January 28, 2015

Japan Equity Research

Chemicals / Fine Chemicals & Textiles Action / TP change

DENKI KAGAKU KOGYO (4061) Neutral

Staying Neutral: Looking for growth drivers for overall earnings

Earnings improvement greater than expected, but still need to find Target price (¥) : 350 → 425
drivers for overall earnings growth: We revise our earnings estimates
based on recent research and the change in our forex assumption to Potential return : -8.6%
¥115/$ for 4Q (Jan-Mar) FY3/15 onward. We raise our OP estimates for Main market........................................ TSE1
FY3/15 to ¥24.0bn (from ¥21.2bn), for FY3/16 to ¥26.0bn (¥23.5bn), and for Share price (Jan 27) ............................ ¥465
FY3/17 to ¥29.0bn (¥26.0bn). Although 1Q (Apr-Jun) OP was low, mainly in 52-week high/low ........................ ¥465 - 325
the elastomers & performance plastics segment, overall OP recovered in Issued shares ............................. 465,954ths
2Q and momentum held up in 3Q. We hike our earnings estimates as a Market cap........................................¥217bn
Avg. daily trading value (1 year).... ¥1,058mn
result. However, the share price rose from November 2014 and, compared
Beta...................................................... 0.99
with our target price, is not attractive at its current level. As we believe share
ROE (FY3/15E) ................................... 9.1%
price performance will rank in the middle of sector companies under our
Shareholders' equity ratio (FY3/15E) . 45.3%
coverage, we maintain our Neutral rating. We need to see some growth Dividend yield (FY3/15E) ..................... 2.6%
drivers for overall earnings, including the launch of new diagnostic reagents. Foreign ownership (Sep/14)............... 30.4%

TP is ¥425, on P/B of 0.93x and our ¥456.4 end-FY3/16 BPS estimate:

Our target price is ¥425, calculated by applying a fair-value P/B of 0.93x to
our end-FY3/16 BPS estimate of ¥456.4. We derive our fair-value P/B
multiple from the correlation between monthly P/B and ROE over the past
ten years. Our FY3/16 ROE estimate is 8.2% and, based on the 10-year
P/B-ROE correlation, the implied fair-value P/B is 0.93x.

Raising our OP estimates for FY3/15 onward, expecting continued OP

growth in FY3/16: Given the earnings improvement since 2Q at the
elastomers & performance plastics segment, we raise our FY3/15 OP
estimate from ¥21.2bn to ¥24.0bn (+13.0% YoY), which is still lower than
guidance (¥25.0bn). The main reason for the adjustment is that the Yasuhiro Nakada
profitability of chloroprene rubber did not worsen as much as we expected Senior Analyst
from 2Q. In FY3/16 we expect the life science & environmental products +81-3-6213-4405
segment to be limited to low profit growth of 3%, as one-off factors in [email protected]
FY3/15 subside. However, we believe overall OP will remain in an uptrend
on sales growth of heat-dissipating substrates in the electronics &
innovative products segment, among others.

Risk factors: Risks that could cause the share price to diverge from our
target include greater-than-expected price and demand volatility for
chloroprene rubber, a sharp fall in demand for electronic materials, a high
volume of influenza vaccine returns, and sharp volatility in raw material/fuel
prices and forex.

Consolidated Sales OP RP NP EPS DPS P/E P/B

Fiscal year ¥mn YoY% ¥mn YoY% ¥mn YoY% ¥mn YoY% ¥ ¥ x x
FY3/13 341,645 -6.3 18,817 -9.2 17,824 -6.2 11,255 -0.7 23.7 10.0 - -
FY3/14 376,809 10.3 21,230 12.8 20,604 15.6 13,573 20.6 29.1 10.0 - -
FY3/15 New E 392,000 4.0 24,000 13.0 23,500 14.1 17,600 29.7 38.4 12.0 12.1 1.07
Old E 393,900 4.5 21,200 -0.1 19,200 -6.8 14,600 7.6 31.9 12.0 14.6 -
Consensus 396,240 5.2 23,686 11.6 22,260 8.0 16,680 22.9 36.4 - 12.8 -
Co. E 400,000 6.2 25,000 17.8 23,500 14.1 18,000 32.6 39.3 12.0 11.8 -
FY3/16 New E 348,400 -11.1 26,000 8.3 24,100 2.6 16,700 -5.1 36.5 14.0 12.7 1.02
Old E 401,500 1.9 23,500 10.8 21,500 12.0 14,800 1.4 32.3 12.0 14.4 -
Consensus 408,060 3.0 26,650 12.5 24,700 11.0 17,180 3.0 37.5 - 12.4 -
FY3/17 New E 355,300 2.0 29,000 11.5 27,200 12.9 18,900 13.2 41.3 14.0 11.3 0.97
Old E 409,700 2.0 26,000 10.6 24,000 11.6 16,600 12.2 36.3 12.0 12.8 -
Notes: Historical and forward EPS, DPS, P/E and P/B based on current outstanding shares (i.e., excluding treasury stock); IFIS consensus estimates
Source: MUMSS, from company data; MUMSS estimates unless noted otherwise

Please refer to important disclosures and certifications in Appendix A

 January 28, 2015
DENKI KAGAKU KOGYO (4061)

Figure 1. DENKI KAGAKU KOGYO (4061): Consolidated financial data Company overview
(¥mn)
Fiscal year FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E Denki Kagaku Kogyo is a diversified manufacturer and
P/L supplier of chemical products, including basic chemicals,
Sales 341,645 376,809 392,000 348,400 355,300 agrochemicals, petrochemicals, pharmaceuticals, and
Gross profit 72,319 77,138 81,000 84,000 88,000
construction materials. The company's primary products
SG&A 53,501 55,908 57,000 58,000 59,000
OP 18,817 21,230 24,000 26,000 29,000
include styrene resins, polyvinyl chloride, and other synthetic
RP 17,824 20,604 23,500 24,100 27,200 resins.
Pretax profit 17,233 20,322 25,000 23,600 26,700
Income tax 5,826 6,634 7,300 6,800 7,700 Medium-term targets (FY3/16)
Effective tax rate (%) 33.8 32.6 29.2 28.8 28.8
NP 11,255 13,573 17,600 16,700 18,900 1. OP ¥60bn+
EBITDA 41,233 43,484 47,000 49,000 52,000 2. OPM 10%+
3. Overseas sales ratio 50%+
YoY (%)
Sales -6.3 10.3 4.0 -11.1 2.0 Source : Company data
OP -9.2 12.8 13.0 8.3 11.5
RP -6.2 15.6 14.1 2.6 12.9
Target price risks & catalysts
Pretax profit -0.6 17.9 23.0 -5.6 13.1
NP -0.7 20.6 29.7 -5.1 13.2 1. Sharp forex fluctuation (firm estimates profit impact of
EBITDA -7.7 5.5 8.1 4.3 6.1 ¥0.2bn for each ¥1 change vs. dollar, ¥70mn vs. euro)
2. Fluctuations in price and demand for chloroprene
% of sales
Gross profit 21.2 20.5 20.7 24.1 24.8
rubber
SG&A 15.7 14.8 14.5 16.6 16.6 3. Sharp decline in electronic materials demand
OP 5.5 5.6 6.1 7.5 8.2
4. Large volume of returns of influenza vaccines
RP 5.2 5.5 6.0 6.9 7.7
Pretax profit 5.0 5.4 6.4 6.8 7.5 5. Sharp fluctuation in price of raw materials and fuel
NP 3.3 3.6 4.5 4.8 5.3
EBITDA 12.1 11.5 12.0 14.1 14.6
Segment breakdown (FY3/14)
Other key items
Capex -23,986 -25,426 -23,000 -23,000 -23,000
Depreciation & amortization 22,416 22,254 23,000 23,000 23,000

