Chief Global Equity Strategist Chang Han Joo, CFA Equity ... · Daihatsu to represent minority...

STRATEGY NOTE

Japan | Equity Strategy

Japan 13 February 2017

Japan Equity StrategyMinority Shareholders: Investing WithoutRepresentation ... History Rhymes

EQU

ITY STRATEG

Y GLO

BA

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Zuhair Khan, CFA *Equity Analyst

+81 352516163 [email protected] Darby §

Chief Global Equity Strategist+852 3743 8073 [email protected]

Takaki Nakanishi *Equity Analyst

+81 3 5251 6127 [email protected] Azuma *

Equity Analyst+81 3 5251 6186 [email protected]

Atul Goyal, CFA ||Equity Analyst

+65 6551 3965 [email protected] Nakanomyo *

Equity Analyst+813 5251 6142 [email protected]

Thanh Ha Pham *Equity Analyst

+81 3 5251 6160 [email protected] Sato *Equity Analyst

+813 5251 6185 [email protected] Han Joo, CFA *


Mitsuko Miyasako *Equity Analyst

+813 5251 6176 [email protected] Fukuhara *


Shinnosuke Takeuchi *Equity Analyst

+813 5251 6138 [email protected]

* Jefferies (Japan) Limited § Jefferies Hong Kong Limited

|| Jefferies Singapore LimitedMCI (P) 047/07/2016

^Prior trading day's closing price unlessotherwise noted.

Key Takeaway

Panasonic's 100% acquisition of its majority owned subsidiary, PanaHome, ismaking headlines because of unfair treatment claims by minority shareholders.This does not surprise us. In July 2016 we had identified PanaHome as acompany at risk of precisely this issue.

In our 7 July 2016 report, "Minority Investors: Investing Without Representation is ...," wewrote about the conflicts of interest at Daihatsu in its acquisition by its majority shareholder,Toyota (7203 JP, Hold, TP ¥6,600). We focused on the lack of independent directors atDaihatsu to represent minority shareholders' interests. We also highlighted the lack ofincentive for any of the inside or outside directors to push for a higher acquisition price dueto their own minimal share ownership. In that report we presented a list of companies withcontrolling shareholders where we believed minority shareholders were potentially at riskof similar treatment if the parent company decided to fully acquire the listed subsidiary.Panahome (1924 JP, NC) was one of the companies on that list.

List of Conflicted Subsidiaries: Our methodology for identifying the at risk companieswas very simple, we did a screening of TSE first section companies that had large corporateshareholders and at most two outside directors. In other words, these are all companieswhose boards have a majority of directors with clear conflicts of interest. In our report wepointed out that the list included many companies in the automotive sector as well as anumber of companies that are subsidiaries or affiliates of the major electronics giants suchas Sony, Panasonic, Toshiba, Canon, Fujitsu, etc. We highlighted that both these sectors arelikely to see significant reorganizations through the acquisitions of subsidiaries.

Panahome Acquisition: Panasonic (6752 JP, Buy, TP ¥1,280) is acquiring the remaining46% of Panahome shares that it does not already own through a share exchange, therebyturning Panahome into a wholly-owned subsidiary. At least one minority shareholder haspublically complained that the share exchange ratio is unfavorable to minority shareholders.The share exchange ratio is only at a small 20% premium to the share price ratio before theannouncement, which itself was at a 52 week low. Everything about the way this acquisitionwas done is almost exactly the same as the way Toyota went about acquiring Daihatsu.History Rhymes.

PanaHome's Board: PanaHome took a number of measures to show that they wereavoiding conflicts of interest. These include hiring third parties to provide fairness opinions,setting up a third party committee to evaluate the proposal and certain board membersrecusing themselves from the vote. While these efforts should be applauded, we believe thatthe conflicts of interest were so extreme as to not make these measures sufficient. 7 out of9 board members were insiders who had worked their entire careers within the Panasonicgroup. The outside directors were both fairly new to the board. The board members onlyheld nominal amounts of Panahome shares, equal to a few months base salary. Nobody hadany incentive to go against their employer and push for minority shareholders to get more.

Token Takeover Premium: Japan has many tangled webs of listed companies with listedsubsidiaries and affiliates. There are many inherent conflicts of interest in these structures.Both the Daihatsu and PanaHome acquistions indicate that implementation of the CorporateGovernance Code has not yet had an impact on improving the protection of minorityshareholder interests. A low proportion of truly independent board members and a lackof incentive alignment through share ownership remain key problems. Investors should bevery cautious when they are minority shareholders in companies that may potentially betaken over. They should expect to be taken out when the stock price is low and to be paidonly a token takeover premium.

Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 14 to 18 of this report.

https://javatar.bluematrix.com/sellside/EmailDocViewer?mime=pdf&co=Jefferies&[email protected]&source=mail&encrypt=906aa116-0053-4335-9cce-1fe397106321

PANAHOME ACQUISITION ........................................................................................................... 2

Minority shareholder complaint .............................................................................................. 2

PanaHome’s procedures to avoid conflicts of interest ............................................................. 2

Past relative valuations ........................................................................................................... 3

The conflict of interest is extreme ............................................................................................ 4

PanaHome’s board .................................................................................................................. 5

No incentive to dissent ............................................................................................................. 6

AUTOMOTIVE INDUSTRY RESTRUCTURING .................................................................................. 6

OTHER COMPANIES OF CONCERN ............................................................................................... 7

AUTOMOTIVE SECTOR - DETAILED DATA ..................................................................................... 9

PanaHome Acquisition Since its founding in 1963, PanaHome (1924 JP, NC) has been a Panasonic group

company and Panasonic (6752 JP, Buy, PT ¥1,280) has owned a 54% majority stake in

PanaHome since 2004. On 20th December 2016, Panasonic and PanaHome announced

that Panasonic would acquire the 46% of PanaHome shares which it did not already own,

thereby converting PanaHome into a wholly-owned subsidiary. This would be done as a

share exchange, at a ratio of 0.8 Panasonic shares for each PanaHome share. Just prior to

the announcement, PanaHome’s shares were trading at a ratio of 0.66:1 vs. Panasonic

shares. Thus the premium being paid was 20%, slightly low for an acquisition, but not

scandalously low.

Minority shareholder complaint

According to a 4th February 2017 Nikkei Asia Review article, “Panasonic’s Buyout of

PanaHome protested by Hong Kong fund” one of the minority shareholders in

PanaHome, Oasis Management, said that it would take legal action if the valuation is not

revised. On Bloomberg, Oasis is listed as holding a 5.04% stake in PanaHome.

