11.7 4.6 6.6 6.7

ROIC (%) 6.2 11.0 4.3 6.2 6.3

ROE (%) 8.4 12.3 4.3 7.0 7.0

ROA (%) 3.8 7.4 3.0 4.1 4.2


Capacitor 114.4 123.7 114.6 118.0 120.1

Ferrite 41.9 46.5 41.7 42.9 44.2

Integrated Module & Device 52.8 57.7 66.5 69.5 72.9

Other components 18.0 12.6 5.5 5.5 5.5

* Net profit for US GAAP. Source: Taiyo Yuden, BNP Paribas estimates



Financial statementsTaiyo Yuden

Cash Flow (JPY b) Year Ending Mar 2015A 2016A 2017E 2018E 2019EPre-tax profit* 14.9 18.3 8.6 15.7 16.4Tax paid 3.9 3.6 3.4 5.5 5.7Depreciation 21.8 23.8 25.0 26.0 26.6Working capital 0.0 0.0 0.0 0.0 0.0Other (1.7) (8.4) (6.8) (11.0) (11.4)Operating cash flow 24.9 38.3 33.8 33.8 35.2Capital expenditure (18.8) (41.3) (29.0) (28.0) (29.0)Other (2.2) 5.9 0.0 0.0 0.0Investing cash flow (21.0) (35.4) (29.0) (28.0) (29.0)Free cash flow 3.9 2.9 4.8 5.8 6.2Change in debt 0.0 0.0 0.0 0.0 0.0Dividends paid (1.2) (1.2) (2.4) (2.9) (3.5)Net buybacks 0.0 0.0 0.0 0.0 0.0Equity issued 0.0 0.0 0.0 0.0 0.0Other (20.1) (0.9) 0.0 0.0 0.0Financing cash flow (21.2) (2.1) (2.4) (2.9) (3.5)Gross change in cash (13.1) (1.5) 2.4 2.9 2.6Other adjustments 0.6 0.8 0.0 0.0 0.0Change in cash (12.5) (0.7) 2.4 2.9 2.6




Financial strengthNet debt/equity (%) (8.3) (8.3) (9.7) (11.0) (12.1)Net debt/total assets (%) (4.7) (4.7) (5.6) (6.5) (7.2)Current ratio (x) 2.3 2.2 2.2 2.3 2.3CF interest cover (x) n/a 3.6 3.1 117.1 103.9



* Net profit for US GAAP. Source: Taiyo Yuden, BNP Paribas estimates



Financial statementsMurata Manufacturing


Revenue 1,043.5 1,210.8 1,139.5 1,341.6 1,425.7


Gross profit 414.3 498.8 438.1 518.3 570.4

SG&A (199.8) (223.4) (224.1) (263.7) (280.3)

R&D 0.0 0.0 0.0 0.0 0.0



Associates 0.0 0.0 0.0 0.0 0.0

Other non-operating income 18.1 (2.1) 0.0 0.0 0.0

Interest paid (0.4) (0.1) (0.1) (0.1) (0.1)

Other non-operating expenses 2.8 3.6 (0.0) 0.0 (0.0)



Pre-tax profit 238.4 279.2 216.3 257.5 293.5

Tax (71.1) (75.0) (51.7) (67.0) (76.3)

Minorities* (0.4) 0.4 0.0 0.0 0.0

Net profit 167.7 203.8 164.7 190.6 217.2


Per share (JPY)