B/S
Current assets 158,595 164,747 174,537 172,704 179,618
Liquidity on hand 10,800 8,427 10,297 23,804 25,988
Accounts receivable 77,111 83,701 89,090 81,020 84,600
Inventory 60,711 62,815 65,350 58,080 59,230
Other 9,973 9,804 9,800 9,800 9,800
Fixed assets 256,761 266,599 266,535 266,469 266,411
Tangible fixed assets 206,214 211,783 211,784 211,780 211,780
Intangible fixed assets 1,243 1,299 1,234 1,172 1,114
1. Elastomers & Performance Plastics
Investments/other assets 50,547 54,816 54,751 54,689 54,631
Total assets 415,356 431,346 441,072 439,174 446,029 2. Infrastructure & Inorganic Materials
Current liabilities 170,752 163,645 163,329 156,400 147,868 3. Electronics & Innovative Products
Short-term debt 71,085 65,005 62,004 61,655 52,503 4. Life Science & Environmental Products
Accounts payable 55,226 54,238 56,020 49,440 50,060 5. Others
Other 44,441 44,402 45,305 45,305 45,305
Source : Company data
Fixed liabilities 69,139 78,185 76,406 72,347 76,444
Long-term debt 43,156 55,663 50,159 40,004 38,001
Other 25,983 22,522 26,247 32,343 38,443
Total liabilities 239,891 241,830 239,736 228,748 224,313
Net assets 175,465 189,516 201,336 210,426 221,716 Major shareholders (1H FY3/15)
Shareholders' equity 179,002 187,658 199,678 208,968 220,458 1. The Master Trust Bank of Japan (TA) 5.96%
Total liabilities + equity 415,356 431,346 441,072 439,174 446,029
2. Japan Trustee Services Bank (TA) 5.00%
C/F 3. Mizuho Bank 3.45%
Operating cash flow 40,215 27,245 28,875 44,512 33,839
4. JA Zenkyoren 3.43%
Investing cash flow -25,864 -26,693 -23,000 -23,000 -23,000
FCF 14,351 552 5,875 21,512 10,839 5. Mitsui Life Insurance 2.56%
Financing cash flow -12,784 -3,327 -4,005 -8,004 -8,655
Source : Company data
Key ratios (%)
ROA 2.8 3.2 4.0 3.8 4.3
ROE 6.4 7.4 9.1 8.2 8.8
Shareholders' equity ratio 43.1 43.5 45.3 47.6 49.4
D/E ratio (net) 57.8 59.8 51.0 37.3 29.3

Per-share indicators
EPS (¥) 23.7 29.1 38.4 36.5 41.3
BPS (¥) 377.0 402.8 436.1 456.4 481.4
DPS (¥) 10.0 10.0 12.0 14.0 14.0
Payout ratio (%) 42.2 34.3 31.3 38.4 33.9

Notes: Historical and forward per-share indicators based on current outstanding shares (i.e., excluding
treasury stock)
Source: MUMSS, from company data; MUMSS estimates

2 Please refer to important disclosures and certifications located in Appendix A of this report.
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

1. Looking for growth drivers for overall earnings; staying Neutral

Target price is now ¥425, maintaining Neutral rating
Target price ¥425 We take a positive view on management revamping the production system and
Neutral rating providing clarity on shareholder returns. However, we believe share price performance
will rank in the middle of sector companies under our coverage, given the modest pace
of earnings improvement. As such, we reiterate our Neutral rating.
Since 2008’s global financial crisis, management has taken initiative to revamp its
production system and clarify its policy on shareholder returns in a bid to improve ROE.
However, many products that have raised expectations in the stock market have failed
to become growth drivers, including phosphor materials for LCD TVs, heat-dissipating
substrates for power semiconductors, diagnostic reagents, and quick-test kits.
Earnings continue to improve, but the pace is modest. We maintain our Neutral rating
because the fair-value share price we derive from historical ROE and P/B does not look
compelling. We need to see new drivers of overall earnings, including the launch of
new diagnostic reagents.
Looking back at share price performance over the past year (Figure 2), for the first half
of 2014 Denki Kagaku’s share price was weak, as were sector share prices in general.
Denki Kagaku’s share price then fell further in August on the release of 1Q results. The
share price then rose in absolute terms and also in relative terms vs. the sector from
November, buoyed by earnings improvement in 2Q and the market taking a positive
view on management’s clarity on shareholder returns. In our view, further
outperformance of the stock will require confirmation of growth stories in such
segments as electronics & innovative products and life science & environmental
products.
With January 2014 as our base line, we indexed the share prices of the ten companies
we cover in the fine chemicals & textiles sector. From March 2014 to October the
sector slightly underperformed TOPIX, but it has outperformed since November.
Figure 2: Denki Kagaku, fine chemicals & textiles sector stock price performance over the past year
15 (%) 20
Denki Kagaku Price (2014/1=0)
(%)
10 Denki Kagaku Relative to sector (2014/1=0) 15
Fine Chemical & Textiles Price (2014/1=0)
5 10
Fine Chemical & Textiles Relative to TOPIX (2014/1=0)
0 5

-5 0

-10 -5

-15 -10

-15
-20
-20
-25
14/1 14/2 14/3 14/4 14/5 14/6 14/7 14/8 14/9 14/10 14/11 14/12 15/1

Source: MUMSS, from DataStream

*The ten companies we cover in the fine chemicals & textiles sector are Teijin (3401), Toray (3402), Kureha
(4023), Tosoh (4042), Tokuyama (4043), Denki Kagaku Kogyo (4061), Kaneka (4118), Mitsubishi Gas
Chemical (4182), Daicel (4202), and Sekisui Chemical (4204).

