Enterprise for analysis: Nikon Co., Ltd.

The stocks code: 7311 Stock prices (September 3rd

, 2012): \2116

Rating: “Buy” Target Stock Prices: \2279

1.Investment Summary

The target price of Nikon Co., Ltd was estimated at \2279 by using the Discounted Cash Flow method. It is 7% higher than

current stock prices \2116. Thus the investment recommendation of Nikon is “buy”. The core business of Nikon, digital SRL

cameras, succeeds all over the world with its higher technology and the spread of culture to take photos.

2.Company Overview.

Nikon which is the Japanese optical instrument maker has been leading optical industries as a pioneer since their establishment

in 1917. Now, Nikon manufactures many kinds of products, mainly digital cameras and its accessories, optical instruments and

precision equipment with their sophisticated technologies. Nikon group’s ratio of overseas sales is 85.6％. This figure means

that they are spreading their business globally enough.

3.Summary of business

■Precision Equipment Company

Semiconductors (ICs, etc.) and liquid crystal displays (LCDs) are key to IT equipment and today we cannot live without them.

Nikon Precision Equipment Company is the major global provider of steppers/scanners, the core equipment for manufacturing

the ICs and LCDs. They developed over 80 models of steppers/scanners, and sold over 9000 steppers/scanners.

■Imaging Company

Nikon Imaging Company accounts for 67.2 % of sale, therefore this company is necessary. Since 1948, the year that the

Nikon I, the company's first camera was released, Nikon have developed high-performing products by combining film camera

technology with current image processing and network technology. Nikon can meet the needs because they have a lot of lineup,

compact digital cameras to digital single-lens reflex camera cameras, Lenses. Nikon keeps large share for digital SML cameras

in many country, and gains their share for compact digital camera in India, China, and Russia.

■Instrument Company

For bioscience area, Nikon manufactures biological microscopes for leading-edge research, and clinic, education. In addition,

they develop industrial microscopes and measuring instruments for electronic device, car, airplane, and so on.

■Others

Nikon is trying to exert their core technologies to other enterprises.

Ex.) ・ Space Development ・ Robot Development ・ Glass industry

4.Trend of market ・ Precision Equipment Market

■IC steppers and scanners:

The scale of IC steppers and scanners market is estimated approximately 755.2 billion yen as of 2011. Semiconductor

demand is in decreasing trend in Japan because Competitiveness of Japanese semiconductor manufacturers has fallen for

the deterioration of the market environment and the rapid appreciation of the yen. However, its world market continues to

be in expanding tendency, because of the increase in a smart phone or PCs in developing countries and the extension of the

living age due to the development of the medical equipment in developed countries. In recent years, there has been an

increase in cooperation and stepper manufacturer of semiconductor manufacturers. They are aiming to reduce costs and

rapid commercialization by joint development.

■LCD steppers and scanners:

Looking ahead, we expect the market to hit bottom during the fiscal year ending March 2013, and then to begin

expanding again sometime around the end of that year, centered on small to medium-sized high-definition panels to meet

smartphone demand. We also expect an increase in new demand for lithography equipment for large plates, to meet

demand for such products as panels with even higher precision than those for full HD televisions.

・ Imaging Products Market

■Japan

The digital camera shipment number for Japan is estimated 9,500,000 now. In the shipment number, the number of

Compact Digital Camera is 8 million, it has been decreasing since 2007. On the other hands, the shipment number of

Digital Camera with Interchangeable Lenses is 1,500,000. It has been increasing since 2003 and grew up to occupy 10% of

the digital camera shipment number.

Next, we will watch this situation on the money base. The shipment amount of money of the digital camera for Japan is

estimated at 162,100 million yen. The shipment amount of money of Compact Digital Camera is 105,200 million yen. It

has been decreasing since 2007. The shipment amount of money of Digital Camera with Interchangeable Lenses is 57

billion yen.

It has been increasing since 2003 and grew up to occupy 30% of the digital camera shipment amount of money.

