Research Coverage Report by Shared Research Inc.

Transcription

1 esearch eport by Shared esearch Inc. This PDF document is an updated note on the company. A comprehensive version of the report on the company, including this latest update, is available on our website and various professional platforms. On November 14, 218, DIC Corporation (DIC) announced earnings results for. Quarterly performance YoY chg (JPYmn) Q2 Q4 Q2 Q4 Q2 Cml. Cml. Cml. FY FY Est. Est. Q2 Est. Init. Est. Vs. prev. Cml. Sales 188, , ,82 191, ,1 193,73 2,57 26, ,197 22,591 21,96 559, ,31 6, , ,427 82, 83, 82, 82, -1, +17,438 YoY -6.2% -9.4% -12.1% -5.7%.4% 2.2% 1.3% 7.4% 3.8% 4.6%.7% -9.2% 4.3% % 5.1% 3.9% 5.1% 3.9% 3.9% Gross profit 44,675 45,75 43,785 45,333 44,338 44,81 46,528 47,942 43,25 45,67 44, ,21 135, ,41 179, , ,635 YoY 1.2% 1.3% -9.3% -4.1% -.8% -2.1% 6.3% 5.8% -2.6% 1.9% -5.1% % -1.9% -2.9% 2.3% GPM 23.7% 24.1% 24.1% 23.6% % 23.2% 23.3% % % 22.1% 23.9% 23.3% pp SG&A expenses 32,332 32,21 29,52 31,488 31,28 31,92 32,11 32,14 32,181 32,376 32,72 93,873 95,121 96, , , ,58 YoY -3.9% -3.3% -13.1% -4.9% % 8.4% 1.7% 3.1% 1..2% -6.8% 1.3% 1.6% -6.3% 1.4% SG&A ratio 17.2% 16.9% 16.2% 16.4% % % 16.8% 16.3% 16.1% 16.7% 16.1% pp Operating profit 12,343 13,729 14,265 13,845 13,13 12,98 14,517 15,928 11,24 13,294 12,94 4,337 4,555 36,412 54,182 56,483 51, 58, 58, 58, -7, -4,143 YoY 17.4% 13.9% % 6.4% % % 9.3%. -1.2% 6.1% 4.2% -9.7% 2.7% 2.7% 2.7% OPM 6.6% 7.2% 7.8% 7.2% 6.9% 6.7% 7.2% 7.7% 5.6% 6.6% % % 7.2% 7.2% 6.2% % 7.1% -.8pp -.9pp ecurring profit 12,83 14,67 15,49 14,58 13,25 12,819 14,67 16,284 11,32 13,441 11,968 41,739 4,676 36,441 55,797 56,96 51, 58, 58, 58, -7, -4,235 YoY % 4.6% 9.7% -12.2% -2.9% 15.8% -16.7% 4.9% -18.1% 17.4% % 13.9% 2.1% % 1.8% 1.8% PM 6.4% 7.7% 8.3% 7.3% % 7.3% 7.9% 5.6% 6.6% 5.9% % 7.4% 7.2% 6.2% % 7.1% -.8pp -.9pp Net income 6,866 1,13 8,39 9,489 8,839 8,61 17,679 3,484 7,41 7,495 7,537 25,278 35,119 22,442 34,767 38,63 35, 4, 4, 4, -5, -12,677 YoY -19.1% 48.6% 7.8% -34.1% 28.7% -14.9% 112.8% -63.3% -16.2% -12.9% -57.4% 9.9% 38.9% -36.1% % 3.6% 3.6% 3.6% Net margin 3.6% 5.3% 4.6% 4.9% 4.7% 4.4% 8.8% 1.7% 3.8% 3.7% 3.7% % 4.6% 4.9% 4.3% 4.8% 4.9% 4.9% -.6pp -2.3pp USD/JPY YoY -2.2% -1.6% -14.8% -8.4% % -4.4% -2..2% % % -1.4% -2.2% -4.8% -2.1% EU/JPY YoY % 5.9% 1.3% % 5.7% % 5.4% % EU/USD Segments YoY chg (JPYmn) Q2 Q4 Q2 Q4 Q2 Cml. Cml. Cml. FY FY Est. Est. Q2 Est. Init. Est. Vs. prev. Cml. Sales 188, , ,82 191, ,1 193,73 2,57 26, ,197 22,591 21,96 559, ,31 6, , ,427 82, 83, 82, 82, -1, +17,438 Printing Inks 94,253 91,344 87,448 92,144 89,9 91,581 94,429 97,756 92,92 95,147 95, ,45 275,91 283, , , , 397, 387,7 391,4-9, +7,95 Fine Chemicals 32,4 33,373 31,537 3,866 34,273 33,183 34,653 33,311 33,85 33,476 31,83 97,31 12,19 99, , ,42 133,7 134,2 135,8 132,5-5 -2,953 Polymers 44,265 45,41 43,66 47,69 46,919 48,255 5,211 52,498 49,372 51,417 51, , , ,127 18, ,883 28,8 29,8 28,5 24,3-1, +6,742 Compounds 15,346 15,454 14,614 15,75 15,38 16,95 16,754 16,793 15,666 16,481 16,386 45,414 47,887 48,533 61,119 64,68 65,3 65,9 67,3 69, Application Materials 12,538 14,139 13,888 15,11 12,768 13,91 14,173 15,235 13,97 14,699 15,29 4,565 4,842 42,825 55,675 56,77 58,8 59,8 58,6 58,4-1, +1,983 Others ,7-37,9-36,1 +2,1 Eliminations -1,767-1,382-9,57-9,779-9,953-9,468-9,88-9,68-8,831-8,76-8,497-3,656-29,229-26,88-4,435-38,99-34,6 +3,141 YoY -6.2% -9.4% -12.1% -5.7%.4% 2.2% 1.3% 7.4% 3.8% 4.6%.7% -9.2% 4.3% % 5.1% 3.9% 5.1% 3.9% 3.9% Printing Inks -5.8% -12.1% % -4.6%.3% % 3.3% 3.9% 1.4% -11.7% % % 3.8% 6.2% 3.8% 4.7% Fine Chemicals -8.3% % -5.3% 5.8% -.6% 9.9% 7.9% -1.2%.9% -8.1% % -2.9% -5.4% 5.7% -1.3% -.9%.3% -2.2% Polymers -6.7% % % % 5.2% 6.6% 2.2% -8.9% % % % 3.2% Compounds. -4.6% % % 14.6% 6.9% 4.2% 2.4% -2.2% -4.4% 5.4% 1.3% -3.9% 5.8% % 4.1% 7. Application Materials -8.1% -7.9% -2.1% 5.6% 1.8% -1.7% 2.1%.8% 2.6% 5.7% %.7% 4.9% -3.2%.7% 4.9% 6.6% % Local currency basis -1.1% 3.2% % 3.4% -.3% % 4.9% 4.4% 3.9% -.3pp +.1pp Printing Inks 1.4% -.9% 1.8% -.7% -.1% 4.4% -.7%. 5.4% 5.9% 4.7% 4.8% -.5pp +4.5pp Fine Chemicals % -1.6% 2.4% 3.1% -2.9% 2.2% % % -.4pp -6.pp Polymers -4.2% % -4.9% 7.4% 4.1% % 5.3% 5.7% 5.1% 3.4% -.4pp -3.3pp Compounds % 2.4% 2.6% 5.1%.7% % 1.1% % 7.6% -.9pp -4.4pp Application Materials -7.1% 2.7% 1.9% 3.9% % 4.8% % 4.4% -1.7pp +4.pp External sales - Printing Inks 94,253 91,344 87,448 92,144 89,9 91,581 94,429 97,756 92,92 95,147 95, ,45 275,91 283, , , ,95 Fine Chemicals 22,6 24,23 23,2 21,999 25,321 24,85 25,956 24,796 26,84 25,956 24,587 69,643 76,82 76,627 91,642 1, Polymers 43,316 44,394 42,721 46,727 45,936 47,197 49,135 51,381 48,358 5,229 5,12 13, , ,77 177, , ,439 Compounds 15,344 15,444 14,578 15,69 15,33 16,77 16,733 16,762 15,626 16,442 16,364 45,366 47,843 48,432 61,56 64, Application Materials 12,522 14,124 13,873 15,95 12,755 13,887 14,159 15,218 13,86 14,686 15,15 4,519 4,81 42,787 55,614 56, ,986 Others Operating profit 12,343 13,729 14,265 13,845 13,13 12,98 14,517 15,928 11,24 13,294 12,94 4,337 4,555 36,412 54,182 56,483 51, 58, 58, 58, -7, -4,143 Printing Inks 4,322 4,24 5,164 4,853 4,15 3,823 4,255 5,354 2,547 3,941 3,914 13,51 12,93 1,42 18,363 17,447 15, 17,2 17,2 17,8-2,2-1,691 Fine Chemicals 2,993 3,983 3,921 3,533 4,28 4,246 4,596 4,35 4,28 4,85 3,444 1,897 13,5 12,457 14,43 17,355 16,5 17,7 16,7 17, -1,2-593 Polymers 4,56 4,89 4,912 5,334 4,497 4,481 4,866 5,764 4,14 4,189 4,127 14,38 13,844 12,33 19,642 19,68 17,4 19,7 2,6 2,1-2,3-1,514 Compounds 1,326 1,499 1,12 1, ,258 1,439 1, ,837 3,51 2,61 4,975 4,989 3,7 4,9 5,2 5, -1,2-891 Application Materials ,49 1,396 1,836 2,545 1,867 2,598 3,6 4, 3,9 3, Others Company-wide -1,13-1,331-1,268-1,438-1,15-1,323-1,354-1,745-1,123-1,59-1,469-3,72-3,827-4,11-5,14-5,572-5,2-5,5-5,6-5, YoY 17.4% 13.9% % 6.4% % % 9.3%. -1.2% 6.1% 4.2% -9.7% 2.7% 2.7% 2.7% Printing Inks 51.3% -12.3% -5.6% % % 1.3% -36.6% 3.1% % % % -1.4% 2. Fine Chemicals % 22.7% 14.9% 4.6% 6.6% 17.2% 21.9% % -25.1% % % -4.9% % -2. Polymers 45.9% 23.2% 11.2% 18.6% -.2% -8.4% -.9% 8.1% -1.7% % 24.7% -3.2% -1.9% % -11.3%. 