Reported EPS 792.2 962.6 775.2 897.2 1,022.6

DPS 180.0 210.0 250.0 290.0 330.0

Growth

Revenue (%) 23.2 16.0 (5.9) 17.7 6.3

EBITDA (%) 47.7 25.1 (13.2) 14.8 9.7



EPS (%) 79.8 21.5 (19.5) 15.7 14.0



EBITDA margin (%) 28.7 30.9 28.5 27.8 28.7


Net margin (%) 16.1 16.8 14.5 14.2 15.2




Inventory days 103.5 103.5 109.8 98.8 106.1

Debtor days 73.9 64.6 60.6 54.3 57.0

Creditor days 28.4 28.4 28.5 25.6 27.5

Operating ROIC (%) 23.9 - 21.5 23.5 25.3

ROIC (%) 17.6 - 16.6 18.3 20.0

ROE (%) 15.9 17.1 12.7 13.4 13.9

ROA (%) 11.3 13.6 10.4 11.1 11.7



Capacitors 334.3 367.3 371.6 397.2 412.5

Piezoelectric 121.9 161.9 171.9 188.6 199.5

Other components 222.9 231.0 220.9 239.2 248.8

Comm. Modules 308.0 395.2 326.1 366.7 411.8

Power Sources & Other Modules 53.0 51.7 46.0 49.0 52.0

Others 3.6 3.8 2.9 2.9 3.0

* Net profit for US GAAP. Source: Murata Manufacturing, BNP Paribas estimates



Financial statementsMurata Manufacturing

Cash Flow (JPY b) Year Ending Mar 2015A 2016A 2017E 2018E 2019EPre-tax profit* 238.4 279.2 216.3 257.5 293.5Tax paid 71.1 75.0 51.7 67.0 76.3Depreciation 84.9 99.1 111.0 118.4 118.9Working capital 0.0 0.0 0.0 0.0 0.0Other (85.1) (210.2) (103.3) (133.9) (152.6)Operating cash flow 259.9 252.5 296.7 249.5 311.4Capital expenditure (101.2) (172.5) (160.0) (120.0) (130.0)Other 9.8 (32.8) 0.0 0.0 0.0Investing cash flow (91.4) (205.3) (160.0) (120.0) (130.0)Free cash flow 168.6 47.1 136.7 129.5 181.4Change in debt 0.0 0.0 0.0 0.0 0.0Dividends paid (31.8) (42.3) (53.1) (61.6) (70.1)Net buybacks 0.0 0.0 0.0 0.0 0.0Equity issued 0.0 0.0 0.0 0.0 0.0Other (35.2) (14.3) 0.0 0.0 0.0Financing cash flow (67.0) (56.6) (53.1) (61.6) (70.1)Gross change in cash 94.1 (0.4) 83.6 67.9 111.3Other adjustments (18.2) 12.1 0.0 0.0 0.0Change in cash 75.9 11.7 83.6 67.9 111.3

Per share (JPY)Operating cash flow per share 1,210.7 1,178.3 1,381.4 1,162.9 1,452.8FCF per share 796.2 222.6 643.4 609.6 854.1

Balance Sheet (JPY b) 2015A 2016A 2017E 2018E 2019ECash & equivalents 358.3 370.0 453.6 521.5 632.8A/c receivable 233.7 194.9 183.5 216.0 229.5Inventories 186.3 217.5 204.6 240.9 256.0Other 37.6 52.9 52.9 52.9 52.9Current assets 815.8 835.4 894.6 1,031.3 1,171.3Tangible fixed assets 386.0 455.9 504.9 506.5 517.6Intangible fixed assets 0.0 0.0 0.0 0.0 0.0Investments and other assets 229.5 226.6 226.6 226.6 226.6Total assets 1,431.3 1,517.8 1,626.0 1,764.4 1,915.4A/c payable 54.5 56.4 53.1 62.5 66.4Short term debt 11.2 6.4 6.4 6.4 6.4Other (132.8) (122.8) (122.8) (122.8) (122.8)Current liabilities 198.5 185.6 182.3 191.7 195.6Long term debt 9.7 3.3 3.3 3.3 3.3Other 84.2 84.9 84.9 84.9 84.9Long-term liabilities 93.8 88.2 88.2 88.2 88.2Total liabilities 292.4 273.8 270.5 279.9 283.8Common equity 1,138.9 1,244.0 1,355.5 1,484.5 1,631.6Preferred equity 0.0 0.0 0.0 0.0 0.0Minorities etc 0.0 0.0 0.0 0.0 0.0Net Assets 1,138.9 1,244.0 1,355.5 1,484.5 1,631.6Liabilities & net assets 1,431.3 1,517.8 1,626.0 1,764.4 1,915.4*includes convertibles and preferred stock which is being treated as debt





* Net profit for US GAAP. Source: Murata Manufacturing, BNP Paribas estimates



Financial statementsNitto Denko


Revenue 825.2 793.1 729.5 759.9 795.6


Gross profit 246.2 244.7 190.1 193.3 203.2

SG&A (139.5) (142.3) (122.9) (111.1) (111.6)

R&D 0.0 0.0 0.0 0.0 0.0



Associates 0.0 0.0 0.0 0.0 0.0


Interest paid 0.0 0.0 0.0 0.0 0.0

Other non-operating expenses (0.8) (0.4) (0.4) 0.0 0.1



Pre-tax profit 105.9 102.0 66.8 82.2 91.7

Tax (27.9) (20.0) (16.5) (18.9) (21.1)

Minorities* (0.2) (0.3) (0.3) (0.3) (0.3)

