Chugoku Marine Paints / 4617

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1 COVERAGE INITIATED ON: LAST UPDATE: Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an owner s manual to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at sr_inquiries@sharedresearch.jp or find us on Bloomberg. Research Report by Shared Research Inc.

2 LAST UPDATE: Research Report by Shared Research Inc. INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company s most recent earnings. First-time readers should start at the business section later in the report. Executive Summary Key financial data Recent updates Highlights Trends and outlook Quarterly trends and results Company forecasts and outlook Business, market and value chain Business description Business by product category Strengths and weaknesses Financial statements Income statement Balance sheet Cash flow statement ROE, ROA, ROIC Other information Corporate governance Top management Dividend policy Shareholder composition Number of employees About paints Profile Historical earnings results and news Historical earnings results News and topics /7

3 LAST UPDATE: Research Report by Shared Research Inc. Executive Summary 217 marks 1th year since founding; core competency in marine paints Chugoku Marine Paints (CMP) was founded in 1917 as a domestic pioneer in anti-fouling paints. This coating is applied to ships to slow subaquatic growth, making for a smoother hull and thus increasing fuel efficiency. At the company s founding, the majority of anti-fouling paints for both public and private use were sourced from overseas. A focus on research and prioritizing technology remains part of the company s DNA. By leveraging its core marine paint technologies, CMP has grown in tandem with Japan s shipping industry, while expanding into industrial and container paints. Leveraging technology, expanding market share by being an early mover in environmental solutions Even within marine paints, anti-fouling paints particularly require technological development. As environmental concerns grow, the company has led development of environmentally compliant anti-fouling paints and strengthened its product lineup. This has increased its brand recognition. Coupled with strengthened sales activities, this resulted in the company expanding its domestic market share in FY25. (Note: FY refers to the Japanese fiscal year ending on March 31.) Maintaining a leading global market share in anti-fouling and container paints CMP holds almost 3% of the global market in anti-fouling paints for new ships, and almost 2% of the ship repair market. It has made steady market share gains over the past two decades. In anti-fouling paint for new ships, it has increased its share in Japan to % (from over 4% prior to 2), in Korea to 2% (from 1%), and in China to 3% (following the Chinese shipbuilding industry taking off). Over the same period, CMP s share of container paints has grown to almost 3% (from about 2%) in China, which produces 95% of global container paints. CMP s share may fluctuate depending on conditions each year. Global market share by market segment (volume basis, company estimates) New ships Ship repair Japan (new ships) China (new ships) Korea (new ships) China (container) Little less than 3% Roughly 2% Roughly % 2%-3% Roughly 15% Little less than 3% CMP Other CMP Other Note: Figures for new ships and ship repair paints are for FY3/1; figures for new ships by region and Chinese containers are recent five-year totals. Planning to release a medium-term management plan in 218 The company has not disclosed a medium-term plan, but it plans to release one in the first half of 218. The plan, which is already being developed, is expected to set the future direction for the company. CMP Other CMP Other CMP Other CMP Other Target sales mix for paints: % ships, 2% containers, and 2% industrial Shared Research predicts that the company s medium-term plan will aim to build a business structure that is unaffected by the ups and downs of the shipbuilding market. CMP will work to achieve leading market share in ship and container products; expand into offshore structures; cultivate new markets in the industrial paint sector; and improve profitability. The company intends to change the current sales mix of 75% for marine paint, 13% containers, and 12% industrial, to %, 2%, and 2%, respectively. In order to free itself from being affected by changes in the shipbuilding market, the company must achieve growth in container and industrial paints. We also believe that CMP is counting on the recovery of the container market and an improved market share, as well as new market development in industrial paints. 3/7

4 LAST UPDATE: Research Report by Shared Research Inc. Key financial data Income statement FY3/4 FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 55,77 3,389 7,84 88,19 14,798 13,22 8,81 9,595 93,5 83,5 9,91 1, , 82,38 8, YoY 11.1% 13.7% 7.% 3.% 18.8% -1.1% -1.2% 11.3% -3.1% -1.% 8.7% 17.4% 7.8% -28.4% -2.9% Gross profit 19,22 2,83 19,932 25,54 28,73 29,72 29,97 28,844 24,855 22,79 25,227 29,424 3,139 2,8 GPM 34.5% 32.8% 29.4% 29.1% 27.4% 28.1% 34.5% 29.9% 2.% 2.4% 27.8% 27.% 31.4% 32.3% SG&A expenses 14,743 1,81 1,3 18,397 2,4 2,42 19,981 2,2 19,381 17,33 21,18 21,982 2,127 21,137 YoY 4.9% 9.1% 1.4% 12.9% 12.%.2% -3.2%.2% -3.2% -1.4% 21.9% 3.8% 18.9% -19.1% SG&A ratio 2.4% 25.4% 24.% 2.9% 19.7% 19.9% 23.% 2.7% 2.7% 2.8% 23.3% 2.% 22.7% 25.7% Operating profit 4,477 4,721 3,32 7,257 8,132 8,429 9,995 8,823 5,474 4,715 4,58 7,442 1,12 5,471 4,1 YoY 2.9% 5.5% -23.1% 99.8% 12.1% 3.7% 18.% -11.7% -38.% -13.9% -13.9% 83.4% 34.5% -45.4% -25.1% OPM 8.% 7.4% 5.4% 8.2% 7.8% 8.1% 11.5% 9.1% 5.9% 5.% 4.5% 7.% 8.7%.% 5.1% Non-operating income (expenses) , Financial income (expense) Gains on foreign exchange Other non-operating income (expenses) Recurring profit 4,294 4,72 3,7 7,13 7,442 7,899 1,28 9,114,4 5,119 5,58 8,359 1,41,7 4,3 YoY 23.4% 1.1% -21.7% 92.7% 4.4%.1% 3.% -11.2% -33.7% -15.2% -1.2% 5.3% 24.% -41.7% -29.2% RPM 7.7% 7.5% 5.5% 8.1% 7.1% 7.% 11.8% 9.4%.5%.1% 5.% 7.8% 9.1% 7.4% 5.4% Extraordinary gains -1, Income taxes 13.% 38.2% 34.4% 25.8% 29.% 25.8% 37.% 3.% 42.5% 33.1% 34.8% 29.7% 28.2% 29.8% Non-controlling interests Net income attributable to parent company shareholders 2,538 2,74 2,33 4,853 5,117 5,31 5,422 5,71 3,7 2,978 3,29 4,748,52 3,43 2,5 YoY 52.5%.5% -2.% 84.3% 5.4% -1.7% 7.8% 5.1% -4.2% -2.9% 9.8% 45.2% 3.9% -44.% -31.4% Net margin 4.% 4.3% 3.9% 5.5% 4.9% 4.9%.2% 5.9% 3.3% 3.% 3.% 4.4% 5.7% 4.4% 3.1% Capital expenditures 1,17 1,4 2,5 2,71 2,2 3,44 2,2 1,55 1,188 1,382 1,34 1,13 1,797 3,972 Depreciation 1,229 1,25 1,22 1,228 1,458 1,555 1,5 1,8 1,535 1,42 1,52 1,71 1,738 1,727 Amortization of goodwill R&D expenses 1,21 1,382 1,38 1,49 1,5 1,8 1,939 1,98 1,92 1,789 1,714 1,849 1,787 1,859 Per share data FY3/4 FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/18 Number of shares (year end; mn) Number of shares (average; mn) BPS (JPY) ,95 1,15 1,18 EPS (JPY) DPS (JPY) Balance sheet (JPYmn) FY3/4 FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 Current assets 3,813 45,143 48,57 4,992 3,57,29 4,8 7,7 7,233 74,315 83,118 95,72 92,58 84,1 Cash and cash equivalents,884 7,943 9,93 8,132 7,975 8,25 14,77 12,412 17,15 22,11 28,37 3,82 34,18 3,918 Accounts receivable 19,29 23,933 24,431 3,198 3,538 34,891 35,32 41,758 37,94 3,944 38,77 47,119 42,42 32,4 Inventories 9,359 11,91 13,11 18,258 17,719 1,2 12,829 14,15 13,751 14,3 15,129 17,2 15,958 14,5 Allowance for doubtful accounts ,71-2,13-2,432-2,117 Others 1,772 1,842 1,832 3,34 2,35 1,75 2,122 2,533 2,3 1,95 3,4 2,429 2,472 2,54 Tangible fixed assets 23,454 23,25 24,541 2,38 25,571 23,837 24,394 23,484 23,2 23,782 25,1 25,915 25,112 2,82 Intangible fixed assets ,29 1,51 1,43 1,427 Investments and other assets 7,95 8,55 1,382 1, 8,91,45 7,42 5,872 5,82 7,255 8,994 11,944 9,575 9,82 Investment securities,81 7,279 8,981 9,11 7,29 4,958 5,823 4,78 4,79,382 8,133 1,82 8,313 8,382 Allowance for doubtful accounts ,4-1,15 Others 1,53 1,745 1,489 1,59 1,712 1,512 1,29 1,21 1, ,44 2,32 2,57 Total assets 8,433 77,18 83,71 12,58 98,55 91,77 9,34 1,35 99,85 1,24 119,19 135,87 128, ,58 Current liabilities 33,989 4,93 39,827 52,22 49,722 44,351 44,124 45,145 42,423 41,879 43,178 5,21 43,149 3,51 Accounts payable 8,71 11,51 11,374 1,873 15,8 13,193 12,97 17,38 12,535 13,37 14,4 19,42 14,378 11,45 Short-term debt 2,44 23,13 23,83 28,5 2,515 25,88 22,478 2,7 23,58 21,998 2,91 21,7 19,578 17,387 Accounts payable-other 3,274 3,544 4,7 5,258 5,174 4,39 4,948 5,31 4,88 4,893 5,415,41,45 5,59 Income taxes payable 7 1, ,89 1, ,893 1, ,435 1,438 1,7 83 Other current liabilities ,32 1,73 1,4 Fixed liabilities,27 5,533 9,41 9,194 7,723 7,41 5,83,285 7,12 7,1 8,58,,423 7,387 Long-term debt 2,725 1,245 2,815 3,185 2,555 3,1 1,182 1,92 2,847 3,314 3,373 1,8 1,728 2,7 Others 3,92 4,288,22,9 5,18 4,49 4,51 4,35 4,15 4,347 5,135 5,574 4,95 4,81 Net assets 27,817 3,73 34,847 4,84 41,15 4,13 4,538 48,874 5,414 5,99 7,332 78,225 78,817 78,19 Shareholders' equity 24,575 2,73 28,747 33,3 37,2 4,433 44,954 49,75 51,927 53,97 55,51 59,29 4,73,752 Treasury stock ,179-1,183-1,192-1,21-1,72 Valuation and translation differences 2,8 2,23 4,394 5,511 1,798-2,581-1,4-4,11-4,19-277,985 13,184 8,42 5,797 Minority interests 1,174 1,347 1,7 2,25 2,28 2,11 3,49 3,129 3,1 3,878 4,844 5,745 5,84 5,18 Total capital and liabilities 8,433 77,18 83,71 12,58 98,55 91,77 9,34 1,35 99,85 1,24 119,19 135,87 128, ,58 Statement of cash flows (JPYmn) FY3/4 FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 Cash flows from operating activities 2, ,53-3,72 4,84 4,74 14,29 1,252 3,7 8,719 1,84 4,355 9,774 1,75 Cash flows from investing activities ,954-2,21-1,34-2,85-1,78-2,154-3,24-2, ,552-5,448 Cash flows from financing activities -1,94 1, ,38-1, ,79-1,71 3,94-4,455-4,42-3,9-3,133-2,737 Financial ratios FY3/4 FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 Interest-bearing debt 23,15 24,858 25,898 31,19 29,7 28,89 23, 22,59 2,355 25,312 24,283 22,75 21,3 2,93 Net cash -1,282-1,915-1,2-23,58-21,95-19,44-8,893-1,184-8,74-3,31 4,84 7,92 12,712 1,825 ROA (RP-based).4%.5% 4.% 7.7% 7.4% 8.3% 1.9% 9.3%.% 5.% 4.5%.% 7.9% 4.9% ROE 1.% 9.7% 8.4% 13.5% 13.2% 13.1% 13.3% 12.8%.% 5.9% 5.7% 7.% 8.9% 5.% Equity ratio 38.9% 38.% 39.% 37.8% 39.4% 41.2% 45.1% 45.% 47.4% 49.7% 52.5% 53.7% 57.% 59.4% 4/7

5 LAST UPDATE: Research Report by Shared Research Inc. Recent updates Highlights On February 1, 218, Shared Research updated the report following interviews with Chugoku Marine Paints, Ltd. On January 31, 218, the company announced earnings results for FY3/18; see the results section for details. For corporate releases and developments more than three months old, please refer to the News and topics section. 5/7

6 LAST UPDATE: Research Report by Shared Research Inc. Trends and outlook Quarterly trends and results Income statement FY3/1 FY3/17 FY3/18 FY3/1 FY3/17 FY3/18 FY3/1 FY3/17 FY3/18 (JPYmn) Q2 Q4 Q2 Q4 Q2 Cml. Cml. Cml. Cons. Cons. Est. % of FY Sales 27,991 31,581 28,984 2,51 2,149 21,89 2,38 2,291 19,94 2,71 21,487 88,55 2,77 1, , 82,38 8, 7.7% YoY 22.1% 14.7% 4.3% -.9% -28.% -3.7% -3.9% -23.5% -5.2% -5.2% 7.2% 13.2% -29.9% -1.2% 7.8% -28.4% -2.9% Gross profit 8,243 9,77 9,331 8,888,598 7,223,38,41 5,898,24,12 27,251 2,27 18,24 3,139 2,8 GPM 29.4% 3.% 32.2% 33.5% 32.7% 33.% 31.9% 31.5% 3.9% 3.1% 28.4% 3.8% 32.% 29.7% 31.4% 32.3% SG&A expenses,83,811,52,713 5,34 5,33 4,945 5,213 4,84 5,55 4,957 19,414 15,924 14,81 2,127 21,137 YoY 21.7% 18.8% 21.9% 13.7% -12.1% -17.3% -24.2% -22.3% -1.1% -1.3%.2% 2.7% -18.% -7.% 18.9% -19.1% SG&A ratio 21.7% 21.% 22.5% 25.3% 2.5% 25.7% 24.7% 25.7% 25.2% 24.3% 23.1% 21.9% 25.7% 24.2% 22.7% 25.7% Operating profit 2,1 2,8 2,811 2,175 1,251 1,591 1,441 1,188 1,94 1,191 1,144 7,837 4,283 3,429 1,12 5,471 4,1 83.% YoY 9.1% 41.5% 3.9% 9.2% -42.1% -44.5% -48.7% -45.4% -12.5% -25.1% -2.% 43.8% -45.3% -19.9% 34.5% -45.4% -25.1% OPM 7.7% 9.1% 9.7% 8.2%.2% 7.3% 7.2% 5.9% 5.7% 5.7% 5.3% 8.8%.9% 5.% 8.7%.% 5.1% Non-operating income (expenses) Financial income (expense) Gains on foreign exchange Others Recurring profit 2,534 3,43 2,795 2,44 1,249 1,54 1,91 1,572 1,194 1,271 1,242 8,372 4,54 3,77 1,41,7 4,3 8.2% YoY 77.1% 39.5% 12.2% -9.4% -5.7% -48.% -39.5% -23.1% -4.4% -18.7% -2.% 37.2% -4.2% -17.7% 24.% -41.7% -29.2% RPM 9.1% 9.% 9.% 7.7%.2% 7.1% 8.4% 7.7%.3%.1% 5.8% 9.5% 7.3%.% 9.1% 7.4% 5.4% Extraordinary gains (losses) Income taxes ,39-1,31-1,12-2,929-1,833 Implied tax rate 29.3% 2.8% 27.2% 3.4% 39.1% 3.3% 24.4% 28.% 3.5% 28.5% 22.9% 27.7% 3.4% 27.2% 28.2% 29.8% Non-controlling interests Net income attributable to parent company shareholders 1,558 1,93 1,792 1, ,79 1, ,28 2,58 2,28,52 3,43 2,5 91.2% YoY 4.2% 39.% 13.9% 4.% -3.7% -52.1% -39.8% -12.% 2.9% -15.2% -24.7% 35.% -51.4% -11.2% 3.9% -44.% -31.4% Net margin 5.%.1%.2% 4.% 2.8% 4.2% 5.4% 5.3% 3.% 3.8% 3.8%.% 4.1% 3.7% 5.7% 4.4% 3.1% EBITDA 2,584 3,33 3,255 2,37 1,8 2,27 1,873 1,48 1,515 1,33 1,21 9,142 5,58 4,79 11,78 7,228 YoY 54.% 35.4% 2.1% 7.9% -35.% -38.% -42.5% -37.5% -9.8% -19.4% -13.5% 3.5% -39.% -14.5% 28.8% -38.% EBITDA margin 9.2% 1.5% 11.2% 9.9% 8.3% 9.3% 9.3% 8.1% 7.9% 7.9% 7.5% 1.3% 9.% 7.8% 1.2% 8.8% Performance by segment FY3/1 FY3/17 FY3/18 FY3/1 FY3/17 FY3/18 FY3/1 FY3/17 (JPYmn) Q2 Q4 Q2 Q4 Q2 Cml. Cml. Cml. Cons. Cons. Sales 27,991 31,581 28,984 2,51 2,149 21,89 2,38 2,291 19,94 2,71 21,487 88,55 2,77 1, , 82,38 Japan 9,945 9,55 1,27 8,94 8,597 9,23 9,38 8,871 8,81 8,524 8,42 29,537 2,58 25,745 38,51 35,529 China 7,54 9,7 8,129,424 4,22 4,52 3,929 4,39 3,374 4,249 5,8 25,435 12,513 13,423 31,859 1,552 Korea 3,798 4,13 3,88 3,551 2,555 2,97 2,548 2,22 1,538 1,14 1,443 12,291 8,7 4,595 15,842 1,29 Southeast Asia 2,89 3,514 3,249 3,553 2,249 2,724 2,49 2,571 2,571 2,91 2,57 9,32 7,43 8,42 13,185 1,34 Europe and US 3,837 4,123 3,7 4,18 2,723 2,15 2,32 2,584 2,88 3,474 3,254 11, 7,37 9,53 15,78 9,954 Marine paints 21,7 24,97 23,291 22,198 1,294 17,33 15,59 15,723 14,7 1,182 14,818 9,85 49,187 45,7 92,3 4,91 Industrial paints 2,99 2,958 3,273 3,2 2,89 3,124 2,97 3,29 2,953 3,8 3,141 9,221 8,99 9,18 12,241 12,19 Container paints 3,318 3,571 2,339 1, ,377 1,399 1,454 1,359 1,45 3,44 9,228 3,54,21 1,435 5,18 Other YoY 22.1% 14.7% 4.3% -.9% -28.% -3.7% -3.9% -23.5% -5.2% -5.2% 7.2% 13.2% -29.9% -1.2% 7.8% -28.4% Japan 12.1% 9.% 2.5% -1.5% -13.% -5.7% -9.9% -1.% 2.4% -5.5% -.8% 7.7% -9.7% -3.4% 5.4% -7.7% China 25.2% 1.% -12.2% -32.2% -4.7% -53.3% -51.7% -37.1% -1.1% -.9% 47.% 2.2% -5.8% 7.3% -7.3% -48.% Korea 45.% 7.8% 3.7% 5.4% -32.7% -35.7% -34.3% -37.3% -39.8% -45.% -43.4% 49.8% -34.3% -43.1% 3.9% -35.% Southeast Asia 1.% 18.% 18.1% 1.3% -21.% -22.5% -23.4% -27.% 14.3%.5% 3.2% 15.9% -22.5% 7.8% 11.% -23.9% Europe and US 35.9% 2.1% 1.9% 32.4% -29.% -3.% -45.1% -35.7% 3.1% 32.8%.1% 23.8% -3.8% 29.4% 25.9% -3.5% Marine paints 24.4% 24.7% 14.1% 1.2% -24.% -3.7% -33.1% -29.2% -9.7% -.5% -5.% 2.9% -29.% -7.1% 15.4% -29.5% Industrial paints -5.2% -5.8% 2.% -5.1% -3.1% 5.% -9.3%.3% 2.% -1.2% 5.8% -3.% -2.5% 2.1% -3.5% -1.8% Container paints 42.2% -1.% -42.8% -3.1% -73.5% -1.4% -4.2% 2.5% 54.8% 2.% 14.3% -13.8% -.4% 7.% -25.3% -51.% Operating profit 2,1 2,8 2,811 2,175 1,251 1,591 1,441 1,188 1,94 1,191 1,144 7,837 4,283 3,429 1,12 5,471 Japan ,225 2, ,773 3,1 China , ,3-45 Korea Southeast Asia ,129 1,1 1,178 2,97 1,53 Europe and US , Adjustments ,231 1,19 1,134 2,79 1,55 OPM 7.7% 9.1% 9.7% 8.2%.2% 7.3% 7.2% 5.9% 5.7% 5.7% 5.3% 8.8%.9% 5.% 8.7%.% Japan.8%.5% 9.3%.1% 8.4% 9.4% 9.4% 8.5% 5.4% 2.7% 2.% 7.5% 9.1% 3.% 7.2% 8.9% China 4.% 7.9% 7.% 5.9% -4.% -2.3% -2.% -2.3% -.% 1.8% 7.5%.% -3.% 2.3%.5% -2.8% Korea 2.4% 3.5% 2.9% 4.2% 9.9% 5.4% 8.8% -1.3% 11.5%.4% -3.8% 3.% 7.9% 2.8% 3.2% 5.9% Southeast Asia 19.% 21.7% 24.8% 21.9% 15.3% 15.7% 15.9% 14.4% 13.2% 1.1% 14.4% 22.1% 15.% 14.% 22.% 15.3% Europe and US -7.7% -4.% -8.5% -.% -4.4% -1.2% -14.2% -1.% -2.2%.8% -.5% -.9% -9.1% -2.% -.% -9.4% Marine paints 21,7 24,97 23,291 22,198 1,294 17,33 15,59 15,723 14,7 1,182 14,818 9,85 49,187 45,7 92,3 4,91 Japan 8,45 8,143 8,454 7,47 7,55 7,285 7,33 7,215 7,2,74,1 25,53 21,73 2,58 32,529 28,918 China 4,324,113 5,39 5,95 3,24 2,925 2,422 2,442 1,972 2,757 2,332 1,7 8,371 7,1 21,171 1,813 Korea 3,787 4,578 3,8 3,54 2,542 2,955 2,528 2,22 1,493 1,579 1,431 12,231 8,25 4,53 15,771 1,227 Southeast Asia 1,41 2,15 1,791 2,22 1,15 1,1 1,37 1,479 1,39 1,71 1,31 5,42 4,142 4,44 7,28 5,21 Europe and US 3,578 3,981 3,542 3,81 2,5 2,478 1,91 2,384 2,3 3,322 3,129 11,11,945 9,114 14,92 9,329 YoY 24.4% 24.7% 14.1% 1.2% -24.% -3.7% -33.1% -29.2% -9.7% -.5% -5.% 2.9% -29.% -7.1% 15.4% -29.5% Japan 17.% 11.1% 3.% -2.3% -1.% -1.5% -12.9% -3.5% 2.1% -7.2% -1.1% 1.3% -13.4% -5.1% 7.1% -11.1% China 2.2% 2.2% 13.1% -15.% -3.1% -52.2% -57.% -52.1% -34.8% -5.7% -3.7% 17.% -47.9% -15.% 7.4% -48.9% Korea 4.9% 7.9% 37.3% 5.9% -32.9% -35.5% -34.% -37.8% -41.3% -4.% -43.4% 51.5% -34.4% -43.9% 38.1% -35.2% Southeast Asia 12.4% 25.5% 2.9% 13.% -24.4% -22.7% -23.2% -33.% 23.9%.% -4.8% 22.1% -23.3% 7.2% 19.3% -2.3% Europe and US 34.7% 23.7% 1.5% 31.4% -28.3% -37.8% -4.3% -38.3% 3.8% 34.1% 4.% 24.5% -37.4% 31.2% 2.2% -37.% Industrial paints 2,99 2,958 3,273 3,2 2,89 3,124 2,97 3,29 2,953 3,8 3,141 9,221 8,99 9,18 12,241 12,19 Japan 1,414 1,337 1,491 1,43 1,42 1,52 1,595 1,572 1,518 1,72 1,723 4,242 4,79 4,913 5,45,281 China ,21 1, ,75 1,424 Korea Southeast Asia 1,151 1,13 1,28 1, ,7 1, 1,95 3,42 2,85 3,15 4,542 3,818 Europe and US YoY -5.2% -5.8% 2.% -5.1% -3.1% 5.% -9.3%.3% 2.% -1.2% 5.8% -3.% -2.5% 2.1% -3.5% -1.8% Japan -9.4% -2.1% -3.1% 2.9% 3.4% 23.% 7.% 12.% 3.8% 1.2% 8.% -5.% 11.% 4.3% -3.1% 11.3% China -2.4% -21.9%.2% -8.1% 2.1% 5.4% -4.% -25.% -35.% -39.1% -14.7% -13.9% -13.5% -31.3% -12.5% -1.5% Korea -73.8% -51.4% -3.4% -54.2% 9.1% -1.8% 42.9% 118.2% 275.% 11.5% -4.% -5.% -23.7% 12.2% -55.7% -1.4% Southeast Asia 9.7% 8.1% 9.% -15.2% -14.1% -17.% -2.% -11.8% 8.2% 1.% 13.2% 9.% -17.2% 1.5% 2.% -15.9% Europe and US -2.% -57.% 41.5% 115.4% 17.3% 5.% 51.7% 75.% 1.2% 5.% -3.4% -25.4% 42.8% -.5% -7.% 52.5% Container paints 3,318 3,571 2,339 1, ,377 1,399 1,454 1,359 1,45 3,44 9,228 3,54,21 1,435 5,18 China 2,878 3,229 1, ,187 1,29 1,23 1,181 1,218 3,212 8,97 3,51 5,11 8,982 4,314 Southeast Asia , Europe and US YoY 42.2% -1.% -42.8% -3.1% -73.5% -1.4% -4.2% 2.5% 54.8% 2.% 14.3% -13.8% -.4% 7.% -25.3% -51.% China 43.9% -18.8% -47.2% -7.% -77.2% -3.2% -39.2% 42.7% 8.3% 2.% 15.7% -1.9% -2.3% 83.9% -29.3% -52.% Southeast Asia 5.3% 12.5% 7.8% -.1% -39.8% -41.% -41.% -43.3% -14.9% -9.1% 12.3% 8.5% -4.8% -4.2% 4.5% -41.4% Europe and US 15.% 11.% 17.9% 29.3% -2.3% -5.8% -55.% -3.7% -33.3% 34.3% 5.8% 47.% -59.2% 9.5% 44.1% -54.3% /7