PanaHome’s procedures to avoid conflicts of interest

As per the 20th December 2016 notice “Panasonic Corporation Announces to Have

Executed a Share Exchange Agreement to Make PanaHome Corporation its Wholly-owned

Subsidiary through Share Exachange,” Panasonic and PanaHome implemented a number

of measures to avoid conflicts of interest. Panasonic retained Nomura Securities to provide

a third-party valuation while PanaHome retained Nikko SMBC for this purpose. PanaHome

also established a third-party committee consisting of their outside board member, Mr.

Naoto Terakawa, their outside Statutory Audit Board member Mr. Katsuhiko Arita, as well

as two outside experts in law and accounting with no material relationship with Toyota.

Four of PanaHome’s nine directors worked for Panasonic in the recent past. These four

board members recused themselves from participating in the negotiations and voting on

the transaction. It would thus appear that PanaHome instituted proper measures to

ensure the avoidance of conflicts of interest and we believe the companies were sincere in

their efforts. Unbridled greed is not culturally acceptable in Japan and we do not believe

any of the companies involved were purposefully acting unethically.

A somewhat low 20% premium to

the pre-acquisition share price ratio

A minority shareholder disagrees on

the valuation

PanaHome had gotten the opinion of

third parties on the valuation

Equity Strategy

Japan

13 February 2017

page 2 of 18 , Equity Analyst, +81 352516163, [email protected] Khan, CFA

Please see important disclosure information on pages 14 - 18 of this report.

http://asia.nikkei.com/Business/Deals/Panasonic-s-buyout-of-PanaHome-protested-by-Hong-Kong-fund

http://asia.nikkei.com/Business/Deals/Panasonic-s-buyout-of-PanaHome-protested-by-Hong-Kong-fund

http://www.panahome.jp/english/news/release/2016/1220.pdf



Chart 1: Share prices (¥) – Panasonic and PanaHome

Source: Bloomberg

Past relative valuations

Before reviewing PanaHome’s measures to avoid conflicts of interest, we would first like to

review whether there might be any merit in the minority shareholders’ contention that

0.8:1 is not an appropriate exchange ratio. A starting point would be to utilize one of the

methodologies used by both the third parties that provided fairness opinions, historic

relative market prices. What we do differently, is that we look at a longer time frame of up

to the past 5 years, rather than only looking at shorter time frames ranging from the past

5 days to a maximum of the past 6 months.

Chart 2: PanaHome vs. Panasonic - relative share prices

Source: Bloomberg, Jefferies estimates

As can be seen from the chart above, at 0.66:1 immediately prior to the acquisition

announcement, PanaHomes shares were trading at lows for the past year relative to

Panasonic shares. Over the past 1 year the average share price ratio was 0.82:1. For the 5

years prior to 2015, the shares had traded at an average relative price of 0.72:1. If we

exclude the 2014-2015 period, when Panasonic’s shares had jumped up sharply before

coming back down, the average ratio was 0.83:1 and the range was 0.62:1 to 1.28:1.

-200

200

600

1,000

1,400

1,800

0

400

800

1,200

1,600

2,000

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Panasonic (LHS) Panahome (RHS)

-

0.2

0.4

0.6

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1.2

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2012 2013 2014 2015 2016 2017

Range Average

Equity Strategy

Japan

13 February 2017



Using this simplistic approach, the minority shareholders’ claim that the 0.8:1 exchange

ratio is too low seems to have some merit. It would certainly appear that Panasonic is not

paying any premium to take 100% ownership of PanaHome. The true worth of PanaHome

shares relative to Panasonic shares cannot be determined by simply looking at past ratios.

It would depend on the future prospects of both companies, which are unknown.

Different investors would base their valuations on different forecasts of the future. Indeed

both Nomura and SMBC Nikko did longer-term forecasts and used DCF methodologies to

value the companies. We presume the minority shareholder also did their own long-term

forecasts and valuations. There must have been different opinions on these future

prospects and how to value them. That said, what we find from their DCF analysis is that

the bottom end of the DCF valuation range is similar to the pre-bid ratio of 0.66:1, while

the high end of the DCF valuation is nearly double that at 1.27:1. Thus we could find

some support from the DCF analysis done by both Panasonic and PanaHome’s advisors

for justifying a significantly higher valuation than 0.8:1.

The question however in our mind is not about which valuation is more appropriate, that

is a matter of opinion, rather it is whether minority shareholders’ rights were given

adequate consideration.

The conflict of interest is extreme

While we do not contend that Panasonic and PanaHome did anything illegal or

intentionally wrong, we nonetheless would like to highlight a few governance matters.

First and foremost is our belief that none of the parties involved in coming up with the

0.8:1 share exchange ratio had any incentive to look after minority shareholders’ interest

beyond the absolute minimum level of care. What we mean by this, is that as long as

nothing too blatantly egregious was being done, nobody had an incentive to speak up.

PanaHome has been a majority owned subsidiary of Panasonic for 12 years and a group

company since its founding. Any person being hired by PanaHome or any firm being

retained by them clearly understands this and knows that when all is said and done, they

were in effect working for Panasonic. The only way to credibly believe the contrary, i.e.

that all parties truly behaved independently of Panasonic, would be if PanaHome had a

board that was clearly dominated by independent outsiders whose interests aligned with

those of minority shareholders.

Table 1: PanaHome’s Board was almost all long-term Panasonic group

salarymen at the time of the acquisition announcement

Inside Directors Age Tenure Title Original Affiliation

Ryuji Matsuhita 53 2.6 President Panasonic

(Parent Company)

Makoto Hatakeyama 59 7.6 Executive Vice President PanaHome

Mitsuhiko Nakata 59 4.6 Executive Vice President PanaHome

Nobuhiko Teranishi 57 0.6 Executive Vice President Panasonic

(Parent Company)

Atsushi Hongo 56 5.6 Senior Managing

Executive Officer

PanaHome

Hideyo Hamatani 57 2.6 Senior Managing

Executive Officer

Panasonic

(Parent Company)

Shinichi Watabe 52 2.6 Senior Managing

Executive Officer

Panasonic

(Parent Company)

Outside Directors Age Tenure Current Affiliation Original Affiliation

Kazuo Ichijo 57 1.6 Hitotsubashi University Hitotsubashi University

Naoto Terakawa 58 0.6 Various corporates Sony

Source: Company Data

Equity Strategy

Japan

13 February 2017



Table 2: PanaHome has an insider dominated board with only the minimum

necessary 2 independent directors.