Net profit 77.9 81.7 50.0 63.0 70.3


Per share (JPY)

Reported EPS 470.9 494.6 305.3 384.7 429.3

DPS 120.0 140.0 150.0 160.0 170.0

Growth

Revenue (%) 10.1 (3.9) (8.0) 4.2 4.7

EBITDA (%) 33.1 (1.0) (21.7) 15.0 9.4

Operating profit (%) 47.2 (4.1) (34.4) 22.3 11.4


EPS (%) 52.6 5.0 (38.3) 26.0 11.6



EBITDA margin (%) 18.5 19.0 16.2 17.9 18.7


Net margin (%) 9.4 10.3 6.9 8.3 8.8



Interest cover (x) 128.0 257.9 172.3 n/a n/a

Inventory days 56.6 60.6 57.5 53.5 53.5

Debtor days 80.1 78.3 71.7 67.3 67.2

Creditor days 67.1 68.0 57.3 48.1 48.0

Operating ROIC (%) 21.2 21.8 13.3 16.0 17.1

ROIC (%) 18.1 18.6 11.5 13.9 14.9

ROE (%) 13.7 13.3 8.0 9.6 10.1

ROA (%) 9.6 9.8 6.1 7.5 7.9



Industrial tape 316.6 322.2 307.1 320.5 332.1

Optronics 509.3 455.8 393.6 408.5 430.5

Medical & membrane 40.8 53.4 59.7 62.8 65.8

* Net profit for US GAAP. Source: Nitto Denko, BNP Paribas estimates



Financial statementsNitto Denko

Cash Flow (JPY b) Year Ending Mar 2015A 2016A 2017E 2018E 2019EPre-tax profit* 105.9 102.0 66.8 82.2 91.7Tax paid 27.9 20.0 16.5 18.9 21.1Depreciation 45.7 48.5 51.0 53.7 57.1Working capital 0.0 0.0 0.0 0.0 0.0Other (36.3) (64.6) (33.0) (37.8) (42.2)Operating cash flow 119.5 140.7 97.4 110.9 120.6Capital expenditure (56.7) (60.4) (60.0) (65.0) (65.0)Other 2.9 3.3 0.0 0.0 0.0Investing cash flow (53.9) (57.1) (60.0) (65.0) (65.0)Free cash flow 65.6 83.6 37.4 45.9 55.6Change in debt 0.0 0.0 0.0 0.0 0.0Dividends paid (17.3) (22.3) (24.5) (26.2) (27.8)Net buybacks 0.0 0.0 0.0 0.0 0.0Equity issued 0.0 0.0 0.0 0.0 0.0Other (51.6) (22.6) 0.0 0.0 0.0Financing cash flow (69.0) (44.9) (24.5) (26.2) (27.8)Gross change in cash 11.7 26.3 12.8 19.8 27.8Other adjustments (0.6) 0.0 0.0 0.0 0.0Change in cash 11.1 26.3 12.8 19.8 27.8




Financial strengthNet debt/equity (%) (33.8) (38.4) (38.9) (39.7) (41.2)Net debt/total assets (%) (24.4) (28.8) (30.2) (31.1) (32.5)Current ratio (x) 2.6 3.3 3.8 3.9 4.1CF interest cover (x) 79.7 211.5 96.8 n/a n/a



* Net profit for US GAAP. Source: Nitto Denko, BNP Paribas estimates



Disclaimers and Disclosures

APPENDIX

DISCLAIMERS AND DISCLOSURES APPLICABLE TO NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (JAPAN) LTD

ANALYST(S) CERTIFICATION

Masahiro Wakasugi, BNP Paribas Securities (Japan) Ltd, +813 6377 2240, [email protected] The BNP Paribas Securities (Japan) Ltd Analysts mentioned in this disclaimer are employed by a non-US affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to NYSE and/or FINRA regulations

The individual(s) identified above certify(ies) that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) with regard to any and all of the subject securities, companies or issuers mentioned in this report; and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed herein.