5.1% 2. Compounds 7.6% 24.8% -45.2% -21.9% -39.4% -16.1% 42.2% 3.8% 4.6% -34.7% -34.2% -1.4% -8.8% -25.4% -13.3%.3% -25.8% -1.8% 4.2%.2% Application Materials -6.3% 47.1% -24.7% % % 48.4% -22.4% % -11.1% 39.2% 38.6% % 38.6% Others -72.7% % % - 1, % % 191.4% Local currency basis 24.2% 11.6% % 1.1% -8.8% 14.7% 3.9% -7.4% % 2.3% -9.4pp -9.9pp Printing Inks 57.4% -3.7% -38.4% % -6.8% 8.8% % % -3.2pp +1.3pp Fine Chemicals -17.9% 53.3% % 18.7% -5.8% 16.8% 18.3% -6..4% -4.6% -3.2% -6.4pp -24.5pp Polymers 52.3% 1.9% -11.6% % -11.4% 29.6% -.7% -11.3%.3% 4.6% 2.7% -11.6pp -7.7pp Compounds %.2% -2.9% -7.1% -26.8% -6.1%.9% -27.4% %.2% -24.4pp -19.7pp Application Materials -6.4% 2.7 倍 -32.4% -2.8% 3.9% 37.8% -9.4% 38.9% % 47.8% pp +6.9pp OPM 6.6% 7.2% 7.8% 7.2% 6.9% 6.7% 7.2% 7.7% 5.6% 6.6% % % 7.2% 7.2% 6.2% % 7.1% -.8pp -.9pp Printing Inks 4.6% 4.4% 5.9% 5.3% % % 4.1% 4.1% 4.9% 4.4% 3.7% % 3.9% 4.3% 4.4% pp -.7pp Fine Chemicals 9.2% 11.9% 12.4% 11.4% 12.3% 12.8% 13.3% 12.9% 12.4% 14.4% 1.8% 11.2% 12.8% 12.6% 11.3% 12.8% 12.3% 13.2% 12.3% 12.8% -.8pp -.2pp Polymers 1.2% 1.8% 11.3% 11.2% 9.6% 9.3% 9.7% % 8.1% % % 1.9% 9.9% 8.3% 9.4% 9.9% 9.8% -1.1pp -1.4pp Compounds 8.6% 9.7% 6.9% 7.2% 5.3% 7.8% 8.6% 8.9% 5.4% % 8.4% 7.3% 5.4% 8.1% 7.7% 5.7% 7.4% 7.7% 7.2% -1.8pp -1.9pp Application Materials 2.3% 4.3% % 5.9% 2.7% % 6.7% % % 3.4% 4.6% 6.1% 6.7% 6.7% 6.2% -.6pp +1.4pp Others 4.7% % -17.2% 3.1% 26.2% 5.1% % 75.9% 17.8% 14.3% % pp Source: Shared esearch based on company data Figures may differ from company materials due to differences in rounding methods. 1/15

2 esearch eport by Shared esearch Inc. results (out November 14, 218) Cumulative : Sales up JPY17.4bn or +3. YoY (+3.4% on local currency basis). Operating profit down JPY4.1bn or -1.2% YoY (-8.8% on local currency basis). Shipping volumes showed solid gains and product repricing helped company to secure higher sales. However, DIC reviewed its full-year plan and announced downward revision of sales and profit forecasts because impact of rising raw materials costs was larger than expected Sales: Price hikes and strong shipment volumes underpinned the top-line gains, with all segments reporting higher sales except Fine Chemicals Operating profit: Top-line growth, price hikes, and robust performance by security inks failed to fully offset the unexpectedly fast rise in raw materials costs. Higher logistics costs, lost opportunities and raw materials procurement difficulties resulting from shutdown accompanying stricter environmental regulations in China, natural disasters in Japan and the US, and forex loss caused by depreciation of currencies in developing nations of Europe all put pressure on profit Full-year forecasts: As of 1H, full-year profit forecasts were left unchanged in anticipation of further product price hikes in 2H By segment and contributions from acquisitions made in 1H, but were revised downward in light of earnings and Q4 outlook. Negative impact of rising raw materials costs and depreciation of currencies in developing nations of Europe likely to continue in Q4 Printing Inks: Operating profit down JPY1.7bn YoY. Full-year forecast revised down JPY2.2bn. obust performance by security inks overseas, but profit down significantly in Japan Fine Chemicals: Operating profit down JPY6mn YoY. Full-year forecast revised down JPY1.2bn. Growth in shipments of color filter pigments and shiny materials following additions to production capacity failed to offset impact of stricter environmental regulations in China Polymers: Operating profit down JPY1.5bn YoY. Full-year forecast revised down JPY2.3bn as profits fall due to time lag between raw material price rise and passing it on to sales prices. The company is slowly pushing price hikes through, but the higher raw materials costs are still having an impact Compounds: Operating profit down JPY9mn. Full-year forecast revised down JPY1.2bn. Strong sales of PPS compounds (+6%) and jet ink (+11%), but profit down significantly on higher price of raw materials Application materials: Operating profit up JPY7mn YoY. Full-year forecast revised down JPY4mn. Natural blue pigment and hollow fiber membrane modules expected to continue driving growth 2/15

3 esearch eport by Shared esearch Inc. Performance Sales YoY (right axis) 4% 2% -2% -4% -6% -8% -1-12% Operating profit OPM (right axis) % 8% 7% 6% 4% 3% 2% 1% Earnings by segment (left: sales, right: operating profit) Printing Inks Fine Chemicals Polymers Compounds Application Materials Others Source: Shared esearch based on company data Printing Inks Fine Chemicals Polymers Compounds Application Materials Others Business environment and results In cumulative, the gradual global economic recovery continued. Gradual economic recovery continued in North America and Europe, while signs of economic recovery continued in Asia. In Japan, the economy has also recovered somewhat. Sales growth due to brisk shipments mainly of strategic products targeting growth in medium-term plan and product unit price increase The company reported cumulative sales of JPY6.7bn, up 3. YoY (+3.4% on local currency basis). Sales volume increased for most strategic products* identified in the company s initial medium-term plan, DIC18. Overall, Fine Chemicals saw lower sales in both yen and local currency terms due to temporary sluggish shipments for cosmetics, lower demand for other pigments, and the falling price of TFT liquid crystal products (though shipping volumes were up). However, sales in other segments rose both in yen and local currency terms due to strong shipment volume and higher product unit prices, leading to higher consolidated sales on both yen and local currency bases. Strategic products are packaging inks in the Printing Inks segment; functional pigments (for color filters, shiny materials, and cosmetics) and LC materials in Fine Chemicals; saturated polyester, urethane, acrylics, and UV polymer in Polymers; jet inks and PPS compounds in Compounds; and industrial adhesive tape, hollow fiber membrane modules, and healthcare products in Application Materials. Operating profit: Top-line growth, price