unicharm - credit suisse

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28 August 2014

Asia Pacific/Japan

Equity Research

Personal Products (Personal Products (Japan)) / MARKET WEIGHT

Unicharm (8113 / 8113 JP) INITIATION

Success of premium diapers in China uncertain

■ Initiate coverage: We initiate coverage of Unicharm with an UNDERPERFORM

rating and ¥5,900 target price (potential return −12.9%). Unicharm’s standout feature is its strong presence in the baby care and feminine care categories in emerging markets, particularly in Asia. Investors have welcomed recent moves by the company to step up shareholder returns through dividend hikes and a stock split. Unicharm plans to have new premium diapers widely on sale in China by the year-end shopping season. However, we think sales could be sluggish, possibly triggering a temporary correction in the share price from early 2015. Despite this near-term risk, we see significant longer term growth potential.

■ Investment themes: Unicharm has a strong presence in Southeast Asia and

China. The company is also gaining market share in India and plans to enter the Brazilian market in earnest as part of its efforts to diversify market exposure.

■ Catalysts/risks: We believe Unicharm could struggle to capture market share

from two main competitors in premium disposable diapers in China. Consumers tend to be more conservative when selecting baby care products than cosmetics and feminine care products. Even if rival products are of high quality, consumers are usually reluctant to switch brands. Baby product maker Pigeon (7956) has benefited from this consumer behavior. The company saw rapid growth in market share when its premium glass nursing bottles were seen as better for babies than plastic bottles. Other companies have launched similar products, but Pigeon has maintained a strong grip on the market. Powdered milk formula is another example. When doubts about quality creep in, they are difficult to shake off. Upside risks include stronger-than-expected sales growth for Unicharm’s disposable diapers in China.

■ Valuation: Our TP is based on an EV/EBITDA of roughly 10x applied to our

FY12/15 estimates. This multiple matches the bottom for 2013, when sales momentum in Unicharm’s disposable diaper business in China deteriorated. Trends in the China business have a large impact on the share price and we think sales of premium products at end-2014 could fall short of guidance.

Share price performance

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4000

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Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the

TOPIX which closed at 1285.92 on 27/08/14

On 27/08/14 the spot exchange rate was ¥103.91/US$1

Performance Over 1M 3M 12M Absolute (%) 6.2 10.9 26.6 Relative (%) 6.2 3.8 13.2

Financial and valuation metrics

Year 3/14A 12/14E 12/15E 12/16E Revenue (¥ mn) 599,455.0 538,000.0 706,000.0 777,000.0 Operating profit (¥ mn) 67,240.0 56,000.0 80,000.0 90,000.0 Recurring profit (¥ mn) 67,913.0 56,000.0 80,000.0 90,000.0 Net income (¥ mn) 38,216.0 31,000.0 47,000.0 54,000.0 EPS (¥) 192.3 154.0 235.3 270.4 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 159.4 238.7 274.0 EPS growth (%) -17.7 -19.9 52.8 14.9 P/E (x) 31.2 44.0 28.8 25.1 Dividend yield (%) 0.63 0.56 0.62 0.65 EV/EBITDA(x) 11.4 15.8 11.8 10.6 P/B (x) 3.2 3.5 3.1 2.8 ROE(%) 11.5 8.1 11.5 11.9 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

Rating UNDERPERFORM* Price (27 Aug 14, ¥) 6,773 Target price (¥) 5,900¹ Chg to TP (%) -12.9 Market cap. (¥ bn) 1,363.55 (US$ 13.12) Enterprise value (¥ bn) 1,289.49 Number of shares (mn) 201.32 Free float (%) 50.0 52-week price range 6,940 - 5,100

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Masashi Mori

81 3 4550 9695

[email protected]

28 August 2014

Unicharm (8113 / 8113 JP) 2

(1) Investment points

Initiate coverage with UNDERPERFORM rating and ¥5,900 TP

We initiate coverage of Unicharm with an UNDERPERFORM rating and a ¥5,900 TP.

Unicharm’s standout feature is its strong presence in the baby care and feminine care

categories in emerging markets, particularly in Asia. Investors have also welcomed recent

moves by the company to step up shareholder returns through dividend hikes and a stock

split. Unicharm plans to have new premium disposable diapers widely on sale in China by

the year-end shopping season. However, we think sales could be sluggish, potentially

triggering a correction in the share price from early 2015. Despite this near-term risk, we

see significant longer-term growth potential.