■Overseas

The digital camera shipment number for foreign countries is estimated at 100 million. In the shipment number, the

number of Compact Digital Camera is 90 million and accomplished sudden growth from 30 million of 2003. The shipment

number of Digital Camera with Interchangeable Lenses is 14 million and accomplished sudden growth from 170,000 of

2003.

Next we will watch this situation on the money base. The shipment amount of money of the digital camera for foreign

countries is estimated at 1,290 billion yen. The shipment amount of money of Compact Digital Camera was the 1 trillion

yen level since 2004, but it was 812,400 million yen in 2011,it was under 1 trillion yen for the first time since 2003.

The shipment amount of money of Digital Camera with Interchangeable Lenses begins with 68,500 million yen in 2003

and accomplishes sudden growth 477,600 million yen in 2011.

The market of Compact Digital Camera is in tendency to reduction and the market of Digital Camera with

Interchangeable Lenses is in a tendency to extend in both the Japan and the foreign countries.

5.Current situation and future strategy

■Precision Equipment

-Current Situation

・ IC steppers and scanners;

Major markets of the world are sharing in the three companies, Nikon, ASML(Netherlands) and Canon(Japan). In the current

market share of each company is approximately 20%, 70%, and 10%. Nikon began to address technology development in

cooperation with Intel (USA) since the early 2000s. As a result, Nikon won a 20% of the market share in 2011. However, in

July 2012, ASML also decided to accept an investment from Intel in order to develop the next-generation stepper that allows

finer processing, "Extreme Ultra Violet (EUV) Steppers". Furthermore, ASML is considering accepting investment from

leading companies in semiconductor such as Samsung Electronics (Korea) and Taiwan Semiconductor Manufacturing Co.

(Taiwan) .

・ LCD steppers and scanners;

Similar to IC steppers and scanners market, major markets of the world are sharing in the three companies, Nikon, ASML

(Netherlands) and Canon (Japan). Since 1986 when Nikon released the NSR-L7501G in the field of LCD manufacturing, Nikon

has developed and sold a large number of LCD steppers and scanners. Nikon is not only a leader in steppers/scanners for large

LCDs, but also supplies models ideal for the manufacture of small and medium-size high-definition LCDs for mobile phones

and car navigation systems. With this strong product lineup, Nikon captured 77% of the global market in 2011 for LCD

steppers/scanners in terms of units sold. In March 2012, Nikon established a Works Yokosuka (Yokosuka City, Kanagawa

Prefecture). Nikon enhanced the Yokosuka Branch that worked as a production base of LCD steppers and scanners.

-Future Strategy

・ IC steppers and scanners;

Nikon has set the goal of mass production of EUV by 2019. For the time being, to improve the existing technology, Nikon is

working on miniaturization. Nikon is working to expand market share by ArF immersion scanner. It is a device to achieve

miniaturization by using a liquid of high refractive instead of lenses. One of the products that will be key to greater market

share is the new NSR-S621D ArF immersion scanner, which we began shipping in January 2012. This new model retains the

proven platform of the NSR-S620D, while offering advancements in overlay accuracy and throughput. The reaction from

customers has been positive, and we expect full-fledged introduction at customer plants from the second half of the fiscal year

ending March 2013. Drawing on this competitiveness, we aim to achieve a 40% share of the market for ArF immersion

scanners by the fiscal year ending March 2015.

Another product underpinning our push to increase market share is the new NSR-S320F ArF scanner announced in December

2011. This new model utilizes a common platform with the NSR-S621D, and offers overlay accuracy and throughput

comparable to that of an immersion scanner. We believe this scanner will allow us to respond to new customer needs.

・ LCD steppers and scanners;

In the LCD steppers and scanners market during the fiscal year ending March 2013, we anticipate that demand will remain

firm for lithography equipment for small to medium-sized high-definition panels, mainly 6th generation plates, but will decline

for large glass plates that are 7th generation and beyond. Nikon already has an extremely large share of the market for LCD

steppers and scanners, owing to such advanced technologies as multi-lens arrays that easily can be adapted to larger and more

precise glass plates. It is forecast to expand market share in the future.