hikes, and robust performance by security inks failed to fully offset the unexpectedly fast rise in raw materials costs. Higher logistics costs, lost opportunities and raw materials procurement difficulties resulting from shutdown accompanying stricter environmental regulations in China, natural disasters in Japan and the US, and forex loss caused by depreciation of currencies in developing nations of Europe all put pressure on profit, leading to downward revision Operating profit fell by 1.2% (-8.8% on local currency basis) to JPY36.4bn. Higher sales, price hikes, and an improved product mix stemming from sales growth of high value-added products appear to have been unable to absorb the losses from higher than expected raw material prices, higher logistics costs, lost opportunities and raw materials procurement difficulties resulting from a shutdown accompanying stricter environmental regulations in China, and natural disasters in Japan and the US. As a result, and in light of earnings and Q4 outlook, DIC revised down its forecasts for each segment, primarily due to raw materials prices rising more than expected. Dividend forecasts remain unchanged (JPY65 at year end; JPY125 for full year). 3/15

4 esearch eport by Shared esearch Inc. Naphtha price in Japan (left: quarterly average price +JPY2,; right: monthly price) CY212 CY213 Naphtha price in Japan (JPY'/KL) CY214 CY215 CY216 CY217 Source: Shared esearch, based on Ministry of Finance trade statistics CY218 Naphtha price in Japan (JPY'/KL) WTI crude oil price (USD/bbl) (USD/bbl) 12 WTI (USD/bbl) Quarterly average Source: Shared esearch based on Bloomberg and other data (USD/bbl) (USD/bbl) 12 8 WTI (USD/bbl) Quarterly average (USD/bbl) eference (as of Q2) Company leaves full-year earnings forecast unchanged The below-plan results in 1H notwithstanding, the company left its full-year earnings forecast unchanged based on 1) the assumption that naphtha prices would stay in the JPY52, 53, range, where they were at the time of the Q2 results announcement, and that the shortfall in 1H would be covered as more price hikes were realized during 2H; 2) the addition to earnings from the JPY1bn increase in the company's sales forecast; and 3) positive contributions to earnings (after all related expenses) from the businesses acquired during 1H (security inks and high purity iron oxide pigments for cosmetics). From, company looking to push through price hikes already proposed plus additional hikes to cover larger-than-expected rise in raw materials costs in Q2 When crude oil prices go up, polymer prices follow with about a three-month time lag. Three more months after that, the cost of raw materials for inks goes up and ink manufacturers have to go to their customers to negotiate new prices that will cover the rising cost of raw materials. This time around, the jump in crude oil prices in Q4 started putting the squeeze on margins at DIC in and Q2 as its selling prices failed to rise in line with the increase in raw materials costs. As DIC made progress pushing through the desired price hikes, its margins started showing improvement in and on into Q2, though most of the improvement was at its Polymers business. Unfortunately, at the Printing Ink business, the price hikes for some products were pushed out into. In addition, some of its raw materials prices did not go up until Q2, slightly later than expected. As a result, during the company will not only be working to push thru its initial price hikes, it will also be working to push another round of price hikes in order to pass along the larger-than-expected increases in raw materials prices in Q2. While the price negotiations have not been easy, the company reports that it is making progress and more customer are accepting the need for higher prices. Impact of raw material prices as of (reference): Varied from initial expectations as follows. a) The price increase and timing were as expected. b) The impact was greater than expected, because the oil price rise (WTI: USD6/bbl) exceeded the company s forecast. That being said, the company does not expect the oil price to have a large effect over the full year, because it will recover a proportional amount in sales prices. With some products such as newspaper ink in the Printing Inks segment, sales price revisions have been slow because of weaker demand. The full-year forecast revisions in reflect these factors (see segment information below for details). evisions to segment forecasts for (as of Q2) In 1H, sales of JPY398.8bn were fairly much in line with the JPY4.bn target, but operating profit of JPY24.3bn fell JPY1.7bn (6.) short of the JPY26.bn target. However, DIC left unchanged the full-year forecasts for operating profit (JPY58.bn), recurring profit (JPY58.bn), and net income attributable to parent company shareholders (JPY4.bn), though it revised the sales forecast upward (by JPY1.bn to JPY83.bn). The company did adjust its full-year forecast for earnings at the individual segment level, however. At the Printing Inks segment, the company left its overall forecast for segment earnings unchanged, lowering the forecast for its domestic business by JPY5mn while raising the forecast for its overseas business by an equal amount based on the expectation that the drop in earnings in Japan would be offset by stronger-than-expected overseas sales of packaging inks and contributions from the newly acquired security ink business. At the Fine Chemical segment, the company increased its forecast for 4/15