IMPORTANT DISCLOSURES REQUIRED IN THE UNITED STATES BY FINRA RULES AND OTHER JURISDICTIONS "BNP Paribas” is the marketing name for the global banking and markets business of BNP Paribas Group. No portion of this report was prepared by BNP Paribas Securities Corp (US) personnel, and it is considered Third-Party Affiliate research under NASD Rule 2711. The following disclosures relate to relationships between companies covered in this research report and the BNP entity identified on the cover of this report, BNP Securities Corp., and other entities within the BNP Paribas Group (collectively, "BNP Paribas"). The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this report:

BNP Paribas represents that: 1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees. 2. It had an investment banking relationship with this company in the last 12 months. 3. It received compensation for investment banking services from this company in the last 12 months. 4. It expects to receive or intends to seek compensation for investment banking services from the subject company/ies in the next 3 months. 5. It beneficially owns 1% or more of any class of common equity securities of the subject company. 6. It makes a market in securities in respect of this company. 7. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in

securities issued by this company. The financial interest is in the common stock of the subject company, unless otherwise noted. 8. The analyst (or a member of his/her household) is an officer, director, employee or advisory board member of this company or has received

compensation from the company.

IMPORTANT DISCLOSURES REQUIRED IN KOREA The disclosure column in the following table lists the important disclosures applicable to each Korea listed company that has been rated and/or recommended in this report:

1. The performance of obligations of the Company is directly or indirectly guaranteed by BNP Paribas Securities Korea Co. Ltd (“BNPPSK”) by means of payment guarantees, endorsements, and provision of collaterals and/or taking over the obligations.

2. BNPPSK owns 1/100 or more of the total outstanding shares issued by the Company. 3. The Company is an affiliate of BNPPSK as prescribed by Item 3, Article 2 of the Monopoly Regulation and Fair Trade Act. 4. BNPPSK is the financial advisory agent of the Company for the Merger and Acquisition transaction or of the Target Company whereby the size of the

transaction does not exceed 5/100 of the total asset of the Company or the total number of outstanding shares. 5. BNPPSK has taken financial advisory service regarding listing to the Company within the past 1 year. 6. With regards to the tender offer initiated by the Company based on Item 2, Article 133 of the Financial Investment Services and Capital Market Act,

BNPPSK acts in the capacity of the agent for the tender offer designated either by the Company or by the target company, provided that this provision shall apply only where tender offer has not expired.

7. The listed company which issued the stocks in question in case where 40 days has not passed since the new shares were listed from the date of entering into arrangement for public offering or underwriting-related agreement for issuance of stocks

8. The Company that has signed a nominated advisor contract with BNPPSK as defined in Item 2 of Article 8 of the KONEX Market Listing Regulation. 9. The Company is recognized as having considerable interests with BNPPSK in relation to No.1 to No. 8. 10. The analyst or his/her spouse owns (including delivery claims of marketable securities based on legal regulations and trading and misc. contracts) the

following securities or rights (hereinafter referred to as “Securities, etc.” in this Article) regardless of whose name is used in the trading. 1) Stocks, bond with stock certificate, and certificate of pre-emptive rights issued by the Company whose securities dealings are being solicited. 2) Stock options of the Company whose securities dealings are being solicited. 3) Individual stock future, stock option, and warrants that use the stocks specified in Item 1) as underlying.

Company Ticker Disclosure (as applicable)

Hirose Electric 6806 JP 2, 3, 4

Kyocera Corp 6971 JP 2, 3, 4

Murata Manufacturing 6981 JP 2, 3, 4

Nidec Corp 6594 JP 5

Panasonic Corp 6752 JP 2, 3, 4

Rohm Co 6963 JP 2, 3, 4

Sony Corp 6758 JP 2, 3, 4

TDK Corp 6762 JP 5

Company Ticker Price (as of 07-Dec-2016 closing price) InterestN/A N/A N/A N/A



Company Ticker Price Rating Valuation & Risks

Hamamatsu Photonics 6965 JP JPY 3,015 Buy Our JPY3,550 TP is based on an EV/EBITDA multiple of 13x on our FY9/18E. Downside risks include: 1) weaker demand from the medical/dentistry sector due to economic slowdown, mainly in Europe and the US; 2) a fall-off in demand resulting from revisions to healthcare systems; 3) declining market share in PMT used in academic research; and 4) rapid JPY appreciation.

Hirose Electric 6806 JP JPY 13,550 Hold Our TP JPY14,000 is based on our FY3/18E P/E of 23x. Downside risks for Hirose Electric are: 1) slowing sales at customer companies, 2) a delayed uptake of Hirose’s products by the automotive and industrial machinery companies it is focusing on, and 3) rapid yen appreciation. Upside risks are the converse of downside risks.