Total Score 0

Entrenchment +10

Outside Influence +5

Skills -20

Diversity 0

Shareholder Alignment +5

Entrenchment +10

Total number of Board Members 9 0

Average tenure 3.2 0

Average age 56.4 +10

CEO age 53 0

Chairperson age N/A 0

Oldest Director 59 0

Chairperson previous CEO No 0

CEO Tenure 2.6 0

Chairperson Tenure N/A 0

Outside Influence +5

Outside Chairperson No 0

Percent of outside directors 22% -5

Number of independent directors 2 +10

Number of committees None 0

Legal vs. advisory committees N/A 0

Insiders vs. outsiders on committee N/A 0

Committee chairperson N/A 0

Skills -20

Accounting 0 -10

Law 0 -10

Business, finance, consulting 1 +5

Academia, politics, bureaucracy 1 -5

Diversity 0

Foreign inside directors 0 0

Foreign outside directors 0 0

Women directors 0 +10

Shareholder Alignment +5

Median - Outside directors ¥0 mn 0

Median - Inside directors ¥9.5 mn 0

Maximum Shareholding ¥15.2 mn 0

CEO Shareholding ¥9.5 mn 0

Compensation Plan Perf Based +5

Source: Jefferies estimates, company data

PanaHome’s board

A quick look at PanaHome’s board makes the conflicts of interest very clear. 7 out of 9

board members are insiders who have spent their careers at either PanaHome or

Panasonic. PanaHome makes a distinction between people who directly worked for

Panasonic within the recent past and other board members. The board members that had

directly worked at Panasonic within the past several years were not allowed to vote on the

transaction. In our opinion, this distinction is not particularly meaningful.

Panasonic was a founding shareholder of PanaHome and has been PanaHome’s majority

shareholder for the past 12 years. As a subsidiary of Panasonic, PanaHome is firmly a

Panasonic group company. It is hard to imagine that PanaHome employees, who have

spent almost their entire careers as Panasonic group employees, would go against their

parent company’s plans unless they had very strong incentives to do so.

Equity Strategy

Japan

13 February 2017



PanaHome’s board had only two outside directors. While both appear to be independent

and not have clear conflicts of interest, they are both recent appointees only having been

on the board for 6 months and 18 months at the time of the bid. It is hard to see the

relatively new outside directors taking a stand on minority shareholder rights unless they

had strong personal incentives to do so.

No incentive to dissent

The median share ownership of PanaHome’s inside board members is ¥9.5mn. The

maximum share ownership is ¥15.2mn. Thus the board members own shares that equate

to a few months base salary. A few extra months of employment at Panasonic group

companies is worth more than most board members’ total share ownership. The upside

from bargaining for a higher share exchange ratio is thus small. This low share ownership

level is after 30-35 year careers at PanaHome or other Panasonic group companies. What

personal incentive would any of these board members have to try to maximize the share

exchange ratio, at the risk of upsetting their parent company?

Neither of the independent directors owns any shares. Thus they have no personal

incentive to try to secure a higher share exchange ratio. Thus none of the directors,

neither the inside directors, nor the independent director, have any meaningful alignment

of interest with minority shareholders.

This lack of incentive to rock the boat is especially true because at Japanese companies,

the last few years of employment are the most lucrative. The bonus paid to senior

employees upon retirement is a large lump sum payment that is lightly taxed. This is then

usually followed by a cushy stint as a senior manager at a smaller group company and

then often an “advisor” position after that. Hard work and loyalty over a 40 year career is

rewarded with a well-paid semi-retirement that can last many years. Why would anyone

put this at risk?

Chart 3: Average Board Structure Score by Sector: The Auto-parts Sub-sector is One of the Worst


Automotive Industry restructuring The automotive industry is likely to go through significant restructuring over the next

several years. We believe that Toyota making Daihatsu a wholly-owned subsidiary is just

the first move, and other Toyota group companies are likely to be reorganised in the

future through mergers and acquisitions. Similarly it is quite possible that Honda (7267 JP,

Buy, ¥3,600) and Nissan affiliates are also reorganized, including Mitsubishi Motors. While

we do not predict blatant asset grabs, these are valuable companies with world leading

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Equity Strategy

Japan

13 February 2017



capabilities. Even small differences in valuations potentially represent billions of dollars

transferring from one set of shareholders to another. Who will represent minority

shareholders’ interests when these reorganisations happen?

Chart 3, shows the overall board structure scores from our 30th September 2016 report

“Board Structure Reform: Meaningful Progress.” It can be seen that the automotive sector

has among the worst board structure scores of any sector. The auto-parts sub-sector

scores particularly badly. The details of the sector’s board structure scores are presented

at the end of the report in Tables 4 to 8.

Other companies of concern In Table 3 we again present the list of companies from our 7th July 2016 report, “Minority

Shareholders: Investing Without Representation Is …” which included PanaHome, which

we have highlighted. These are companies that have controlling or large corporate

shareholders and had at most two outside directors. We excluded companies where the

large shareholder is the founding family. We excluded companies with at least 3 outside

directors.

The list includes some companies such as NTT (9437 JP, NC) and Japan Tobacco (2914 JP,

NC) that still have the government as their main shareholder. Why these companies do

not have better board structures is surprising given that the government is a key driver of

corporate governance reform. The list also has many companies from the automotive

sector. Other companies that show up in the list are subsidiaries of electronics giants Sony

(6758 JP, Buy, TP ¥5,150), Panasonic (6752 JP, Buy, TP ¥1,280), Toshiba (6502 JP, NC),

Fujitsu (6702 JP, NC), Canon (7751 JP, Hold, TP ¥3,000) and Ricoh (7752 JP, Hold, TP

¥940). Subsidiaries of the trading company, Itochu (8001 JP, Buy, TP ¥1,850) and the

retailer Aeon (8267, JP, NC) also feature in this list.

When corporate Japan reorganises over the coming years to improve operational

efficiencies or balance sheets, it is questionable as to whether minority shareholder

interests will be adequately represented. Investors in companies on this list should

be very cautious as they risk the same fate as minority investors in Daihatsu

and PanaHome. In particular they should look at whether the board members of these

companies have any meaningful share ownership. If not, investors should assume that the

board members interests are aligned with the parent company and not the minority

sharesholders.