5 esearch eport by Shared esearch Inc. segment earnings by JPY1.bn, raising the forecast for its domestic business by JPY4mn and for its overseas businesses by JPY6mn, based on the assumption that the decline in liquid crystal materials prices would stay in line with expectations, sales of high-margin color filter pigments and shiny materials would remain strong, and the newly acquired cosmetic materials business would make a positive contribution to earnings. At the Polymers segment, the company lowered its forecast for segment earnings by JPY9mn, lowering the forecast for its domestic business by JPY5mn and its overseas businesses by JPY5mn, adding that raw materials costs rose more than expected but that it was making more progress on price hikes during. At the Compounds segment, the company lowered its forecast for segment earnings by JPY3mn, lowering the forecast for its domestic business by JPY4mn while raising the forecast for its overseas business by JPY1mn, based on the expectation of a larger-than-expected impact on margins from higher raw materials prices (with the exception of two strategic products) that would be only partially offset by ongoing progress on price hikes. At the Application Materials segment, the company raised its forecast for segment earnings by roughly JPY1mn, lowering the forecast for its domestic business by JPY2mn while raising the forecast for its overseas business by JPY2mn, assuming continued strong sales of strategic products but pressure on margins from the rising cost of raw materials used in products sold to the domestic construction market. Outlook as of (reference) The company did not change 1H nor full-year forecasts. aw material prices rose in and the delay in revising product prices to match these increases led to lower profits in. However, from Q2 on, the company expects to see an increase in shipment volume as it enters a period of demand and progress on product price revisions. We look for gradual YoY improvement in Q2,, and Q4. The impact of higher raw material prices and amount passed on to sales prices have both been revised up versus the initial full-year forecast. The company has revised full-year forecasts by segment (refer to table). (as of the beginning of, for reference) In, the company forecasts sales growth of 3.9% (+3.9% in local currency terms) and operating profit growth of 2.7% (+2.3%). DIC expects a solid demand environment across the board for individual segments to drive sales. However, the company sees sources of uncertainty in oil price strength and a tight supply-demand balance for pigment intermediates in China due to environmental regulations. The company has incorporated raw material price strength as a significant drag on profits in its forecasts. It expects sales growth to be driven by higher shipment volume across all segments. DIC plans to be proactive in Asian and other overseas markets in each segment. For operating profit, the company expects substantial impact from high raw material prices to be offset by higher shipment volume and an improved product mix, paving the way for profit growth. Management targets capital expenditures and investments of JPY51.bn (-JPY11.4bn YoY, including small acquisitions), depreciation of JPY33.bn (+JPY1.5bn), interest-bearing debt of JPY26.bn (-JPY5.6bn), and an annual dividend of JPY125 (+JPY5). The operating profit forecast is JPY7.bn short of the JPY65.bn contained in the initial medium-term plan, DIC18. The company thinks that the initial target would have been achievable assuming an exchange rate of JPY12/USD. The outlook by segment is as follows. a) Printing Inks: DIC expects a further decline in demand for publishing and newspaper inks, but sees demand for packaging ink driving further sales growth centered on food products, beverages, and daily necessities and accordingly targets more sales; with regard to publishing and newspaper inks, it plans to expand sales for high value-added products that are environmentally friendly, and looks to achieve further efficiency gains in production. b) Fine Chemicals: The company plans to focus on high-growth fields for functional pigments, and concentrate resources in products in strength areas for LC materials. c) Polymers: In Japan, DIC plans to transition to niche and high value-added products, and strengthen environmental friendly products by shifting to water-based and non-soluble products. d) Compounds: For PPS compounds, management plans to strengthen local completion-type systems for production, sales, and technical services at key overseas sites; for jet ink, it plans to make steady inroads into the commercial and industrial large-size IJP market, where demand is expected to grow. e) Application Materials: for industrial adhesive tape, the company plans to expand sales in non-mobile fields; for hollow fiber modules, it looks to increase sales for deaerating and decarbonizing products; for healthcare foods (spirulina), it will work to boost sales of its natural blue food coloring (linablue). 5/15

6 esearch eport by Shared esearch Inc. Printing Inks Performance trends Sales YoY (right axis) Operating profit OPM (right axis) % 6% 4% 3% 2% % -2 Printing Ink Cumulative Q2 Cumulative Full-year Act. Act. Act. YoY LC Change Act. Act. Act. YoY LC Change Act. Act. Act. Act. Act. Est. Est. Q2 Chg LC Chg YoY Est. Init. Est. Sales % +1.8% % +3.3% % +5.9% Japan % -3.6% % -2.3% Europe and the Americas % +2.7% % % +6.8% Asia (ex-japan), others % +6.9% % Consolidation adjustments Operating profit % -38.4% % -16.4% % -1.8% Japan % -56.3% % -55.3% % -3.7% Europe and the Americas % -28.8% % +4.7% % Asia (ex-japan), others % % -29.1% % +.4% Consolidation adjustments OPM 4.6% % -1.7pp % pp 4.9% 4.4% 3.7% % 3.9% 4.3% -.4pp -.4pp 4.4% 4. Japan 5.2% 5.6% 2.6% -3.pp % 2.4% -2.9pp % % 5.1% % -1.5pp -1.1pp 4.2% 5.3% Europe and the Americas % pp 3.1% % 3.6% 3.8% 3.6% % pp 3.9% 3.6% Asia (ex-japan), others % 3.7% -2.6pp 7.6% 5.9% 3.9% -2.pp 7.8% 6.2% 4.6% 7.9% 6.2% 4.8% 5.6% -.6pp -.8pp 5.9% 6.6% Source: Shared esearch based on company data sales mix: oughly two-thirds packaging ink, under 3 publishing ink, and under 1 newspaper ink Market overview: Growth in packaging ink market; publishing and newspaper ink shrinking in developed nations, expanding in certain regions in Asia Growth strategy: estructure production facilities, and advance growth (4% annually, expected) and gain market share in packaging ink to compensate for drop in demand for publishing and newspaper inks (roughly ) Cumulative : Operating profit down JPY1.7bn YoY. Full-year forecast revised down JPY2.2bn. obust performance by security inks