Kyocera Corp 6971 JP JPY 5,524 Hold We have a JPY5,200 target price based on our FY3/18E P/E of 23x. Upside risks are 1) activist investors owning Kyocera shares, 2) more progress with smartphone structural reforms than anticipated, 3) a larger rise in demand for the components business than expected, 4) rapid yen depreciation and 5) enhanced shareholder returns. Downside risks are the converse of upside risks.

Murata Manufacturing 6981 JP JPY 15,270 Buy Our TP of JPY18,000 is based on a FY3/18E P/E multiple of 20x (the historical five-year average). Downside risks include (1) delays in the shift to 4G in emerging countries, (2) delays in the transition to LTE-Advanced in China, (3) late introduction of technology to achieve 1Gbps communication speed in advanced countries and (4) sharp yen appreciation. (1) to (3) above, in particular, could result in supply-demand deterioration for related products and a risk of negative impact on prices.

Nidec Corp 6594 JP JPY 9,989 Buy Our TP of JPY12,000 is based on our FY3/18E P/E of 28.4x. Risks include: 1) delays in regulations on automotive, appliance, commercial and industrial motors; 2) slowing volumes and rising price competition due to a slump in demand; 3) a greater-than-forecast decline in HDD volumes; and 4) rapid JPY appreciation.

Nitto Denko 6988 JP JPY 8,404 Hold Our TP JPY8,200 is based on our FY3/18E P/E of 18x: JPY7,000 and by adding roughly JPY1,200 for our estimated value of the new drug. Upside risks include: 1) the LCD business recovering more than expected; 2) greater-than-expected uptake of thin-film polarizer; 3) greater-than-expected ITO-film improvement; 4) approval for the cirrhosis of the liver drug; and 5) rapid JPY depreciation. Downside risks include: 1) the LCD business deteriorating more than anticipated; 2) thin-film polarizer gaining less adoption than expected; 3) ITO-film sales deteriorating more than expected; 4) rejection of the cirrhosis of the liver drug; and 5) rapid JPY appreciation.

Panasonic Corp 6752 JP JPY 1,262 Buy Our TP of JPY1,400 is based on a P/E of 16x FY3/18E. Downside risks include 1) Slowdown in auto demand, 2) delays in restructuring of TV and semiconductor businesses, and 3) steep emerging market currency depreciation should be negative for earnings.

Rohm Co 6963 JP JPY 6,440 Buy Our TP JPY7,800 is based on FY3/18E EV/EBITDA of 7.0x. Downside risks are: (1) a sudden slowdown in demand for automobiles, (2) a delay in the shift to car electrification, (3) difficulties at the company’s partners in the area of platform business and (4) any sudden appreciation in the yen.

Sharp Corp 6753 JP JPY 227 Reduce Our JPY113 TP is based on a FY3/18E EV/EBITDA of 8x. Upside risks include 1) increase in Sharp’s share of displays used in Chinese and North American smartphones, 2) growth in solar power generation business overseas, 3) improved profitability in TV and communication equipment businesses, and 4) rapid depreciation of the JPY versus the EUR.

Sony Corp 6758 JP JPY 3,199 Hold Our JPY3,400 TP is based on sum-of-the-parts (SOTP) model based on our FY3/18E and EV/EBITDA target multiples. Upside risks include: 1) unexpectedly large cost cuts, notably through reforms “sparing no sacred cows” to quote CFO Yoshida; 2) improved market share in middle/high-end smartphones; 3) better-than-forecast performance in games (network business, VR, Vue, etc); 4) unexpectedly strong growth in non-electronics businesses, including pictures, music and financial services; and 5) fluctuations in FX. Downside risks are the opposite of the upside risks.

Taiyo Yuden 6976 JP JPY 1,254 Hold Our target price of JPY1,250 is based on a FY3/18E P/E of 16x. Downside risks for Taiyo Yuden are: 1) inventory adjustments by North American and Chinese, smartphone makers; 2) falling prices due to slowing demand or oversupply; and 3) rapid JPY appreciation. Upside risks include: 1) unexpectedly sharp growth in smartphone demand in North America and China; 2) stabilisation of prices due to a tightening demand-supply balance; and 3) rapid JPY depreciation.

TDK Corp 6762 JP JPY 8,010 Hold Our TP of JPY8,000 is based on our FY3/18E P/E of 16x. Downside risks include 1) near-term correction in automobile market, 2) slow rate of adopting lithium polymer batteries for use in smartphones, 3) unexpectedly severe correction in HDD market, and 4) rapid JPY appreciation. Upside risks are the opposite of 1) to 4) above.