In FY3/14, Unicharm reported its ninth straight year of record OP, supported by steady

growth in the Asia market. Unicharm is a major supplier of disposable diapers and

feminine care products in Asia, with high market shares in Southeast Asia (Indonesia,

Thailand, and Vietnam) and in China. The company has recently lost share in China’s

disposable diaper market, but plans to win it back by launching new products in the

growing premium diaper category in 2H 2014. In 2013, Unicharm moved into second place

in China's sanitary napkin market. The company has acquired leading hygiene product

companies in Vietnam and Myanmar in recent years and is steadily expanding its market

share in India and plans to enter the Brazilian market in earnest. We view these strategic

moves to diversify its market exposure as positive.

Figure 1: OP by region Figure 2: Profitability set to recover gradually in China

0

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(JPY b)Japan China Asia ex China Other

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Note: FY12/14 is an irregular nine-month accounting period for some

group companies due to standardization of fiscal year.

Source: Company data, Credit Suisse estimates

Note: OPM by region


28 August 2014

Unicharm (8113 / 8113 JP) 3

Main catalyst for 2014: year-end sales trends for premium diapers in China

We believe sales trends for Unicharm’s premium diapers in the year-end shopping season

in China will likely be a major share price catalyst. The disposable diaper business in

China accounts for only a small share of Unicharm’s earnings, but is the factor with the

largest impact on the share price.

Kao (4452) and Kimberly Clark (KC), which are both strong in the premium diaper

category, have seen rapid growth in sales since 1H 2013. Kao sells the Merries brand and

KC is focused on Huggies. Both companies supply the Chinese market with products

made overseas. Kao has a disposable diaper plant in Japan, while KC has a site in South

Korea. The two companies have used these plants to make premium products for China.

Prior to 2013, both Kao and KC had low market shares in China.

In 2013, consumer concerns in China about domestically made disposable diapers

(reports about harmful materials used in locally made products) spread rapidly on the

Internet and by word of mouth. This led to the perception that diapers made overseas are

safer, fueling increased demand for foreign-made products. Sales of imported products

made by Kao and KC, which at that point were only available in limited volumes online or

at hypermarkets, started to grow rapidly.

This prompted P&G, Unicharm, and Hengan, the three leading sellers of standard and

economy type diapers in the retail store channel, to move into the premium category.

After more than a year of this shift to premium products, where do the main players stand

today? Based on 1H 2014 market shares (brick-and-mortar basis), Kao and KC continue

to grow at the expense of P&G and Unicharm. Many retail stores now stock P&G’s new

premium range of disposable diapers, which come in pure white packaging embossed with

gold lettering. Unicharm also started importing its Moony Airfit range from Japan in 2013,

retaining the local Japanese packaging. Despite these moves, market shares for P&G and

Unicharm have continued to contract in 2014, although Unicharm’s share was probably

also affected by a strategic inventory adjustment.

So what is the outlook for the market? We think it will be difficult for other companies to

unseat the premium brands of Kao and KC, now that they are established among

consumers. Consumers tend to be more conservative about baby care products than

cosmetics and feminine care products, because they are selecting products for their child,

not themselves. Even if the quality of rival products is high, consumers are usually

reluctant to switch brands.

Pigeon, a Japanese maker of baby products, has benefited from this consumer behavior.

Several years ago, there were reports that plastic nursing bottles could be harmful to

babies. This led to a rush in demand for glass bottles made by Pigeon, even though they

cost more. US, European and Chinese rivals have since launched rival products, but

Pigeon has maintained a strong grip on the market. Similar cases have occurred in the

powdered milk formula market.

This consumer behavior led to changes in market share in China’s disposable diaper

market between 2H 2013 and 1H 2014. A number of companies have launched premium

products, but only Kao and KC have succeeded in increasing market share. Kao’s exports

of premium diapers from Japan to China grew rapidly from 2012 and sales growth is still

strong today. It is hard to determine whether consumer preference for product origin or

brand loyalty is behind this growth, but shipments remain healthy. Kao and KC have both

started local production of cheaper versions of their imported diapers. Shipments of these

products are also strong, suggesting they are starting to generate sales synergies with

imported products.

28 August 2014

Unicharm (8113 / 8113 JP) 4

Unicharm is gradually restocking sales channels with upgraded versions of its locally

made Mamy Poko standard diapers, which come in new packaging and offer higher quality.

It also plans to launch a new locally made premium diaper range from autumn this year.

According to Unicharm, the range will incorporate world-first technology, making them the

softest and most comfortable diapers on the market. The material technology will be more

advanced than that used in products sold in Japan and the range will only be available in

China. The product launch is likely to be one of Unicharm’s key events to date.