Please refer to important disclosures and certifications located in Appendix A of this report. 3
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

2. Rating and target price calculation

¥425 TP based on P/B of 0.93x and our end-FY3/16 BPS estimate of ¥456.4
¥425 target price Our target price is ¥425, calculated by applying a fair-value P/B of 0.93x to our
Neutral rating end-FY3/16 BPS estimate of ¥456.4. We derive our 0.93x fair-value P/B multiple from
the correlation between monthly P/B and ROE over the past ten years. Our FY3/16
ROE estimate is 8.2% and, based on the P/B-ROE correlation the past ten years, the
implied fair-value P/B is 0.93x.
Our previous target price (¥350) was based on the average P/E of the fine chemicals &
textiles sector. Given the earnings and valuation gaps that have emerged in the sector,
we believe sector share prices are unlikely to converge near the average P/E. As such
we change to a P/B-based valuation method.
Figure 3: Historical correlation between ROE and P/B

16
　 　
2.5
ROE (%) P/B(X) P/B (x) y = 0.0879x + 0.2296
14 R² = 0.521
Top of historical range(x 2.03)
2.0
12 ▲Target Price

10 1.5
8

6 1.0
ROE (%, lhs)
4 P/B (x, rhs)
0.5
2 Bottom of historical range(x 0.52)
ROE (%)
0 0.0
2004/12 2006/12 2008/12 2010/12 2012/12 2014/12 0 5 10 15 20
　
Source: MUMSS, from ASTRA Manager
Note: Quick consensus estimates for ROE; profit is based on RP multiplied by 68.9% (to exclude extraordinary items)

Risk to our target price

Risk factors that could cause the share price to diverge from our target include
greater-than-expected price and demand volatility for chloroprene rubber, a sharp fall
in demand for electronic materials, a high volume of influenza vaccine returns, and
sharp volatility in raw material/fuel prices and forex.

4 Please refer to important disclosures and certifications located in Appendix A of this report.
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

3. Earnings structure: Compared with previous peak, life science & environmental
products covering for electronics & innovative products
Denki Kagaku handles a wide range of items, from styrene and chloroprene rubber of
the elastomers & performance plastics segment, to semiconductor-related components,
heat-dissipating substrates, and phosphor materials of the electronics & innovate
products segment, as well as the life science & environmental products segment’s
health care-related products (e.g. vaccines, diagnostic reagents, and hyaluronic acid),
textiles (e.g. PVC-related synthetic fibers for wigs), and processed resin products (e.g.
food trays). Since OP peaked in FY3/11, earnings have slumped on a drop in
profitability at the electronics & innovative products segment, but have been
underpinned by growth at the life science & environmental products segment. From
FY3/15 onward, we expect continued growth in consolidated OP, aided by a swing to
profit growth at the electronics & performance plastics segment.
Figure 4: OP by segment
Elastomers & Performance Plastics Infrastructure & Inorganic Materials
45 (¥bn) Electronics & Innovative Products Life Science & Environmental Products
Other Adjustments
Consensus average Consensus high
40 Consensus low MUMSS E
Consolidated OP
35

30

25

20

15

10

-5
FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E FY3/15CE

Source: MUMSS, from company data; MUMSS estimates unless otherwise noted; Bloomberg consensus as
of 19 January

Figure 5: Change in segment OP weighting (FY3/11 vs. FY3/15)

FY3/11 OP FY3/15E OP (MUMSS Estm ates)
Life science & 　

environmental
segment growth
Other Other
4%
5%
have offset Elastomers &
Elastomers &
Performance
electronics Life Science & Performance Plastics
materials Environmental
Products 20%
Plastics
Life Science &
18%

weakness from Environmental Infrastructure &

Inorganic
FY3/11 to FY3/15 29%
Infrastructure & Products
Materials
Inorganic 41%
Materials 13%
12%
Electronics &
Electronics & Innovative
Innovative Products
Products 23%
35%

Source: MUMSS, from company data; MUMSS estimates for FY3/15

Please refer to important disclosures and certifications located in Appendix A of this report. 5
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

4. Earnings trends: FY3/15 OP should fall only slightly short of guidance thanks to
earnings improvement since 2Q
We forecast FY3/15 OP of ¥24.0bn (+13.0% YoY; company target ¥25.0bn). 1Q
(Apr-Jun) marked a very slow start with OP of only ¥2.9bn (down 45% YoY).
Elastomers & performance plastics earnings improved in 2Q (Jul-Sep), but 1H OP was
still ¥1.0bn short of the initial target. We anticipate mixed performances by segment in
2H, and forecast full-year OP to be also ¥1.0bn (4%) short of the company’s target.
We expect operating cash flow in the ¥28.9-44.5bn range from FY3/15, while free cash
flow should remain positive. With finances continuing to improve, we expect the
debt/equity ratio to decline from 0.64x at end-FY3/14 to 0.56x at end-FY3/15 and 0.41x
at end-FY3/17. We anticipate DPS improving (in accordance with the company’s
shareholder returns policy) from ¥10 in FY3/14 to ¥12 in FY3/15 and ¥14 in FY3/16.
Forex assumptions underlying our earnings estimates for 4Q (Jan-Mar) FY3/15 onward
are ¥115/$ and ¥135/€. In terms of OP sensitivity to forex rates, yen depreciation of
¥1/$ and ¥1/€ boost annual OP by ¥200mn and ¥40 million, respectively.
3Q (Oct-Dec) FY3/15 estimates
OP ¥7.5bn, We expect 3Q FY3/15 OP to come in at ¥7.5bn (+25% YoY). The life science &
up 25% YoY environmental products segment enters its peak period for shipments of Denka
Seiken’s vaccines. Moreover, we do not expect the electronics & innovative products
segment to dip as much as it typically does in 3Q. We expect OP to rise 15.0% QoQ as
a result.
The market consensus (Bloomberg average, as of January 21) is ¥7.5bn, with the
highest estimate at ¥8.1bn and the lowest at ¥6.5bn. Our estimate is roughly in line
with the average.
4Q (Jan-Mar) FY3/15 estimates
OP ¥7.1bn, Our forecast for 4Q FY3/15 OP is ¥7.1bn (+51% YoY). Typically the OP of the life
up 51% YoY science & environmental products segment peaks in 3Q, the period of highest volume
for seasonal vaccine shipments. However, we do not expect OP to dip as much in 4Q
FY3/15 as it does in a typical year given that (1) shipments of pre-pandemic vaccines
are expected for the national stockpile and (2) the influenza season started earlier than
usual, which should keep the return rate down.
We attribute the difference between our estimate and the consensus to our inclusion of
vaccine shipments to the national stockpile and our expectations for impact in 4Q from
cost reductions from lower raw material/fuel prices.
Figure 6: Denki Kagaku Kogyo (4061): Quarterly segment OP
FY3/14 FY3/15
(¥bn)
1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE
Operating profits 5.2 5.2 6.0 4.7 2.9 6.5 7.5 7.1
（ Consensus ） 7.5 4.9
Elastomers & Performance Plastics 1.7 1.1 -0.2 1.3 0.6 1.6 0.3 1.8
Infrastructure & Inorganic Materials 1.1 1.1 1.2 0.6 0.6 0.9 1.1 0.6
Electronics & Innovative Products 0.6 0.7 0.4 1.0 1.0 1.5 1.2 1.8
Life Science & Environment Products 1.6 2.0 4.3 1.4 0.5 2.2 4.5 2.6
Others 0.2 0.2 0.3 0.3 0.2 0.3 0.4 0.3
Source: MUMSS, from company data; MUMSS estimates; Bloomberg consensus as of 21 January