Sources: Factset, BNP Paribas



GENERAL DISCLAIMER

This report was produced by BNP Paribas Securities (Japan) Ltd, member company(ies) of the BNP Paribas Group.

This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set forth herein. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Customers are advised to use the information contained herein as just one of many inputs and considerations prior to engaging in any trading activity. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. This report is not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Information and opinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the recipient’s own independent verification, or taken in substitution for the exercise of judgment by the recipient. Additionally, the products mentioned in this report may not be available for sale in certain jurisdictions. As an investment bank with a wide range of activities, BNP Paribas may face conflicts of interest, which are resolved under applicable legal provisions and internal guidelines. You should be aware, however, that BNP Paribas may engage in transactions in a manner inconsistent with the views expressed in this document, either for its own account or for the account of its clients. Australia: This report is being distributed in Australia by BNP Paribas Sydney Branch, registered in Australia as ABN 23 000 000 117 at 60 Castlereagh Street Sydney NSW 2000. BNP Paribas Sydney Branch is licensed under the Banking Act 1959 and the holder of Australian Financial Services Licence no. 238043 and therefore subject to regulation by the Australian Securities & Investments Commission in relation to delivery of financial services. By accepting this document you agree to be bound by the foregoing limitations, and acknowledge that information and opinions in this document relate to financial products or financial services which are delivered solely to wholesale clients (in terms of the Corporations Act 2001, sections 761G and 761GA; Corporations Regulations 2001, division 2, reg. 7.1.18 & 7.1.19) and/or professional investors (as defined in section 9 of the Corporations Act 2001). Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Hong Kong: This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a subsidiary of BNP Paribas, is regulated by the Securities and Futures Commission for the conduct of dealing in securities, advising on securities, dealing in futures contracts and advising on corporate finance. For professional investors in Hong Kong, please contact BNP Paribas Securities (Asia) Limited (address: 63/F Two International Finance Centre, 8 Finance Street, Central, Hong Kong; tel:2909 8888; fax: 2845 2232) for all matters and queries relating to this report. India: In India, this document is being distributed by BNP Paribas Securities India Pvt. Ltd. ("BNPPSIPL"), having its registered office at 5th floor, BNP Paribas House, 1 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai 400 051, INDIA (Tel. no. +91 22 3370 4000 / 6196 4000, Fax no. +91 22 6196 4363). BNPPSIPL is registered with the Securities and Exchange Board of India (“SEBI”) as a research analyst (Regn. No. INH000000792) and as a stockbroker in the Equities and the Futures & Options segments of National Stock Exchange of India Ltd. (“NSE”) and BSE Ltd. and in the Currency Derivatives segment of NSE (SEBI Regn. Nos.: INB/INF/NSF/NSE231474835, INB/INF011474831; CIN: U74920MH2008FTC182807; Website: www.bnpparibas.co.in). No material disciplinary action has been taken against BNPPSIPL by any regulatory or government authority. BNPPSIPL or its associates may have received compensation or other benefits for brokerage services or for other products or services, from the company(ies) that have been rated and/or recommended in the report and / or from third parties. Indonesia: This report is being distributed to Indonesia based clients by the publishing entity shown on the front page of this report. Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens except in compliance with applicable Indonesian capital market laws and regulations. This report is not an offer of securities in Indonesia and may not be distributed within the territory of the Republic of Indonesia or to Indonesian citizens in circumstance which constitutes an offering within the meaning of Indonesian capital market laws and regulations. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association, the Financial Futures Association of Japan and the Type II Financial Instruments Firms Association. BNP Paribas Securities (Japan) Limited accepts responsibility for the content of a report prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Malaysia: This report is issued and distributed by BNP Paribas Capital (Malaysia) Sdn Bhd. The views and opinions in this research report are our own as of the date hereof and are subject to change. BNP Paribas Capital (Malaysia) Sdn Bhd has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of BNP Paribas Capital (Malaysia) Sdn Bhd. This publication is being provided to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of BNP Paribas Capital (Malaysia) Sdn Bhd. Philippines: This report is being distributed in the Philippines by BNP Paribas Manila Branch, an Offshore Banking Unit (OBU) of BNP Paribas whose head office is in Paris, France. BNP Paribas Manila OBU is registered as an offshore banking unit under Presidential Decree No. 1034 (PD 1034), and regulated by the Bangko Sentral ng Pilipinas. This report is being distributed in the Philippines to qualified clients of OBUs as allowed under PD 1034, and is qualified in its entirety to the products and services allowed under PD 1034. Singapore: This report is distributed in Singapore by BNP Paribas Securities (Singapore) Pte Ltd ("BNPPSSL") and may be distributed in Singapore only to an Accredited or Institutional Investor, each as defined under the Financial Advisers Regulations ("FAR") and the Securities and Futures Act (Chapter 289) of Singapore, as amended from time to time. In relation to the distribution to such categories of investors, BNPPSSL and its representatives are exempted under Regulation 35 of the FAR from the requirements in Section 36 of the Financial Advisers Act of Singapore, regarding the disclosure of certain interests in, or certain interests in the acquisition or disposal of, securities referred to in this report. For Institutional and Accredited Investors in Singapore, please contact BNP Paribas Securities (Singapore) Ptd Ltd (company registration number: 199801966C; address: 10 Collyer Quay, 34/F Ocean Financial Centre, Singapore 049315; tel: (65) 6210 1288; fax: (65) 6210 1980) for all matters and queries relating to this report. South Africa: In South Africa, BNP Paribas Securities South Africa (Pty) Ltd is a licensed member of the Johannesburg Stock Exchange and an authorised Financial Services Providers and subject to regulation by the Financial Services Board. BNP Paribas Securities South Africa (Pty) Ltd does not expressly or by implication represent, recommend or propose that the financial products referred to in this report are appropriate to the particular investment objectives, financial situation or particular needs of the recipient. This document does not constitute advice as contemplated in the Financial Advisory and Intermediary Services Act, 2002. South Korea: BNP Paribas Securities Korea is registered as a Licensed Financial Investment Business Entity under the FINANCIAL INVESTMENT SERVICES AND CAPITAL MARKETS ACT and regulated by the Financial Supervisory Service and Financial Services Commission. This document does not constitute an offer to sell to or the solicitation of an offer to buy from any person any financial products where it is unlawful to make the offer or solicitation in South Korea. Switzerland: This report is intended solely for customers who are “Qualified Investors” as defined in article 10 paragraphs 3 and 4 of the Swiss Federal Act