overseas, but profit down significantly in Japan Sales: Up 2.9% YoY (+4.4% for liquid crystal materials). Demand from newspaper and publishing market still on the decline, but overall sales mix improves on strong sales of packaging inks (mostly overseas) Newspaper inks: Despite tough domestic pricing environment, DIC appears to have increased market share Packaging inks: Overseas sales in Europe and Central and South America show continued strong growth; North America and Asia also see growth M&A: Sales at new security printing ink subsidiary (acquired February 218) going well, expected to continue adding to earnings from Q2; future growth prospects in the paper currency (banknote) ink market Initial forecast for : Increased sales of packaging ink should offset fall in demand for publishing and newspaper inks. Fall in operating profit due to higher raw material prices. Q2 and forecast to be tough As of : Based on results, full-year operating profit forecast was decreased by JPY6mn. Domestic newspaper ink was a negative factor and subsidiaries in Europe and North America were a positive factor for profits, while earnings in Asia were affected by higher raw material prices As of Q2: Based on Q2 results, full-year operating profit forecast was left unchanged. There was a JPY7mn increase in the Americas and Europe, where packaging inks performed favorably, but a JPY5mn decline in Japan and JPY2mn decline in Asia due to higher raw material prices As of : Operating profit forecast was reduced JPY2.2bn (-JPY9mn in Japan, -JPY6mn in the Americas and Europe, and -JPY7mn in Asia other than Japan) to JPY15.bn 6/15

7 esearch eport by Shared esearch Inc. Japan Overall sales declined YoY due to lower demand for publishing inks. Operating profit fell YoY by JPY1.7bn (from JPY2.8bn in cumulative to JPY1.1bn), taking a significant hit from the JPY2.2bn decline in sales, higher raw material prices, and higher logistics costs. eference (as of Q2) The slump in demand for publishing and newspaper inks in Japan has made it difficult to pass along higher raw materials costs to customers. The company has been working on increasing its share of customers business, but these efforts were not enough to absorb the profit decline stemming from higher raw material prices in. As a result, the company lowered its full-year operating profit forecast by JPY9mn from a JPY2mn YoY increase to a JPY7mn decline. As of the company expected the effects of price revisions to appear from Q2 onward for business in Japan as a whole, but made no progress passing along higher raw materials costs to customers in the publishing, newspaper, and packaging industry. Cost-cutting measures (including production consolidation and personnel transfers) had only a limited impact on 1H earnings, prompting the company to lower its full-year operating profit forecast by another JPY5mn at the time of its Q2 results announcement. The company set out to expand its share of the newspaper ink market in and, judging from the modest increase in sales volumes, appears to have made good progress toward this goal during 1H. Sales of packaging inks finished 1H slightly higher, staging a comeback in Q2 after being down in as a result of inventory adjustments at client companies. The Americas and Europe Sales came in ahead of plan as packaging ink sales continued to underpin top-line growth in Americas and Europe during, much as it did during 1H. On the earnings front, it seems the company saw additional contributions to earnings from multiple, small acquisitions by subsidiary Sun Chemical, cost-savings from business restructuring undertaken by Sun Chemical (in and ), and increased sales of high-margin packaging inks. However, DIC raised its initial, full-year operating profit target of JPY9.bn (-JPY5mn YoY) to JPY9.8bn (+JPY3mn YoY) at the end of, raised it again following Q2, to JPY1.5bn (+JPY1.bn YoY), but lowered it following, to JPY9.9bn (+JPY4mn YoY). Shared esearch postulates that depreciation of the Turkish lira resulting in forex losses was a contributing factor. Turkish lira (vs Japanese yen), euro (vs US dollar), British pound (vs Japanese yen) YoY 217 JPY/TY Source: Shared esearch based on Bloomberg and Mizuho Bank data YoY 217 USD/EU YoY 217 JPY/GBP eference (as of Q2) Sun Chemical Sun Chemical has been actively using M&A since 212 to expand its portfolio of high value-added businesses. Some of the larger acquisitions include the 212 acquisition of Benda-Lutz (a manufacturer of aluminum pigments and other shiny materials commonly used in automobiles and cosmetics, but also finding use as a foaming agent to create lightweight foam concrete for construction applications) and the 215 acquisition of Kingfisher Colours Limited (manufacturer of cosmetics materials). Sun Chemical has also made a number of acquisitions since the start of 218, including Luminescence Holding Ltd., which makes and sells tamper-resistance security inks for use on passports, paper currency (banknotes), and other security-sensitive applications. This year Sun Chemical has also acquired a US-based manufacturer of high-purity iron oxide pigments (used in cosmetics) from Hong Kong's Cathay Industries Group (the acquisition included all facilities, assets, and the customer list). After all acquisition-related expenses and goodwill amortization, these two acquisitions are both expected to contribute to sales and earnings this year (in the case of cosmetics materials, the contributions will come under the Fine Chemicals segment). Luminescence Holding is not just an ink manufacturer, it also has an ink solutions business and is looking to move into the banknote printing ink market. Switzerland-based SICPA dominates the banknote printing ink market at this time but Sun Chemical is looking to use its reputation to get a foothold in the market. In addition to the contributions to earnings from these latest acquisitions, DIC also anticipates greater than JPY1.bn in cost savings from the recent restructuring at Sun Chemical, and reports that cost savings were in line with expectations in 1H and appear to be on track to meet its full-year target. Looking now at trends by region, we note that sales were flat in North America as growth in packaging ink absorbed the impact of a decline in demand for newspaper ink and publishing ink products. In Europe, shipments of packaging ink increased, and sales were up YoY. Sales in Latin America rose on 7/15