Table 3: Companies with controlling or large shareholders and at most 2 outside directors

Code Company name Market Cap

(¥ bn)

Major share holder % Held Directors Outside

Directors

% Outside

Directors

9437 NTT DOCOMO INC 11,414 NTT 62.4 15 2 13

9432 NIPPON TELEGRAPH & TELEPHONE 10,574 MINISTRY OF FINANCE 35.2 12 2 17

2914 JAPAN TOBACCO INC 8,568 MINISTRY OF FINANCE 33.4 7 2 29

7201 NISSAN MOTOR CO LTD 4,059 RENAULT SA 43.4 9 1 11

9613 NTT DATA CORP 1,370 NIPPON TELEGRAPH & T 54.2 11 2 18

2413 M3 INC 1,181 SONY CORP 39.4 8 1 13

4508 MITSUBISHI TANABE PHARMA 1,045 MITSUBISHI CHEMICAL 56.3 8 2 25

4151 KYOWA HAKKO KIRIN CO LTD 1,004 KIRIN HOLDINGS CO LT 50.1 8 2 25

4612 NIPPON PAINT HOLDINGS CO LTD 761 NIPSEA INTERNATIONAL 39.0 7 2 29

4506 SUMITOMO DAINIPPON PHARMA 751 SUMITOMO CHEMICAL CO 50.1 8 2 25

3659 NEXON CO LTD 639 NXC CORP 38.6 7 2 29

8028 FAMILYMART CO LTD 632 ITOCHU CORP 37.7 11 1 9

7262 DAIHATSU MOTOR CO LTD 562 TOYOTA GROUP 51.2 11 1 9

7205 HINO MOTORS LTD 539 TOYOTA GROUP 50.1 11 2 18

8729 SONY FINANCIAL HOLDINGS INC 474 SONY CORP 60.0 9 2 22

8570 AEON FINANCIAL SERVICE CO LT 463 AEON 43.2 11 2 18

9719 SCSK CORP 414 SUMITOMO CORP 48.8 18 2 11

Investors much check to see if board

members have any meaningful share

ownership to align their interests

with those of minority shareholders

Equity Strategy

Japan

13 February 2017



https://javatar.bluematrix.com/pdf/UTdICd0u

https://javatar.bluematrix.com/pdf/dq9ckDRU

https://javatar.bluematrix.com/pdf/dq9ckDRU

Table 3: Companies with controlling or large shareholders and at most 2 outside directors

Code Company name Market Cap

(¥ bn)