on Collective Investment Schemes of 23 June 2006 (CISA) and the relevant provisions of the Swiss Federal Ordinance on Collective Investment Schemes of 22 November 2006 (CISO). “Qualified Investors” includes, among others, regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes, regulated insurance companies as well as pension funds and companies with professional treasury operations. This document may not be suitable for customers who are not Qualified Investors and should only be used and passed on to Qualified Investors. For specification purposes, a “Swiss Corporate Customer” is a Client which is a corporate entity, incorporated and existing under the laws of Switzerland and which qualifies as “Qualified Investor” as defined above." BNP Paribas (Suisse) SA is authorised as bank and as securities dealer by the Swiss Federal Market Supervisory Authority FINMA. BNP Paribas (Suisse) SA is registered at the Geneva commercial register under No. CH-270-3000542-1. BNP Paribas (Suisse) SA is incorporated in Switzerland with limited liability. Registered Office: 2 place de Hollande, CH-1204 Geneva. Taiwan: This report is being distributed to Taiwan based clients by BNP Paribas Securities (Taiwan) Co., Ltd or by a subsidiary or affiliate of BNP Paribas. Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decision. Information on securities that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities. BNP Paribas Securities (Taiwan) Co., Ltd. may not execute transactions for clients in these securities. This publication may not be distributed to the public media or quoted or used by the public media without the express written consent of BNP Paribas.

Thailand: Research relating to Thailand and Thailand based issuers is produced pursuant to an arrangement between BNP PARIBAS (“BNPP”) and Finansia Syrus Securities Public Company Limited (“FSS”). FSS International Investment Advisory Securities Co Ltd (“FSSIA”) prepares and distributes research under the brand name “BNP PARIBAS/FSS”. BNPP is not an affiliate of FSSIA or FSS. FSS also publishes a different research product under the brand name “FINANSIA SYRUS,” which is prepared by research analysts who are not part of FSSIA and who may cover the same securities, issuers, or industries that are the subject of this report. The ratings, recommendations, and views expressed in this report may differ from the ratings, recommendations, and views expressed by other research analysts or research teams employed by FSS. This report is being distributed outside Thailand by members of BNP Paribas. Turkey: This report is being distributed in Turkey by TEB Investment (TEB YATIRIM MENKUL DEGERLER A.S., Teb Kampus D Blok Saray Mah. Kucuksu Cad. Sokullu Sok., No:7 34768 Umraniye, Istanbul, Turkey, Trade register number: 358354, www.tebyatirim.com.tr) and outside Turkey jointly by TEB Investment and BNP Paribas. Information, comments and suggestions on investment given in this material are not within the scope of investment consulting. The investment consulting services are rendered tailor made for individuals by competent authorities considering the individuals’ risk and return preferences. However the comments and recommendations herein are based on general principles. These opinions may not be consistent with your financial status as well as your risk and return preferences. Therefore, making an investment decision only based on the information provided herein may not bear consequences in parallel with your expectations. This material issued by TEB Yatırım Menkul Değerler A.Ş. for information purposes only and may be changed without any prior notification. All rights reserved. No part of this material may be copied or reproduced in any manner without the written consent of TEB Yatırım Menkul Değerler A.Ş. Although TEB Yatırım Menkul Değerler A.Ş. gathers the presented material that is current as possible, it does not undertake that all the information is accurate or complete, nor should it be relied upon as such. TEB Yatırım Menkul Değerler A.Ş. assumes no responsibility whatsoever in respect of or arising out or in connection with the content of this material to third parties. If any third party chooses to use the content of this material as reference, he/she accepts and approves to do so entirely at his/her own risk.