8 esearch eport by Shared esearch Inc. strong performance of packaging and newspaper ink. As a result, sales rose 3.3% YoY on a local currency basis, and 3.6% (JPY6.5bn) in yen terms after forex impact. As of, operating profit fell JPY5mn YoY (-23.6% YoY, -28.8% YoY on local currency terms) due to higher raw material prices, despite the growth in packaging ink, but rose for 1H due to increased sales of packaging ink and security printing ink. With regard to the impact of the sharp depreciation of the Turkish lira, a) with regard to manufacturing costs, the company noted that it was worried about the rising cost of imported raw materials, the majority of which are denominated in Euros, but that depreciation of the Turkish lira would also be good for sales and its gross profit margin because shipments to Europe are also denominated in Euros; and b) at the time of results calculation, the appreciation of the Euro would provide a boost to the result for operations in Turkey on a standalone basis, and that currency swings would have an impact on earnings when results were calculated in a consolidated basis, though that impact would not be very large. Company sees positive growth in operating profit over the full year As of, as in other regions, raw material price increases more than expected, but price revisions were progressing well and higher prices were expected to be passed onto sales prices from Q2 onward, which they apparently were. The full-year operating profit forecast for the Americas and Europe is JPY1.5bn, which is about 6 of JPY17.2bn for the segment as a whole. As of, the company revised up its full-year operating profit forecast by JPY8mn, but revised it up another JPY7mn as of the end of 1H. The upward revision at the end of 1H was based on a) the expectation of cost savings and efficiency gains from the restructuring of Sun Chemical sooner than projected in the company's initial plan, b) price hikes to pass along the higher cost of raw materials, with most of the price hikes being in the packaging ink area, and c) contributions to earnings from the recently acquired security ink subsidiary. Asia and Oceania On a regional basis, 1) sales increased in Southeast Asia and China on higher packaging and publishing ink sales. 2) Sales were down in Oceania due to weak demand for newspaper and publishing ink. 3) In India, sales were up for all products. As a result, sales were up on both a local currency (+6.2% YoY) and yen basis (+4. YoY). General trends were the same as in and 1H. Operating profit Operating profit also fell significantly because of a sharp increase in raw material prices. Larger-than-expected increases in raw materials prices led to a further reduction in the operating profit forecast for the full year. Compared to Japan, the Asia region is more easily influenced by the spot market when it comes to purchasing raw materials. As a result, there is a strong tendency for fluctuations in raw material prices to be directly reflected in their cost, the impact of market conditions easily reverberates, and forecasts are difficult. DIC began reducing the share of purchases on the spot market in 217 in favor of increasing purchases under long-term contracts with producers around the world. It says this helped keep the rise in procurement costs in line with expectations in both and Q2, though these measures had more impact in the Polymers business than others because most products sold in Japan and Asia are manufactured in-house. Versus forecast (reference as of Q2) The impact of higher-than-expected raw materials costs prompted the company to lower its full-year operating profit forecast for the region by JPY2mn, from JPY4.2bn to JPY4.bn, at the time of its 2Q results announcement, (this follows a reduction in its forecast from JPY4.7bn to JPY4.2bn for the same reason at the time of its 1Q results announcement). Heading into 2H, the company does not appear to be particularly concerned about the lag between raw material price increases and its own price hikes, however, having taken a number of steps to mitigate the impact, including a) changes in its procurement practices, b) increases in sales of packaging inks and more progress on price hikes, and c) the adoption of a high-price strategy. Fine Chemicals Performance trends Sales YoY (right axis) 2 6 Operating profit OPM (right axis) % 13% 12% 11% Source: Shared esearch based on company data -1 9% 8/15

9 esearch eport by Shared esearch Inc. Fine Chemicals Cumulative Q2 Cumulative Full-year Act. Act. Act. YoY LC Change Act. Act. Act. YoY LC Change Act. Act. Act. Act. Act. Est. Est. Q2 Chg LC Chg YoY Est. Init. Est. Sales % -1.6% % % Japan % -4.3% % -2.8% % -7.7% Overseas % % -2.1% % +.6% Consolidation adjustments Operating profit % +3.9% % +.4% Japan % -9.3% % +6.7% % -6.3% Overseas % +4.8% % % Consolidation adjustments OPM 9.2% 12.3% 12.4% +.2pp 1.6% % +.9pp 11.2% 12.8% 12.6% 11.3% 12.8% 12.3% 13.2% +.4pp -.9pp 12.3% 12.8% Japan 15.3% % -.9pp 14.9% 17.7% pp % 18.2% 18.1% % 19.3% +.3pp -.5pp % Overseas 6.2% 8.1% 9.2% +1.1pp 7.8% 8.8% 9.4% +.6pp 7.7% 8.8% 8.9% % % +.6pp -.7pp Source: Shared esearch based on company data sales mix: About 2 3 functional pigments, 5 6 other pigments (including lower margin, high-end products), LC materials make up the remainder Market overview: Largest share in green and blue color filters (under functional pigments). Cosmetics sales growing in Asia Chemical supplies down due to stricter environmental regulations in China. Titanium oxide supplies tighten due to deteriorating operating conditions at some manufacturers Growth strategy: Sales promotions of high performance materials, sustain (green color filters) and expand (blue color filters, TFT liquid