Major share holder % Held Directors Outside

Directors

% Outside

Directors

3141 WELCIA HOLDINGS CO LTD 355 AEON CO LTD 50.5 9 2 22

8933 NTT URBAN DEVELOPMENT CORP 349 NIPPON TELEGRAPH & T 67.3 14 2 14

8905 AEON MALL CO LTD 317 AEON 49.2 12 2 17

8060 CANON MARKETING JAPAN INC 292 CANON INC 50.1 10 2 20

4739 ITOCHU TECHNO-SOLUTIONS CORP 272 ITOCHU CORP 56.1 9 2 22

6755 FUJITSU GENERAL LTD 258 FUJITSU LTD 42.2 11 2 18

7282 TOYODA GOSEI CO LTD 226 TOYOTA GROUP 42.7 8 1 13

3769 GMO PAYMENT GATEWAY INC 222 GMO INTERNET INC 51.7 12 2 17

1881 NIPPO CORP 208 JX HOLDINGS INC 56.9 9 1 11

7248 CALSONIC KANSEI CORP 205 NISSAN MOTOR CO LTD 40.7 5 2 40

1942 KANDENKO CO LTD 176 TEPCO POWER GRID INC 46.2 15 2 13

6756 HITACHI KOKUSAI ELECTRIC INC 172 HITACHI LTD 50.4 5 2 40

6641 NISSIN ELECTRIC CO LTD 164 SUMITOMO ELECTRIC IN 51.0 9 2 22

2327 NS SOLUTIONS CORP 163 NIPPON STEEL & SUMIT 54.8 10 2 20

1983 TOSHIBA PLANT SYSTEMS & SERV 160 TOSHIBA CORP 59.6 13 2 15

9787 AEON DELIGHT CO LTD 156 AEON 30.6 13 2 15

7222 NISSAN SHATAI CO LTD 149 NISSAN MOTOR CO LTD 43.1 6 2 33

8283 PALTAC CORPORATION 143 MEDIPAL HOLDINGS COR 50.1 10 2 20

1924 PANAHOME CORP 138 PANASONIC CORP 54.0 9 2 22

1941 CHUDENKO CORP 133 CHUGOKU ELECTRIC POW 37.5 12 2 17

6995 TOKAI RIKA CO LTD 131 TOYOTA GROUP 31.2 11 1 9

7862 TOPPAN FORMS CO LTD 121 TOPPAN PRINTING CO L 58.6 11 2 18

1662 JAPAN PETROLEUM EXPLORATION 116 MINISTER OF ECON TRA 34.0 14 2 14

8870 SUMITOMO REAL ESTATE SALES 115 SUMITOMO REALTY & DEV 70.3 9 0 0

8133 ITOCHU ENEX CO LTD 111 ITOCHU CORP 52.2 8 2 25

1766 TOKEN CORP 108 TOMEI SHOJI KK 30.4 5 1 20

7251 KEIHIN CORP 107 HONDA MOTOR CO LTD 41.3 11 2 18

9810 NIPPON STEEL & SUMIKIN BUSSA 104 NIPPON STEEL & SUMIT 36.0 11 2 18

6588 TOSHIBA TEC CORP 101 TOSHIBA CORP 50.0 8 1 13

8806 DAIBIRU CORP 100 MITSUI OSK LINES LTD 50.9 7 2 29

8214 AOKI HOLDINGS INC 93 ANNIVERSAIRE HOLDING 38.7 15 2 13

1973 NEC NETWORKS & SYSTEM INTEGR 93 NEC CORP 38.4 9 2 22

4553 TOWA PHARMACEUTICAL CO LTD 88 YOSHIDA JIMUSHO KK 40.8 13 1 8

5191 SUMITOMO RIKO COMPANY LTD 84 SUMITOMO ELECTRIC IN 49.5 10 2 20

7230 NISSIN KOGYO CO LTD 83 HONDA MOTOR CO LTD 34.7 10 1 10

2281 PRIMA MEAT PACKERS LTD 81 ITOCHU CORP 39.4 8 1 13

8566 RICOH LEASING CO LTD 79 RICOH CO LTD 51.2 6 1 17

9422 CONEXIO CORP 76 ITOCHU CORP 48.3 7 2 29

4708 RELIA INC 75 MITSUI & CO LTD 34.1 7 2 29

5449 OSAKA STEEL CO LTD 73 NIPPON STEEL & SUMIT 60.6 7 1 14

4551 TORII PHARMACEUTICAL CO LTD 70 JAPAN TOBACCO INC 53.5 9 2 22

6967 SHINKO ELECTRIC INDUSTRIES 65 FUJITSU LTD 50.0 7 0 0

6183 BELLSYSTEM24 HOLDINGS INC 64 ITOCHU CORP 41.1 8 2 25

7942 JSP CORP 63 MITSUBISHI GAS CHEMI 51.0 11 1 9

7739 CANON ELECTRONICS INC 58 CANON INC 53.3 13 2 15

4812 INFO SERVICES INTL DENTSU 56 DENTSU INC 61.8 11 2 18

1934 YURTEC CORP 55 TOHOKU ELECTRIC POWE 46.7 12 2 17

2726 PAL CO LTD 54 SCOTCH TAYLOR'S SHOP 34.0 8 1 13

4996 KUMIAI CHEMICAL INDUSTRY CO 52 ZENNOH 30.5 13 1 8

4201 NIPPON SYNTHETIC CHEMICAL 49 MITSUBISHI CHEMICAL 51.0 8 2 25

7970 SHIN-ETSU POLYMER CO LTD 49 SHIN-ETSU CHEMICAL C 52.0 12 2 17

9946 MINISTOP CO LTD 48 AEON 47.4 7 2 29

8934 SUN FRONTIER FUDOUSAN CO LTD 44 HOUON CO LTD 42.0 6 2 33

2715 ELEMATEC CORP 43 TOYOTA GROUP 56.7 9 2 22

9370 YUSEN LOGISTICS CO LTD 42 NIPPON YUSEN KK 59.5 8 2 25

7274 SHOWA CORP 42 HONDA MOTOR CO LTD 33.5 11 2 18

1949 SUMITOMO DENSETSU CO LTD 40 SUMITOMO ELECTRIC IN 50.0 10 2 20


Equity Strategy

Japan

13 February 2017



Automotive Sector - Detailed Data

Table 4: Autos (1)

Source: Jefferies estimates, Bloomberg

Ticker Name

Market Cap

(¥ Bn) Subsector

Total

Score

Shareholder

Alignment

Entrenched

Board

Outside

Influence Skills Diversity

7203 Toyota Motor 20,075 Auto - OEM 50 60 -30 20 -15 15

7201 Nissan Motor 4,514 Auto - OEM 35 30 -5 0 -15 25

7272 Yamaha Motor 701 Auto - OEM 25 10 -5 25 -5 0

7261 Mazda Motor 946 Auto - OEM 15 5 -20 25 -5 10

7270 Fuji Heavy 3,018 Auto - OEM 10 10 -5 15 -10 0

7211 Mitsubishi Motors 472 Auto - OEM 10 5 -20 15 -10 20

7267 Honda Motor 5,384 Auto - OEM 0 10 -5 5 -20 10

7269 Suzuki Motor 1,692 Auto - OEM -55 10 -60 15 -30 10

5949 Unipres 88 Auto - Parts 65 0 10 35 10 10

6923 Stanley Electric 483 Auto - Parts 40 35 5 5 -5 0

5334 NGK Spark Plug 413 Auto - Parts 30 5 0 10 5 10

7251 Keihin 120 Auto - Parts 20 5 5 5 5 0

6201 Toyota Industries 1,590 Auto - Parts 15 15 -20 15 -5 10

3116 Toyota Boshoku 421 Auto - Parts 15 20 -20 10 -5 10

7222 Nissan Shatai 149 Auto - Parts 15 5 5 15 -10 0

7278 Exedy 127 Auto - Parts 10 20 -10 5 -5 0

7230 Nissin Kogyo 102 Auto - Parts 0 5 10 0 -15 0

7988 Nifco 299 Auto - Parts -5 20 -30 15 -20 10

6995 Tokai Rika 187 Auto - Parts -5 10 5 -5 -15 0

7312 Takata 30 Auto - Parts -5 5 -5 0 -15 10

5991 NHK Spring 239 Auto - Parts -10 0 -20 5 -5 10

6674 GS Yuasa 174 Auto - Parts -10 0 -15 -5 0 10

7313 TS Tech 179 Auto - Parts -10 0 -5 5 -10 0

6473 JTEKT 507 Auto - Parts -15 0 -20 15 -10 0

7282 Toyoda Gosei 317 Auto - Parts -15 0 -10 5 -10 0

6902 Denso 3,261 Auto - Parts -25 5 -25 15 -30 10

7259 Aisin Seiki 1,385 Auto - Parts -25 30 -40 10 -35 10

7240 NOK 382 Auto - Parts -30 10 -25 5 -30 10

7276 Koito Mfg 796 Auto - Parts -50 10 -50 -5 -15 10

5802 Sumitomo Electric 1,156 Auto - Parts -55 0 -60 25 -20 0

5108 Bridgestone 3,003 Auto - Tires 150 15 -15 100 10 40

5105 Toyo Tire & Rubber 179 Auto - Tires 55 5 10 20 10 10

5110 Sumitomo Rubber 406 Auto - Tires 50 5 -5 40 10 0

5101 Yokohama Rubber 274 Auto - Tires -15 5 -20 15 -15 0

7205 Hino Motors 625 Auto - Trucks -5 10 -20 15 -10 0

7202 Isuzu Motors 1,037 Auto - Trucks -10 0 -15 5 -10 10

Equity Strategy

Japan

13 February 2017



Table 5: Autos (2)

Source: Jefferies estimates

Ticker Name

Total

Score

Median

Outside

Median

Inside

Max

Shrhldg

CEO

Shrhldg

Comp.

Plan

Board

Size

Avg.

Age

CEO

Age

Chair

Age

Oldest

Director

Chair

prev CEO

Avg.