Putting aside brand image and product origin and assuming product quality is high, what

are the prospects for this new product? Kao promotes its Japan-made Merries brand by

focusing on breathability and the smoothness of the diaper lining. Some observers believe

the smooth texture of Kao’s disposable diapers has been the key to their success,

because they are more suited to China’s climate. KC sells the leading Huggies brand, and

it also focuses on breathability, absorbency and the feel of its cotton-type linings. Although

the industry is different, competition in the LCD TV market at one point focused on

features such as the world’s largest screen or the world’s best resolution, with makers

trying to sell consumers high-quality TVs that exceeded their everyday needs. The

success of Unicharm’s new range will hinge on how well it can convince consumers about

the high quality of its products. We think it could incur a high level of costs initially due to

free samples and other marketing strategies, so the outlook for earnings is unclear, even if

the new range sells well.

Unicharm also plans to continue focusing on its Mamy Poko range of standard diapers,

which could lead to brand cannibalization. Unicharm apparently plans to make Mamy Poko

its main premium brand. At this point, it is difficult to see how the company intends to

communicate the difference between Mamy Poko and its new premium range. We are

also concerned about the positioning of the Japan-made Moony brand in its premium

strategy. We think sales and profits from Unicharm’s premium diapers in China could fall

short of market expectations.

Figure 3: Unicharm – share price and catalysts

4,000

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105

Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14

(Yen)(Index)Versus TOPIX (LHS)

Share price (RHS)

Concern over delclining sales in China diaper business

released new disposable diaper product in China

negative news on inventory adjustment of old products in China and concerns over rise in material price

completed inventory adjustment in China and announced share buy back

released mid-term plan. Market expectation rises on Unicharm's advance into premium-class diapers market in China

announced share buy backand stock split

Source: Bloomberg, Credit Suisse

28 August 2014

Unicharm (8113 / 8113 JP) 5

Valuation

Our TP is based on an EV/EBITDA of around 10x applied to our FY12/15 estimates. This

multiple is the bottom for 2013, when sales momentum in Unicharm’s disposable diaper

business in China deteriorated. Trends in Unicharm’s China business have a large impact

on the share price and we think sales of premium products at the end of 2014 could fall

short of guidance. Our multiple is the same level as the average for the domestic home

and personal care sector (Bloomberg consensus, based on FY14 estimates), which we

think is the bottom valuation for Unicharm due to its strong position in emerging markets.

Figure 4: EV/EBITDA (12-month forward basis) Figure 5: Unicharm premium has shrunk since April 2012

peak

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Unicharm/K-C (rhs)

Unicharm

K-C

(x) (x)

Source: Bloomberg, Credit Suisse estimates Note: Comparison of EV/EBITDA using results for trailing 12 months)

Source: Bloomberg, Credit Suisse estimates

Risks

Upside risks to our TP include stronger-than-expected sales growth in either or both of

Unicharm’s premium and standard lineups in China without cannibalization of other

company products. Earnings upside is another risk. Although competitors are lining up to

move into the Indonesia market, Unicharm could maintain sales growth at over 20% and

protect its high market share in Indonesia.

28 August 2014

Unicharm (8113 / 8113 JP) 6

(2) Earnings forecasts

Figure 6: Earnings forecast summary

¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%)

Consolidated

14/3 Actual 599,455 20.9 67,240 13.0 67,913 4.5 38,216 -11.4 192.3 -17.7

14/12 CS E 538,000 　　　　　- 56,000 　　　　　- 56,000 　　　　　- 31,000 　　　　　- 154.0 　　　　　-

CoE 540,000 　　　　　- 56,600 　　　　　- 55,000 　　　　　- 31,700 　　　　　- 157.5 　　　　　-

IBES E 543,132 　　　　　- 57,412 　　　　　- 56,048 　　　　　- 31,983 　　　　　- 159.4 　　　　　-

15/12 CS E 706,000 　　　　　- 80,000 　　　　　- 80,000 　　　　　- 47,000 　　　　　- 235.3 　　　　　-

IBES E 708,873 　　　　　- 80,895 　　　　　- 78,877 　　　　　- 48,980 　　　　　- 238.7 　　　　　-

16/12 CS E 777,000 10.1 90,000 12.5 90,000 12.5 54,000 14.9 270.4 14.9

IBES E 782,638 10.4 92,089 13.8 90,930 15.3 55,118 12.5 274.0 14.8

Sales Operating profit Recurring profit Net profit EPS

Source: Company data, I/B/E/S, Credit Suisse estimates

FY12/14 estimates: Expect results in line with guidance

We forecast OP of ¥56bn, slightly higher than guidance (¥56.6bn). All our sales estimates

are on a local currency basis. China: +11% YoY for baby care products, +12% for feminine

care products; Indonesia: +28% and +15%, respectively; Thailand: +7% and +5%;

Vietnam: +30% and +20%. In China’s feminine care market, Unicharm has registered

growth of 30% over the last two years, significantly higher than the rate of market growth.