United States: This report may be distributed in the United States only to U.S. Persons who are “major U.S. institutional investors” (as such term is defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a “major U.S. institutional investor”. U.S persons who wish to effect transactions in securities discussed herein must do so through BNP Paribas Securities Corp., a US-registered broker dealer and member of FINRA, SIPC, NFA, NYSE and other principal exchanges. Certain countries within the European Economic Area: This document may only be distributed in the United Kingdom to eligible counterparties and professional clients and is not intended for, and should not be circulated to, retail clients (as such terms are defined in the Markets in Financial Instruments Directive 2004/39/EC (“MiFID”)). This document will have been approved for publication and distribution in the United Kingdom by BNP Paribas London Branch, a branch of BNP Paribas SA whose head office is in Paris, France. BNP Paribas SA is incorporated in France with limited liability with its registered office at 16 boulevard des Italiens, 75009 Paris. BNP Paribas London Branch (registered office: 10 Harewood Avenue, London NW1 6AA; tel: [44 20] 7595 2000; fax: [44 20] 7595 2555) is lead supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR). BNP Paribas London Branch is authorised by the ACPR and the Prudential Regulation Authority (PRA) and subject to limited regulation by the Financial Conduct Authority and PRA. Details about the extent of our authorisation and regulation by the PRA, and regulation by the Financial Conduct Authority are available from us on request. This report has been approved for publication in France by BNP Paribas, a credit institution licensed as an investment services provider by the ACPR whose head office is 16, Boulevard des Italiens 75009 Paris, France. This report is being distributed in Germany either by BNP Paribas London Branch or by BNP Paribas Niederlassung Frankfurt am Main, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Other Jurisdictions: The distribution of this report in other jurisdictions or to residents of other jurisdictions may also be restricted by law, and persons into whose possession this report comes should inform themselves about, and observe, any such restrictions. By accepting this report you agree to be bound by the foregoing instructions. This report is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. All research reports are disseminated and available to all clients simultaneously through our internal client websites. For all research available on a particular stock, please contact the relevant BNP Paribas research team or the author(s) of this report.

Additional Disclosures Target price history, stock price charts, valuation and risk details, and equity rating histories applicable to each company rated in this report is available in our most recently published reports available on our website: http://eqresearch.bnpparibas.com, or you can contact the analyst named on the front of this note or your BNP Paribas representative. All share prices are as at market close on 7 December 2016 unless otherwise stated.



RECOMMENDATION STRUCTURE

Stock Ratings Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price. BUY (B). The upside is 10% or more. HOLD (H). The upside or downside is less than 10%. REDUCE (R). The downside is 10% or more. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. * In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. Industry Recommendations Improving (): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months. Stable (previously known as Neutral) (): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months. Deteriorating (): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months. Country (Strategy) Recommendations Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

RATING DISTRIBUTION (as at 8 December 2016)

Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report. © 2016 BNP Paribas Group

Total BNP Paribas coverage universe 460 Investment Banking Relationship (%)

Buy 269 (58.5%) Buy 36.06

Hold 131 (28.5%) Hold 38.17

Reduce 60 (13.0%) Reduce 28.33


Documents

SECTOR REPORT JAPAN ELECTRONIC COMPONENTS · 2016-12-08 · SECTOR REPORT JAPAN ELECTRONIC COMPONENTS 2017 recovery scenarios Electronic parts/device indices are recovering from the