7 LAST UPDATE: Research Report by Shared Research Inc. FY3/18 results (out January 31, 218) Cumulative : Sales and operating profit down 1.2% and 19.9%, respectively. Sales declined in Japan, China, and Korea as adjustments continued for the mainstay marine paints for new ships In quarterly results, sales rose 7.2%, the first sales growth since FY3/1, as demand for repairs recovered in part and the market for containers recovered rapidly Versus forecasts: Earnings look set to surpass company forecasts, which were revised in Q2 to include anticipated risk GPM: Deteriorated by 2.8pp on impact of rising cost of raw materials, which account for the bulk of manufacturing costs. Some price-related measures also had a negative impact on GPM SG&A expenses: Fell JPY1.1bn, helping SG&A-to-sales ratio improve 1.5pp. Reversal of allowance for doubtful accounts occurred again in, pushing profit up a cumulative JPY5 mn. Personnel expenses also declined Operating profit: The GPM fell 2.8pp due in part to the soaring prices of raw materials. This was offset by reducing SG&A expenses and the decline in profit was limited to JPY854mn Marine paints: Recovered demand related to ratification of the International Convention for the Control and Management of Ships Ballast Water and Sediments contributed to sales in the US, Europe, Southeast Asia, and parts of China Paint demand for new ships continued the same trend as in 1H. CMP expects last-minute demand for repairs to decline gradually after peaking in Container paints: Sales rose 7%. After bottoming out in FY3/17, sales improved due to the rapid recovery of container paint sales in China. Performance continues to be favorable so far in Q4 as well FY3/19: Paint demand for new ships may recover slightly. Possibility of reactionary falloff after last-minute repair demand must be considered. Container paints continue favorable performance Causes of concern are how raw material cost trends will impact GPM and how reversal of allowance for doubtful accounts will impact SG&A expenses. CMP aims to absorb such impacts by strengthening measures to reduce costs and raise prices Topic: CMP plans to announce a new medium-term plan in the latter half of Q4 or in FY3/19 based on its vision of the future. Drafting mainly by the company s next generation 7/7

8 LAST UPDATE: Research Report by Shared Research Inc. Cumulative quarterly sales (left and middle charts) and operating profit (right chart) Quarterly earnings Industrial paints YoY (right axis) 2% % % % % % - FY3/11 Marine paints Container paints - FY3/13 - FY3/ % - FY3/17-2% -3% Japan Korea - FY3/ Southeast Asia 2% FY3/13 - FY3/15 China - FY3/17 1% % -1% -2% -3% Operating profit 9.3%. - FY3/11.2%.3% FY3/13 4.% % FY3/15 OPM (right axis) 1% 8.8% 7.8.9% FY3/17 5.% 3.4 8% % 4% 2% % Marine paints Industrial paints Container paints OPM (%) Operating profit (right axis) FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/ Exchange rate assumptions (quarter average and quarter end) FY3/7 Business overview Cumulative : Sales and operating profit down 1.2% and 19.9%, respectively. Sales declined in Japan, China, and Korea as adjustments continued for the mainstay marine paints for new ships In cumulative FY3/18, sales fell 1.2% YoY and operating profit fell 19.9%. In, quarterly sales rose 7.2%. In terms of the business environment, the company thinks the world economy at large continued to be on a gradual growth track, with developed counties seeing brisk growth and China achieving stable growth. Favorable factors included a recovery of ship repair demand centered on Europe, the US, Southeast Asia, and parts of China. Sales of container paints in China also recovered rapidly, showing an improved market. However, industrial paints saw slower growth in China while demand for new ships witnessed a further decline due to a continued adjustment against a backdrop of oversupply of shipping tonnage (primarily in China and Korea) in the mainstay marine paint market. Overall, conditions remained harsh as raw materials prices continued to be relatively high. FY3/9 FY3/11 JPY/USD (avg.) JPY/EUR (avg.) FY3/13 FY3/15 JPY/USD (qtr-end) JPY/EUR (qtr-end) FY3/ FY3/7 JPY/CNY (avg.) JPY/1KRW (avg.) FY3/9 FY3/11 JPY/CNY (qtr-end) JPY/1KRW (qtr-end) FY3/13 FY3/15 FY3/17 A lower GPM and decline in gross profit (-JPY2.bn) was balanced in part by lower SG&A expenses (-JPY1.1bn), but operating profit still fell 2% YoY (-JPY854mn) to JPY3.4bn. High raw material prices and other factors affected GPM, which fell 2.8pp to 29.7%. In Japan, it appears some price-related measures also had an impact. Factors contributing to the lower SG&A expenses were the careful control of personnel expenses and a reversal of allowance for doubtful accounts again in (cumulative JPY5 mn; 1H was about JPY4mn) on careful management of receivables and enhanced collection efforts. 8/7

9 LAST UPDATE: Research Report by Shared Research Inc. In regard to new ship market demand in China and Korea, attention should be given to the fact that the company is conducting activities aimed at gaining orders, with a focus on credit risk and profitability in the midst of a subdued market environment, and its sales have declined more than would be expected based on the market adjustment. At the same time, a reversal of allowance for doubtful accounts is one of the factors leading to increased profits. It should be noted that a reversal of allowance for doubtful accounts does not occur with any regularity, so there is no problem if receivables can be collected in the next financial year as well, but there is a possibility that the current reversal could lead to apparently lower profit later. Naphtha CIF prices and GPM (JPY'/kl) FY3/4 FY3/5 Naphtha price FY3/ FY3/7 GPM (right axis) FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 Source: Shared Research based on Trade Statistics of Japan from Ministry of Finance and company data FY3/14 FY3/15 FY3/1 FY3/17 FY3/18 38% 3% 34% 32% 3% 28% 2% 24% 22% 2% Segment breakdown In cumulative, sales were down JPY735mn YoY (-1.2%). At end-1h, sales were down JPY2.2bn YoY, showing that YoY decline was narrowed in the quarter (in alone sales were actually up 7.2%). Marine paint sales dropped JPY3.5bn, particularly in Japan (JPY1.1bn decrease), China (JPY1.3bn decrease), and Korea (JPY3.5bn decrease). Meanwhile, marine paints saw firm sales increases of JPY2.2bn in Europe and the US and JPY298mn in Southeast Asia. Although repair demand is strong (increasing revenue), demand for new ships has drastically fallen in China and Korea. Owing to efforts to maintain market share in Japan, a positive impact was seen on sales and profits. Container paint sales rapidly recovered in after bottoming out and the benefits of water-based paints began to appear in Q2, leading to improved profitability and a JPY2.bn YoY increase in sales. In the three months in, container paint sales in China saw significant growth as sales rose JPY2.bn YoY (2.7x). In both and cumulative, the impact of price was larger than the impact of volume. The manufacturing cost of water-based paints is high, but the selling price also increases, so currently water-based paints are helping to improve margins. Demand remains strong and the situation in, including margins, appears likely to continue. In addition, the forex situation contributed JPY83mn (about JPY1.bn for alone) to sales. If this impact were omitted, sales would have declined by 2.5% (+2.1% for alone). Forex US Dollar Euro Korean Won Renminbi JPY/USD YoY JPY/EUR YoY JPY/1KRW YoY JPY/CNY YoY FY3/15 Act FY3/1 Act % % % % FY3/17 Act % % % % FY3/18 Init. Assumption % % % % FY3/15 Cml. Act FY3/1 Cml. Act % % % % FY3/17 Cml. Act % % % % FY3/18 Cml. Act % % % % Medium-term management plan In the latter half of Q4 or in FY3/19, CMP plans to announce a new medium-term plan formulated mainly by the generation who will lead the company next. The company says it has gathered wisdom from across the corporate planning, marine paints (sales and technology), industrial paints (sales and technology), and production departments to present a snapshot of the company s future, strategies for arriving at that future, and an outline of measures to be implemented over the 9/7

10 LAST UPDATE: Research Report by Shared Research Inc. next three years. Target figures are milestones the company aims to reach each year in order to achieve its vision of the future. Even as mainstay marine paints appear to be bottoming out, it has high hopes for a growth scenario that extends beyond the market environment. Outlook for Q4 and FY3/19 Company forecasts, as they were revised in Q2, appear to have taken into account anticipated risk (stagnation in paint demand for new ships in China and Korea, deteriorating earnings in order to maintain share of domestic demand, rising costs of raw materials, etc.) and avoided being overly optimistic. Based on results, with rapid recovery in container paints and a decrease in SG&A expenses, including reversal of allowance for doubtful accounts, it turns out the revised forecasts may have been conservative. In Q4 and FY3/19, although shipbuilding appears to be recovering, which will help the situation with regard to mainstay marine paints, there is concern of a reactionary falloff after last-minute repair demand ahead of ratification of the International Convention for the Control and Management of Ships Ballast Water and Sediments (September 217). However, the convention includes a two-year relief measure, so the decrease in demand from Q4 FY3/18 onward may be gradual. In container paints, the shift to water-based paints that began in China in April 217 resulted in robust performance in FY3/18, which appears likely to continue through Q4 and FY3/19. CMP says it has confidence in its paints, which it began preparing for the market about five years ago, and the market response has been favorable as the company aims to distinguish itself from its competitors. However, it seems likely that margins will gradually shrink going forward. Marine paints for Korea: Unprofitable orders taken in 21 when Korean shipbuilders were in dire straits (CMP was unable to avoid accepting unprofitable orders due to a late start in Japan and China and credit risk) had an impact on the Korean paint market in 217. As CMP took a sales approach that included careful profitability management, there were relatively few orders it could accept, and sales to Korea declined significantly. However, the Korean shipbuilding market has been improving, and the company has been able to increase the number of orders it can accept. Of concern in terms of profit is the fact that raw material costs (the bulk for oil, followed by metals such as cuprous oxide and zinc) form a large portion of manufacturing costs, so the increase in raw material costs from September 217 had a negative impact on GPM. Depending on price levels in FY3/19, this impact may continue. In addition, in FY3/18, reversal of allowance for doubtful accounts totaling JPY5 mn in cumulative helped to reduce SG&A expenses, but there is no guarantee the company will be able to maintain the same pace of receivables collection in FY3/19. CMP says it plans to raise prices and strengthen effort to reduce costs. Expenses related to doubtful accounts: Reversal of allowance for doubtful accounts may result in a YoY decline in profit in FY3/19, but if CMP had not decided to focus on profitability, it is likely FY3/17 and FY3/18 performance would have been worse due to expenses related to doubtful accounts. Marine paints FY3/15 FY3/1 FY3/17 FY3/18 FY3/15 FY3/1 FY3/17 FY3/18 FY3/15 FY3/1 FY3/17 (JPYmn) Q2 Q4 Q2 Q4 Q2 Q4 Q2 Cml. Cml. Cml. Cml. Cons. Cons. Cons. Marine paints 17,32 2,27 2,418 21,943 21,7 24,97 23,291 22,198 1,294 17,33 15,59 15,723 14,7 1,182 14,818 57,87 9,85 49,187 45,7 79,75 92,3 4,91 Japan 7,229 7,331 8,13 7,53 8,45 8,143 8,454 7,47 7,55 7,285 7,33 7,215 7,2,74,1 22,723 25,53 21,73 2,58 3,37 32,529 28,918 China 3,598 5,87 4,987,38 4,324,113 5,39 5,95 3,24 2,925 2,422 2,442 1,972 2,757 2,332 13,72 1,7 8,371 7,1 19,71 21,171 1,813 Korea 2,578 2,79 2,815 3,344 3,787 4,578 3,8 3,54 2,542 2,955 2,528 2,22 1,493 1,579 1,431 8,72 12,231 8,25 4,53 11,41 15,771 1,227 Southeast Asia 1,3 1,713 1,411 1,97 1,41 2,15 1,791 2,22 1,15 1,1 1,37 1,479 1,39 1,71 1,31 4,424 5,42 4,142 4,44,394 7,28 5,21 Europe and US 2,5 3,217 3,41 2,938 3,578 3,981 3,542 3,81 2,5 2,478 1,91 2,384 2,3 3,322 3,129 8,914 11,11,945 9,114 11,852 14,92 9,329 YoY 2.1% 1.7% 23.4% 18.2% 24.4% 24.7% 14.1% 1.2% -24.% -3.7% -33.1% -29.2% -9.7% -.5% -5.% 2.% 2.9% -29.% -7.1% 19.5% 15.4% -29.5% Japan 3.4% 3.3% 19.1%.9% 17.% 11.1% 3.% -2.3% -1.% -1.5% -12.9% -3.5% 2.1% -7.2% -1.1% 8.5% 1.3% -13.4% -5.1% 8.1% 7.1% -11.1% China 34.2% 37.4% 35.1% 43.% 2.2% 2.2% 13.1% -15.% -3.1% -52.2% -57.% -52.1% -34.8% -5.7% -3.7% 35.7% 17.% -47.9% -15.% 37.9% 7.4% -48.9% Korea 49.7% 24.2% 3.4% 34.8% 4.9% 7.9% 37.3% 5.9% -32.9% -35.5% -34.% -37.8% -41.3% -4.% -43.4% 35.8% 51.5% -34.4% -43.9% 35.5% 38.1% -35.2% Southeast Asia 38.7% 8.1% 1.% 17.1% 12.4% 25.5% 2.9% 13.% -24.4% -22.7% -23.2% -33.% 23.9%.% -4.8% 1.5% 22.1% -23.3% 7.2% 1.7% 19.3% -2.3% Europe and US 25.2% 22.5% 14.5% -2.7% 34.7% 23.7% 1.5% 31.4% -28.3% -37.8% -4.3% -38.3% 3.8% 34.1% 4.% 2.4% 24.5% -37.4% 31.2% 13.7% 2.2% -37.% 1/7

11 LAST UPDATE: Research Report by Shared Research Inc. Marine paints Japan China Korea 23% 24% 25% Southeast Asia Europe and US YoY (right axis) 24% 2% 18% 14% 25. 7% 17% % % % % % -5% -4% -4% -% -8% -11% -1% -25% -18% -31% -29% -1% -33% 3% 2% 1% % -1% -2% -3%. FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/18-4% Japan sales 25% 2% 15% 1% 5% % -5% -1% -15% % FY3/12 China sales FY3/ FY3/14.9 Japan YoY (left axis) FY3/15 FY3/1 FY3/17 FY3/ % 4% 2% % -2% -4% -% % FY3/ FY3/ FY3/ China YoY (left axis) FY3/15 FY3/1 FY3/17 FY3/18 1 Korea sales 8% Korea YoY (left axis) 7 % 4% % % -2% % 1 -% FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/18 Marine paints: Recovered demand related to ratification of the International Convention for the Control and Management of Ships Ballast Water and Sediments contributed to sales in the US, Europe, Southeast Asia, and parts of China Paint demand for new ships continued the same trend as in 1H. CMP expects last-minute demand for repairs to decline gradually after peaking in Japan: Higher raw material costs are impacting efforts to maintain market share 11/7