6 Please refer to important disclosures and certifications located in Appendix A of this report.
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

FY3/15 estimates: Expecting OP of ¥24.0bn, short of guidance of ¥25.0bn, thanks

to earnings improvement since 2Q
OP ¥24.0bn, We forecast FY3/15 OP at ¥24.0bn (+13.0% YoY), which would be a shortfall of 4%
up 13.0% YoY versus the company’s ¥25.0bn (+17.8%) target. We expect each segment but the
“other” segment to fall several hundred million yen short of target, which explains the
gap between our forecast and the company’s overall target. We expect the life science
& environmental products segment’s shortfall to be relatively large as a decline in
hyaluronic acid sales volume at the parent company and the 1H struggle of
Denkapolymer (manufactures food trays and other products) take their toll. Our
forecast is higher than before as we factored in improvement in the profitability of
chloroprene rubber since 2Q.
Our FY3/15 estimate is roughly on par with the Bloomberg market consensus of
¥23.4bn (as of January 21), with the consensus ranging from a high of ¥25.0bn to a low
of ¥21.2bn (which matches our previous estimate).
FY3/16 estimates: Only slight profit growth likely for life science & environmental
products, as one-off factors related to vaccine shipments subside
OP ¥26.0bn, We forecast FY3/16 OP at ¥26.0bn (+8.3% YoY). Profitability should improve at the life
up 8.3% YoY science & environmental products segment as raw materials costs decline at
Denkapolymer. However, the segment will likely be limited to slight profit growth
(+3.0%) to ¥10.2bn, given that the vaccine shipments for the national stockpile that
were booked in FY3/15 will be lacking and the risk that sales of hyaluronic acid will
decline on weak domestic demand and competition.
We have not factored in impact from the acquisition of the chloroprene rubber business
of E. I. du Pont de Nemours and Company (announced on December 11, 2014) as the
transaction has not closed yet.
FY3/17 estimates: Pace of profit growth should improve at life science &
environmental products as extraordinary factors drop out
OP ¥29.0bn, Our FY3/17 OP forecast is ¥29.0bn (+11.5% YoY), with life science & environmental
up 11.5% YoY products segment’s OP at ¥11.2bn (+9.8%). While there is risk new vaccine
manufacturing methods will emerge, at present we do not assume any major changes
in market share, and we anticipate profit growth as the use of diagnostic reagents
expands to new applications.
Figure 7: Factor analysis of our OP forecast change
(¥bn) FY3/15E FY3/16E FY3/17E
Revised estimates 24.0 26.0 29.0
Previous estimates 21.2 23.5 26.0
Difference 2.8 2.5 3.0
Weak yen benefit 1.5 3.0 3.0
Volume, term of trade, costs, etc. 1.3 -0.5 0.0
Forex ($/¥) Revised 108.6 115.0 115.0
Previous 101.3 100.0 100.0
Source: MUMSS, MUMSS estimates

Please refer to important disclosures and certifications located in Appendix A of this report. 7
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

Figure 8: Denki Kagaku Kogyo (4061) Segment sales and OP (¥mn)

FY3/13 FY3/14 FY3/15E FY3/16E FY3/16E FY3/15E FY3/16E FY3/16E FY3/15CE
(¥mn) Revised Revised Revised Previous Previous Previous
Sales 341,645
売上高 376,809 392,000 348,400 355,300 393,900 401,500 409,700 400,000
YoY （ -6.3% 10.3% 4.0% -11.1% 2.0% 4.5% 1.9% 2.0% 6.2%
Operating profits 18,817
営業利益 21,230 24,000 26,000 29,000 21,200 23,500 26,000 25,000
YoY （ -9.2% 12.8% 13.0% 8.3% 11.5% -0.1% 10.8% 10.6% 17.8%
Operating margin （ 5.5% 5.6% 6.1% 7.5% 8.2% 5.4% 5.9% 6.3% 6.3%
$/¥ rate 為替前提83.1 100.2 108.6 115.0 115.0 101.3 100.0 100.0 104.0
Sales [ 341,645 376,809 392,000 348,400 355,300 393,900 401,500 409,700 400,000
Elastomers & Performance Plastics 142,819 166,503 170,700 123,100 125,100 171,700 173,000 175,000 174,000
Infrastructure & Inorganic Materials 47,934 49,642 50,600 51,400 52,300 50,100 50,900 51,800 50,000
Electronics & Innovative Products 39,209 42,116 47,900 49,900 50,900 50,200 51,900 54,200 50,000
Life Science & Environmental Products 77,326 77,968 82,100 83,300 86,300 81,300 85,100 88,100 84,000
Others 34,355 40,579 40,700 40,700 40,700 40,600 40,600 40,600 42,000
Operating profits [ 18,817 21,230 24,000 26,000 29,000 21,200 23,500 26,000 25,000
Elastomers & Performance Plastics 1,045 4,014 4,300 5,200 6,300 2,500 2,900 3,500 4,500
Infrastructure & Inorganic Materials 3,159 3,955 3,200 3,500 3,900 3,000 3,300 3,700 3,500
Electronics & Innovative Products 2,960 2,692 5,400 5,900 6,400 5,100 5,400 5,900 5,500
Life Science & Environmental Products 10,925 9,451 9,900 10,200 11,200 9,400 10,700 11,700 10,500
Others 700 1,043 1,200 1,200 1,200 1,200 1,200 1,200 1,000

Source: MUMSS, from company materials; MUMSS estimates unless otherwise noted

8 Please refer to important disclosures and certifications located in Appendix A of this report.
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

Cash flow: Operating cash flow should remain around ¥30bn, driving continued
improvement in shareholder returns and financial strength
We expect operating cash flow to continue rebounding on improvement in OP.
Moreover, in FY3/16 we expect inventories to decline (mainly at the elastomers &
performance plastics segment), reducing working capital requirements and lifting
operating cash flow to ¥44.5bn. As for capex, at the moment it is difficult to
quantitatively factor in any specific strategic investments. For this reason we assume
that capex will remain around ¥23bn, slightly higher than the roughly ¥20bn invested in
a normal year. Based on the preceding, we forecast free cash flow at ¥5.9bn for
FY3/15, ¥21.5bn for FY3/16, and ¥10.8bn for FY3/17.
Figure 9: Cash flows
(¥bn)
60
50
40
30
20
10
0
-10 CF from operations
CF from investments
-20
Free cash flow
-30
-40
FY3/04 3/05 3/06 3/07 3/08 3/09 3/10 3/11 3/12 3/13 3/14 3/15E 3/16E 3/17E