■Imaging Products

-Current Situation

90% of digital SRL cameras market has been overwhelmed by Nikon and Canon. In the background of the strength, there are

brand name and technical capabilities to produce precise digital SRL cameras which are cultivated spending long time. Nikon’s

share is 25.4% and Canon’s share is 24.9% in 2011. Nikon has overtaken Canon for the first time in four years since 2007.

Nikon produce 90% of digital SRL cameras in Thailand. So it took effect that had little influence of the Great East Japan

Earthquake. Nikon was affected by the flood of Thailand , but the result of reconstructing the usual quantity of production and

responding to good demand, the sales amount increased. Nikon and Canon has conquered the market of digital SRL cameras,

but recently the new product of the digital SRL cameras for beginners is put on sale in succession by other company.

In the market of Mirrorless Camera which is very popular recently,OLYMPUS and Panasonic which started late with digital SRL

cameras make efforts in development and lead forming the market of Mirrorless Camera. So Nikon is behind.

In the market of Compact Digital Camera, Canon’s share is 18.8%, Sony’s share is 17.1%, Nikon’s share is 15.2%,Samsung’s

share is 9.6%. Although the offensive of the smart phone is strengthened still more and the market is reducing, Nikon increase the

sales amount. A sale reinforcement plan worked and got a top share in Europe

-Future Strategy

To increase the Imaging Company’s market share, Nikon declares “steady introduction of new products with distinctively

superior technologies” as Medium Term Management Plan. The Nikon 1 interchangeable lens-type advanced digital camera

represents one fruit of this ongoing strategy. The Nikon 1 is favored by women and young people, segments of the market

where Nikon has traditionally been weak. However, it is also accepted as an attractive second camera for digital SLR(Digital

single lens reflex camera ) owners.

When we look to the future of the imaging business, Nikon’s keyword has got to be emerging markets. Much of Nikon’s

future success will depend on how much market share they are able to capture in developing countries that still have a strong

potential for future economic expansion. They already have a solid market share in some of these emerging countries, but many

other areas await development. Brand strength is extremely important in these countries, where establishment of strong brand

appeal will lead to brand-based demand.

The Nikon brand is already well established in India, Russia and China, where they consistently command a strong share of

the market. However, Nikon remains relatively weak in much of Central and South America, the Middle East, Africa and parts

of Southeast Asia. They will focus on improving our brand image in these regions. As part of these efforts, in addition to the

sales subsidiaries we have already established in Thailand, Brazil and the United Arab Emirates, we will now turn our attention

to reinforcing our sales and service systems in Central and South America and the Middle East.

6. Analysis of financial statement

Gross margin and operating margin are relatively higher than other companies. But, the economic depression in 2008 made

manufacturing companies’ margin lower.

In precision equipment business, the demands of equipment became small because they didn’t intend to pay money for capital

investment. In imaging products business, buyer motivation became lower and the demands decreased.

You can see the margin of industry average. It is because of the terrible earthquake occurred in Japan in 2011. Overseas sales of

Nikon is very large (about 86 percent of Nikon’s sales), so we can say that the effect on Nikon was small.

7. Future net sales

Nikon has two main businesses, “Precision equipment” and “Imaging products”. Each business sales is expected as below.

■Precision equipment business

The market size of IC is estimated 29208 billion yen in 2012 and it will grow by 7.6 percent per year. It is said that the market

size of IC steppers and scanners is 2 percent of the IC market size. The sales of Nikon can be estimated by market size of

steppers and canners × market share of Nikon. Nikon’s share in IC steppers and scanners market is estimated 22 percent (2013),

19 percent (2014-2016), 18 percent (2017-2019), and 17 percent (2020-2022). ASML (Netherland) is rapidly growing in this

market, Nikon will be not able to raise its share.

There is no estimate of LCD market size forecast, the sales of Nikon is calculated by forecasted number of sales × price.