12 LAST UPDATE: Research Report by Shared Research Inc. China: Focus on profitability remains unchanged. Reversal of allowance for doubtful accounts was booked in as well, contributing to lower SG&A expenses Korea: CMP has a lot of unprofitable orders from 21, when the shipbuilding market was in dire straits, and this impacts paint prices. As the company focuses on profitability, the number of projects that can be accepted has fallen Industrial paints FY3/15 FY3/1 FY3/17 FY3/18 FY3/15 FY3/1 FY3/17 FY3/18 FY3/15 FY3/1 FY3/17 (JPYmn) Q2 Q4 Q2 Q4 Q2 Q4 Q2 Cml. Cml. Cml. Cml. Cons. Cons. Cons. Industrial paints 3,153 3,14 3,29 3,183 2,99 2,958 3,273 3,2 2,89 3,124 2,97 3,29 2,953 3,8 3,141 9,52 9,221 8,99 9,18 12,85 12,241 12,19 Japan 1,5 1,35 1,539 1,33 1,414 1,337 1,491 1,43 1,42 1,52 1,595 1,572 1,518 1,72 1,723 4,44 4,242 4,79 4,913 5,827 5,45,281 China ,45 1,21 1, ,948 1,75 1,424 Korea Southeast Asia 1,49 1,2 1,18 1,274 1,151 1,13 1,28 1, ,7 1, 1,95 3,177 3,42 2,85 3,15 4,451 4,542 3,818 Europe and US YoY 4.% 1.1% -.% 2.7% -5.2% -5.8% 2.% -5.1% -3.1% 5.% -9.3%.3% 2.% -1.2% 5.8% 1.7% -3.% -2.5% 2.1% 1.9% -3.5% -1.8% Japan -2.1% -15.5% -8.3% -2.1% -9.4% -2.1% -3.1% 2.9% 3.4% 23.% 7.% 12.% 3.8% 1.2% 8.% -8.7% -5.% 11.% 4.3% -11.% -3.1% 11.3% China 21.% 32.%.9% 35.7% -2.4% -21.9%.2% -8.1% 2.1% 5.4% -4.% -25.% -35.% -39.1% -14.7% 19.5% -13.9% -13.5% -31.3% 23.1% -12.5% -1.5% Korea 74.% 191.7% 175.% 1.% -73.8% -51.4% -3.4% -54.2% 9.1% -1.8% 42.9% 118.2% 275.% 11.5% -4.% 22.2% -5.% -23.7% 12.2% 222.4% -55.7% -1.4% Southeast Asia 2.8% -.7% 8.3% 29.% 9.7% 8.1% 9.% -15.2% -14.1% -17.% -2.% -11.8% 8.2% 1.% 13.2% 3.5% 9.% -17.2% 1.5% 9.8% 2.% -15.9% Europe and US 7.4% 44.2% -21.2% -4.9% -2.% -57.% 41.5% 115.4% 17.3% 5.% 51.7% 75.% 1.2% 5.% -3.4% 19.7% -25.4% 42.8% -.5% 81.2% -7.% 52.5% Industrial paints FY3/11 Japan China Korea Southeast Asia Europe and US YoY (right axis) % FY3/12-7% -9% -1% 12% % FY3/13 3% 1% % 15% 17% 9% FY3/14 5% FY3/15 1% -1% 3% -5% -% FY3/ % % -3% % FY3/17-9% % 2% -1% FY3/18 % 2% 15% 1% 5% % -5% -1% -15% Domestic sales and new housing starts (mn sqm) New housing starts floor area Domestic industrial paints (right axis) (JPYmn) 25 2, 1, ,5 1,51 1,28 1,495 1,55 1,5941,1 1,79 1, 1,52 1,72 1,523 1,71,5 1,539 1,595 1,572 1,4291,42 1,471 1,45 1,373 1,35 1,33 1,414 1,491 1,42 1, ,43 1,337 1, FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/ Container paints FY3/15 FY3/1 FY3/17 FY3/18 FY3/15 FY3/1 FY3/17 FY3/18 FY3/15 FY3/1 FY3/17 (JPYmn) Q2 Q4 Q2 Q4 Q2 Q4 Q2 Cml. Cml. Cml. Cml. Cons. Cons. Cons. Container paints 2,333 4,282 4,8 3,271 3,318 3,571 2,339 1, ,377 1,399 1,454 1,359 1,45 3,44 1,71 9,228 3,54,21 13,972 1,435 5,18 China 2, 3,977 3,771 2,949 2,878 3,229 1, ,187 1,29 1,23 1,181 1,218 3,212 9,748 8,97 3,51 5,11 12,97 8,982 4,314 Southeast Asia , Europe and US YoY -13.1% 2.8% 43.8% 3.3% 42.2% -1.% -42.8% -3.1% -73.5% -1.4% -4.2% 2.5% 54.8% 2.% 14.3% 2.2% -13.8% -.4% 7.% 22.4% -25.3% -51.% China -17.% 3.2% 48.4% 35.5% 43.9% -18.8% -47.2% -7.% -77.2% -3.2% -39.2% 42.7% 8.3% 2.% 15.7% 21.8% -1.9% -2.3% 83.9% 24.7% -29.3% -52.% Southeast Asia 5.7% -1.2% -4.9% -.8% 5.3% 12.5% 7.8% -.1% -39.8% -41.% -41.% -43.3% -14.9% -9.1% 12.3% -5.9% 8.5% -4.8% -4.2% -4.5% 4.5% -41.4% Europe and US 17.% 49.% 52.7% -15.9% 15.% 11.% 17.9% 29.3% -2.3% -5.8% -55.% -3.7% -33.3% 34.3% 5.8% 7.3% 47.% -59.2% 9.5% 4.7% 44.1% -54.3% 12/7

13 LAST UPDATE: Research Report by Shared Research Inc. Container paints FY3/11 China4.8 Southeast Asia Europe and US YoY (right axis) % 3.4 FY3/ % -% 3% 5%.8-4% -57%-8% 3.2 FY3/ % 3.4 FY3/ % 24% 1% 27% 44% 3% 42% 55% 2% -13% -17%.9-43% -3%-74% -1% -4% 2% FY3/15 FY3/1 2.3 FY3/17 FY3/ % 4% 3% 2% 1% % -1% China: saw significant recovery compared with Q2 and performance has remained favorable so far in Q4. The price increase from a shift to water-based paints has contributed more than any increase in volume. Margins have also improved thanks to the shift China (export) containerized freight index 1,4 1,3 1,2 1,1 1, Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-1 Apr-17 Source: Shared Research based on Bloomberg data 1,2 1,1 1, Apr-14 Apr-15 Apr-1 Apr-17 For details on previous quarterly and annual results, please refer to the Historical performance section. 13/7

14 LAST UPDATE: Research Report by Shared Research Inc. Company forecasts and outlook Income statement FY3/17 FY3/18 Initial Est. FY3/18 Revised Est. Difference (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY Sales 42,39 4,329 82,38 42, 43, 85, 39,855 4,145 8, -2,145-2,855-5, YoY -29.4% -27.3% -28.4% -.1%.% 3.2% -5.2% -.5% -2.9% Operating profit 2,842 2,29 5,471 2,8 2,9 5,7 2,285 1,815 4, ,85-1, YoY -43.5% -47.3% -45.4% -1.5% 1.3% 4.2% -19.% -31.% -25.1% OPM.8%.5%.%.7%.7%.7% 5.7% 4.5% 5.1% Recurring profit 2,813 3,23,7 3, 3,3,3 2,45 1,835 4, ,45-2, YoY -49.% -32.% -41.7%.% 1.1% 3.7% -12.4% -43.8% -29.2% RPM.7% 8.1% 7.4% 7.1% 7.7% 7.4%.2% 4.% 5.4% Net income attributable to parent company shareholders 1,489 2,154 3,43 1,75 2,5 3,8 1,47 1,33 2, ,17-1,3 YoY -57.3% -28.5% -44.% 17.5% -4.8% 4.3% -1.5% -52.% -31.4% Net margin 3.5% 5.3% 4.4% 4.2% 4.8% 4.5% 3.7% 2.% 3.1% Exchange rates US Dollar Euro Korean Won Chinese Renminbi JPY/USD YoY JPY/EUR YoY JPY/1KRW YoY JPY/CNY YoY FY3/17 1H Act % % % % FY3/18 1H Act % % % % FY Initial Est % % % % FY Revised Est % % % % 2H Revised Est % % % % Full-year company forecasts for FY3/18 (initial plan out May 9, 217) Performance trends Sales Operating profit GPM (right axis) OPM (right axis) 35% 3% 25% 2% 11.5% 4 5.9% 5.1% 5.9% 7.4% 8.% 7.4% 8.2% 7.8% 8.1% 9.1% 7.% 8.7% 4.% 5.4% 5.9% 5.% 4.5%.%.7% FY3/99 FY3/1 FY3/3 FY3/5 FY3/7 FY3/9 FY3/11 FY3/13 FY3/15 FY3/17 15% 1% 5% % Business environment Signs point to recovery in the global economy, but the company predicts a weak market mainly for demand for new ships since oversupply of shipping tonnage still remains in the marine transport market. In contrast, maintenance demand has been recovering from a reactionary drop in FY3/17 against the demand hike generated the previous year in prospect of the ratification of international convention for ballast water management. As the convention was ratified, maintenance demand is expected to rise again before the convention takes effect in September 217. Further, demand for industrial paints is expected to recover in developing countries and also in Japan. The company also expects higher sales of container paints owing to full migration to water-based pains in response to environmental regulation. However, in light of the weak demand for new ships, the company predicts that these positive factors will not be enough to significantly boost overall momentum, and the current adjustment period will continue through FY3/18. As for the MOSE project in Italy, it expects sales of about JPY2mn in FY3/18 as it did in FY3/17. Implementing continuous cost-cutting measures, continuously tightening credit risk management, and launch of new businesses remain issues for FY3/18. In this business environment, as themes for FY3/18, the company will continue to advance the existing measures: implementation of continuous cost-cutting measures, continuous tightening of credit risk management, and launching of new businesses. In addition, it plans to launch new products in a timely manner and cultivate markets leveraging both internal and external networks in order to expand market shares in existing markets while creating new markets. 14/7

15 LAST UPDATE: Research Report by Shared Research Inc. Reasons behind numerical targets The company forecasts higher sales and profit in FY3/18: sales of JPY85.bn (+3.2% YoY) and an operating profit of JPY5.7bn (+4.2% YoY). The higher sales are expected because assuming that demand for new ships is weak, the company expects a rise in demand related to the international convention prior to the effectuation scheduled for September 217. It also sees container paint sales to have bottomed out, and expects exchange rates to remain near previous year levels. Meanwhile, new businesses will continue to be in a developmental phase in FY3/18. Positive and negative factors for gross profit We view positive factors for gross profit to be: 1) expected rise in sales mix of relatively-profitable anti-fouling paints due to an increase in maintenance demands, and 2) sales volume recovery at the Shanghai plant (the plant significantly improved its cost structure, implementing measures following earnings drop in FY3/17). Negative factors for gross profit are: 1) rising crude oil prices curtailing low material prices that the company benefited from throughout FY3/17, and 2) downward pressure on prices of marine paints especially in Korea. Minimal impact of forex on gross profit can be considered as a neutral factor. The company completed the construction of a new plant in the Netherlands in late March spending about JPY2.8bn, but its impact on gross profit appears to be limited. In light of factors such as lower demand in container paints, the operational rate at CMP's Chinese factories that produce container paints declined significantly in 21. Although the company worked to implement structural reforms via measures such as reducing personnel and improving production efficiency, its overall Chinese business posted an operating loss for 1H. There were delays in structural reforms versus initial plans, but the company was successful in reducing losses in 2H, and earnings improved to a point of recording a monthly profit in March 217. Assumptions for forex rates JPY/USD YoY JPY/EUR YoY JPY/1KRW YoY JPY/CNY YoY FY3/15 Act FY3/1 Act % % % % FY3/17 Init. Assumption % % % % Act % % % % FY3/18 Init. Assumption % % % % GPM Gross profit GPM (right axis) % % % % 27.% 1 2.% 2.4% 5 FY3/11 FY3/13 FY3/15 FY3/17 33% 32% 1 31% 3% 29% 28% 27% 2% 25% 24% FY3/11 FY3/12 FY3/13 Gross profit FY3/14 FY3/15 GPM (right axis) FY3/ FY3/17 FY3/18 4% 3% 32% 28% 24% 2% SG&A expenses: Assuming the same level of allowance for bad debts as the previous year for FY3/18 Concerns are allowance for doubtful accounts that served as reasons for cost increase in FY3/14 and FY3/1. The company appears to have factored in the same level of allowance for doubtful accounts as FY3/17 for the current period, under the view that the impact will be limited, as it took measures to tightly control credit in FY3/17 and is placing strong focus on collecting accounts receivables (In FY3/17, there was a reversal of allowance for doubtful accounts of about JPY2mn, which contributed to operating profit). This assumption appears highly probable since: the company will continue to place focus on credit management in FY3/18 (the entire company including the top management will be paying full attention to credit management); and in Korea, the Korean government plans to provide additional support to Daewoo Shipbuilding and the new president of Korea is willing to maintain employment. 15/7

16 LAST UPDATE: Research Report by Shared Research Inc. In view of these assumptions, the company forecasts an increase in operating profit of JPY229mn YoY. It commented that this is an earnings forecast based on neutral observation on the current circumstances, unlike past company forecasts that had to take a conservative view on credit risks. SG&A expenses SG&A expenses SG&A-to-sales ratio (right axis) 2.1 2% % % % 23.3% 23% % 22% 2 21% 2.7% 2.7% 2.8% 2.% FY3/11 FY3/13 FY3/15 FY3/17 2% FY3/ FY3/12 SG&A expenses FY3/13 FY3/14 SG&A-to-sales ratio (right axis) FY3/15 FY3/1 FY3/17 FY3/18 2% 24% 22% 2% 18% Capital expenditures 25 Operating CF Investing CF Financing CF Interest-bearing debt (right axis) Cash and cash equivalents (right axis) FY3/ FY3/5 FY3/1 FY3/ Capital expenditures Depreciation FY3/ FY3/5 FY3/1 FY3/15 Finishing investment in new unmanned factories in Europe, the company s capital investment is expected to return to investment within the range of depreciation cost. The company completed the construction of a new factory in Europe (the Netherlands) on March 22, 217 spending JPY2.8bn. The production capacity is 1, tons/month. The existing factory (production capacity: 7 tons/month) will continue production until the new factory starts steady production and is slated to become a warehouse thereafter. The company commented that the new factory realizes higher production capacity without having to increase staff, and using the existing factory as a warehouse contributes to reducing outsourcing costs. CMP is exploring the implementation of unmanned factories at its main production bases. This initiative is triggered by environmental factors (measures to combat VOC), and cost factors (personnel expenses). Below are trends of demand for marine paints by region. Trends of demand for marine and container paints The company has not disclosed the breakdown of sales (FY3/18 forecast of JPY85.bn) by segment or market location, but assesses the market environments as follows. Demand for maintenance As stated above, demand for maintenance is expected to increase before the international convention on ballast water management* takes effect on September 8, 217. Such demand has already shown a rise since the latter half of (overseas subsidiaries is from January to March). As in the case with 215, there is a concern about a reactionary drop following demand hikes, but after the nine months in FY3/18 up to September 217, the drop in demand is anticipated in Q4, which may help soften the impact of reactionary decline in FY3/19 on a full-year comparison basis. 1/7

17 LAST UPDATE: Research Report by Shared Research Inc. A rush in maintenance-driven demand in spring 215 boosted CMP s 1H FY3/1 results. Demand was spurred by the impending activation of the International Convention for the Control and Management of Ships' Ballast Water and Sediments, adopted by the International Maritime Organization in February 24, which seeks to prevent the movement of harmful organisms and pathogens within ballast water. (The fall in FY3/17 was a backlash.) Although demand cooled in 2H FY3/1, member countries accounted for 34.87% of the total global merchant ship tonnage as of June 1, 21, close to the 35% requirement for implementing the convention, as Ghana, Indonesia, and Morocco rarified the convention in November 215, Tuvalu in December 215, and Belgium and Fiji in March 21, followed by Saint Lucia in May and Peru in June. Upon ratification by Finland in September 21, a total of 52 countries have signed on, achieving a ratification rate of 35.14% and satisfying conditions for the convention to take effect on September 8, 217. Japan With the end of an excessively strong yen, the domestic shipbuilding industry is intensifying its competitive edge, although it is still subject to the sluggishness of the bulk shipping market due to a slowing Chinese economy and concerns of economic stagnation in emerging markets. The company expects that the domestic industry incurs less of an effect compared to other markets by catching demand shifts from bulk ships to ships such as tankers. For FY3/18, the company expects that the situation will not suddenly worsen from how it was in 215, judging from orders received by domestic shipbuilders (the order schedule has been filled until FY218 and the shipbuilders are receiving orders for 219 and thereafter). CMP also forecasts that it will manage to maintain its current market share or see a slight decline. The company plans to launch new products to improve quality and combat downward pressure on prices. SEAFLO NEO CF Z: Released in May 217. A new fuel-efficient anti-fouling paint for ocean-going vessels. The product concepts are improvement of fuel efficiency, anti-fouling effect during anchorage, and slime prevention. Instead of a common metallic cuprous oxide component, this eco-friendly paint contains a novel organic anti-fouling agent that is easily degraded in seawater, which allows continuous stable paint film surface renewal in combination with unique technology, exercising performance equivalent to or beyond anti-fouling paints containing cuprous oxide. Registered with EU BPR (Biocidal Products Regulation). Sales of marine paints in Japan 4 Sales FY3/11 FY3/13 FY3/15 FY3/ FY3/11 FY3/12 FY3/13 FY3/14 Sales FY3/15 FY3/1 FY3/17 FY3/18 China For 21, the company saw that the Chinese market continued to recover after bottoming in 213 and 214 and recovered nearly to the levels of 21 to 212, although a correction phase continued against a backdrop of a downturn in bulk shipping. However, no change will be wrought in a trend of bipolarization amid the sluggish bulk shipping into customers who seek high value-added paints with high fuel efficiency to gain higher competitiveness and those who prefer products at reasonable prices. In 217, market demand is expected to decrease due to delays in ship completion and cancellation of shipbuilding orders. In 21 (FY3/17), the company did not take price-related measures as it focused on profitability. Moreover, as an industry shake-out advanced in the Chinese ship production market, particularly among small and medium-size shipbuilders, CMP placed emphasis on the management of credit risk in its sales activities. As the company did not follow rival companies discounting battle, its market share temporarily fell. That said, in 217, the rival companies may see their shares shrink to a level lower than where they were the previous year. In 217, CMP will maintain its management policy of focusing on credit risks, but it expects sales volume to remain flat or slightly rise versus the previous year due partly to the rival companies declining market shares. 17/7

18 LAST UPDATE: Research Report by Shared Research Inc. Sales of marine paints in China Sales JPY/CNY (SR est.; right axis) Sales JPY/CNY (SR est.; right axis) FY3/11 FY3/13 FY3/15 FY3/17 1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/18 1 Korea The Korean shipbuilding industry was struggling, pressured by technological competition and the weaker yen from Japan, and cost competitiveness in China. As the company had been focusing on marine resource development in recent years, it was affected by the drop in oil prices and resulting market stagnation. In 215, marine paint demand saw a boost as many ships were completed. Judging from the trend of shipbuilding orders received, the company views that demand stemming from the rise in completed ships will show an increase in 217 as it did in 21. In 215, CMP s sales activities to shipowners expanded its market share and bolstered sales. In 21, however, its market share dropped temporarily because it prioritized the management of credit risk and profitability. The Korean shipbuilding industry will continue to struggle, and due to severe downward pressure on prices, the company appears to expect lower market share and sales volume during the period. Sales of marine paints in Korea 18 Sales JPY/KRW' (SR est.; right axis) FY3/11 FY3/13 FY3/15 FY3/ JPY/KRW' (SR est.; right axis) FY3/11 FY3/12 FY3/13 Sales FY3/14 FY3/ FY3/ FY3/17 FY3/ Demand for container paints Demand for container paints shows large fluctuations between roughly 2.mn and 3.mn TEUs (as seen in 27 and 214, it can also be around 3.5mn TEUs). In 21 (December fiscal year-end for the China business), demand continued to drop following the previous year trend and sales significantly fell due partly to forex effects. In Q2, however, water-based paints became a requirement from July 21 in the Guangzhou region of China, and a rush demand that resulted pushed up the sales volume. This underpinned demand in 21, which finished at about 2.mn TEUs. By April 217, all container paints were required to be water-based throughout China, and so there was accelerated demand in FY3/18. Migration to water-based paints raises cost, which in turn raises sales prices. However, since this is a low-margin market, the GPM will likely remain flat or only show a slight improvement. Schedule for migration to water-based container paints in China July 21: In Guangzhou region, container makers voluntarily adopted water-based paints for all containers April 217: All container paints became water-based throughout China (based on regulations) Chinese VOC tax: A consumption tax of 4% is applied to compounds with a VOC value that exceeds 42g/l. The tax applies to products manufactured or imported on or after February 1, /7