Source: MUMSS, from company materials; MUMSS estimates

Interest-bearing debt should continue to decline as free cash flow improves. We

anticipate the debt/equity ratio declining from 0.56x at the end of FY3/15 to 0.49x in
FY3/16, and 0.41x in FY3/17.
Figure 10: Interest-bearing debt and D/E ratio
160 (¥bn) Interest-bearing debt (JPYbn; left axis)
1.2

D/E ratio (x; right axis)

140
1.0
120
0.8
100

80 0.6

60
0.4
40
0.2
20

0 0.0
FY3/04 3/05 3/06 3/07 3/08 3/09 3/10 3/11 3/12 3/13 3/14 3/15E 3/16E 3/17E

Source: MUMSS, from company materials; MUMSS estimates

Please refer to important disclosures and certifications located in Appendix A of this report. 9
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

5. Corporate governance
The company has appointed two independent outside directors. There is no corporate
governance committee; instead the internal audit and internal control departments
cooperate directly. These include the board of directors, board of auditors, internal
audit department, and the legal department. The company aims to improve corporate
governance and enterprise value by ensuring the board of directors is active,
reinforcing auditing structures, improving management efficiency, and strengthening
the compliance system.
Denki Kagaku’s two outside directors are Kozo Tanaka and Tadashi Hashimoto. The
former was selected for his many years of experience as an attorney and his rich
knowledge of the law, which he uses to provide valuable insights to management.
Although Mr. Tanaka does not have direct experience in running a corporation, he is
well-versed in business law and the company considers him highly knowledgeable
about corporate governance. Tadashi Hashimoto was appointed to the board because
he worked for many years in the financial industry and is highly knowledgeable about
accounting matters. He uses this knowledge to provide valuable advice to
management. Mr. Hashimoto previously worked at Mizuho Financial Group, a financial
institution with which the company does business, but he has not recently been an
executive officer at Mizuho and, in fact, retired from the firm several years ago (11
years ago as of the June 2014 general shareholders meeting). The company also
deems that Mizuho loans account for a small enough portion of its total borrowings, so
that the board should not be influenced by Mr. Hashimoto’s former affiliation with
Mizuho. Accordingly, the company has no reservations concerning Mr. Hashimoto’s
independence and objectivity as an outside director.
Figure 11: Corporate governance structure
General Shareholders' Meeting

assign/
dismiss Assign/dismiss
report

Directors
(Board of report
Directors )

supervise assign/ Audit &

dismiss Supervisory
Board
Representative
Director
supervise assist assign/dismiss

Executive Directors Audit & Supervisory

Executive
Officers auditing duties
Business Units

supervise
Affiliates Financial
Auditor

Internal Audit

Internal Auditing Dept.

(Incl. Administrative, Legal,
Environment and Safety,
and Quality Management
departments)

Source: MUMSS, from company materials

10 Please refer to important disclosures and certifications located in Appendix A of this report.
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

Figure 12: Directors of the board

Job titles Name Responsibilities
Representative Director, President Shinsuke Yoshitaka
Senior Managing Executive Chief Technology Officer
Representative Director Hitoshi Watanabe
Officer Purchasing Dept.,Logistics Dept.
Director Tetsuro Maeda
Corporate Planning, Development,
Senior Managing Executive
Director Mitsukuni Ayabe Investor Relations Dept., Internal Audit Dept.,
Officer
Accouting & Finance Dept., Information Systems
Head of Elastomers & Performance Plastics Denka
Director Managing Executive Officer Shinji Sugiyama
Chemicals GmbH
Head of Infrastructure & Inorganic Materials
Director Managing Executive Officer Hideyuki Udagawa
Disaster Reconstruction Support Div.
Head of Electronics and Innovative Products Denka
Director Managing Executive Officer Manabu Yamamoto
Corporation
Outside Director Kozo Tanaka Lawyer
Outside Director Tadashi Hashimoto Director, Taoka Chemical Co., Ltd

Source: MUMSS, from company materials (as of 1 April 2014)

Policy on returns to shareholders: total payout ratio of 50%

When it reported quarterly earnings on 10 November, the company also issued a
release titled “Denka establishes a policy on shareholder returns and sets a budget for
growth investments.” The policy calls for a total payout ratio of 50%, which includes a
steady cash dividend with a minimum dividend payout ratio of 30%, plus flexible
purchases of treasury stock in accordance with the stock price level and market
environment. Regarding the budget for forward-looking strategic investments, the basic
policy is to appropriate funds from retained earnings and cash inflows after paying out
shareholder returns, and the amount budgeted is approximately ¥50bn over four years
(FY3/15 through FY3/18).
Through this shareholder returns policy along with initiatives set forth in the DENKA100
business plan that runs through FY3/18, the company aims to maximize shareholder
returns and resources for forward-looking strategic investments in a way that does not
erode its financial soundness, and to swiftly achieve its goal of securing ROE of 10% or
greater.

Figure 13: Shareholder return policies

Total shareholder
payout target of
1. Policy on shareholder returns
50% Target total payout ratio*: 50%
*Target total payout ratio = (dividends paid+treasury stock purchased) /consolidated net income

2. Methods of shareholder return

(1) Cash dividends: maintain steady cash dividends, with minimum payout ratio set at 30%
(2) Share buyback: Flexible purchase of shares in step with stock prices and the market environment

3. Forward-looking strategic investments

After paying out shareholder returns, Denka will appropriate funds from its retained earnings as well as
cash inflows to finance such investments. Total amount budgeted is approximately ¥50bn over four
years , FY14-17.

4. Term
Four years through FY17, the target year of the "Denka 100" business plan

Source: MUMSS, from company materials

Please refer to important disclosures and certifications located in Appendix A of this report. 11
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