crystals) market share. Maintain firm hold on top market share for color filters Cumulative : Operating profit down JPY6mn YoY. Full-year forecast revised down JPY1.2bn. Growth in shipments of color filter pigments and shiny materials following additions to production capacity failed to offset impact of stricter environmental regulations in China Liquid crystal materials: Competition heating up from Chinese producers; it appears decline in earnings was in line with expectations as prices set with aim of maintaining market share Functional pigments: Increased production capacity for color filter pigments in response to rising demand, continued strong demand for shiny materials for construction use; demand for cosmetic-use materials remains strong but titanium oxide procurement difficulties continue to pose problems. Stricter environmental regulations in China had a negative impact, including lost opportunities M&A: Acquired US-based manufacturer of high-purity iron oxide pigments for cosmetics from Hong Kong industrial group with aim of stabilizing supply and adding to earnings Initial forecast for : Impact of tight supply-demand balance to persist. Factoring risk of price competition in liquid crystals. Forecasting continued growth in color filter sales As of : Based on results, the company increased the sales forecast by JPY3.3bn, but decreased the operating profit forecast by JPY3mn to JPY16.7bn As of Q2: Based on Q2 results, the company lowered the sales forecasts by JPY1.6bn, but increased the operating profit forecast by JPY1.bn to JPY17.7bn on prospects for additional contributions from color filter materials and shiny materials As of : Based on results, the company lowered the sales forecasts by JPY5mn and the operating profit forecast by JPY1.2bn (JPY3mn for Japan and JPY9mn for overseas) to JPY16.5bn Sales of pigments fell. This was because of a 3% increase in sales of functional pigments overall on growth in pigments for color filters and shiny materials temporary but temporarily sluggish shipments of cosmetics pigments and a decrease in sales of other pigments. Sales of TFT liquid crystals increased 2% in as a result of expanding shipments to existing customers, but fell in 1H on the impact of lower product prices and fell 12% in cumulative. As a result, overall segment sales fell on both a local currency (-2.9%) and yen basis (-2.9%, -JPY2.9bn). The drop in operating profit from TFT liquid crystal materials was offset by a more profitable sales mix stemming from growing sales of high-margin products (such as color filter pigments and shiny materials), but Shared esearch believes the impact of rising prices for raw materials and stricter environmental regulations in China caused operating profit to finish down YoY. eference (as of Q2) The company has been setting its prices for TFT liquid crystal materials with the aim of maintaining market share, but the impact of this on earnings has been in line with expectations. To help mitigate the impact, the company is looking to lower production costs by moving more plants to China and increase its patented processing technology. At the same time, investors will also want to watch how much success the company has improving its sales 9/15

10 esearch eport by Shared esearch Inc. mix by expanding sales of higher-margin products such as color filter pigments and shiny materials. With regard to color filter pigments, we note that the company's green color filter pigments for flat panel displays face little in the way of competition and so have been able to benefit fully from the increase in production of flat panel displays, and that sales of blue color filter pigments were also up YoY and QoQ in Q2 thanks to expanded production capacity, giving the company double-digit growth in sales of color filter pigments as a whole. Sales of shiny materials for the construction market also remained strong in Q2. Demand from the cosmetics market remains strong but procuring enough titanium oxide continues to be a problem; as a result, sales were down more than 2 YoY in Q4 (which appears to be the bottom). DIC is working to develop new suppliers and is also searching for substitutes for titanium oxide, but all this must also negotiate with its customers (cosmetics manufacturers) and this requires additional time as well. That said, the company appears to think there is a chance that things on procurement front will improve during 2H. The company is expecting sales to cosmetics manufacturers to be in line with last year, though even if sales were below plan in would probably have little impact in earnings thanks to the price hikes the company is pushing through to pass along the higher cost of raw materials to customers. Also in relation to cosmetics materials, we note that in July 218 DIC announced that it had acquired a US-based manufacturer of high-purity iron oxide pigments (used in cosmetics) from Hong Kong's Cathay Industries Group (the acquisition included all facilities, assets, and the customer list). The acquired manufacturer was one of the company s suppliers, and is expected to contribute to stabilizing the company s procurement of high-purity oxide pigments. After all acquisition-related expenses and goodwill amortization, this acquisition is expected to contribute to sales and earnings at the Fine Chemical segment this year. eference as of aw material price rises do not usually affect fine chemicals much, but since, chemical product supplies from China (pigment intermediates) have shrunk owing to stricter environmental regulations. The supply-demand balance for titanium oxide has tightened due to deteriorating operating conditions at some manufacturers titanium oxide plants. This has flowed through to raw material price rises and procurement difficulties. We understand that the impact of procurement difficulties was particularly marked in functional pigments for cosmetics in Q4. Although sales of pigments for cosmetics fell YoY in from a high year-ago level, sales bottomed out and turned up from Q4, which the company sees as a sign that the