However, with uptake now leveling off in China’s major cities, sales have started to slow.

To counter this, Unicharm may start to expand sales in regional cities and boost sales in

the premium segment. We estimate growth in China’s feminine care market is in the mid-

single digits, but we think Unicharm can continue to grow sales at a double-digit pace. We

expect the company to transfer its successful marketing approaches from major cities to

regional cities. In the feminine care market, younger women in particular are quite open to

new products, provided the brand image is pitched right. We see plenty of potential for

Unicharm to encourage women in regional cities to trade up to its products. We are upbeat

about Unicharm’s prospects in China’s feminine care market.

In China’s baby care market, Unicharm saw a double-digit slump in sales in FY3/14 due

to: (1) an inventory adjustment in retail channels to run down inventories of old products,

and (2) delays in launching new premium products. We forecast double-digit sales growth

in FY12/14, supported by a rebound in sales after the inventory adjustment and the launch

of new locally made premium products in 2H. However, we see limited prospects for a

recovery in market share, as sales growth is likely to be in line with market growth. In

Indonesia and Vietnam, Unicharm’s strong performance in FY3/14 is likely to continue this

fiscal year, but growth could slow in Thailand due to the impact of political instability on

some products.

We see the OPM falling from 11.2% in FY3/14 to 10.4% in FY12/14 due to: (1) sustained

weakness in emerging market currencies (since mid-2013) and high material prices,

(2) higher marketing costs, mainly in China, and (3) negative one-off accounting impacts

due to a change in fiscal year-end.

Medium-term outlook: ongoing expansion in Asia business

We forecast OP growth of around 10% per year over the medium term, based on the

following assumptions for sales growth in each area from FY12/15. For the baby care

business in China we forecast average annual sales growth of 7%, while for the feminine

care business we expect growth of 12%. We also forecast respective growth rates of 26%

and 13% for Indonesia, 8% and 5% for Thailand, and 30% and 20% for Vietnam.

28 August 2014

Unicharm (8113 / 8113 JP) 7

For the baby care business in China, we project ongoing growth in sales of premium

products. However, our sales growth projection for standard products, which have a

heavier weighting, is slightly below the rate we forecast for the market as a whole in view

of stiff competition and slower growth in this category, and because of cannibalization from

the company’s own premium products. In the feminine care business, we see no change

from the current pattern of progressive growth in market share driven by a sales push in

regional cities.

In Indonesia, we think Unicharm will continue to face minimal threat from P&G, which

relies solely on modern channel distribution in urban areas. Noteworthy, however, is the

full-fledged entry into disposable diaper sales by Kao, which markets some of its products

via Indonesia’s small local shops (warung). Kao is gaining market share in feminine

hygiene products, where it is gradually undermining Unicharm's No. 1 position. As the

disposable diapers offered by Unicharm and Kao are of comparable quality, competition

boils down to marketing and sales channels. We imagine Kao will take the sales network

and marketing methods used for feminine hygiene products, and exploit them for its baby

care business. While it is likely to take some time, we expect Kao to make steady inroads

into the market shares of Unicharm and local Indonesian manufacturers. That said, we

think Unicharm's topline growth will weaken only slightly, as there remains substantial

scope for market expansion. Unicharm is experiencing stable growth in Thailand, where

competition is not that fierce. Nor does the company have much competition in Vietnam,

and we expect its business there to continue growing strongly.

Unicharm is undertaking upfront investment and building new production bases especially

in emerging markets. Marketing and personnel costs are rising as the company is also

making forays into new markets such as Brazil. However, we think its investment burden

will be lighter than in the past, due to productivity improvements in recent years.

All in all, we think increasing sales volume, especially in Asia, will offset costs arising from

fierce competition in emerging markets in Asia and startup costs associated with

establishing a presence in new markets. We expect overseas earnings to continue

growing at the current pace.

Unicharm has been gaining share of the domestic baby care market, but we see little of

this growth feeding through to profits, as margins are generally thin. Nonetheless, we see

domestic earnings increasing steadily on the back of higher sales of the company’s

feminine hygiene products, which have improved designs and functionality, and mounting

demand for its health care products (e.g., diapers for the elderly), as the population ages.