Figure 14: Consolidated income statement, cash flow, and segment information
FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17 FY3/15CE
(E) (E) (E) (Nov ）
(¥ mn)
Sales 323,875 357,893 364,712 341,645 376,809 392,000 348,400 355,300 400,000
YoY -3.1% 10.5% 1.9% -6.3% 10.3% 4.0% -11.1% 2.0% 6.2%
Cost of sales 251,411 281,220 291,421 269,326 299,671 311,000 264,400 267,300
% YoY -7.4% 11.9% 3.6% -7.6% 11.3% 3.8% -15.0% 1.1%
% of sales 77.6% 78.6% 79.9% 78.8% 79.5% 79.3% 75.9% 75.2%
Gross Profit 72,464 76,673 73,290 72,319 77,138 81,000 84,000 88,000
% YoY 15.9% 5.8% -4.4% -1.3% 6.7% 5.0% 3.7% 4.8%
% of sales 22.4% 21.4% 20.1% 21.2% 20.5% 20.7% 24.1% 24.8%
SG&A 50,809 52,055 52,576 53,501 55,908 57,000 58,000 59,000
% YoY -2.7% 2.5% 1.0% 1.8% 4.5% 2.0% 1.8% 1.7%
% of sales 15.7% 14.5% 14.4% 15.7% 14.8% 14.5% 16.6% 16.6%
Operating profits 21,655 24,618 20,713 18,817 21,230 24,000 26,000 29,000 25,000
YoY 110.2% 13.7% -15.9% -9.2% 12.8% 13.0% 8.3% 11.5% 17.8%
Operating margin 6.7% 6.9% 5.7% 5.5% 5.6% 6.1% 7.5% 8.2% 6.3%
Non-operating income (loss) -4,767 -1,566 -1,717 -993 -626 -500 -1,900 -1,800 -1,500
Net financial income -1,064 -503 -366 -255 25 -200 -100 0
Others -3,703 -1,063 -1,351 -738 -651 -300 -1,800 -1,800
Recurring profits 16,888 23,052 18,996 17,824 20,604 23,500 24,100 27,200 23,500
YoY 445.8% 36.5% -17.6% -6.2% 15.6% 14.1% 2.6% 12.9% 14.1%
Recurring margin 5.2% 6.4% 5.2% 5.2% 5.5% 6.0% 6.9% 7.7% 5.9%
Extraordinary profit 0 0 0 0 0 2,000 0 0
Extraordinary loss 1,048 2,021 1,657 590 281 500 500 500
NIBT 15,840 21,031 17,338 17,233 20,322 25,000 23,600 26,700
Income taxes - current 6,960 6,385 6,187 5,826 6,634 7,300 6,800 7,700
Minority interests in income 49 108 -179 151 114 100 100 100
Net profits 10,474 14,355 11,330 11,255 13,573 17,600 16,700 18,900 18,000
YoY 627.9% 37.1% -21.1% -0.7% 20.6% 29.7% -5.1% 13.2% 32.6%
Net margin 3.2% 4.0% 3.1% 3.3% 3.6% 4.5% 4.8% 5.3% 4.5%
Consolidated segm ent
Sales 323,875 357,893 364,712 341,645 376,809 392,000 348,400 355,300 400,000
Elastomers & Performance Plastics 131,554 156,398 163,593 142,819 166,503 170,700 123,100 125,100 174,000
Infrastructure & Inorganic Materials 48,992 48,571 48,592 47,934 49,642 50,600 51,400 52,300 50,000
Electronics & Innovative Products 38,959 46,914 43,351 39,209 42,116 47,900 49,900 50,900 50,000
Life Science & Environmental Products 71,540 72,985 76,106 77,326 77,968 82,100 83,300 86,300 84,000
Other 32,828 33,023 33,067 34,355 40,579 40,700 40,700 40,700 42,000

Operating profits 21,655 24,618 20,713 18,817 21,230 24,000 26,000 29,000 25,000
Elastomers & Performance Plastics 1,680 4,970 3,723 1,045 4,014 4,300 5,200 6,300 4,500
Infrastructure & Inorganic Materials 2,265 3,025 3,893 3,159 3,955 3,200 3,500 3,900 3,500
Electronics & Innovative Products 6,361 8,471 4,618 2,960 2,692 5,400 5,900 6,400 5,500
Life Science & Environmental Products 10,854 7,188 7,697 10,925 9,451 9,900 10,200 11,200 10,500
Other 639 886 830 700 1,043 1,200 1,200 1,200 1,000
Adjustments -146 75 -49 25 73

Cash Flow statem ent

Net profits 10,474 14,355 11,330 11,255 13,573 17,600 16,700 18,900
Depreciation 20,931 22,292 23,960 22,416 22,254 23,000 23,000 23,000
Working Capital 3,367 -1,066 -5,397 -2,378 -9,682 -6,142 8,760 -4,110
Others 11,646 -1,801 -1,372 8,922 1,100 -5,583 -3,948 -3,951
CF from Operating activities 46,418 33,780 28,521 40,215 27,245 28,875 44,512 33,839
Capex -27,440 -24,235 -22,289 -23,986 -25,426 -23,000 -23,000 -23,000
Others -937 472 -74 -1,878 -1,267 0 0 0
CF from Investm ent activities -28,377 -23,763 -22,363 -25,864 -26,693 -23,000 -23,000 -23,000
Free Cash Flow 18,041 10,017 6,158 14,351 552 5,875 21,512 10,839
Changes in interest bearing debt -15,189 -6,015 3,488 -3,807 6,427 -8,505 -10,504 -11,155
Others -2,073 -4,539 -7,538 -8,977 -9,754 4,500 2,500 2,500
CF from Financial activities -17,262 -10,554 -4,050 -12,784 -3,327 -4,005 -8,004 -8,655
Source: MUMSS, from company and AstraManager data; MUMSS estimates unless otherwise noted.

12 Please refer to important disclosures and certifications located in Appendix A of this report.
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

Figure 15: Consolidated financial data and key indicators

FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17
(¥mn) (E) (E) (E)
Financial indicators

Current assets 138,360 143,352 153,637 158,595 164,747 174,537 172,704 179,618
Cash and bank deposits 6,856 6,258 8,308 10,800 8,427 10,297 23,804 25,988
Notes and accounts receivable 74,843 75,564 78,059 77,111 83,701 89,090 81,020 84,600
Inventories 44,411 47,621 54,526 60,711 62,815 65,350 58,080 59,230
Other current assets 12,250 13,909 12,744 9,973 9,804 9,800 9,800 9,800
Fixed assets 262,046 258,693 248,915 256,761 266,599 266,535 266,469 266,411
Tangible fixed assets 207,005 203,395 201,637 206,214 211,783 211,784 211,780 211,780
Intangible fixed assets 3,476 2,749 1,770 1,243 1,299 1,234 1,172 1,114
Investments and others 51,565 52,548 45,507 49,303 53,517 53,517 53,517 53,517
Total Assets 400,406 402,045 402,552 415,356 431,346 441,072 439,174 446,029
Current liabilities 150,689 153,410 160,676 170,752 163,645 163,329 156,400 147,868
Notes and account payable 45,499 48,364 52,367 55,226 54,238 56,020 49,440 50,060
ST loans 57,709 60,631 68,323 71,085 65,005 62,004 61,655 52,503
Other current liabilities 47,481 44,415 39,986 44,441 44,402 45,305 45,305 45,305
Long-term liabilities 89,401 80,453 69,139 69,139 78,185 76,406 72,347 76,444
Long-term loans 62,866 53,929 49,725 43,156 55,663 50,159 40,004 38,001
Other fixed liabilities 26,535 26,524 19,414 25,983 22,522 26,247 32,343 38,443
Total liabilities 240,091 233,864 229,815 234,647 241,831 239,736 228,748 224,313
Minority interest 2,491 2,561 2,334 1,707 1,858 1,658 1,458 1,258
Total net assets 157,825 165,621 170,403 179,002 187,658 199,678 208,968 220,458
Total Liabilities, Minority Interest and Net Assets400,406 402,045 402,552 415,356 431,346 441,072 439,174 446,029