Tenure

CEO

Tenure

Chair

Tenure

7203 Toyota Motor 50 0 10 20 20 10 -5 -5 0 0 -15 0 -5 0 0

7201 Nissan Motor 35 0 0 10 15 5 0 0 0 0 0 0 -5 0 0

7272 Yamaha Motor 25 0 5 0 0 5 -5 0 0 0 0 0 0 0 0

7261 Mazda Motor 15 0 0 0 0 5 0 0 0 0 -5 -10 -5 0 0

7270 Fuji Heavy 10 0 5 0 0 5 0 -5 0 0 0 0 0 0 0

7211 Mitsubishi Motors 10 0 0 0 0 5 0 -5 -5 0 -10 0 0 0 0

7267 Honda Motor 0 0 5 0 0 5 -15 10 0 0 0 0 0 0 0

7269 Suzuki Motor -55 0 0 5 0 5 0 -10 0 -15 -15 -10 -10 0 0

5949 Unipres 65 0 0 0 0 0 0 10 0 0 0 0 0 0 0

6923 Stanley Electric 40 5 0 5 10 15 0 10 0 0 0 0 -5 0 0

5334 NGK Spark Plug 30 0 0 0 0 5 0 0 0 0 0 0 0 0 0

7251 Keihin 20 0 0 0 0 5 -5 10 0 0 0 0 0 0 0

6201 Toyota Industries 15 0 5 10 0 0 -5 -5 0 0 0 -10 0 0 0

3116 Toyota Boshoku 15 0 0 10 0 10 -5 0 0 0 -5 -10 0 0 0

7222 Nissan Shatai 15 0 0 0 0 5 -5 10 0 0 0 0 0 0 0

7278 Exedy 10 0 0 0 0 20 -5 0 0 0 0 0 -5 0 0

7230 Nissin Kogyo 0 0 0 0 0 5 0 10 0 0 0 0 0 0 0

7988 Nifco -5 0 0 0 0 20 -5 -10 0 0 -15 0 0 0 0

6995 Tokai Rika -5 0 0 0 0 10 -5 10 0 0 0 0 0 0 0

7312 Takata -5 0 0 0 5 0 -5 10 0 0 -5 0 -5 0 0

5991 NHK Spring -10 0 0 0 0 0 0 -5 -5 0 0 0 0 -10 0

6674 GS Yuasa -10 0 0 0 0 0 -5 0 0 0 0 -10 0 0 0

7313 TS Tech -10 0 0 0 0 0 -15 10 0 0 0 0 0 0 0

6473 JTEKT -15 0 0 0 0 0 -5 0 0 0 -5 -10 0 0 0

7282 Toyoda Gosei -15 0 0 0 0 0 0 0 0 0 0 -10 0 0 0

6902 Denso -25 0 5 0 0 0 -15 0 0 0 0 -10 0 0 0

7259 Aisin Seiki -25 0 10 10 0 10 -15 -5 0 0 -5 -10 -5 0 0

7240 NOK -30 0 0 0 5 5 0 0 -5 0 -5 0 -15 0 0

7276 Koito Mfg -50 0 0 0 0 10 -15 0 0 0 -10 -10 -15 0 0

5802 Sumitomo Electric -55 0 0 0 0 0 -15 -5 -10 0 -5 0 -5 -20 0

5108 Bridgestone 150 0 5 0 0 10 -5 0 0 0 0 -10 0 0 0

5105 Toyo Tire & Rubber 55 0 0 0 0 5 0 10 0 0 0 0 0 0 0

5110 Sumitomo Rubber 50 0 0 0 0 5 -5 0 0 0 0 0 0 0 0

5101 Yokohama Rubber -15 0 0 0 0 5 -5 0 0 0 -5 -10 0 0 0

7205 Hino Motors -5 0 0 0 0 10 -5 -5 0 0 -10 0 0 0 0

7202 Isuzu Motors -10 0 0 0 0 0 -5 0 0 0 0 -10 0 0 0

Shareholder Alignment Entrenched Board

Equity Strategy

Japan

13 February 2017



Table 6: Autos (3)

Source: Jefferies estimates

Ticker Name

Total

Score

Outside

Chair

%

Outsiders

#

Indep

# of

Comm'te

Legal vs.