worst is over. The company is working on obtaining new suppliers of titanium oxide amid the lingering effect of procurement difficulties, and says pigment intermediate prices are stabilizing. A YoY earnings improvement is expected from Q2 onward as price revisions are progressing. Sales of pigments for color filters were up slightly, due in part to inventory adjustment at customers of green pigment, in which DIC has around 8 market share. For blue pigment (DIC s market share is around 5 and increasing), sales were modest, but increased by double digits, and the effect of 5 production capacity expansion should appear from Q2 onward. The effect of capacity expansion began to appear for shiny materials* since 217, with sales up 2 YoY in to compensate for lower sales of cosmetics pigments. DIC s initial forecast for was conservative, especially for 1H. Although the company lowered its full-year operating profit forecast in, this appears to reflect a cautious outlook for LC materials, on which it commented that it was not taking an optimistic view. In general pigments, it is aiming to improve profits by streamlining. Shiny materials: Inorganic substances that produce a change in hue similar to metals and pearl. End-applications include automobile and packaging exteriors and cosmetics. Demand is also increasing for use as a foaming agent for lightweight foam concrete. Earnings have been trending up since subsidiary Sun Chemical acquired Benda-Lutz Werke in 212. Production bases are in Austria, Poland, US, ussia, and China. Products are mainly sold in Eastern Europe, Japan, and the Middle East. Polymers Performance trends Sales YoY (right axis) Operating profit OPM (right axis) % 12% 1 8% 6% 4% 1-1 2% -1 Source: Shared esearch based on company data 1/15

11 esearch eport by Shared esearch Inc. Polymers Cumulative Q2 Cumulative Full-year Act. Act. Act. YoY LC Change Act. Act. Act. YoY LC Change Act. Act. Act. Act. Act. Est. Est. Q2 Chg LC Chg YoY Est. Init. Est. Sales % +4.3% % % Japan % +2.4% % +3.3% % +3.6% Overseas % +9.9% % +1.1% % +11.9% Consolidation adjustments Operating profit % -11.6% % % +.3% Japan % -8.6% Overseas % +12.2% % +11.1% % +22.6% Consolidation adjustments OPM 1.2% 9.6% 8.1% -1.5pp % 8.1% -1.3pp 1.7% % 1.9% 9.9% 8.3% 9.4% -.5pp -1.1pp 9.9% 9.8% Japan 7.9% 9.3% 7.1% -2.2pp 8.7% 7.3% +7.3pp 9.1% 9.1% 7.2% % 7.6% 8.6% -1.1pp -1.pp Overseas 15.3% 9.2% 9.4% +.2pp 14.3% pp 13.9% % 13.4% 9.3% 8.9% 1.2% +.9pp -1.3pp 1.9% 9.7% Source: Shared esearch based on company data sales mix: Sales of various resins, with a domestic shift to niche and high value-added products. Bolstering more environmentally friendly aqueous and non-soluble products Market overview: Increased usage of polystyrene for food packaging in general-purpose goods. In Japan, polymers for paint and ink down, but up for electric/electronic devices. Shifting toward high value-added polymers. DIC will continue expanding high value-added offerings Growth strategy: Aiming for expanded product mix of high value-added polymers such as epoxy and UV-cured resins. Stronger environmental measures also acting as a tailwind Cumulative : Operating profit down JPY1.5bn YoY. Full-year forecast revised down JPY2.3bn as profits fall due to time lag between raw material price rise and passing it on to sales prices. The company is slowly pushing price hikes through, but the higher raw materials costs are still having an impact Initial forecast for : Domestic profits to fall as price revisions will not compensate for high raw material prices. Overseas profits to rise on procurement initiatives and progress in price pass-through As of : As with Printing Inks, efforts to reduce the share of spot purchases and increase that of long-term contracts have proved effective As of Q2: Operating profit forecasts revised down JPY9mn. Both domestic and overseas reduced by JPY5mn, apparently on impact of higher raw material prices As of : Operating profit forecasts revised down JPY2.3bn. Domestic reduced by JPY1.4bn and overseas reduced by JPY9mn, apparently on impact of higher raw material prices On a regional basis, the breakdown was as follows: a) in Japan, shipment growth of high value-added products, such as epoxy resins for electronics, drove growth in sales (+JPY3.4bn) while operating profit fell (-JPY1.9bn) due to higher raw material prices; and b) in overseas markets, sales (+JPY4.2bn) and operating profit (+JPY2mn) rose as a result of growth in high value-added products, such as epoxy resins for electronics, just as in Japan. In the overall segment, operating profit declined -JPY1.5bn due to the rise in raw material prices. The impact on earnings from rising raw materials costs notwithstanding, during the period the company apparently saw continued steady growth in sales of strategic products (such as UV-curable resins and epoxy resins), and also benefited from the cyclical rise in demand for peripheral products, such as polystyrene packaging materials for foods, that accompanied the improvement in the economy. eference (as of Q2) Looking out to and beyond, the company sees the impact of prices hikes on earnings becoming more and more evident as price hikes continue to be implemented (especially overseas), the company pushes through additional price hikes for some products that were delayed, and another round of price hikes to cover the increase in raw materials prices seen in Q2. eference as of : Cost increases are progressively being passed onto sales prices mainly overseas, however, and the company expects to recoup the additional outlay over the full year. As with Printing Inks, efforts to reduce the share of spot purchases and increase that of long-term contracts have proved effective (the impact is greater in the Polymers segment, which has a higher proportion of purchases from outside suppliers). Sales rose YoY in cumulative for high value-added products, such as epoxy resins (+4%, +3% in 1H, +11% in ), UV cured resins (+4%, +7% in 1H, +9% in ), and aqueous resins (+2%, +2% in 1H, +6% in ), but it is of concern that sales of UV cured 11/15