19 LAST UPDATE: Research Report by Shared Research Inc. Sales of container paints in China Sales JPY/CNY (SR est.; right axis) FY3/11 FY3/13 FY3/15 FY3/ FY3/ FY3/ FY3/13 Sales FY3/14 JPY/CNY (SR est.; right axis) FY3/ FY3/ FY3/17 FY3/ /7

20 LAST UPDATE: Research Report by Shared Research Inc. Outlook New medium-term management plan to be announced in 218 In the medium-term, CMP targeted sales of JPY12bn and operating profit of JPY1bn. When the company achieved the operating profit target in FY3/1, it commented that it aims to continue securing the JPY1bn profit. In FY3/17, however, sales and operating profit dropped to JPY82.4bn and JPY5.5bn respectively, due to changes in the market environment. As a weak demand is expected for new ships also in FY3/18, the company is looking for a new business structure that does not depend on marine paints. CMP is currently drafting a new medium-term plan, which it expects to announce at the end of FY3/18 or in 1H FY3/19. Target sales mix for paint: % ships, 2% containers, and 2% industrial CMP is carrying out the following measures: Establish a leading market share in paint for ships and containers Expand into offshore structures Cultivate new markets in the industrial sector Improve profitability The company s sales mix in FY3/1 was 8% ships, 9% containers, and 11% industrial use, and in FY3/17, respectively 79%, 15%, and %. The company wants to raise the composition of container and industrial-use paints to 2% each in order to limit the impact of demand fluctuations in marine paints on earnings. To realize this sales mix, accelerated growth in container and industrial paints is necessary. Other important conditions include a recovery of the container paint market and developing new markets in industrial paints. Top market share in ship and container paint Aim for top market share by improving weaker areas CMP has top global market shares for marine and container paints. Yet certain regions and markets pose challenges, and it seeks to improve in these areas. The company s market share estimates for paint (as of FY3/15) stand at under 3% for new ships, about 2% for ship repairs, and under 3% for containers. Plans seek to increase these figures to over 3% for new ships and containers, and almost 3% for repairs. Ship construction undertaken in major shipbuilding countries and demand for marine paints Orders on hand (end 215) Global marine paints demand CMP's sales of marine paints Europe and US 7% Korea 29% Others 5% Japan 2% China 39% Ship repairs % New ships 4% Ship repairs 45% New ships 55% Source: Shared Research based on World Shipbuilding Statistics, company data 2/7

21 LAST UPDATE: Research Report by Shared Research Inc. Global market share by market segment (unit volume; company estimates) New ships Ship repair Japan (new ships) China (new ships) Korea (new ships) China (container) Little less than 3% Roughly 2% Roughly % 2%-3% Roughly 15% Little less than 3% CMP Other CMP Other CMP Other CMP Other CMP Other CMP Other Repair demand According to company estimates, in the overall market, marine paint demand comprises about 4% for new ships and % for ship repairs in 215. In contrast, for CMP, new ships accounted for about 5-55% of sales; repairs accounted for about 4-45%; and others accounted for -5% (in FY3/17), demonstrating CMP s strength in the new ship market, but also space to capture demand in the ship repair market. Global marine transport volume and shipping tonnage, The Japanese Shipowners Association, IHS, Clarkson, New shipbuilding order volume, completion volume, and orders on hand 4 Orders on hand Order volume Completion volume Completion volume Orders on hand (right axis) (gross tons, mn CY94 CY95 CY9 CY97 CY98 CY99 CY CY1 CY2 CY3 CY4 CY5 CY CY7 CY8 CY9 CY1 CY11 CY12 CY13 CY14 CY15 Source: Shared Research based on materials from The Japanese Shipowners Association and IHS Aim to establish its brand CMP has been able to acquire a high market share in the new ship market due to its connections with ports and shipowners, combined with strong sales activities. In the ship repair market, however, customer needs vary some value cost while others value functionality. Customers in Europe tend to be particularly sensitive to costs. To further increase market share in marine paint for new ships, CMP plans to focus on sales activities to shipowners, and strengthening brand recognition leveraging its position as a market leader. New products that demonstrate functionality and quality are essential, as is a strong track record. CMP was able to provide efficient and quality products, and to strengthen its track record. It was one of the first marine paint companies to adapt its products to meet environmental needs. The company introduced its SEAFLO NEO series of anti-fouling paints in 21. SEAFLO NEO significantly reduces VOC (volatile organic compounds), and improves fuel efficiency through 21/7

22 LAST UPDATE: Research Report by Shared Research Inc. reduced friction. As of 1H FY3/1, its NEO series including SEAFLO NEO Z, introduced in 214 accounted for over half of marine paint sales. CMP plans to increase market share through sales activities leveraging the track record of its SEAFLO NEO series. Strengthening partnerships CMP has made creating a global structure a top priority, and has created a global service network for production (plants), supply (storage locations), and marketing (sales offices). As of April 217, it had a presence in about 35 countries and 1 bases (production, supply and marketing). Its network includes local subsidiaries, as well as technological partnerships with companies overseas. CMP has already extended its network into key regions, and it plans to continue expansion into locations with potential long-term demand, such as areas with potential natural resources or economic growth. Responding to environmental concerns through VOC products for container paint The company has a container paint market share of 2-3%, and is focusing on further growth through development of environmentally compliant paint. It thinks that stricter regulations will mean an industry shift to water-based paints, and began test sales of a water-based paint in 213. China is seeing tightening environmental regulations, such as added taxation on paints with VOC over a certain level. According to the company, all major marine paint manufacturers have developed water-based paints for containers, although performance varies. The industry was yet to transition to water-based paints due to cost issues such as creating facilities for organic solvents, but the migration to water-based paints appears to be on the move finally in 21 onward. Schedule for migration to water-based container paints in China July 21: In Guangzhou region, container makers to voluntarily adopt water-based paints for all containers April 217: All container paints to be water-based all over China (based on established rules) Chinese VOC tax: A consumption tax of 4% is applied to compounds with a VOC value that exceeds 42g/l. The tax applies to products manufactured or imported on or after February 1, 215. Expansion into offshore structures Winning orders for large-scale projects, despite slow start of Japanese companies (CMP s customers) CMP s market share in offshore structures is small. While Japanese companies (CMP s primary customers) were slow to develop offshore structures for marine resource development, non-japanese companies were actively entering the market. As a result, rival firm International Paint (subsidiary of Akzo Nobel N.V.; Euronext: AKZA) captured a large global market share, compared to CMP, which relied on Japanese companies. Although development projects around the world are being postponed or canceled due to low oil prices, it is still a large market, and remains on the company s radar. Order balance for major Korean shipbuilding companies (USDbn, March 21) Order backlog Merchant ships Marine structures Samsung Heavy Industries Daewoo Shipbuilding & Marine Engineering Hyundai Heavy Industries Hyundai Samho Total To enter marine development, the company established a marine development department in 212. In 213, its products were chosen for use in the MOSE project, large-scale mobile gates to prevent flooding in Venice, Italy. Anti-flooding gates are typically installed underwater to prevent damage to the surrounding environment. This requires materials with high levels of anti-corrosion and anti-fouling functions. After evaluating various coating materials and systems for more than 1 years, the MOSE project selected CMP s products primarily Bioclean. The company s paints were delivered in line with construction progress, and sales were recorded on a quarterly basis during FY3/15. The company expects continued demand from the second stage of construction. Maintenance is to be conducted every five to ten years, for 1 years. Another CMP paint product CONTECT is also used for the mobile components of the gates that require work under water. 22/7

23 LAST UPDATE: Research Report by Shared Research Inc. In 214, the company s anti-corrosion products primarily BANNOH 2 were selected for use in the construction, maintenance, and operation of the Uruguay-based Floating LNG Storage and Regasification Unit (FSRU), undertaken by Mitsui O.S.K. Lines, Ltd. (TSE1: 914). As of October 215, the FSRU project was under construction by Daewoo Shipbuilding & Marine Engineering Co., Ltd. (Korea-based KRX: 42), and had the largest LNG storage tank in the world, with capacity of 23, cubic meters. It is slated for operation in mid-217. CMP s has high market share when considering sales solely to Japanese companies. It is particularly strong in offshore wind power generation, where it holds 9% domestic market share. If the market share of Japanese companies grows, then CMP s market share should follow suit. Still, amid a decline in oil prices, more time may be required until global investment in marine resource development and LNG gain momentum. Business Development department to market new applications and coordinate industrial and marine segments overseas In July 215, the company established a business development department to oversee the existing marine department and overseas industrial sales department. This new department serves to win new projects and lead development of new product applications, in addition to coordinating operations between the industrial and marine segments. CMP s market share in offshore structures is small, so Shared Research sees significant potential to expand market share. Offshore structures April 215 Total South the Gulf America of Mexico Source: Shared Research based on the Floating Production Systems Report published by Energy Maritime Associates Seeking new markets in industrial paints CMP aims to increase industrial paints to 2% of sales, by leveraging its core technologies in new areas. Its heavy anti-corrosion technology includes anti-fouling paint for use in offshore structures and offshore wind power plants, as well as CONTECT (to prevent peeling of concrete in humid environments). Southwest Asia Canada US the North Sea the Mediterranean Southeast Asia Oceania China the Middle East Planning Constructing Operating January 21 South the Gulf America of Mexico Southwest Asia Canada US the North Sea the Mediterranean Southeast Asia Oceania China Oher the Middle East FPSO Floating Production, Storage and Offloading Vessel FSO Floating Storage and Offloading Vessel SEMI Production Semisubmersible TLP Tension Leg Platform SPAR Production Spar (cylindrical shape) FSRU Floating LNG Storage and Regasification Unit BARGE CMP began sales of CONTECT in 213. In June 215, CONTECT WE1 (with additional special fibers) was registered on the New Technology Information System (NETIS) of the Japanese Ministry of Land, Infrastructure, Transport and Tourism. NETIS is a system to evaluate and promote technologies for public works projects. CONTECT is used to prevent and repair concrete peeling in public infrastructure such as highways and railroads. According to the information registered in NETIS, this product reduces lead times by as much as 5% compared with previous methods of attaching layers of fiber sheets, cutting total costs by more than 2% on lower personnel and facilities expenses. Although sales for this product as of FY3/15 were still in the tens of millions of yen, the company anticipates future growth. Enter the automotive market leveraging its paints for woodwork Apart from the heavy anti-corrosion sector, CMP is seeking to break into the high function paint market. A key product is PHOLUCID a hard coating material intended for use in automotive headlight covers. This product takes CMP s UV curable paint technology for woodwork and applies it to plastics. Headlight covers typically use polycarbonate materials, which become opaque and yellow, and are easy to scratch. The company provides hard coatings to protect these polycarbonate materials. As of May 21, PHOLUCID has obtained a certification in the US after passing exposure tests and other examinations. CMP plans to launch the product in FY3/18. Strengths of PHOLUCID (per CMP): 1. Curing starts immediately after ultraviolet light irradiation, leading to faster production lines 2. Large-scale drying ovens are not necessary, leading to compact facilities and simpler production lines 3. High hardness properties, contributes to durability 4. Various functions can be incorporated to meet customer needs 23/7

24 LAST UPDATE: Research Report by Shared Research Inc Possible to apply to various materials including ABS and PET plastics The company does not expect PHOLUCID to reach the target of 2% of total sales in the near future given the small scale of sales of high function paints. Still, through the development and sales department CMP seeks to expand its products and their applications. Other products that saw new applications include CMP LINER (uses technology from the CUS product, a railway caulking resin to fill gaps between beams and crossties which has been sold to bullet train and railway operators both in Japan and abroad for more than 4 years), and EVATRON (a radio wave absorbing paint that can reduce interference and prevent corrosion). As CMP LINER is also used for ships to prevent vibrations and keep stability, the product belongs to the Marine paints segment. CONTECT PHOLUCID Improving profitability The company thinks it can improve profitability even further, and is continuing measures to increase efficiency and lower costs. CMP is exploring initiatives such as unmanned factories, inventory cost reductions (higher inventory efficiency ratio), and consolidation and discontinuation of certain products and raw materials in order to reduce manufacturing costs. Unmanned factories CMP is working on the implementation of unmanned factories. For FY3/17, the company spent JPY2.8bn to create a new factory in the Netherlands. This initiative was triggered by environmental factors (measures to combat VOC), and cost factors (personnel expenses). The company is thinking of tests in the Netherlands, followed by expansion into its key production bases in Shanghai and Japan. 24/7

25 LAST UPDATE: Research Report by Shared Research Inc. Comparison of company estimates and historical results Results vs. Estimates FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Initial Est. 17, 94, 92, 1, 92, 84, 9, 115, 9, 85, Est. as of 17, 94, 92, 1, 92, 84, 9, 115, 9, 85, Est. as of Q2 17, 87, 92, 95, 84,5 84, 9, 115, 9, 8, Sales Operating profit Recurring profit Net income attributable to parent company shareholders Est. as of 17, 87, 92, 95, 84,5 84, 15, 115, 83, Results 13,22 8,81 9,595 93,5 83,5 9,91 1, , 82,38 vs. Initial Est. -3.2% -7.% 5.% -.4% -9.1% 8.2% 11.2%.1% -8.5% vs. Est. as of -3.2% -7.% 5.% -.4% -9.1% 8.2% 11.2%.1% -8.5% vs. Est. as of Q2-3.2% -.2% 5.% -1.5% -1.% 8.2% 11.2%.1% -8.5% vs. Est. as of -3.2% -.2% 5.% -1.5% -1.% 8.2% 1.7%.1% -.8% Initial Est. 8,3 8, 1,1 9, 4, 4, 5,5 8,,8 5,7 Est. as of 8,3 8, 1,1 9, 4, 4, 5,5 8,,8 5,7 Est. as of Q2 8,3 9,3 1,1 5,7 4,9 4, 5,5 9,,8 4,1 Est. as of 8,3 9,3 1,1 5,7 4,9 4, 7, 9, 5,5 Results 8,429 9,995 8,823 5,474 4,715 4,58 7,442 1,12 5,471 vs. Initial Est. 1.% 24.9% -12.% -39.2% 17.9% 1.5% 35.3% 25.2% -19.5% vs. Est. as of 1.% 24.9% -12.% -39.2% 17.9% 1.5% 35.3% 25.2% -19.5% vs. Est. as of Q2 1.% 7.5% -12.% -4.% -3.8% 1.5% 35.3% 11.2% -19.5% vs. Est. as of 1.% 7.5% -12.% -4.% -3.8% 1.5%.3% 11.2% -.5% Initial Est. 7,8 7,5 1,3 9,25 4,2 4,2, 8,8 7,,8 Est. as of 7,8 7,5 1,3 9,25 4,2 4,2, 8,8 7,,8 Est. as of Q2 7,8 9,2 1,3, 5, 4,2, 9,8 7, 4,3 Est. as of 7,8 9,2 1,3, 5, 4,2 7,8 9,8 5,8 Results 7,899 1,28 9,114,4 5,119 5,58 8,359 1,41,7 vs. Initial Est. 1.3% 3.9% -11.5% -34.7% 21.9% 2.4% 39.3% 18.4% -13.2% vs. Est. as of 1.3% 3.9% -11.5% -34.7% 21.9% 2.4% 39.3% 18.4% -13.2% vs. Est. as of Q2 1.3% 11.% -11.5%.7% 2.4% 2.4% 39.3%.3% -13.2% vs. Est. as of 1.3% 11.% -11.5%.7% 2.4% 2.4% 7.2%.3% 4.8% Initial Est. 5,3 4,8 5, 5,25 2,5 2, 3,7 5,3 4, 3,8 Est. as of 5,3 4,8 5, 5,25 2,5 2, 3,7 5,3 4, 3,8 Est. as of Q2 5,3 5, 5, 3,5 2,9 2, 3,7, 4, 2,5 Est. as of 5,3 5, 5, 3,5 2,9 2, 5,, 3,2 Results 5,31 5,422 5,71 3,7 2,978 3,29 4,748,52 3,43 vs. Initial Est. -5.1% 13.% 1.8% -41.% 19.1% 25.7% 28.3% 22.7% -8.9% vs. Est. as of -5.1% 13.% 1.8% -41.% 19.1% 25.7% 28.3% 22.7% -8.9% vs. Est. as of Q2-5.1% 8.4% 1.8% -12.4% 2.7% 25.7% 28.3% 8.4% -8.9% vs. Est. as of -5.1% 8.4% 1.8% -12.4% 2.7% 25.7% -5.% 8.4% 13.8% 25/7

26 LAST UPDATE: Research Report by Shared Research Inc. Business, market and value chain Business description Earnings 14 Sales Operating profit GPM (right axis) OPM (right axis) 12 3% % 5.9% 5.1% 5.9% 7.4% 8.% 7.4% 8.2% 9.1% 7.8% 8.1% 7.% 8.7% 4.% 5.4% 5.9%.% 5.% 4.5% FY3/99 FY3/1 FY3/3 FY3/5 FY3/7 FY3/9 FY3/11 FY3/13 FY3/15 FY3/17 2% 1% % Sales by market segment Marine paints Industrial paints 9% % % 11% 8.8 Container paints Others 25% 13% % 12% 13% 12% 8 13% 12% 2% 12% 11% 1% % 14% 13% % 15% 15% % 2% 9% 1% 22% 8% 4 1% 13% 25% 25% 23% 71% 8% 75% 7% 7% 2% 27% % 7% 73% 58% 2 3% 58% 4% 4% 2% 1% 3% FY3/ FY3/2 FY3/4 FY3/ FY3/8 FY3/1 FY3/12 FY3/14 FY3/ % 15% 79% Business expansion History 217 marks 1th anniversary since founding; core competency in marine paints The company was founded in 1917 by a former technical officer of the Kure Naval Arsenal as a domestic pioneer in anti-fouling paint. At that time, the majority of anti-fouling paints for both public and private use were sourced from overseas. In its initial year, the company acquired patents in Japan, the UK, and the US, and was registered as a naval supplier in 192. In addition to anti-fouling paints, the company acquired patents for products such as oxygen-generating agents and synthetic resins. A focus on research and prioritizing technology remains part of the company s DNA. CMP s HQ and resin production facility in 1929 Source: Company data CMP s anti-fouling paints were chosen as a superior domestic product by the Ministry of Commerce and Industry in September 193, and designated as a standard paint by the Ministry of the Navy of Japan in March CMP grew in tandem with Japan s postwar shipping industry, expanding into industrial and container paints. 2/7

27 LAST UPDATE: Research Report by Shared Research Inc. Expanding from marine paints to container paints; shifting production locations to capture top market share In the 1973, CMP established a main overseas base in Hong Kong, and expanded into container paints. It shifted its production of container paints from Japan to Korea, Taiwan, and China. CMP held about a 3% market share in the container paint market. Business trends Sales excluding marine paints Marine paints sales Recurring profit (right axis) Recurring profit RPM (right axis) 14% 12% 1% 8% % 4% % FY3/8 FY3/9 FY3/ FY3/1 FY3/15 % FY3/8 FY3/9 FY3/ FY3/1 FY3/15 Local production for local consumption; creating overseas network through partnerships In 1985, the Plaza Accord caused a rapid appreciation in the yen, and the company took advantage of this opportunity to establish production bases overseas, working throughout the 199s and 2s to consolidate its network. In contrast with standard overseas production models, the company aimed for local production for local consumption. By partnering with local firms to license its technology, the company filled regional gaps, leading to its current overseas network. CMP still uses this model of localized production and consumption. In the industrial paints sector, which has various applications, the company narrowed its focus during the 199s to concentrate resources on heavy anti-corrosion (anti-rust) and wooden materials (construction materials). Overseas network Technology responding to environmental concerns Leveraging technology to expand; core competency in anti-fouling paints Anti-fouling paints are a segment of marine paints where technological ability is particularly valuable. As environmental concerns grow, the company has prioritized developing environmentally compliant anti-fouling paints. In the late 198s, organotin compounds (particularly tributyltin), frequently used in anti-fouling paints, were discovered to have detrimental effects on marine life. CMP swiftly responded by terminating anti-fouling paints that contained organotin compounds, and worked to develop more environmentally friendly products. 27/7