Interest-bearing debt 120,575 114,560 118,048 114,241 120,668 112,163 101,659 90,504
Shareholders' equity 157,825 165,621 170,403 179,002 187,658 199,678 208,968 220,458
Total assets 400,406 402,045 402,552 415,356 431,346 441,072 439,174 446,029
D/E ratio (x) 0.76 0.69 0.69 0.64 0.64 0.56 0.49 0.41
Shareholders' equity ratio 39.4% 41.2% 42.3% 43.1% 43.5% 45.3% 47.6% 49.4%
Cash and cash equivalent 6,856 6,258 8,308 10,800 8,427 10,297 23,804 25,988
EBITDA 42,586 46,910 44,673 41,233 43,484 47,000 49,000 52,000
EV 317,058 315,688 269,233 262,030 277,177 314,792 290,781 277,442
Shares outstanding (consolidated, mn) 505.82 505.82 481.85 474.82 465.92 457.91 457.91 457.91
[ROE/ROA]
ROE(%) 6.9% 8.9% 6.7% 6.4% 7.4% 9.1% 8.2% 8.8%
Net margin 3.2% 4.0% 3.1% 3.3% 3.6% 4.5% 4.8% 5.3%
Total asset turnover (x) 0.8 0.9 0.9 0.8 0.9 0.9 0.8 0.8
Financial leverage (x) 2.5 2.5 2.4 2.3 2.3 2.3 2.2 2.1
ROA(%) 2.7% 3.6% 2.8% 2.8% 3.2% 4.0% 3.8% 4.3%
[Per share data]
EPS (¥) 20.7 28.4 23.5 23.7 29.1 38.4 36.5 41.3
BPS (¥) 312.0 327.4 353.6 377.0 402.8 436.1 456.4 481.4
Dividend (¥) 8.0 10.0 10.0 10.0 10.0 12.0 14.0 14.0
CFPS (¥) 62.1 72.5 73.2 70.9 76.9 88.7 86.7 91.5
[Valuations]
P/E (x) 19.41 14.45 14.08 14.09 12.15 12.10 12.75 11.27
P/B (x) 1.29 1.25 0.94 0.89 0.88 1.07 1.02 0.97
Dividend yield 1.99 2.44 3.02 2.99 2.82 2.58 3.01 3.01
PCFR (x) 6.47 5.66 4.52 4.71 4.60 5.24 5.36 5.08
EV/EBITDA (x) 7.45 6.73 6.03 6.35 6.37 6.70 5.93 5.34

Source: MUMSS, from company and AstraManager data; MUMSS estimates

Notes: Per share data based on share prices and shares outstanding at each FY-end; forward valuations based on 27 Jan closing

Please refer to important disclosures and certifications located in Appendix A of this report. 13
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

Figure 16: Denki Kagaku Kogyo (4061) Segments and business units
Business Segment (FY3/14; ¥bn） Main products Products, business description
Sales OP % of OP OPM
Chloroprene rubber "Denka Chloroprene", special rubber offering superb heat and oil resistance "Denka
Elastomers & acetylene black ER", acetylene black
Elastomers & Performance
Transparent polymers (MS,MBS,ABS Resin), heat-resistant-ABS resin "Denka Malecca", SBC resin
166.5 4.0 1.9% 2.4% Performance plastics "Clearen" (styrene-butadiene block copolymer)

Styrene & acetyl Chemicals Styrene monomer, poval, copolymer emulsion of acetic acid vinyl and ethylene "Denka Eva Tex"

Ordinary Portland cement, Denka High-early Strength Portland Cement, Moderate Heat Portland Cement,
Infrastructure & Inorganic Materials Cement soil stabilizer
Additive for cement and concrete "Denka CSA", high strength concrete "Denka∑1000", additive for
49.6 4.0 1.9% 8.0% Special cement additives cementitious non-shrink grout mortar "Denka Taskon", accelerator for sprayed concrete "Denka Natmic",
concrete repair, reinforcement business

Agri-products Calcium cyanamide, fused magnesium phoshate, fused silicate phoshate, magnesium humate

Inorganic products Calcium carbide, "Flux Compound" (Alumina Cement, alumina fiber), desulfurizing agent

Electronics & innovative Heat radiation measures products (electronic circuit card, heat dissipation sheet), electron source (emitter
Electronics & Innovative Product product), LED component (fluorescent substance), adhesive (hard-rock)
products
epoxy material filler for sealing semiconductors (fused silica), ceramics powders, molds (silicon nitride,
42.1 2.7 1.3% 6.4% Functional ceramics boron nitride)
Products for manufacturing Electronic parts conveyance material (emboss carrier tape, cover tape), semiconductor wafer protection,
processes adhesive tape for fixation, adhesive for temporary fixation

Food containers and functional sheets, electrical tape (vinyl tape), packing tape, synthetic fibers, rain
Life Science & Environmental Products Resin treatment products gutters, corrugated underground drainpipes

High polymer hyaluronic acid preparation (Joint function improvement agent), influenza and other
78.0 9.5 4.5% 12.1% Medical Science vaccines, bacteria/virus detection reagent, reagent for clinical testing
Source: MUMSS, from company data; corporate & eliminations account for ¥1.1bn in addition to the above

14 Please refer to important disclosures and certifications located in Appendix A of this report.
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

Appendix A
Analyst Certification
The analyst(s) mentioned on the cover of this report hereby certify(ies) (or, where multiple analysts are responsible, individually certify
with respect to each security that the analyst covers in this report) that the views expressed in this report accurately reflect their
personal views about the subject company(ies) and its (their) securities, and also certify(ies) that they have not been, are not, and will
not be receiving direct or indirect compensation in exchange for expressing any specific recommendation(s) or view(s) in this report.