Advisory

Majority

Outsiders

Comm'te

Chair Acct Law

Business

/ Finance

Academia

/ Govt. Women

Foreign

Inside

Foreign

Outside

7203 Toyota Motor 50 0 -5 15 10 0 0 0 -10 -10 10 -5 0 5 10

7201 Nissan Motor 35 0 -5 5 0 0 0 0 -10 -10 5 0 0 15 10

7272 Yamaha Motor 25 0 -5 10 10 0 10 0 -10 -10 15 0 0 0 0

7261 Mazda Motor 15 0 -5 10 10 0 0 10 -10 10 0 -5 10 0 0

7270 Fuji Heavy 10 0 -5 10 10 0 0 0 -10 -10 10 0 0 0 0

7211 Mitsubishi Motors 10 0 5 10 0 0 0 0 -10 -10 15 -5 20 0 0

7267 Honda Motor 0 0 -5 10 0 0 0 0 -10 -10 5 -5 10 0 0

7269 Suzuki Motor -55 0 -5 10 10 0 0 0 -10 -10 0 -10 10 0 0

5949 Unipres 65 0 5 10 5 10 5 0 -10 10 10 0 10 0 0

6923 Stanley Electric 40 0 -5 10 0 0 0 0 10 -10 0 -5 0 0 0

5334 NGK Spark Plug 30 0 -5 15 0 0 0 0 10 -10 5 0 10 0 0

7251 Keihin 20 0 -5 10 0 0 0 0 -10 10 5 0 0 0 0

6201 Toyota Industries 15 0 -5 10 10 0 0 0 -10 -10 15 0 10 0 0

3116 Toyota Boshoku 15 0 -5 15 0 0 0 0 -10 -10 15 0 10 0 0

7222 Nissan Shatai 15 0 5 10 0 0 0 0 -10 -10 10 0 0 0 0

7278 Exedy 10 0 -5 10 0 0 0 0 -10 -10 15 0 0 0 0

7230 Nissin Kogyo 0 0 -5 5 0 0 0 0 -10 -10 5 0 0 0 0

7988 Nifco -5 0 5 10 0 0 0 0 -10 -10 5 -5 10 0 0

6995 Tokai Rika -5 0 -10 5 0 0 0 0 -10 -10 5 0 0 0 0

7312 Takata -5 0 -5 5 0 0 0 0 -10 -10 5 0 10 0 0

5991 NHK Spring -10 0 -5 10 0 0 0 0 -10 10 0 -5 10 0 0

6674 GS Yuasa -10 0 -10 5 0 0 0 0 10 -10 0 0 10 0 0

7313 TS Tech -10 0 -5 10 0 0 0 0 -10 -10 10 0 0 0 0

6473 JTEKT -15 0 -5 10 10 0 0 0 -10 -10 10 0 0 0 0

7282 Toyoda Gosei -15 0 -5 10 0 0 0 0 -10 -10 10 0 0 0 0

6902 Denso -25 0 -5 10 10 0 0 0 -10 -10 0 -10 0 0 10

7259 Aisin Seiki -25 0 -5 15 0 0 0 0 -10 -10 0 -15 10 0 0

7240 NOK -30 0 -5 10 0 0 0 0 -10 -10 0 -10 10 0 0

7276 Koito Mfg -50 0 -10 5 0 0 0 0 -10 -10 5 0 10 0 0

5802 Sumitomo Electric -55 0 -5 10 10 0 0 10 -10 -10 5 -5 0 0 0

5108 Bridgestone 150 0 20 25 15 10 15 15 -10 10 20 -10 20 0 20

5105 Toyo Tire & Rubber 55 0 5 15 0 0 0 0 -10 10 10 0 10 0 0

5110 Sumitomo Rubber 50 0 -5 15 10 0 10 10 -10 10 10 0 0 0 0

5101 Yokohama Rubber -15 0 -5 10 10 0 0 0 -10 -10 10 -5 0 0 0

7205 Hino Motors -5 0 -5 10 10 0 0 0 -10 -10 10 0 0 0 0

7202 Isuzu Motors -10 0 -5 10 0 0 0 0 -10 -10 10 0 10 0 0

Outside Influence Skills Diversity

Equity Strategy

Japan

13 February 2017



Table 7: Autos (4)

Source: Jefferies estimates, Bloomberg, company data

Ticker Name

Total

Score

Median

Outside

Median

Inside

Max

Shrhldg

CEO

Shrhldg

Comp.

Plan

Board

Size

Avg.

Age

CEO

Age

Chair

Age

Oldest

Director

Chair

prev CEO

Avg.

Tenure

CEO

Tenure

Chair

Tenure

7203 Toyota Motor 50 0 116 28,439 28,439 SO 11 64.9 60 69 81 No 6.0 16 3

7201 Nissan Motor 35 1 9 3,073 3,073 PB 9 62.3 62 62 69 No 6.4 8 8

7272 Yamaha Motor 25 6 54 116 114 PB 11 60.7 61 63 4.0 7

7261 Mazda Motor 15 6 11 18 8 PB 10 62.8 61 66 74 Yes 6.6 6 2

7270 Fuji Heavy 10 0 100 201 201 PB 8 64.0 62 69 3.6 7

7211 Mitsubishi Motors 10 1 1 7 7 PB 10 64.4 67 67 78 No 2.4 2 2

7267 Honda Motor 0 0 87 111 90 PB 13 58.0 57 68 2.9 1

7269 Suzuki Motor -55 2 23 1,796 194 PB 8 67.1 57 86 86 Yes 8.4 13 16

5949 Unipres 65 0 22 47 47 8 58.5 62 65 3.5 12

6923 Stanley Electric 40 11 45 1,177 1,177 PB,SO 9 58.7 60 69 6.7 31

5334 NGK Spark Plug 30 1 22 34 34 PB 10 60.2 62 62 62 No 4.6 0 0

7251 Keihin 20 0 10 13 5 PB 11 57.2 58 63 2.4 0

6201 Toyota Industries 15 0 85 2,966 92 11 63.9 58 70 70 Yes 3.5 6 3

3116 Toyota Boshoku 15 5 32 2,306 45 SO 12 62.3 63 69 72 Yes 2.3 1 1

7222 Nissan Shatai 15 2 4 7 2 PB 6 58.7 59 62 2.0 0

7278 Exedy 10 5 9 28 28 PBSC 11 61.1 61 70 6.8 10

7230 Nissin Kogyo 0 1 13 37 27 PB 8 56.8 58 68 2.6 5

7988 Nifco -5 0 29 57 23 PBSC 6 67.2 66 66 85 3.5 0 0

6995 Tokai Rika -5 0 19 36 19 SO 11 59.7 61 62 4.2 3

7312 Takata -5 2 1 958 958 6 57.7 50 50 74 No 6.9 3 3

5991 NHK Spring -10 0 20 56 56 9 63.6 67 70 4.0 10

6674 GS Yuasa -10 0 6 41 7 12 60.5 56 66 70 Yes 4.7 4 1

7313 TS Tech -10 0 13 63 33 14 58.7 63 65 3.6 18

6473 JTEKT -15 1 19 68 68 11 62.8 63 65 75 Yes 2.9 3 0

7282 Toyoda Gosei -15 0 16 34 25 9 60.7 59 66 66 Yes 2.9 2 1

6902 Denso -25 2 70 207 135 13 61.3 58 67 67 Yes 4.3 6 1

7259 Aisin Seiki -25 5 101 4,814 48 SO 13 65.0 64 74 74 Yes 6.3 1 11

7240 NOK -30 1 45 888 888 PB 10 62.6 68 68 75 No 11.9 27 27

7276 Koito Mfg -50 0 48 528 58 SO 15 62.6 61 69 76 Yes 12.2 13 1

5802 Sumitomo Electric -55 7 13 78 78 13 63.5 71 71 6.0 19

5108 Bridgestone 150 0 58 110 110 SO 11 61.0 64 64 66 Yes 3.3 3 3

5105 Toyo Tire & Rubber 55 0 7 16 7 PB 8 59.8 55 69 1.4 3

5110 Sumitomo Rubber 50 0 22 47 47 PB 11 61.6 59 70 4.9 10

5101 Yokohama Rubber -15 0 11 138 58 PB 12 60.9 57 69 71 Yes 3.5 7 5

7205 Hino Motors -5 2 16 192 52 SO 11 64.1 64 69 76 No 4.3 4 3

7202 Isuzu Motors -10 0 49 172 96 12 61.8 62 66 66 Yes 3.6 9 1

Entrenched Board (Age, Tenure in Years)Shareholding (¥ mn)

Equity Strategy

Japan

13 February 2017



Table 8: Autos (5)


Ticker Name

Total

Score

Outside

Chair

%

Outsiders

#

Indep Comm'tes

Legal vs.