28 LAST UPDATE: Research Report by Shared Research Inc. Swift response to global tin-free movement; success in gaining market share Organotin compounds are suitable for use as biocides, but in 21an international agreement adopted by the International Maritime Organization banned new coats of anti-fouling paints containing organotin from 23 onward. From 28, the organotin compounds were banned outright. This meant either complete removal of the compounds from ships, or a protective coat to prevent them from leaking into the environment. This tin-free movement significantly impacted the marine paints industry. In the 198s International Paint was the market leader, followed by five smaller firms, but Japanese companies were able to quickly catch up and expand market share due to their early development of tin-free paints. In Japan a voluntary ban on the compounds was enacted by the Japan Paint Manufacturers Association in the 199s. In the 2s, hydrolysable paints that react with seawater to become hydrophilic resins became the industry standard. Hydrophilic resins dissolve with seawater, demonstrating anti-fouling properties. Competition for development of tin-free paints is heated among Japanese companies, especially between Nippon Paint Holdings Co., Ltd. (TSE1: 412), NOF Corporation (TSE1: 443), and CMP. CMP strengthened its product lineup through development of all types of hydrolysable paints, including acrylic polymer and silyl polymer. These strengths in development and product variety contributed to strong brand recognition, and in combination with improved sales activities, CMP gained the leading position in the domestic market. Hydrolysable anti-fouling paints (SEAFLO NEO series, etc.) and hydration separation paints (SEAJET series, etc.) Seawater Material Material Material Resin contained in the anti-fouling paint undergoes chemical reaction with seawater Paint is broken up and resin is released Remaining anti-fouling agent is released, preventing attachment of organisms Seawater Anti-fouling paint Anti-fouling paint Resin contained in the anti-fouling paint undergoes chemical reaction with seawater Market share Material Material Material CMP holds almost 3% of the global market in anti-fouling paints for new ships, and almost 2% for ship repairs. It has made steady market share gains over the past two decades, increasing its share in anti-fouling paints for new ships in Japan to % (from more than 4% prior to 2), Korea to 2% (from 1%), and China to 3% (following the start of large-scale ship production there). Its share for container paints has also grown to almost 3% (from about 2%) in China, which accounts for 95% of global container production. Global market share by market segment (unit volume; company estimates) Hydration layer is created Anti-fouling agent contained in hydration layer is released, preventing attachment of organisms New ships Ship repair Japan (new ships) China (new ships) Korea (new ships) China (container) Little less than 3% Roughly 2% Roughly % 2%-3% Roughly 15% Little less than 3% CMP Other CMP Other CMP Other CMP Other CMP Other CMP Other Note: Figures for new ships and ship repair are for FY3/1; figures for new ships by region and Chinese containers are recent five-year totals. 28/7

29 LAST UPDATE: Research Report by Shared Research Inc. Competitors Marine paints: Top three market leaders (including CMP) hold 7% share; top five hold 9% share Competitors in marine paints include International Paint (Netherlands), Jotun Group (Norway; unlisted), Hempel Group (Denmark; unlisted), and PPG Industries (NYSE: PPG). CMP, International Paint, and Jotun account for about 7% of the global market. Including Hempel and PPG, these top five companies hold about 9% of the global market. Each company has joint ventures or partnerships in key shipbuilding countries Japan, China, and Korea. Joint ventures and partnerships for major marine paint companies Container paints: CMP and COSCO Kansai hold top global market share, top four companies hold 8 9% global market share In container paints, CMP and COSCO Kansai Paint & Chemicals (joint venture between Kansai Paint Co., Ltd. [TSE1: 413] with a 35.29% stake and COSCO International Holdings Limited [SEHK: 517], established in 1992) together hold about 5-% of the market. Combined with Hyundai Group s KCC Corporation (KRX: 238) and Hempel, these four companies have an oligopoly, holding 8-9% market share. Japan China Korea Chugoku Marine Paints, Ltd. Chugoku Marine Paints, Ltd. Chugoku Marine Paints (Shanghai), Ltd. Chugoku-Samhwa Paints, Ltd. 92% stake 59.4% stake International Paint International Paint Japan (a division of AkzoNobel K.K.) International Paint of Shanghai Co., Ltd. International Paint (Korea) Ltd. Jotun Coatings (Zhangjiagang) Co., Ltd. Jotun Kansai Paint Marine Co., Ltd. Jotun COSCO Marine Coatings (Qindao) Co., Ltd. Chokwang Jotun Ltd. Hempel Dai Nippon Toryo Co., Ltd. (TSE: 411) Hempel (China) Ltd. Hempel (Korea) Co., Ltd. PPG Industries, Inc. (Sigma Coating) PPG PMC JAPAN Co., Ltd. PPG Coatings (Kunshan) Co., Ltd. PPG SSC Co., Ltd. Industrial paints: Construction materials account for about 2/3 of domestic sales; market share of over 5% in wood floor coatings In industrial paints, the company maintains a high market share within Japan in anti-fouling paints for power generation and wood floor coatings. CMP controls more than 5% of the market in wood floor coatings. Combined with Washin Chemical Industry Co., Ltd. (unlisted), Natoco Co., Ltd. (TSE JASDAQ: 427), and DIC Corporation (TSE1: 431), the four companies have a market share of 7-8%. Production and development Production bases centered on local production, local consumption Under the model of local production, CMP has manufacturing bases in various countries. Marine paints are manufactured at all of its bases. Container paints are manufactured in China, where demand is highest. Industrial paints are manufactured in Southeast Asia, China, and Japan, where demand is high. Production capacity of marine paints is about 25, metric tons per month, with almost half produced in Shanghai and Guangdong, China, and less than 4% in Japan. Utilization rates are about 9%, and particularly busy months are managed through overtime production. No significant investments expected, excluding unmanned plants The company s production capacity is increasing, and investment is not likely to spike in the immediate future. However, it is considering building unmanned plants, and related investment may be made at plants in Shanghai and Japan, following the new plant in Europe that started operation in 217. The company stated that about JPY1.5bn is required to establish a plant with monthly output of 2,-5, tons. In the case of an unmanned plant, unmanned equipment is required in addition to it. The total investment for the new unmanned plant in Europe was JPY2.8bn. The plant was completed on March 22, /7

30 LAST UPDATE: Research Report by Shared Research Inc. Production capacity by location and plans for capacity increase contained in securities reports for the past 1 years Creating global supply structure through out-licensing Annual Capacity Construction Investments (JPYmn) Completion securities Location Description increase start (planned) report Planned Executed (ton/month) (planned) FY3/ Shanghai, Coating material production 2, ,5 Aug-5 Sep- China FY3/9 Shanghai, New factory 2,5 77 4,28 Nov-8 Mar-1 China FY3/1 Shanghai, New factory 2,5 1,537 4,28 Nov-8 Mar-1 China Korea Coating material production 121-1, May-1 Aug-1 FY3/12 Shanghai, Coating material production 1, Jun-12 Jun-13 China FY3/14 Shanghai, Coating material production 1, Jul-12 Aug-13 China FY3/13 Shanghai, Coating material production 1,331 1,248 5 Jul-12 Jun-14 China FY3/15 Kyushu Coating material production 298-1, Apr-15 Jan-1 FY3/1 Kyushu Coating material production , Apr-15 May-1 Shanghai, Facilities related to coating Oct-15 Jun-1 China material production Netherlands Coating material production 2,235-1,2 May-1 Dec-1 CMP s global supply network includes licensees of its technology. The following table outlines major overseas partnerships. CMP receives an initial upfront payment and royalties based on sales. Licensees and royalties received Licensing Technology New Zealand Jacobsen Manufacturing Ltd. Manufacturing technology of paints Australia Supalux Paint Co. Pty. Ltd. Manufacturing technology of paints The Philippines Charter Chemical & Coating Corp. Manufacturing technology of paints Republic of South Africa Dekro Paints (PTY) Ltd. Manufacturing technology of paints Vietnam Haiphong Paint Joint Stock Company Manufacturing technology of paints Petro Vietnam Paint Joint Stock Company Manufacturing technology of paints Egypt Suez Canal Paints & Chemicals Co. Manufacturing technology of paints Brazil Renner Herrmann S. A. Manufacturing technology of paints Argentina Sinteplast S. A. Manufacturing technology of paints (JPYmn) 2.8% 5 Royalties received 2.1% % 1.2% 1.2% % of recurring profit (right axis) % 1.4% 72 1.% % 1.5% 73.7%.8% % % 11 2.% %.9% FY3/ FY3/2 FY3/4 FY3/ FY3/8 FY3/1 FY3/12 FY3/14 FY3/ % 3.% 2.5% 2.% 1.5% 1.%.5%.% Development structure: Hiroshima (marine, containers) and Shiga (industrial) as backbones; possible aggressive investment Production is concentrated in Hiroshima (marine paints, container paints, resins) and Shiga (industrial paints). Marine paints are developed in Hiroshima and produced in areas such as Kyushu. Container paints are developed in Hiroshima and produced in China. Industrial paints are both developed and produced in Shiga. Technology departments are located in Shanghai, Korea, Singapore, and the Netherlands, and serve to adjust formulas to local conditions, and customize products to meet local needs. While master formulas are created in Japan, each local market has different materials that may be used, materials that may be bought at lower costs, and demand, so the local departments optimize and adjust the master recipes to meet local needs. The Netherlands base also gathers data on CMP s European competitors. R&D expenses are almost JPY2.bn, mainly from personnel expenses. As it has sufficient funds, the company plans to actively invest in R&D. 3/7

31 LAST UPDATE: Research Report by Shared Research Inc. R&D expenses 2, 1,5 3.5% 3.3% 1,48 1,511 1,31 2.7% R&D expenses 1,179 1,21 % of sales (right axis) 1,5 1,49 1,382 1,38 1,8 1,939 1,98 1,92 1,789 1,714 1,849 1,787 1,859 4.% 3.% 1, 2.3% 2.2% 2.2% 2.% 2.2% 2.3% 2.% 5 1.7% 1.5% 1.7% 2.% 2.% 2.1% 1.9% 1.7% 1.% 1.% (JPYmn) FY3/ FY3/2 FY3/4 FY3/ FY3/8 FY3/1 FY3/12 FY3/14 FY3/1 Major group companies Stake Description Domestic Ohtake-Meishin Chemical, Co., Ltd 1.% Production of raw materials (resins) Kobe Paints, Ltd. 1.% Production and sale of paint. Separate brand consolidated in 1994 Hong Kong CHUGOKU MARINE PAINTS (Hong Kong), Ltd. 1.% Product sales Shanghai, China CHUGOKU MARINE PAINTS (Shanghai), Ltd. 92.% Product manufacturing and sales Guangdong, China CHUGOKU MARINE PAINTS (Guangdong), Ltd. 1.% Product manufacturing and sales Korea CHUGOKU SAMHWA PAINTS, Ltd. 59.5% Product manufacturing and sales Singapore CHUGOKU MARINE PAINTS (Singapore) Pte. Ltd. 1.% Product manufacturing and sales Malaysia CHUGOKU MARINE PAINTS (Malaysia) Sdn. Ltd. 1.% Product manufacturing and sales Netherlands CHUGOKU MARINE PAINTS B.V. 1.% Product manufacturing and sales Indonesia P.T. CHUGOKU PAINTS INDONESIA 54.% Product manufacturing and sales Thailand (*) TOA-CHUGOKU PAINTS Co., Ltd. 49.% Product manufacturing and sales* US CMP COATINGS, Inc. 1.% Product manufacturing and sales * Made a consolidated subsidiary given its substantial performance As of FY3/17, the company had 24 consolidated subsidiaries. Aside from Kobe Paints, Ltd., all have a financial year-end in December. Although the company s stake in its Thai subsidiary is 49.%, CMP controls operations and so it is consolidated..% When analyzing net income attributable to non-controlling interests, focus on Thailand, Korea, and China Net income attributable to non-controlling interests is heavily influenced by the performance of consolidated subsidiaries in Thailand (49.% stake; mainly industrial paints) and Korea (59.5% stake; mainly marine paints). Performance of the Shanghai subsidiary (92% stake) is also a factor, as container paints are volatile and almost entirely target the Chinese market. All the joint venture partners are local companies. Net income attributable to non-controlling interests FY3/ FY3/2 FY3/4 FY3/ FY3/8 FY3/1 FY3/12 FY3/14 FY3/1.% , -1,2 (JPYmn) % -5.% -.5% -.% % -8.3% -9.2% Net income attributable to non-controlling interests % -.% % % -8.9% -9.2% -9.7% -1.2% -2.% -4.% -.% -8.% -1.% -11.% -12.% Non-controlling interests Pre-tax profit (right axis) 31/7

32 LAST UPDATE: Research Report by Shared Research Inc. Segments Structure by segment Sales (top) and operating profit (bottom) by segment Japan China Korea Southeast Asia Europe and US Asia FY3/99 FY3/1 FY3/3 FY3/5 FY3/7 FY3/9 FY3/11 FY3/13 FY3/15 FY3/ FY3/99 FY3/1 FY3/3 FY3/5 FY3/7 FY3/9 FY3/11 FY3/13 FY3/15 FY3/17 Japan China Korea Southeast Asia Europe and US Asia Others Eliminations Company-wide expenses Operating profit The company s reportable segments are divided by region. CMP also releases sales by region and market. As regional segments have a combination of marine, industrial, and container paints, the data can be difficult to decipher. It is more effective to consider the company s performance by product category marine paints, industrial paints, and container paints. Sales by region (FY3/1, JPYbn) Japan China Korea Southeast Asia Europe and US.3 18%.3 1% % 1.4 9% 4.3 2% 1.8 5% %.1 1% %. % 5. 5%.4 4%.2 2% % Marine paints Industrial paints Container paints Others Marine paints Industrial paints Container paints Others Marine paints Industrial paints Container paints Others Marine paints Industrial paints Container paints Others Marine paints Industrial paints Container paints Others Segment summary (JPYmn) Sales and % of sales FY3/7 Marine paints 51,238 7% Container paints 13,41 2% Industrial paints 22,892 34% FY3/17 4,91 5% 5,18 4% 12,19 1% 1-year CAGR 2% -9% -% Japan 28,918 45% - -,281 52% China 1,813 17% 4,314 84% 1,424 12% Korea 1,227 1% % Southeast Asia 5,21 9% % 3,818 32% Europe and US 9,329 14% 2 4% 424 4% Market share New ships Less than 3% China 2-3% Wooden flooring Over 5% Ship repair Approx. 2% Electric anti-fouling Approx. 2/3 Customers Shipowners and shipyards Container manufacturers and shipowners Building material and plant industries 32/7

33 LAST UPDATE: Research Report by Shared Research Inc. Business by product category Marine paints Sales of marine paints Japan China Korea Southeast Asia Europe and US FY3/ FY3/2 FY3/4 FY3/ FY3/8 FY3/1 FY3/12 FY3/14 FY3/1 Summary Marine paints primarily used in large ships such as tankers Marine paints are used primarily (about 95-1%) for large ships such as tankers, bulk ships, and container ships, but also for pleasure boats and fishing boats. This business has built upon core technologies developed since the company s founding, and has high margins compared with other product categories. In particular, CMP has been able to add value in anti-fouling paints. The following describes the company s business structure for paints for large ships, which account for the majority of sales. Demand: new ships and repairs (averaging three years) Demand for large ships can be divided into new ships and ship repairs. Shipbuilding is done primarily in China, Japan, and Korea. Repair demand is centered in Southeast Asian areas such as Singapore, given the location along global shipping lanes and the concentration of shipping and maintenance companies in those countries. Global demand for marine paints is about 4% for new ships and % for ship repairs. CMP is a global market leader, with almost 3% share in new ships and more than 2% in ship repairs. The sales composition is split 55:45 between new ships and ship repairs. Demand for new ships occurs at various stages during the shipbuilding process, but the initial stages show the most demand. The ship repair cycle is two to five years, with an average of three years. Demand is heavily influenced by global shipping tonnage. During repairs, anti-fouling paints are completely reapplied. Each repair cycle sees the re-emergence of competition, so a high market share in new ships does not translate into a high share in repairs. Generally, it seems that about 1% of a ship s overall manufacturing cost is earmarked for paint. Ship construction undertaken in major shipbuilding countries and demand for marine paints (company estimates) Orders on hand (end 215) Global marine paints demand CMP's sales of marine paints Europe and US 7% Korea 29% Others 5% Japan 2% China 39% Ship repairs % New ships 4% Ship repairs 45% New ships 55% Source: Shared Research based on World Shipbuilding Statistics, company data New ship demand The marine transport industry has continued to grow amid global economic growth and globalization. Increased marine transport volume has boosted demand for shipping. Increased shipping tonnage (number of ships multiplied by average capacity 33/7

34 LAST UPDATE: Research Report by Shared Research Inc. per ship) has led to demand for new ships. Demand for new ships was particularly robust from 23, in line with China s rapid economic growth. Shipbuilding orders fell sharply during the global financial crisis. In the shipbuilding industry, after , when orders received in were completed, the number of orders for new ships was on a downtrend. This surplus shipping capacity led to falling prices, compressing margins in the marine transport industry, and leading to fewer new ships being built. In 213, orders received began to recover, and it appears that conditions have bottomed out in core shipbuilding countries such as Japan, China, and Korea. The number of orders on hand in these countries at end 214 has been steady for about two years, leading CMP to expect shipbuilding demand to be steady. Still, paint prices have declined due to constrained spending on shipbuilding following the global financial crisis, and this effect has remained through FY3/15. Global marine transport volume and shipping tonnage Source: Shared Research based on The Shipbuilders' Association of Japan and Clarkson materials New shipbuilding order volume, completion volume, and orders on hand (gross tons, mn Orders on hand Order volume Completion volume Completion volume Orders on hand (right axis) CY94 CY95 CY9 CY97 CY98 CY99 CY CY1 CY2 CY3 CY4 CY5 CY CY7 CY8 CY9 CY1 CY11 CY12 CY13 CY14 CY Order volume, completion volume, and orders on hand in main shipbuilding countries Source: Shared Research based on data from the Japanese Shipowners Association and IHS Repair demand Repair demand for paint is driven by bottom paint, which deteriorates with age. Demand fluctuates less for ship repair than for new ships, although there is some volatility. In addition, demand can spike with stricter regulations, as companies rush to comply. On the whole, demand for repairs is steady. When repairing ships, anti-fouling paints are reapplied to the entire bottom. The ship repair cycle is about two to five years, with an average of three years. The amount of paint is driven by surface area but also by shipping volume. As a result, more shipping 34/7

35 LAST UPDATE: Research Report by Shared Research Inc. volume means more paint. Repair demand accounts for about 9% of marine paint sales in Southeast Asia, Europe, and the Americas. Primary uses for CMP products in large-scale ships Interior: Anti-corrosion paint, water-resistant paint, living quarters paint, etc. Deck paint Anti-fouling paint Exterior panel paint Tank paint Business structure From receiving orders to booking sales The construction of a large ship requires between three to four years from contract signing to completion. After the contract is signed, stages include planning and design, ship block construction, block installation, launch and rigging, testing, and delivery. The keel must be laid about six months prior to delivery, and contracts for paint must be signed about one to two years before the keel is laid. As most of marine paint sales are booked during the stage when the keel is laid, from receiving an order to recording sales can take between one and two years. Block installation is done either on a berth or in a construction dock. The official beginning of construction of a ship either on a berth or in a construction dock is called laying the keel. Launch entails floating the ship that was previously in a berth or construction dock. Completion refers to the completion of all construction work. Ship construction process 1)Request from client 2)Contract/order 3)Plan/design 4)Lay the keel 5)Launch/rigging )Testing Requests received from client for specifications and cost estimates Win order and execute contract Three-dimensional computer model created Model based on designs and conduct tests in pools created Large ships are made via the block construction method Parts are constructed by block, and construction occurs on berths or in docks Includes cutting, bending, welding, construction, and painting of the hull After parts are joined, water is flooded into the dock and the ship is floated (launch) Anchored to the port, internal construction is undertaken (rigging) Test runs are made to ensure the ship meets design specifications 7) Delivery and the Japan Shipbuilders Association Customers: ports and shipowners for new ships, shipowners for repairs Customers for new ships and ship repairs vary slightly. For new ships, shipowners contract with shipyards to build a ship. Unless requested by the future owner, the shipyard chooses paints based upon a standardized list according to the intended use of the ship. However, when paint reapplication is required for ship repairs, shipowners contract directly with paint manufacturers. The shipowner can request a certain paint type, even those not on the list, so sales to shipowners become essential. In paint for new ships, the company aims to be included on the standard list and to be requested by shipowners. In paint for repairs, the company is directly targeting shipowners, including operators. 35/7