Required Disclosures
Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. ("MUMSS") and/or its affiliate(s) beneficially owns 1% or more* of any class of
common equity securities of TEIJIN, TORAY INDUSTRIES, KUREHA, TOSOH, Tokuyama, DENKI KAGAKU KOGYO, KANEKA,
Mitsubishi Gas Chemical, Daicel, Sekisui Chemical.
*Calculations for companies within one month of a public listing of shares may be based on the Offering Memorandum.
Within the past 12 months, MUMSS and/or its affiliate(s) did manage or co-manage a public offering of securities of TEIJIN,
Mitsubishi Gas Chemical.
Within the past 12 months, MUMSS and/or its affiliate(s) did not manage nor co-manage a public offering of securities of TORAY
INDUSTRIES, KUREHA, TOSOH, Tokuyama, DENKI KAGAKU KOGYO, KANEKA, Daicel, Sekisui Chemical.
Within the past 12 months, MUMSS and/or its affiliate(s) received and/or entered into an agreement to receive compensation for
investment banking services from TEIJIN, Mitsubishi Gas Chemical.
Within the past 12 months, MUMSS and/or its affiliate(s) did not receive and/or has not entered into an agreement to receive
compensation for investment banking services from TORAY INDUSTRIES, KUREHA, TOSOH, Tokuyama, DENKI KAGAKU
KOGYO, KANEKA, Daicel, Sekisui Chemical.
Within the next 3 months, MUMSS and/or its affiliate(s) expects to receive or intends to seek compensation for investment banking
services from TEIJIN, TORAY INDUSTRIES, KUREHA, TOSOH, Tokuyama, DENKI KAGAKU KOGYO, KANEKA, Mitsubishi Gas
Chemical, Daicel, Sekisui Chemical.
MUMSS and/or its affiliate(s) is not a market maker or liquidity provider in the securities of TEIJIN, TORAY INDUSTRIES, KUREHA,
TOSOH, Tokuyama, DENKI KAGAKU KOGYO, KANEKA, Mitsubishi Gas Chemical, Daicel, Sekisui Chemical.
The analyst(s) mentioned on the cover of this report or a member of the analyst's household does not hold options, rights, warrants,
futures, long positions and/or short positions in the securities of TEIJIN, TORAY INDUSTRIES, KUREHA, TOSOH, Tokuyama,
DENKI KAGAKU KOGYO, KANEKA, Mitsubishi Gas Chemical, Daicel, Sekisui Chemical.
The analyst(s) mentioned on the cover of this report or a member of the analyst's household does not serve as an officer, director or
advisory board member to TEIJIN, TORAY INDUSTRIES, KUREHA, TOSOH, Tokuyama, DENKI KAGAKU KOGYO, KANEKA,
Mitsubishi Gas Chemical, Daicel, Sekisui Chemical.

Mitsubishi UFJ Morgan Stanley Securities Rating System (as of 5 September 2014):
Definitions of individual stock ratings
Overweight (OW) The analyst expects the stock to outperform other stocks in the subsector as classified by MUMSS
Neutral (N) The analyst expects the stock to have a neutral performance relative to other stocks in the subsector as
classified by MUMSS
Underweight (UW) The analyst expects the stock to underperform other stocks in the subsector as classified by MUMSS
NR Not Rated
RS Rating Suspended. Stock rating, target price either have not been assigned or have been suspended due to
applicable laws and/or MUMSS policy

Definitions of sector ratings (for MUMSS coverage universe)

Bullish MUMSS strategists expect the sector to outperform the MUMSS coverage universe as a whole
Neutral MUMSS strategists expect the sector to be roughly in line with the MUMSS coverage universe as a whole
Bearish MUMSS strategists expect the sector to underperform the MUMSS coverage universe as a whole

Definitions of small cap stock ratings

Buy The analyst expects the share price to rise in absolute terms
Hold The analyst expects the share price to fluctuate modestly in absolute terms
Sell The analyst expects the share price to decline in absolute terms
NR Not Rated
RS Rating Suspended. Stock rating, target price either have not been assigned or have been suspended due to
applicable laws and/or MUMSS policy

Unless otherwise specified, the time frame for target prices included in this report is over the next 12 months.

Please refer to important disclosures and certifications located in Appendix A of this report. 15
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

Distribution of ratings on individual stocks (updated as of 27 January 2015).

Investment banking
Rating category Coverage universe
relationships*
Buy (Overweight , Buy) 33.6% 40.0%
Hold (Neutral , Hold) 55.7% 32.5%
Sell (Underweight , Sell) 9.2% 31.8%
Others 1.5% 28.6%
Based on the MUMSS stock rating system, with “Buy” equated to “Overweight” for individual stocks and “Buy” for small caps, “Hold”
equated to “Neutral” and “Hold”, and “Sell” equated to “Underweight” and “Sell”.

* Data on the investment banking relationships relates to the previous 12 months. Weighting by rating category provided from 5 September 2014 onward

Additional Required Disclosures

MUMSS has established organizational and administrative arrangements such as appropriate policies and procedures to monitor
activities and/or communication between the research department and other business areas of MUMSS and to monitor
correspondence and personal brokerage accounts of all those involved in the production of research.
MUMSS policy prohibits its analysts, persons reporting to analysts, and members of their households from owning securities of any
company in the analysts' area of coverage or from serving as an officer, director, or advisory board member of such company.
Individuals who are involved in the production of research who have knowledge of the timing or content of research which is not
publicly available are prohibited from undertaking personal transactions in financial instruments to which the research relates (or in
any financial instruments) until the intended recipients of the research have had a reasonable opportunity to act on it.
Analysts are paid in part based on the profitability of MUMSS, which includes investment banking revenues.

MUMSS and/or its affiliate(s) may have holdings in other financial interests or other products issued by the companies named in this
report. MUMSS and/or its affiliate(s) may have a short or long position in respect to these financial interests or other products.
An officer (or officers) of MUMSS (member of the board, executive director or auditing officer as stipulated by the Company Act of
Japan (Law no. 86 of 2005, as amended, the Company Act)) serve(s) as an officer (or officers) in Mitsubishi UFJ Financial Group,
Mitsubishi Logistics
Stock rating history: as of 27 January 2015
DENKI KAGAKU KOGYO (4061)
DATE Rating
5 Sep 2014 Neutral

Stock rating history available upon request.

Mitsubishi UFJ Morgan Stanley Securities Rating System before 5 September 2014:
Definitions of individual stock ratings
Outperform (O) The stock is expected to outperform the TOPIX by more than 15% over the next 12 months
Neutral (N) The stock is expected to have a total return of ±15% vs the TOPIX over the next 12 months
Underperform (U) The stock is expected to underperform the TOPIX by more than 15% over the next 12 months
NR Not Rated
RS Rating Suspended. Stock rating, target price either have not been assigned or have been suspended due to applicable laws and/or MUMSS policy
Unless otherwise specified, the time frame for target prices included in this report is over the next 12 months.

Definitions of sector ratings (for MUMSS coverage universe)

Overweight Sector expected to outperform the TOPIX over the next 12 months
Neutral Sector expected to be roughly in line with the TOPIX over the next 12 months
Underweight Sector expected to underperform the TOPIX over the next 12 months

Disclaimers
This report has been prepared by MUMSS solely for the purpose of supplying information to the clients of MUMSS and/or its affiliate(s)
to whom it is distributed. This report is not, and should not be construed as, a recommendation, solicitation or offer to buy or sell any
securities or related financial products.
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16 Please refer to important disclosures and certifications located in Appendix A of this report.
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

or liability as to the accuracy, reliability, completeness, adequacy or appropriateness of such information. Information contained herein
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arising from, or in connection with, this report.

Please refer to important disclosures and certifications located in Appendix A of this report. 17
 January 28, 2015
DENKI KAGAKU KOGYO (4061)

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©Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. All Rights Reserved 2015.
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18 Please refer to important disclosures and certifications located in Appendix A of this report.