Nikon has strength in LCD steppers and scanners market, and the market size will grow because of the spread of smart phones

and development of developing countries. But, the demands of large size displays are decreasing today, so LCD equipment

market doesn’t grow as IC equipment. Nikon’s forecasted number of sales will grow by 2 percent. Using average price of these

3 years, 1504 million yen is estimated price. The price will decrease by 1 percent per year by price competition.

■Imaging products business

Estimating number of sales and price by region, sales of cameras and lenses are estimated by calculating sum of forecasted

number of sales × average price by region.

Forecasted number of sales:

First, using the total number of Japanese camera companies’ sales by region, prorate the number of each products of Nikon in

2012. The demand of digital SRL cameras is estimated to increase with GDP of each region. The demand of lenses is 1.5 times

of digital SRL cameras according to past trend. Additionally, it is estimated that the 10 percent of customers who bought

cameras in these 3 years buy additional lenses. The demand of Compact digital cameras is estimated to decrease by 2 percent

per year because of the spread of the smart phones and the price competition.

Average price by region:

First, using total sales and the number of Japanese camera companies’ sales by region, we calculated average price of Japanese

camera companies by region in 2012. Nikon has more selection of goods (from high-end for professionals to low-end for

amateurs) than the others, average price by region of Nikon is estimated by average price of all companies × price index of

Nikon. Price index of Nikon is 1.8 (digital SRL cameras), 1.4 (lenses), 1.1 (compact digital cameras). The price of compact

digital cameras is estimated to decrease by 3 percent because of the price competition.

Sales of instruments business and other business are estimated to fix from 2012.

8.Valuation

■DCF (Discounted Cash Flow) Model:

The target stock price was estimated by discounting the future operating free cash flow of ten years and continuation value

with WACC (Weighted Average Cost of Capital:7.94%). As a result, the target stock price is estimated to be 2279 yen. Hence,

the target stock price is higher than the stock price of 2116 yen and investment recommendation is “buy”.

9.Factors of Risk

■Overseas Expansion

The Nikon Group’s production and sales activities largely depend on countries outside Japan. The foreign currency markets

could have an impact on sales and earnings from transactions conducted in foreign currencies for the Group’s products and

services. Then, business in Japan and overseas is susceptible to changes in laws, tax structures and regulations regarding

imports and exports.

■Effects by Market Trends

In precision equipment area, the semiconductor industry is regarded as the most featured industry which has very changeable

business cycle. The specialty sometimes causes oversupply of semiconductor devices. In addition, in instrument equipment area,

the market of microscope tends to be a saturated condition, so there is enough ability to change the competition structure.

■Intensifying Price Competition

In digital cameras, the principal product of the Imaging Products Business, competition is becoming more intense with the

entry into the market of electric goods manufacturers in Japan and overseas alongside traditional camera producers. Also, since

the product lifecycle is short, particularly for compact digital cameras, companies tend to try to sell products manufactured in

large quantities over a short period of time, which drives further price competition due to slower market expansion.

In IC steppers and scanners, there is the possibility that, as advanced technology develops, competitors will launch a price

reduction offensive.

■ Retaining Key Personnel and the Loss of Personnel or Expertise

The Nikon Group relies on personnel who possess expertise and skills in advanced technology and other areas, and retaining

these personnel is important to overcoming the fierce competition in the market. However, in the event of further employment

mobility for whatever reason, there is a possibility that these key personnel will leave, and their knowledge and expertise will

flow outside the Company.

In the Nikon Group’s business, technical innovation is rapid, and long-term education and training are essential to personnel

development. Difficulties in replacing lost key personnel could have a negative impact on the future growth, earnings, and

financial position of the Nikon Group.

Balance Sheet [1993-2012] (Millions yen)

Profit and Loss Statement [1993-2012] (Millions yen)

Cash Flow Statement [1993-2012] (Millions yen)

Estimated balance sheet [2013-2022] (Millions yen)

Estimated Profit and Loss Statement [2013-2022] (Millions yen)

Estimated Cash Flow Statement [2013-2022] (Millions yen)

Estimated sales of each business

World GDP [billions U.S. dollars]

DCF method