36 LAST UPDATE: Research Report by Shared Research Inc. Maintaining and increasing market share requires strong connections with shipyards and shipowners The company has gained a high market share in the new shipbuilding market due to its connections with shipyards and shipowners, which it strengthens through sales activities. Yet in the ship repair market, customer needs vary some value cost while others value functionality. Customers in Europe are particularly cost sensitive. Sales strategy map for marine paints Sales Repairs: Ship owners New ships: Shipbuilders (Attempt to capture requests from ship owners) Ship owner (Pure owner) Charter Ship owner (Marine transport company) Repair order New ship construction order Shipbuilding facility (Shipbuilding companies) Shipbuilding facility (Shipbuilding companies) Sales (Registration on standard list) and Delivery of paints Chugoku Marine Paints Where are sales booked? New ships: sales are booked in the country of the shipyard where the ship is built. Paints are delivered to the shipyard. Ship repairs: sales are booked in the country where the shipowner is based. The shipowner places the order. Geographic segment profits In international shipping, shipowners and shipyards are unevenly distributed geographically. In response, CMP has established a group to unify its global network and win orders. Although localized production and consumption is a core policy for CMP, raw materials may be sourced from and operating expenses concentrated in certain regions. This can cause geographic segment profits to show up as losses. Regional characteristics Japan Marine paint sales for the Japanese market 1% 5% % -5% -1% -15% 33.7 Marine paints sales (Japan) % % 1% 28.1 YoY 8% 7% % -2% FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/18 FY3/ % 45 2% % % 3 5% 25 5 % 2 4-5% % % 1 FY3/12 Marine paints sales (Japan) FY3/13 FY3/14 FY3/15 YoY FY3/1 FY3/17 1 Japanese companies have global market share of 2% (new ships); CMP holds % domestic share in new ships, top in repairs Based on completed projects, Japan has a global market share of about 2% in the market for new ships (215). New ships comprise 35% of CMP s marine paint sales (FY3/1). In new ships, the company holds a market share of about % in Japan. For repairs it faces fierce competition for the top market share. As of 214, it was second to NKM Coatings Co., Ltd. (wholly owned subsidiary of Kansai Paint; partnered with Jotun). CMP has relative strength in large ocean-going vessels, but as the bulk of domestic demand comes from coastal vessels, it cannot use this strength in Japan. However, Shared Research thinks that the company is more focused on competing for ocean-going vessel demand, which represents a larger market. Competition for Japanese coastal vessel repair is limited to domestic competitors, but for overseas ocean-going vessels it is competing with International, Jotun, Hempel, and PPG. 3/7

37 LAST UPDATE: Research Report by Shared Research Inc. Keels laid for new ships and domestic sales Industrial and others Marine Domestic keels laid for new ships (gross tons, right axis) 12, 1, 8,, 4, 2, (JPYmn) FY3/4 FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 Source: Shared Research based on Ministry of Land, Infrastructure, Transport and Tourism, and company data FY3/14 FY3/15 FY3/1 FY3/17 5, 4, 3, 2, 1, -1, Orders received, orders completed, and orders on hand in Japan Source: Shared Research based on The Japanese Shipowners Association, and IHS data Domestic repair demand and domestic sales 75 Domestic repair volume CMP's domestic sales (right axis) 5 25 Domestic keels laid volume CMP's domestic sales (right axis) FY3/99 FY3/3 FY3/7 FY3/11 FY3/15 FY3/99 FY3/3 FY3/7 FY3/11 FY3/15 (Gross ton) (Gross ton) Source: Shared Research based on Ministry of Land, Infrastructure, Transport and Tourism, and company data Domestic new ship and repair demand Although domestic repair demand fell in 2 25, CMP s sales were gently rising. This was due to the company shifting its ship repair docks for ocean-going vessels, such as to China and Singapore. As of 21, domestic ship repair demand was centered on coastal vessels. Shared Research does not foresee any further decline in domestic repair demand. Domestic keels laid and repair demand % 4% Domestic keels laid volume YoY, % 5, 4% Domestic repair volume YoY 12, 1, 2% 4, 2% 8, % 3, %, -2% -4% 2, -2% 1, -4% 4, 2, -% FY3/4 FY3/ FY3/8 FY3/1 FY3/12 FY3/14 FY3/1 Source: Shared Research based on Ministry of Land, Infrastructure, Transport and Tourism, and company data -% FY3/4 FY3/ FY3/8 FY3/1 FY3/12 FY3/14 FY3/1 37/7

38 LAST UPDATE: Research Report by Shared Research Inc. Domestic anti-fouling paint demand The following charts show a correlation between CMP s solvent-based anti-fouling paints, and anti-fouling paint sales in the Japanese market. Domestic anti-fouling paint shipments and the company s domestic marine-related sales 5, 4, 3, 2, FY3/4 (JPYmn) FY3/ FY3/8 FY3/1 FY3/12 FY3/14 Domestic anti-fouling paint shipments Marine paints sales (Japan, right axis) FY3/1 12, 1, Source: Ministry of Economy, Trade and Industry, Japan Paint Manufacturers Association, Shared Research based on company data 8,, (JPYmn) 5% 4% 3% 2% 1% - -1% -2% -3% -4% Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Domestic anti-fouling paint shipments YoY 1, 1, Domestic anti-fouling paint shipping volumes and average unit prices 4% 3% 2% 1% - -1% -2% -3% FY3/4 FY3/ FY3/8 YoY FY3/1 Shipment volume FY3/12 FY3/14 FY3/1 FY3/18 Source: Shared Research based on data from Japan Paint Manufacturers Association ('MT),5 2%, 15% 1% 5,5 5% 5, 4,5 - -5% -1% 4, -15% 3,5-2% 3, -25% FY3/4 FY3/ FY3/8 YoY FY3/1 FY3/12 Unit price FY3/14 FY3/1 FY3/18 ((JPY') China Marine paint sales for the Chinese market 4% 3% 2% 1% % -1% -2% -3% -4% -5% -% 18.2 Marine paints sales (China) YoY % -3% % 38% % 28 8% -2% -4% -% FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/18 FY3/ % 24 % % % % Marine paints sales (China) FY3/12 FY3/ FY3/ YoY FY3/ FY3/ FY3/ China has a global market share of about 37% for new ships (completed) in 215. CMP s sales composition of marine paints is 23% for new ships (FY3/1). The company has a market share in China of almost 3% for new ships, and jostles with Jotun for the prime position. Shipbuilding in China grew in tandem with the country s rapid economic development. Yet a limited number of Chinese companies have the necessary shipbuilding technology to shift away from the bulk shipping market, meaning the Chinese market could be hit if the bulk shipping market declines. Many Japanese companies, by contrast, can use their technologies to shift from manufacturing bulk ships to tankers or other ships. Jotun which competes with CMP for the top position established Jotun Ocean Paint in 1993 in partnership with COSCO. As such, for new ships and ship repairs involving COSCO, order will go to Jotun. However, CMP has been successful in acquiring other customers, and its share in China has been about 3% from /7

39 LAST UPDATE: Research Report by Shared Research Inc. Orders received, orders completed, and orders on hand in China 15 Orders on hand Order volume Completion volume Completion volume Orders on hand (right axis) (gross ton CY94 CY95 CY9 CY97 CY98 CY99 CY CY1 CY2 CY3 CY4 CY5 CY CY7 CY8 CY9 CY1 CY11 CY12 CY13 CY14 CY15 mn) Source: The Japanese Shipowners Association, Shared Research based on HIS data Korea Marine paint sales for the Korean market 5% 4% 3% 2% 1% % -1% -2% -3% -4% Marine paints sales (Korea) YoY Korea had a global market share of about 34% for new ships (completed) in 215. CMP s sales composition for marine paints is 17% for new ships (as of FY3/1). The company had a market share of about 1% for new ships until 213, but sales measures to capture demand from southern European shipowners were successful. Market share was 2 3% in % Marine paints sales (Korea) 18 3% 3% 38% % % % % % % 4-2% -35% 2-4% FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/18 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 YoY FY3/ Competitors include Jotun, International, and KCC, rounding out the top four companies in the country (including the company). However, shipyards in Korea tend to use domestic KCC products, and CMP is aiming to increase its market share through stronger sales activities to shipowners. Additionally, Korean firms are strong in marine resource development (offshore structures), and if the oil and energy market gains momentum, demand for related anti-fouling materials may increase. Still, as of 215 demand for offshore structures was soft on relatively low oil prices. Orders received, orders completed, and orders on hand in Korea (gross ton mn) (gross ton, mn) Orders on hand Order volume Completion volume Completion volume Orders on hand (right axis) CY94 CY95 CY9 CY97 CY98 CY99 CY CY1 CY2 CY3 CY4 CY5 CY CY7 CY8 CY9 CY1 CY11 CY12 CY13 CY14 CY15 Source: The Japanese Shipowners Association, Shared Research based on HIS data Korean shipbuilders: orders received (USDbn, March 21) Order backlog Merchant ships Marine structures Samsung Heavy Industries Daewoo Shipbuilding & Marine Engineering Hyundai Heavy Industries Hyundai Samho Total (gross ton, mn) 39/7

40 LAST UPDATE: Research Report by Shared Research Inc. Key products Anti-fouling paints Anti-fouling paints (to prevent degradation of ship bottoms) have long been a core technology for the company. Anti-fouling paints cut friction with water by acting as a protective coating to prevent shellfish and algae from attaching to ship bottoms. This boosts fuel efficiency. Wave drag resistance, viscous pressure resistance, and friction all affect marine vessel operation. Of these, viscous pressure and friction accounts for 8% of total resistance. Smoothing the painted surface can further decrease friction and increase fuel efficiency. As shipping companies look to increase efficiency, the company is focusing on providing high-performance anti-fouling paints that are environmentally compliant. Anti-fouling paints, friction, and fuel efficiency Track record Fuel efficiency improvement examples Sea trial Power saved by Ship type Shipyard A 4.% Bulk carrier Shipyard B.5% 3.5% PCC Shipyard C 3.5% Bulk carrier Shipyard D 2.% 2.8% Bulk carrier Bulk carrier Training ship Ship in service Fuel efficiency improved by Shipowner A 17.1% PCC Shipowner B 14.3% PCC Ship type Shipowner C 4.4% RORO Shipowner D 5.% Container Shipowner E 3.% Bulk carrier Bulk carrier (3 months post-application) High-speed ferry (1 months post application) Anti-fouling paint sale activities focus on track record, plus price and efficiency SEAFLO NEO, which went on sale in 21, was used on more than 2 vessels in three years. The product has continued to enjoy steady sales growth. In 213, the company unveiled SEAFLO NEO Z, with further improvements in performance. SEAFLO NEO Z lasts up to months, and has proven to be a smooth, stable paint. SEAFLO NEO Z leads to a 5 8% improvement in fuel efficiency (SEAFLO NEO is 3 5%) when compared with traditional hydrolysable anti-fouling paints, according to the company. The paint also addresses environmental concerns such as reducing carbon dioxide and VOC emissions. It received recognition in 214 by the Ministry of the Environment and the Nihon Keizai Shimbun for combating global warming. In May 217, it released a new product SEAFLO NEO CF Z. By launching the new product, it aimed to improve quality and combat downward pressure on prices. SEAFLO NEO CF Z: Released in May 217. A new fuel-efficient anti-fouling paint for ocean-going vessels. The product concepts are improvement of fuel efficiency, anti-fouling effect during anchorage, and slime prevention. Instead of a common metallic cuprous oxide component, this eco-friendly paint 4/7

41 LAST UPDATE: Research Report by Shared Research Inc. contains a novel organic anti-fouling agent that is easily degraded in seawater, which allows continuous stable paint film surface renewal in combination with unique technology, exercising performance equivalent to or beyond anti-fouling paints containing cuprous oxide. Registered with EU BPR (Biocidal Products Regulation). In anti-fouling paints, the company has been focusing on its track record, in addition to price and functionality. The NEO series, including SEAFLO NEO Z, already makes up 5% of mainstay anti-fouling paint sales. The company can use this solid track record when winning new customers. Container paints Sales of container paints Japan China Korea Southeast Asia Europe and US FY3/ FY3/2 FY3/4 FY3/ FY3/8 FY3/1 FY3/12 FY3/14 FY3/ Container paint overview Container paints use technology gained while the company was producing marine paints. The company makes and sells paints for the exterior, interior, and floors of shipping containers. Most container buyers are in China, causing sales and production (including paints) to be conducted mainly in China (Shanghai plant). Demand Container demand closely correlated to shipping volume; demand for container paints almost all new The total number of shipping containers has continued to increase in proportion to shipping volume growth. The average lifespan of a container is years. The price of a new container is about USD1,5. Old containers are sold as scrap material or converted for other uses. As a result, repair demand is low, so container coating sales hinge on new unit production. Global economic downturn can prompt a big drop in demand for container paint. Marine transport volume and marine container handling volume 8 Seaborne trade YoY change Container volume YoY change (right axis) 8,, 4 4, 2 2, -2-2, -4 (ton mn) CY8 CY88 CY9 CY92 CY94 CY9 CY98 CY CY2 CY4 CY CY8 CY1 CY12 CY14 Source: Shared Research based on data from the Shipbuilders Association of Japan and the International Association of Ports and Harbors -4, Container ships on key shipping routes continue to get bigger, supporting container paint demand Shipping containers must first be installed in a container terminal, for temporary storage. Then containers are stacked on the appropriate container ship, carried on a container vessel capable of carrying several thousand TEUs along key shipping routes, and transferred to smaller container vessels, which transport them to their final destination. The construction of new container vessels was previously expected to lead to 3x container demand, as it would require one container for the starting point, for transport, and for the destination. But now, due to efficiency gains, construction of new 41/7

42 LAST UPDATE: Research Report by Shared Research Inc. container vessels leads to under 2x container demand. Trends of building vessels with increased capacity have led to vessels carrying more than 1, TEUs, and vessels with 2,-plus TEU capacity are slated for completion in 217. TEU (twenty-foot equivalent units): TEUs are units used to express a container's carrying capacity, with 1 TEU corresponding to a single 2ft container. Containers are typically 2ft by 4ft; a 4ft container is classified as 2 TEU. Global container ships and composition by TEU capacity Ships 1, TEU 4-year TEU nominal Dec-1 Dec-17 Dec-18 Dec-19 Dec-2 Dec-1 Dec-17 Dec-18 Dec-19 Dec-2 CAGR 18, - 21, ,395 1,93 2,2 2,2 22.8% 13,3-17, ,83 2,14 2,375 2,51 2,51 8.1% 1, - 13, ,512 3,1 3,29 3,32 3,32 7.2% 7,5-9, ,17 4,241 4,241 4,241 4,241.4% 5,1-7, ,911 2,94 2,94 2,94 2,94.2% 4, - 5, ,77 3,23 3,23 3,23 3,23 -.4% 3, - 3, % 2, - 2, ,572 1,75 1,755 1,7 1,7 2.9% 1,5-1, ,8 1,71 1,11 1,11 1,11 2.4% 1, - 1, % % % Total 5,112 5,325 5,475 5,51 5,52 2,271 21,88 23,114 23,37 23,38 3.% Total after Exp. Scrap/Slip 5,112 5,11 5,14 5,97 5,28 2,271 2,9 21,944 21,95 21,71 1.7% YoY.1%.% -1.% -1.4% 3.4% 4.7%.1% -1.1% Source: Shared Research based on Alphaliner FleetForecast (January 217) Business structure Sales and customers Key customers for container paint are container manufacturers. CMP also sells to shipowners who own containers, and container leasing companies. Using its existing sales network and local support facilities has enabled it to maintain its market share. Container production centered on China, where CMP has almost 3% market share Almost 95% of global production of containers is centered on China. As such, the company sells almost all of its container paint in China. The worldwide container handling volume is increasing in net terms by 15mn to 2mn units annually. In line with this, container demand is estimated at around 2.5mn to 3mn containers per year, and company forecasts suggest that demand will continue to be around 2.5mn a year, plus or minus 1% (although demand for new containers could increase to more than 3mn, as it did in 27 and 214). Demand continued to decelerate in 2H 215 and stay lower in 1H 21, with 21 forecast to fall short by 2mn. The company was an early entrant to the Chinese market, and has been able to maintain a market share of almost 3%. CMP is one of the top groups, alongside COSCO Kansai. Demand spiked in FY3/7 and FY3/8, after which sales declined significantly, mainly due to a decline in paint prices that followed a slowdown in the overall container industry. The company's market share also dropped from more than 3% to under 3%. Competitor COSCO Kansai has captured demand from the COSCO Group. Yet CMP captured demand from companies other than COSCO, enabling it to increase market share in FY3/7 and FY3/8. Changes in Chinese marine container handling volume and sales of the company s container paints 35, Sales of container paints China container volume YoY change (right axis) 3, 25, 2, 15, 1, 5, 25, 2, 15, 1, 5, -5, FY3/ FY3/2 FY3/4 FY3/ FY3/8 (JPYmn) CY99 CY1 CY3 CY5 CY7, the Japan Shipbuilders Association, and IAPH FY3/1 CY9 FY3/12 CY11 FY3/14 CY13 FY3/1 CY15-1, 42/7

43 LAST UPDATE: Research Report by Shared Research Inc. Chinese container paint market and the company s market share 4, Other companies CMP 3, 27% 2, 29% 28% 29% 2% 28% 24% 22% 1, 22% (1, TEU) CY28 CY29 CY21 CY211 CY212 CY213 CY214 CY215 CY21 CY217 Industrial paints Sales of industrial paints Summary Japan China Korea Southeast Asia Europe and US FY3/ FY3/2 FY3/4 FY3/ FY3/8 FY3/1 FY3/12 FY3/14 FY3/1 Resources concentrated in anti-corrosion and wooden materials during the 199s; high domestic market share Industrial paints use the company s experience gained in marine paints. In the 199s CMP focused on heavy anti-corrosion (anti-rust) and wooden construction materials. By region, sales in Southeast Asia were JPY4.5bn in FY3/15. Domestically, construction sales are 2x heavy anti-corrosion sales. In construction, products for wooden floors comprise about half of sales. For heavy anti-corrosion, products for manufacturing plants account for one third of sales, and anti-fouling paint for electricity generation about one quarter. CMP has been able to strengthen its technological ability through focusing on certain businesses. Its domestic share of anti-fouling paint for electricity generation is almost two thirds of the overall market; in wooden flooring it holds over half. Sales of industrial paints, domestic sales and domestic market share for key products FY3/17 sales by region Domestic sales breakdown Anti-fouling paints for electric power generation For wooden flooring.4 3%.1 1% % %.3 52% Approx. 1/3 Approx. 2/3 approx. 7% more than 5% Japan Korea Europe and US China Southeast Asia Building material Heavy anti-corrosion CMP Others CMP Others 43/7

44 LAST UPDATE: Research Report by Shared Research Inc. Demand and business Domestic demand impacted by housing starts; overseas business mainly comprises heavy anti-corrosion paints Construction paints comprise about 2/3 of the company s domestic industrial paint sales, making it particularly vulnerable to conditions in housing starts. Overseas sales mainly comprise heavy anti-corrosion paints. By region, sales to Southeast Asia (mainly Thailand) comprise a majority of sales. In Thailand, key users are manufacturing plants (mostly petrochemical plants) and public infrastructure like bridges. TOA, a local partner company of CMP S consolidated subsidiary TOA-CHUGOKU PAINTS CO., LTD. (49% stake), handles new local projects. Many of the projects are ODA (Official Development Assistance) projects from Japan. In March 213 CMP used its high-durability paint Fluorex on Nhat Tan Bridge (Vietnam-Japan Friendship Bridge), constructed in Hanoi as an ODA project. CMP s partners can help it comply with ODA program requirements, such as finding local manufacturers. Domestic sales and new housing starts ,495 1,5 1,934 1,51 New housing starts floor area Domestic industrial paints (right axis) 1,28 1,55 1,594 1,1 1,79 1,7 1,52 1,523 1,5 1,595 1,539 1,572 1,429 1,42 1,471 1,45 1,373 1,35 1,33 1,414 1,491 1,42 1,43 1,337 2, 1, 1, FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 (mn sqm) Measures for new markets In industrial paints, the company wants to expand into new fields using its core technologies. Heavy anti-corrosion paint technologies include anti-corrosion paint BIOCLEAN intended for offshore structures and wind power generation, and CONTECT, which can prevent the peeling of concrete in humid conditions. (JPYmn) Apart from the heavy anti-corrosion sector, CMP is also seeking to enter high function paints. For example, PHOLUCID a hard coating material for use in automotive headlight covers uses the company s core technologies in UV curable paints for woodwork, and applies them to plastics. 44/7