Advisory

Majority

Outsiders

Comm'te

Chair Acct Law

Business

/ Finance

Academia

/ Govt. Women

Foreign

Inside

Foreign

Outside

7203 Toyota Motor 50 27% 3 N C Advisory - , - , - - , - , - 2 1 1 1

7201 Nissan Motor 35 11% 1 - , - , - - , - , - 1 3 1

7272 Yamaha Motor 25 27% 2 N C Advisory - , Y , Y - , - , - 3

7261 Mazda Motor 15 20% 2 N C Advisory - , - , - - , Y , Y 1 1 1

7270 Fuji Heavy 10 25% 2 N C Advisory - , - , - - , - , - 2

7211 Mitsubishi Motors 10 40% 2 - , - , - - , - , - 3 1 2

7267 Honda Motor 0 15% 2 - , - , - - , - , - 1 1 1

7269 Suzuki Motor -55 25% 2 N C Advisory - , - , - - , - , - 2 1

5949 Unipres 65 38% 2 A Legal Y , - , - - , - , - 1 2 1

6923 Stanley Electric 40 22% 2 - , - , - - , - , - 1 1

5334 NGK Spark Plug 30 30% 3 - , - , - - , - , - 2 1 1

7251 Keihin 20 18% 2 - , - , - - , - , - 1 1

6201 Toyota Industries 15 27% 2 N C Advisory - , - , - - , - , - 3 1

3116 Toyota Boshoku 15 25% 3 - , - , - - , - , - 3 1

7222 Nissan Shatai 15 33% 2 - , - , - - , - , - 2

7278 Exedy 10 27% 2 - , - , - - , - , - 3

7230 Nissin Kogyo 0 13% 1 - , - , - - , - , - 1

7988 Nifco -5 33% 2 - , - , - - , - , - 1 1 1

6995 Tokai Rika -5 9% 1 - , - , - - , - , - 1

7312 Takata -5 17% 1 - , - , - - , - , - 1 1

5991 NHK Spring -10 22% 2 - , - , - - , - , - 1 1 1

6674 GS Yuasa -10 8% 1 - , - , - - , - , - 1 1

7313 TS Tech -10 14% 2 - , - , - - , - , - 2

6473 JTEKT -15 18% 2 N C Advisory - , - , - - , - , - 2

7282 Toyoda Gosei -15 22% 2 - , - , - - , - , - 2

6902 Denso -25 15% 2 N C Advisory - , - , - - , - , - 2 1

7259 Aisin Seiki -25 23% 3 - , - , - - , - , - 3 1

7240 NOK -30 20% 2 - , - , - - , - , - 2 1

7276 Koito Mfg -50 7% 1 - , - , - - , - , - 1 1

5802 Sumitomo Electric -55 15% 2 N C Advisory - , - , - - , Y , Y 1 1

5108 Bridgestone 150 64% 7 A N C Legal Y , Y , Y Y , Y , Y 1 4 2 2 2

5105 Toyo Tire & Rubber 55 38% 3 - , - , - - , - , - 1 2 1

5110 Sumitomo Rubber 50 27% 3 N C Advisory - , Y , Y - , Y , Y 1 2

5101 Yokohama Rubber -15 25% 2 N C Advisory - , - , - - , - , - 2 1

7205 Hino Motors -5 18% 2 N C Advisory - , - , - - , - , - 2

7202 Isuzu Motors -10 17% 2 - , - , - - , - , - 2 1

Outside Influence Skills Diversity

Equity Strategy

Japan

13 February 2017



Analyst Certification:I, Zuhair Khan, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Sean Darby, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Takaki Nakanishi, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Yoshihiro Azuma, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Atul Goyal, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Masahiro Nakanomyo, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Thanh Ha Pham, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Hiroko Sato, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Chang Han Joo, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Mitsuko Miyasako, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Sho Fukuhara, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Shinnosuke Takeuchi, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.Registration of non-US analysts: Zuhair Khan, CFA is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.Registration of non-US analysts: Sean Darby is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.Registration of non-US analysts: Takaki Nakanishi is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.Registration of non-US analysts: Yoshihiro Azuma is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.Registration of non-US analysts: Atul Goyal, CFA is employed by Jefferies Singapore Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.Registration of non-US analysts: Masahiro Nakanomyo is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, publicappearances and trading securities held by a research analyst.Registration of non-US analysts: Thanh Ha Pham is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.Registration of non-US analysts: Hiroko Sato is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

Equity Strategy

Japan

13 February 2017



Registration of non-US analysts: Chang Han Joo, CFA is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, publicappearances and trading securities held by a research analyst.Registration of non-US analysts: Mitsuko Miyasako is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.Registration of non-US analysts: Sho Fukuhara is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.Registration of non-US analysts: Shinnosuke Takeuchi is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, publicappearances and trading securities held by a research analyst.As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.

Investment Recommendation Record(Article 3(1)e and Article 7 of MAR)

Recommendation Published , 22:00 ET. February 12, 2017Recommendation Distributed , 01:00 ET. February 13, 2017

Company Specific DisclosuresFor Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Explanation of Jefferies RatingsBuy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or morewithin a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an averagesecurity price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus20% or less within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinionson the investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility inthe bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intendedto represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment stylesuch as growth or value.

Equity Strategy

Japan

13 February 2017



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Risks which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• AEON Delight (9787 JP: ¥3,355, BUY)• Aisin Seiki (7259 JP: ¥5,550, HOLD)• Bridgestone (5108 JP: ¥4,201, BUY)• Canon Inc. (7751 JP: ¥3,264, HOLD)• Canon Marketing Japan (8060 JP: ¥2,238, BUY)• Denso (6902 JP: ¥5,047, HOLD)• Fuji Heavy Industries (7270 JP: ¥4,409, HOLD)• Fujitsu General (6755 JP: ¥2,182, BUY)• GMO Payment Gateway Inc. (3769 JP: ¥6,230, BUY)• Hitachi Kokusai Electric (6756 JP: ¥2,546, HOLD)• Honda Motor (7267 JP: ¥3,605, BUY)• ITOCHU Corporation (8001 JP: ¥1,586, BUY)• ITOCHU Techno-Solutions Corporation (4739 JP: ¥3,130, BUY)• Japan Tobacco (2914 JP: ¥3,683, HOLD)• M3 (2413 JP: ¥2,963, BUY)• Mazda Motor (7261 JP: ¥1,590, HOLD)• Nexon Co., Ltd. (3659 JP: ¥1,803, BUY)• Nippon Paint Holdings Co., Ltd (4612 JP: ¥3,470, HOLD)• Nissan Motor (7201 JP: ¥1,126, HOLD)• NTT DATA Corporation (9613 JP: ¥5,390, HOLD)• Panasonic (6752 JP: ¥1,218, BUY)• Ricoh Company, Ltd. (7752 JP: ¥991, HOLD)• SCSK Corporation (9719 JP: ¥4,090, BUY)• Sony Corp (6758 JP: ¥3,590, BUY)• Suzuki Motor (7269 JP: ¥4,520, BUY)• Toyota Motor (7203 JP: ¥6,446, HOLD)• TS Tech (7313 JP: ¥2,855, BUY)• Yamaha Motor (7272 JP: ¥2,527, HOLD)

For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 1112 50.71% 332 29.86%HOLD 901 41.09% 174 19.31%UNDERPERFORM 180 8.21% 16 8.89%

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