45 LAST UPDATE: Research Report by Shared Research Inc. Strengths and weaknesses Strengths 1 years experience in core technologies: After being founded in 1917, the company focused on marine paints as its core technology, beginning sales to the Japan s Navy before the WWII, and expanding to the civil shipbuilding market domestically as well as to China and Korea after the war. It has been successful in maintaining a leading market share. Shared Research views this success as a result of CMP s focus on technology and leveraging the technology to quickly respond to evolving market needs such as demand for environmentally compliant and fuel efficient paints. Capitalizing on its core technology, the company has expanded to include container paints and industrial paints, and is now searching for a profitable niche in industrial paints. Global network: Shipbuilding is concentrated in Japan, China, and Korea, while repairs are centered in Southeast Asia. The majority of shipowners are located in Europe and the Americas. As such, a global network in each major area of the world is important to success in marine paints. CMP s model is local production for local consumption the company was early to expand overseas through joint ventures and partnerships, allowing it to build a global production, storage, and distribution network. While the number of partners still lags behind that of its western rivals, CMP s coatings are sought by shipowners, and its paints have been placed on standard lists of shipyards. This allowed the company to expand and maintain a high market share. Growing brand recognition: Both sales capabilities and a strong brand are prerequisite to expand market share, with functionality, cost, and track record being the key to successful customer acquisition. The company has been developing fuel efficient and environmentally compliant products since 21. During FY3/15, about 1/2 of CMP s marine paint sales were from new products introduced from 21 or later, and its brand recognition has been rising. Shared Research believes that if the company could further lower its cost base, it would be able to increase its market share in repairs, particularly in anti-fouling paints. Weaknesses Need to capture repair demand in anti-fouling paints to stabilize earnings: CMP leads the market in the marine paints industry for new ships, at almost 3%. However, its market share in repairs is lower, at about 2%. For the industry overall, the market for new ships vs. repairs is roughly 2:3. The repair market is less influenced by the vagaries of the industry cycle compared to the new ship market. Gaining ground in the market for repairs would lead to increased earnings stability. Limited experience outside of the marine paints domain: The company targets a sales mix of % marine paints, 2% container paints, and 2% industrial paints. As of FY3/15, these figures were 75%, 13%, and 12%, respectively. Although the company has introduced new products using its existing core technology, such as anti-peeling paints for concrete and hard coatings for automobile headlights, their contributions to earnings was limited even as of FY3/17. In Shared Research s view, these new areas require time to accumulate technologies and marketing experience, and to build sales and customer networks. Late entry into offshore structures leading to opportunity losses: Although CMP has a market share of between 2% and 3% in marine paints, its share in offshore structures (marine resource development) is low despite a substantial addressable market. International Paint, a major rival, has had a head start in this area, while CMP is yet to gain any meaningful traction. In the Korean shipbuilding industry, where the market is concentrated, total orders outstanding for the top three companies as of October 215 stood at USD127.9bn, of which 4% (USD59.4bn) was for offshore structures. CMP, on the other hand, had only one order from a Japanese company, highlighting its late start. 45/7

46 LAST UPDATE: Research Report by Shared Research Inc. Financial statements Income statement Income statement FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 3,389 7,84 88,19 14,798 13,22 8,81 9,595 93,5 83,5 9,91 1, , 82,38 85, YoY 13.7% 7.% 3.% 18.8% -1.1% -1.2% 11.3% -3.1% -1.% 8.7% 17.4% 7.8% -28.4% 3.2% Gross profit 2,83 19,932 25,54 28,73 29,72 29,97 28,844 24,855 22,79 25,227 29,424 3,139 2,8 GPM 32.8% 29.4% 29.1% 27.4% 28.1% 34.5% 29.9% 2.% 2.4% 27.8% 27.% 31.4% 32.3% - SG&A expenses 1,81 1,3 18,397 2,4 2,42 19,981 2,2 19,381 17,33 21,18 21,982 2,127 21,137 Personnel expenses 5,95,134,411,875,939,915,747,27,51 7,177 7,74 8,278 7,589 Transportation expenses 2,82 2,927 3,39 3,82 3,779 3,25 3,5 3,477 3,71 3,389 4,21 4,398 3,513 Sales commission - - 1,877 2,174 2,9 2,12 2,41 2,215 1,312 1,82 2,594 3,91 2,33 Provision of allowance for doubtful accounts , Other 7,2 7,223,7 7,585 7,798 7,24 7,27,937,42 7,222 7,492 8,848 7,791 YoY 9.1% 1.4% 12.9% 12.%.2% -3.2%.2% -3.2% -1.4% 21.9% 3.8% 18.9% -19.1% - SG&A-to-sales ratio 25.4% 24.% 2.9% 19.7% 19.9% 23.% 2.7% 2.7% 2.8% 23.3% 2.% 22.7% 25.7% - Transportation expenses, % of sales 4.5% 4.3% 3.8% 3.7% 3.% 3.8% 3.8% 3.7% 3.7% 3.7% 3.8% 3.8% 4.3% Sales commission, % of marine paints sales % 3.4% 2.7% 2.9% 3.3% 3.1% 2.1% 2.7% 3.3% 4.3% 3.1% Operating profit 4,721 3,32 7,257 8,132 8,429 9,995 8,823 5,474 4,715 4,58 7,442 1,12 5,471 5,7 YoY 5.5% -23.1% 99.8% 12.1% 3.7% 18.% -11.7% -38.% -13.9% -13.9% 83.4% 34.5% -45.4% 4.2% OPM 7.4% 5.4% 8.2% 7.8% 8.1% 11.5% 9.1% 5.9% 5.% 4.5% 7.% 8.7%.%.7% OP before depreciation & goodwill amortization 5,98 4,859 8,482 9,587 1, 11,21 1,524 7,33,15 5,47 9,143 11,78 7,228 YoY 4.8% -18.8% 74.% 13.% 4.4% 1.1% -9.4% -33.2% -12.3% -8.4% 1.9% 28.8% -38.% OPM 9.4% 7.2% 9.% 9.1% 9.7% 13.4% 1.9% 7.5% 7.4%.2% 8.% 1.2% 8.8% Non-operating income (expenses) , Financial income (expenses) Gains on foreign exchange Royalties received Technological training fee Other non-operating income Recurring profit 4,72 3,7 7,13 7,442 7,899 1,28 9,114,4 5,119 5,58 8,359 1,41,7,3 YoY 1.1% -21.7% 92.7% 4.4%.1% 3.% -11.2% -33.7% -15.2% -1.2% 5.3% 24.% -41.7% 3.7% RPM 7.5% 5.5% 8.1% 7.1% 7.% 11.8% 9.4%.5%.1% 5.% 7.8% 9.1% 7.4% 7.4% Extraordinary gains (losses) Income taxes -1,82-1,494-1,834-2,331-1,997-3,814-2,7-2,55-1,73-2,5-2,342-2,929-1,833 Implied tax rate 38.2% 34.4% 25.8% 29.% 25.8% 37.% 3.% 42.5% 33.1% 34.8% 29.7% 28.2% 29.8% Non-controlling interests Net income attributable to parent company shareholders 2,74 2,33 4,853 5,117 5,31 5,422 5,71 3,7 2,978 3,29 4,748,52 3,43 3,8 YoY.5% -2.% 84.3% 5.4% -1.7% 7.8% 5.1% -4.2% -2.9% 9.8% 45.2% 3.9% -44.% 4.3% Net margin 4.3% 3.9% 5.5% 4.9% 4.9%.2% 5.9% 3.3% 3.% 3.% 4.4% 5.7% 4.4% 4.5% Capital expenditures 1,4 2,5 2,71 2,2 3,44 2,2 1,55 1,188 1,382 1,34 1,13 1,797 3,972 Depreciation 1,25 1,22 1,228 1,458 1,555 1,5 1,8 1,535 1,42 1,52 1,71 1,738 1,727 Amortization of goodwill R&D expenses 1,382 1,38 1,49 1,5 1,8 1,939 1,98 1,92 1,789 1,714 1,849 1,787 1,859 Performance by segment FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 3,389 7,84 88,19 14,798 13,22 8,81 9,595 93,5 83,5 9,91 1, , 82,38 85, China 33,172 34,475 35,333 39,22 43,579 41,351 4,821 37,529 34,182 35,8 3,532 38,51 35,529 Japan 13,8 1,747 3,84 38,145 31,99 2,3 31,229 31,412 27,4 2,3 34,35 31,859 1,552 Korea ,377 8,543 9,97,22 8,472 11,575 15,842 1,29 Southeast Asia ,33 7,394 7,58 8,238 1,548 11,81 13,185 1,34 Europe and US,89,442 9,118 11,154 1,838 8,417 8,7 7,82 7,391 1,88 12,45 15,78 9,954 Marine paints 38,913 42,933 51,238 3,35 73,73 74,27 72,933 71,23 3,87,722 79,75 92,3 4,91 Industrial paints 14,112 13,24 13,41 14,831 13,1 1,8 11,199 1,454 1,993 12,445 12,85 12,241 12,19 Container paints 9,723 1,992 22,892 2,2 15,72 1,335 12,84 11,54 8,419 11,41 13,972 1,435 5,18 Others YoY 13.7% 7.% 3.% 18.8% -1.1% -1.2% 11.3% -3.1% -1.% 8.7% 17.4% 7.8% -28.4% 3.2% China 4.2% 3.9% 2.5% 12.1% 1.% -5.1% -1.3% -8.1% -8.9% 2.4% 4.4% 5.4% -7.7% - Japan 34.1% 22.4% 83.9% 23.8% -1.1% -3.4% 53.4%.% -12.% -5.7% 31.8% -7.3% -48.% - Korea %.5% -31.8% 3.% 3.% 3.9% -35.% - Southeast Asia % 3.% 7.% 28.% 12.% 11.% -23.9% - Europe and US 2.9% -.5% 41.5% 22.3% -2.8% -22.3% 2.3% -8.7% -.% 4.2% 15.2% 25.9% -3.5% - Marine paints - 1.3% 19.3% 23.% 1.4%.7% -1.8% -2.3% -1.3% 4.5% 19.5% 15.4% -29.5% - Industrial paints - -.2% 1.2% 1.7% -7.9% -2.9% 3.% -.7% 5.2% 13.2% 1.9% -3.5% -1.8% - Container paints % 18.3% 13.7% -39.% -91.5% 85.2% -4.8% -2.8% 35.% 22.4% -25.3% -51.% - Operating profit 4,721 3,32 7,257 8,132 8,429 9,995 8,823 5,474 4,715 4,58 7,442 1,12 5,471 5,7 China 2,789 2,54 1,381 1,99 2,992 5,14 3,9 2,458 2,214 1,9 1,598 2,773 3,1 Japan ,439 2,4 1,52 1,9-2 2,345 2,3-45 Korea , Southeast Asia ,477 1,984 2,97 1,53 Europe and US ,125-1, , Elimination , 2,179 1,4 1,358 1,42 1,92 2,79 1,55 OPM 7.4% 5.4% 8.2% 7.8% 8.1% 11.5% 9.1% 5.9% 5.% 4.5% 7.% 8.7%.%.7% China 8.4%.% 3.9% 5.%.9% 12.3% 9.%.5%.5% 5.% 4.4% 7.2% 8.9% Japan % 7.9% 5.3% 3.9% -2.4%.8%.5% -2.8% Korea % 7.3% 2.4% -.4% 4.4% 1.3% 3.2% 5.9% Southeast Asia % 13.4% 1.% 11.9% 14.% 1.8% 22.% 15.3% Europe and US % -13.1% -14.4% -12.2% -5.% -4.8% -.% -9.4% Effects of market environment changes Until FY3/13, for the parent company, material costs accounted for almost 9% of CoGS. Owing to the impact of the naphtha market, market prices overseas became increasingly volatile, and domestically forex played a role as well. Resin takes up a large share of costs by value and has a high processing cost which allows CMP to add value meaning that the naphtha market has an indirect impact, although delayed. This trend becomes even stronger for materials that use special resins like anti-fouling paints. 4/7

47 LAST UPDATE: Research Report by Shared Research Inc. CoGS breakdown for the parent 1% 8% % 4% 2% % 8% % % % % % % % 5% 5% 5% % % % 5% 1% 1% 1% 9% 9% 8% 8% 8% 7% 7% 7% 7% 7% 7% 7% 58.8% 5.3% 55.4% 58.1% 57.% 54.9% 54.3% 53.% 52.4% 51.% 82% 84% 85% 8% 85% 8% 8% 8% 88% 88% 88% 8% 87% 87% 87% 49.% 48.9% 5.4% 47.9% FY3/99 FY3/1 FY3/3 FY3/5 FY3/7 FY3/9 FY3/11 FY3/13 48.% Material expenses Personnel expenses Expenses Material expenses/product sales (right axis) % 55% 5% 45% Naphtha CIF prices and GPM (JPY'/kl) FY3/4 FY3/5 Naphtha price FY3/ FY3/7 GPM (right axis) FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 38% 3% 34% 32% 3% 28% 2% 24% 22% 2% Naphtha CIF prices and average price of anti-fouling paints in Japan (JPY'/kl) 9 FY3/4 Naphtha price FY3/5 FY3/ FY3/7 Average price of anti-fouling paints in Japan (right axis) FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/ (JPY/kg) Exchange rates CMP has created a world-wide network for both manufacturing and sales. The company aims for localized production and consumption. It does not experience effects from exchange rates on a sales or operating profit level like a typical exporting company. These effects are typically felt from conversion rates when forming a new partnership. Raw material prices are affected but the impact on the company is not significant. Forex gains and losses in non-operating profit mainly comprise both settlement and valuation differences. Note that the impact of Chinese subsidiaries when they borrow dollars is significant. Exchange rate assumptions (average and quarter-end) FY3/7 FY3/9 FY3/11 JPY/USD (avg.) JPY/EUR (avg.) FY3/13 FY3/15 JPY/USD (qtr-end) JPY/EUR (qtr-end) FY3/ FY3/7 JPY/CNY (avg.) JPY/KRW' (avg.) FY3/9 FY3/11 JPY/CNY (qtr-end) JPY/KRW' (qtr-end) FY3/13 FY3/15 FY3/17 47/7

48 LAST UPDATE: Research Report by Shared Research Inc. The following describe elements of the income statement unique to CMP. SG&A expenses The main components of SG&A expenses are semi-fixed costs such as personnel expenses, and variable costs such as transportation expenses and sales commissions. A big overseas footprint means exchange rates have a big impact. Royalties received (non-operating income) Licensees of its technology are part of its global supply network. The following table shows the major overseas partnerships. From partners, CMP gets an initial royalty plus a percentage of sales. Technological training fee (non-operating income) After application, the paint becomes similar to a film coating and starts to exhibit its properties. The company receives technological training fees when aiding in the process. As the amount of work increases as the number of people associated with project increases, this may impact SG&A expenses. Tax rate Differences with statutory tax rate FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 Statutory tax rate 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 37.8% 37.8% 35.4% Effective tax rate 38.2% 34.4% 25.8% 29.% 25.8% 37.% 3.% 42.5% 33.1% 34.8% 29.7% Difference -2.3% -.1% -14.7% -11.5% -14.7% -2.9% -1.5% 2.% -4.7% -3.% -5.7% Difference in tax rate of overseas subsidiaries -19.8% -1.3% -27.% -2.9% -14.9% -1.5% -12.3% -13.1% -12.9% -14.9% -11.9% Items that are never included in income such as international fees 1.8% 1.7% 3.4% 3.% 3.2% 3.3% 5.2% 4.2% 4.5% 4.1% 3.4% Items that are never included in gains such as dividend income -1.5% -2.4% -1.8% -1.5% -1.7% -4.2% -5.2% -.% -5.% -3.3% -4.8% Pending dividends 1.3% 17.8% 14.% 2.4% 1.2% 8.4% 12.9% 1.5% 13.2% 15.1% 9.% Accrued directors' bonuses -.4%.2%.4%.3%.2%.3%.5%.5%.2%.2% Decline from adoption of overseas tax deductions - -2.% -4.2% -1.9% -2.1% -1.1% -5.2% -1.3% -1.4% -1.9% -.7% Decline from deductions from research and testing fees % -1.4% -1.8% -1.7% -1.5% -1.7% -2.5% -2.1% -2.3% -2.3% Change in valuation allowance related to deferred tax assets.%.1%.2%.2% -2.5% - 1.1%.7% -.1%.9% 2.2% Income tax from previous years % % Other.3% -1.9% 1.3% -1.4% 1.% 2.5% -5.% -3.% -.8% -.9% -.8% Net income attributable to non-controlling interests Net income attributable to non-controlling interests is heavily influenced by the performance of consolidated subsidiaries in Thailand (49.% stake; mainly industrial paints) and Korea (59.5% stake; mainly marine paints). Performance of the Shanghai subsidiary (92% stake) is also a factor, as container paints are volatile and almost entirely target the Chinese market. All the joint venture partners are local companies. Geographic segment profits In international shipping, shipowners and shipyards are unevenly distributed geographically. In response, CMP has established a group to unify its global network and win orders. Although localized production and consumption is a core policy for CMP, raw materials may be sourced from and operating expenses concentrated in certain regions. This can cause geographic segment profits to show up as losses. 48/7

49 LAST UPDATE: Research Report by Shared Research Inc. Breakdown of sales Income by segment FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 3,389 7,84 88,19 14,798 13,22 8,81 9,595 93,5 83,5 9,91 1, , 82,38 85, YoY 13.7% 7.% 3.% 18.8% -1.1% -1.2% 11.3% -3.1% -1.% 8.7% 17.4% 7.8% -28.4% -2.4% Marine paints 38,913 42,933 51,238 3,35 73,73 74,27 72,933 71,23 3,87,722 79,75 92,3 4,91 Japan ,9 31,359 27,821 28,97 3,37 32,529 28,918 China ,214 19,7 18,58 14,297 19,71 21,171 1,813 Korea ,535 9,,17 8,423 11,41 15,771 1,227 Southeast Asia ,214 4,225 4,245 5,479,394 7,28 5,21 Europe and US ,272 7,577 7,124 1,425 11,852 14,92 9,329 YoY - 1.3% 19.3% 23.% 1.4%.7% -1.8% -2.3% -1.3% 4.5% 19.5% 15.4% -29.5% Japan % -11.3% 1.% 8.1% 7.1% -11.1% China % -2.% -22.8% 37.9% 7.4% -48.9% Korea % -31.9% 3.4% 35.5% 38.1% -35.2% Southeast Asia %.5% 29.1% 1.7% 19.3% -2.3% Europe and US % -.% 4.3% 13.7% 2.2% -37.% Industrial paints 14,112 13,24 13,41 14,831 13,1 1,8 11,199 1,454 1,993 12,445 12,85 12,241 12,19 Japan ,745 5,84 5,995,595 5,827 5,45,281 China ,4 1,773 1,585 1,582 1,948 1,75 1,424 Korea Southeast Asia ,31 2,731 3,259 4,53 4,451 4,542 3,818 Europe and US YoY - -.2% 1.2% 1.7% -7.9% -2.9% 3.% -.7% 5.2% 13.2% 1.9% -3.5% -1.8% Japan % 3.3% 1.% -11.% -3.1% 11.3% China % -1.% -.2% 23.1% -12.5% -1.5% Korea % -19.4% 9.% 222.4% -55.7% -1.4% Southeast Asia % 19.3% 24.4% 9.8% 2.% -15.9% Europe and US % 11.4% 29.9% 81.2% -7.% 52.5% Container paints 9,723 1,992 22,892 2,2 15,72 1,335 12,84 11,54 8,419 11,41 13,972 1,435 5,18 Japan China ,373 1,31 7,547 1,183 12,97 8,982 4,314 Korea Southeast Asia ,1 97 1, Europe and US YoY % 18.3% 13.7% -39.% -91.5% 85.2% -4.8% -2.8% 35.% 22.4% -25.3% -51.% Japan China % -29.% 34.9% 24.7% -29.3% -52.% Korea Southeast Asia % 4.4% 38.% -4.5% 4.5% -41.4% Europe and US % -18.2% 55.4% 4.7% 44.1% -54.3% 49/7

50 LAST UPDATE: Research Report by Shared Research Inc. Balance sheet Balance sheet FY3/4 FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Current assets 3,813 45,143 48,57 4,992 3,57,29 4,8 7,7 7,233 74,315 83,118 95,72 92,58 84,1 Cash and cash equivalents,884 7,943 9,93 8,132 7,975 8,25 14,77 12,412 17,15 22,11 28,37 3,82 34,18 3,918 Accounts receivable 19,29 23,933 24,431 3,198 3,538 34,891 35,32 41,758 37,94 3,944 38,77 47,119 42,42 32,4 Inventories 9,359 11,91 13,11 18,258 17,719 1,2 12,829 14,15 13,751 14,3 15,129 17,2 15,958 14,5 Deferred tax assets , ,19 1,1 1,81 1,4 Allowance for doubtful accounts ,71-2,13-2,432-2,117 Others 1,77 1,118 1,12 2,173 1, ,98 1,77 1,3 1,128 2,477 1,419 1,391 1,47 Tangible fixed assets 23,454 23,25 24,541 2,38 25,571 23,837 24,394 23,484 23,2 23,782 25,1 25,915 25,112 2,82 Intangible fixed assets ,29 1,51 1,43 1,427 Investments and other assets 7,95 8,55 1,382 1, 8,91,45 7,42 5,872 5,82 7,255 8,994 11,944 9,575 9,82 Investment securities,81 7,279 8,981 9,11 7,29 4,958 5,823 4,78 4,79,382 8,133 1,82 8,313 8,382 Allowance for doubtful accounts ,4-1,15 Others 1,53 1,745 1,489 1,59 1,712 1,512 1,29 1,21 1, ,44 2,32 2,57 Fixed assets 31,2 32,25 35,149 37,5 34,983 31,14 32,278 3,235 29,17 31,925 35,91 39,31 3,331 38,5 Total assets 8,433 77,18 83,71 12,58 98,55 91,77 9,34 1,35 99,85 1,24 119,19 135,87 128, ,58 Current liabilities 33,989 4,93 39,827 52,22 49,722 44,351 44,124 45,145 42,423 41,879 43,178 5,21 43,149 3,51 Accounts payable 8,71 11,51 11,374 1,873 15,8 13,193 12,97 17,38 12,535 13,37 14,4 19,42 14,378 11,45 Short-term debt 2,34 21,983 22,453 27,875 25,885 24,939 2,59 19,529 23,43 21,933 2,82 19,32 18,52 17,35 Current portion of long-term debt 1 1, ,819 1, ,35 1,58 31 Accounts payable - other 3,274 3,544 4,7 5,258 5,174 4,39 4,948 5,31 4,88 4,893 5,415,41,45 5,59 Income taxes payable 7 1, ,89 1, ,893 1, ,435 1,438 1,7 83 Other current liabilities ,32 1,73 1,4 Fixed liabilities,27 5,533 9,41 9,194 7,723 7,41 5,83,285 7,12 7,1 8,58,,423 7,387 Long-term debt 2,725 1,245 2,815 3,185 2,555 3,1 1,182 1,92 2,847 3,314 3,373 1,8 1,728 2,7 Asset retirement obligations 2,22 2,228 3,38 3,4 3,44 3,2 3,2 3,2 2,44 2,15 2,15 2,37 2,252 2,252 Deferred tax liabilities ,153 1,82 1,345 1,35 Others 1,72 1,393 2,479 2,224 1, ,37 2,122 1,98 1,73 Total liabilities 4,1 4,495 48,88 1,217 57,445 51,72 49,88 51,431 49,43 49,541 51,8 5,81 49,572 43,889 Net assets 27,817 3,73 34,847 4,84 41,15 4,13 4,538 48,874 5,414 5,99 7,332 78,225 78,817 78,19 Shareholders' equity 24,575 2,73 28,747 33,3 37,2 4,433 44,954 49,75 51,927 53,97 55,51 59,29 4,73,752 Capital stock 11,2 11,2 11,2 11,2 11,2 11,2 11,2 11,2 11,2 11,2 11,2 11,2 11,2 11,2 Capital surplus 7,784 7,785 7,785 7,785 7,785 7,783 7,783 7,783 7,783 7,783 7,783 7,783 7,783 7,783 Retained earnings 5,2 7,355 9,418 13,753 17,74 21,21 25,739 3,547 32,721 34,87 37,27 41,79 4,522 49,45 Treasury stock ,179-1,183-1,192-1,21-1,72 Valuation and translation differences 2,8 2,23 4,394 5,511 1,798-2,581-1,4-4,11-4,19-277,985 13,184 8,42 5,797 Unrealized gains on investment securities 1,2 1,54 2,717 2,73 1, ,124 4,2 2,15 2,19 Foreign currency translation adjustment Share subscription rights Non-controlling interests 1,174 1,347 1,7 2,25 2,28 2,11 3,49 3,129 3,1 3,878 4,844 5,745 5,84 5,18 Total liabilities and equity 8,433 77,18 83,71 12,58 98,55 91,77 9,34 1,35 99,85 1,24 119,19 135,87 128, ,58 Capital expenditures 1,17 1,4 2,5 2,71 2,2 3,44 2,2 1,55 1,188 1,382 1,34 1,13 1,797 3,972 Depreciation 1,229 1,25 1,22 1,228 1,458 1,555 1,5 1,8 1,535 1,42 1,52 1,71 1,738 1,727 Amortization of goodwill Working capital 19,978 24,333 2,172 37,583 38,391 37,7 35,155 38,54 38,91 37,934 39,142 45,325 43,22 35,15 Total interest-bearing debt 23,15 24,858 25,898 31,19 29,7 28,89 23, 22,59 2,355 25,312 24,283 22,75 21,3 2,93 Net cash -1,282-1,915-1,2-23,58-21,95-19,44-8,893-1,184-8,74-3,31 4,84 7,92 12,712 1,825 Accounts receivable days Days in inventory Accounts payable days Working capital efficiency Current ratio 18% 11% 122% 125% 128% 137% 145% 155% 1% 177% 193% 191% 213% 23% Fixed ratio 118.7% 19.2% 1.1% 9.1% 9.1% 82.3% 74.2%.1% 2.%.4% 57.5% 54.3% 49.7% 52.5% Equity ratio 38.9% 38.% 39.% 37.8% 39.4% 41.2% 45.1% 45.% 47.4% 49.7% 52.5% 53.7% 57.% 59.4% Intangible fixed assets The increase in FY3/14 relates to land use rights from expanding the Shanghai plant. Currency rates explain fluctuations thereafter. Tangible fixed assets Land was revalued at end March 2. The difference in value was recorded in net assets JPY3.9bn at end FY3/17. Investments and other assets FY3/15 s increase in the others item is from bankruptcy rehabilitation claims. Allowance for doubtful accounts Amid the 28 global financial crisis, China s shipbuilding industry suffered and payment periods lengthened. Increases from FY3/14 onward relate to sales in China and Korea. Accounts payable-other and accrued expenses (current liabilities) Accounts payable for sales commissions are recorded in this item. Unpaid portions are recorded according to construction progress. The difference between accounts payable and accrued expenses lies in whether or not the liability has been determined. We note that the government s recognition of this can be different. 5/7

51 LAST UPDATE: Research Report by Shared Research Inc. Guarantee obligations In contingent liabilities, guarantee obligations for Mitsubishi Corporation Chemical (JPY827mn at end FY3/17) are listed, to lower the risk of customers defaulting. 51/7

52 LAST UPDATE: Research Report by Shared Research Inc. Cash flow statement Statement of cash flows FY3/4 FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities Income before income taxes 3,248 4,783 4,344 7,115 8,35 7,74 1,138 9,27,29 5,2 5,89 7,899 1,383,154 Depreciation 1,229 1,25 1,22 1,228 1,458 1,555 1,5 1,8 1,535 1,42 1,52 1,71 1,738 1,727 Amortization of goodwill Change in provisions for loyalty points Change in accounts receivable ,497 1,15-1,319-4,599-3,82 2,825-8,83 3,43 4,38 3,338 -,351 3,128 7,114 Change in inventories -11-2, , ,51-2, ,25-1, ,138 Change in accounts payable -78 2, , ,157-4, ,574-4,448-2,93 Change in accrued consumption tax Others ,38 1,275-1, ,21 1,9-523 Subtotal 3,19 2,171 5,17-1,8,48 7,255 1,453 5,75,357 1,19 11,527,47 12,95 13,38 Interest and dividends income received Security deposits paid , Income taxes paid ,149-2,221-1,343-1,727-2,52-1,982-4,418-2,5-1,87-1,74-2,44-2,822-2,8 Cash flows from operating activities 2, ,53-3,72 4,84 4,74 14,29 1,252 3,7 8,719 1,84 4,355 9,774 1,75 Cash flows from investing activities Change in time deposits ,5-1, ,477-1,533 Change in securities Change in investment securities , Acquisition of fixed assets ,19-2,45-2,3-2,572-3,9-2,17-1,341-1,139-1,4-1,924-1,247-1,1-3,94 Proceeds from sales of fixed assets , Purchase of investments in subsidiaries Others Cash flows from investing activities ,954-2,21-1,34-2,85-1,78-2,154-3,24-2, ,552-5,448 Cash flows from financing activities Change in short-term debt 375 1, , , ,419-2,94-3,15-2, Change in long-term debt Purchase of treasury shares Income from retirement of treasury shares Cash dividends paid , ,59-1,12 Cash dividends paid to minority shareholders Proceeds from share issuance to minority shareholders Others Cash flows from financing activities -1,94 1, ,38-1, ,79-1,71 3,94-4,455-4,42-3,9-3,133-2,737 Effect of exchange rate on cash and cash equivalents ,95 1,828 1, Change in cash and cash equivalents 1,1 1,821 1,737-1, ,955-2,721 4,349 1,734 5,128 1,32 2,428 1,574 Cash and cash equivalents (beginning of year) 4,928,88 7,91 9,47 7,752 7,858 8,591 14,547 11,825 1,174 17,98 23,37 24,4 2,828 Cash and cash equivalents (year end),88 7,91 9,47 7,752 7,858 8,591 14,547 11,825 1,174 17,98 23,37 24,4 2,828 28,43 In FY3/7 sales rose 3% YoY to JPY2.4bn. Operating cash flow has been positive since FY3/99. Excluding investment for production capacity increases, capital investment has annual demand for renewal of about JPY1.bn. Operating cash flow continues to exceed investment cash flow, underpinning debt repayment. FY3/14 was cash-positive, and this trend has continued. Cash flow and capital expenditures 25 Operating CF Investing CF Financing CF Interest-bearing debt (right axis) Cash and cash equivalents (right axis) FY3/ FY3/5 FY3/1 FY3/ Capital expenditures Depreciation FY3/ FY3/5 FY3/1 FY3/15 52/7

53 LAST UPDATE: Research Report by Shared Research Inc. ROE, ROA, ROIC FY3/1 FY3/2 FY3/3 FY3/4 FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ROE -5.8% -1.8% 7.% 1.% 9.7% 8.4% 13.5% 13.2% 13.1% 13.3% 12.8%.% 5.9% 5.7% 7.% 8.9% 5.% Net margin -3.4% -.9% 3.3% 4.% 4.3% 3.9% 5.5% 4.9% 4.9%.2% 5.9% 3.3% 3.% 3.% 4.4% 5.7% 4.4% Total asset turnover Financial leverage ROA 2.4% 3.9% 5.3%.4%.5% 4.% 7.7% 7.4% 8.3% 1.9% 9.3%.% 5.% 4.5%.% 7.9% 4.9% ROIC 2.3% 3.4% 4.4% 5.2% 5.3% 3.7%.5%.8% 7.2% 8.% 7.4% 4.4% 3.7% 2.9% 5.%.7% 3.7% NOPAT 1,227 1,84 2,15 2, 2,8 2,154 4,34 4,823 4,999 5,928 5,233 3,247 2,923 2,51 4,79,72 3,2 Net assets + Interest-bearing debt 52,4 49,852 49,552 5,111 53,257 58,138,388 71,13 9,139 9,15 7,834 74,12 79,39 8,813 9,298 1,552 99,193 ROIC (before tax) 4.% 5.8% 7.5% 8.9% 8.9%.2% 1.9% 11.4% 12.2% 14.5% 12.5% 7.4% 5.9% 4.7% 7.7% 1.% 5.5% OPM 4.% 5.9% 7.4% 8.% 7.4% 5.4% 8.2% 7.8% 8.1% 11.5% 9.1% 5.9% 5.% 4.5% 7.% 8.7%.% Sales / Invested capital % ROE ROA ROIC 13.5% 13.2% 13.1% 13.3% 12.8% 1% 5% % 2.3% 3.4% -1.8% 7.% 4.4% 1.% 9.7% 5.2% 5.3% 8.4% 3.7%.5%.8% 7.2% 8.% 7.4%.% 4.4% 5.9% 5.7% 3.7% 2.9% 7.% 5.% 8.9%.7% 5.% 3.7% -5% -5.8% -1% FY3/1 FY3/ FY3/11 FY3/1 ROE 15% 1% 5% % -5% % -3.4% % 3.3% -1.8% -.9% 13.5% 13.2% 13.1% 13.3% 12.8% % 9.7% % %.2% 5.9% 5.7% 5.5% 5.9% 4.% 4.3% 4.9% 4.9% 3.9% 3.3% 3.% 3.% 8.9% 7.% % 4.4% 5.% % ROE Net margin Total asset turnover (right axis) Financial leverage (right axis) -1% FY3/1 FY3/ FY3/11 FY3/1 ROIC 1% ROIC (before tax) OPM Sales / Invested capital (right axis) 2 14% 12% 1% 8% % 4% 2%.9 4.% % 5.9% % % 5.4% % % 8.1% 11.5% % % 5.% 4.5% % %.8.% 1 % FY3/1 FY3/ FY3/11 FY3/1 12 Net assets Interest-bearing debt Operating profit (right axis) FY3/1 FY3/ FY3/11 FY3/ /7

54 LAST UPDATE: Research Report by Shared Research Inc. Other information Corporate governance The company has a board of directors and board of corporate auditors, with an executive officer system in place to increase transparency. A management meeting for directors and executive officers is held periodically. In June 215, CMP had five directors (including one outside director) and four corporate auditors (including two outside corporate auditors). Six of these directors and auditors also serve as executive officers. Outside director Koji Ueda is a CPA, professor of management strategy at the Kwansei Gakuin University Professional Graduate School Institute of Business and Accounting, and representative partner at Nexus Audit Company. The two outside corporate auditors both established tax office practices after retiring from the Japanese National Tax Agency. Top management President Masataka Uetake (born January 12, 1945) Uetake joined CMP in 198. In 1997 he became director and general manager of the marine paints division. In 23 he became a managing director and president of the marine coatings division. In 27 he became a senior managing director, overseeing sales and overseas operations. In April 21, he was appointed president. At end March 215, Uetake held 12, CMP shares. Dividend policy The company aims to provide stable dividends, based on company performance (see table). Shareholder returns FY3/1 FY3/2 FY3/3 FY3/4 FY3/5 FY3/ FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total dividends a) ,59 Total treasury stock acquired b) Total returns to shareholders c) = a) + b) 1,182 1,239 1, , ,1 1,7 Net income attributable to parent company shareholders d) -1, ,5 2,538 2,74 2,33 4,853 5,117 5,31 5,422 5,71 3,7 2,978 3,29 4,748,52 Dividend payout ratio a) / d) -19.2% -81.3% 2.9% 2.3% 19.1% 19.% 14.2% 17.5% 17.8% 1.5% 15.7% 29.1% 29.1% 2.3% 2.9% 1.3% Total shareholder return ratio c) / d) -7.% % 5.3% 2.8% 2.% 2.3% 14.% 18.5% 18.% 1.% 15.8% 29.2% 1.8% 2.4% 21.1% 1.4% Before amortization of goodwill c) / e) -7.% % 5.3% 2.8% 2.% 2.3% 14.% 18.5% 18.% 1.% 15.8% 29.2% 1.8% 2.4% 21.1% 1.4% Net assets available to common shareholders (year end) 24,31 23,825 23,939 2,44 29,32 33,142 38,575 38,819 37,852 43,489 45,745 47,38 52,821 2,488 72,48 73,133 Average of beginning and end of f) 27,19 24,7 23,882 25,291 27,985 31,234 35,858 38,97 38,33 4,71 44,17 4,527 5,5 57,55 7,484 72,87 year Before deducting assets available to 24,31 23,825 23,939 2,44 29,32 33,142 38,575 38,819 37,852 43,489 45,745 47,38 52,821 2,488 72,48 73,133 holders of Class A preferred shares EPS (JPY) DPS (JPY) DOE a) / f) 1.1% 1.5% 1.9% 2.% 1.8% 1.7% 1.9% 2.3% 2.3% 2.2% 2.% 1.9% 1.7% 1.5% 1.5% 1.5% 7% Payout ratio Total shareholder return ratio DOE (right axis) % 3% 5% 4% 2% 3% 2% 1% 1% % FY3/1 FY3/ FY3/11 FY3/1 % 54/7

55 LAST UPDATE: Research Report by Shared Research Inc. Shareholder composition Top shareholders Shares % of issued (') shares The Hiroshima Bank, Ltd. 3, % KBL EPB S.A ,88 4.2% STATE STREET BANK AND TRUST COMPANY 2,749 4.% Japan Trustee Services Bank, Ltd. (Trust account) 2, % NORTHERN TRUST CO. (AVFC) RE NVI1 2, % Meiji Yasuda Life Insurance Company 2, 2.9% FCP SEXTANT AUTOUR DU MONDE 2, 2.9% The Master Trust Bank of Japan, Ltd. (Trust account) 1, % Mitsubishi Corporation 1, % The Bank of Tokyo-Mitsubishi UFJ, Ltd. 1, % Treasury stock 3,55 5.2% Shares issued 9,9 1.% (as of end March 217) Number of employees (Consolidated) Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Number of employees Shanghai Factory Shiga Factory Guangdong Factory Shiga Technical HQs Korea Factory Kyushu Factory Singapore Factory Otake Technical HQs Malaysia Factory Kinki service center Indonesia Factory Other locations Thailand Factory Otake-Meishin Chemical US Factory Kobe Paints Netherlands Factory Other domestic subsidiaries Other overseas subsidiaries About paints Characteristics of paint industry Broad user base; Specialized safety and environmental awareness; Low barriers to entry, so small companies can enter the market leading to many manufacturers. However, in the company s mainstay marine paints sector or heavy anti-corrosion sector, development and manufacture for specialized uses and a global supply network (marine paints) are essential. Regulatory approval needs to be acquired for each country and customers like strong track records. As such, new entrants struggle. Paint products in these sectors are products and half products. For coatings to work, correct application is key and so CMP conducts application training onsite. Composition of paints Paints contain resins, pigments, additives, and solvents. Resins are a key ingredient for coatings, and determine the properties of the coating. Pigments add color, and can act as a determinant in coating thickness, or as a protective layer. Additives improve coating functionality. Solvents adjust the density of resins. Solvents evaporate, so are not part of coatings. Composition of coatings Coatings are separated into lower, middle, and upper layers. Development is ongoing to formulate a single coating that incorporates the features of each layer. Lower layer coatings protect the underlying material. Middle layer coatings aid in the function of the finished product and bond the lower and upper layers. The upper layer coatings have either cosmetic or functional roles, like anti-fouling. 55/7

56 LAST UPDATE: Research Report by Shared Research Inc. Profile Company Chugoku Marine Paints, Ltd. Phone Head office Tokyo club building 3-2- Kasumigaseki, Chiyoda-ku, Tokyo 1-13 Listed on Tokyo Stock Exchange 1st Section Established Exchange listing May 1917 October 2, 191 Audit firm Ernst & Young ShinNihon LLC Website Fiscal year-end March IR web 5/7

57 LAST UPDATE: Research Report by Shared Research Inc. Historical earnings results and news Historical earnings results 1H FY3/18 results (out October 31, 217) 1H: Sales and operating profit down 5.2% and 19.%, respectively. Sales declined significantly in the mainstay marine paints for new ships mainly in China and Korea due to oversupply of shipping. Operating profit: The decline in GPM due to the soaring prices of raw materials was offset by reducing SG&A expenses such as fixed costs and debt recovery expenses. As such, the decline in profit was limited to JPY557mn. New shipbuilding: Sales decline in China and Korea was due to continuing a sales strategy focused on credit risk and profitability after the decline in demand. Ship repair: Sales increased as expected, contributing to the sales increase in Southeast Asia, Europe, and the US. Demand related to the international convention on ballast water management increased slightly, so the risk of a reactionary falloff has diminished. Container paints: Sales were flat after bottoming out in FY3/17. However, the benefits of water-based paints are beginning to appear, and it is worth noting that this should lead to improved profitability. Downward forecast revision: Full-year forecast for operating profit revised down by JPY1.bn to JPY4.1bn due to paint demand for new ships falling more than expected and a price hike in raw materials. The revision takes into account risks related to demand and the price of raw materials, so the company is aiming to surpass the revised plan in FY3/19. Cumulative quarterly sales (left and middle charts) and operating profit (right chart) Quarterly earnings Marine paints Industrial paints Container paints OPM (%) Operating profit (right axis) FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/1 FY3/17 FY3/ /7