Finances and shareholder returns: steadily increasing dividends

In our view, Unicharm has sound finances (based on data for FY3/14, it had a liquidity

ratio of 178% and a quick ratio of 121%). The company remains effectively debt-free, and

has a shareholders' equity ratio of 60%. While we expect capex in the baby care business,

any such spending is likely to remain within the bounds of operating cash flow, posing no

threat to finances. We also see little likelihood that Unicharm will engage in M&A deals, as

its business is built on organic growth in baby and feminine care product sales in emerging

markets.

Earlier in August, the company announced a stock split (three for one) and share buyback.

Unicharm has a policy of steady and sustainable dividend increases, and has said that

where necessary, it will conduct share buybacks on a flexible basis. Unicharm therefore is

fairly proactive on the subject of shareholder returns. Considering its healthy finances and

the current level of free cash flow, we think the company is well positioned to continue

raising its dividend.

28 August 2014

Unicharm (8113 / 8113 JP) 8

Figure 7: Sales and OP forecasts by region

FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY12/14E FY12/15E FY12/16E

FX

JPY/CNY 15.30 14.61 13.59 12.96 12.35 12.67 15.90 16.35 16.35 16.35

JPY/100IDR 1.26 1.01 0.96 0.96 0.91 0.88 0.92 0.88 0.88 0.88

JPY/THB 3.64 2.96 2.75 2.75 2.59 2.71 3.19 3.15 3.15 3.15

JPY/USD 114.38 100.59 92.88 85.45 79.08 83.10 100.24 102.00 102.00 102.00

JPY/EUR 161.59 143.67 131.15 112.00 111.12 102.63 129.68 138.00 138.00 138.00

Sales (JPY m)

Japan 217,474 222,471 220,673 219,064 229,083 236,993 255,767 193,000 272,000 286,000

Asia 72,421 79,939 96,041 118,423 145,263 189,172 256,253 263,000 335,000 386,000

(China) - - 34,340 44,740 56,345 72,286 92,879 106,000 115,000 126,000

Other 46,967 45,439 40,110 39,460 54,045 69,606 87,435 82,000 99,000 105,000

Total 336,864 347,849 356,825 376,947 428,391 495,771 599,455 538,000 706,000 777,000

Sales y-y (%)

Japan 5.1 2.3 -0.8 -0.7 4.6 3.5 7.9 - - 5.1

Asia 27.9 10.4 20.1 23.3 22.7 30.2 35.5 - - 15.2

(China) - - - 30.3 25.9 28.3 28.5 - - 9.6

Other 22.5 -3.3 -11.7 -1.6 37.0 28.8 25.6 - - 6.1

Total 11.6 3.3 2.6 5.6 13.6 15.7 20.9 - - 10.1

OP (JPY m)

Japan 24,023 23,376 29,313 25,367 29,319 30,897 35,316 27,000 37,500 40,000

Asia 8,497 9,918 13,486 18,354 21,901 25,781 31,548 27,000 40,000 47,000

(China) - - 5,462 8,158 9,290 9,091 7,980 9,000 11,000 12,000

Other 1,206 1,448 2,382 2,932 826 2,834 481 2,000 2,500 3,000

Elimination 4 139 -116 -92 -146 -24 -105 0 0 0

Total 33,731 34,883 45,066 46,561 51,900 59,488 67,240 56,000 80,000 90,000

OP y-y (%)

Japan 0.9 -2.7 25.4 -13.5 15.6 5.4 14.3 - - 6.7

Asia 67.9 16.7 36.0 36.1 19.3 17.7 22.4 - - 17.5

(China) - - - 49.4 13.9 -2.1 -12.2 - - 9.1

Other 25.0 20.1 64.5 23.1 -71.8 243.1 -83.0 - - 20.0

Total 12.7 3.4 29.2 3.3 11.5 14.6 13.0 - - 12.5

OP margin (%)

Japan 11.0 10.5 13.3 11.6 12.8 13.0 13.8 14.0 13.8 14.0

Asia 11.7 12.4 14.0 15.5 15.1 13.6 12.3 10.3 11.9 12.2

(China) - - 15.9 18.2 16.5 12.6 8.6 8.5 9.6 9.5

Other 2.6 3.2 5.9 7.4 1.5 4.1 0.6 2.4 2.5 2.9

Total 10.0 10.0 12.6 12.4 12.1 12.0 11.2 10.4 11.3 11.6

Sales breakdown (%)

Japan 64.6 64.0 61.8 58.1 53.5 47.8 42.7 35.9 38.5 36.8

Asia 21.5 23.0 26.9 31.4 33.9 38.2 42.7 48.9 47.5 49.7

(China) - - - 11.9 13.2 14.6 15.5 19.7 16.3 16.2

Other 13.9 13.1 11.2 10.5 12.6 14.0 14.6 15.2 14.0 13.5

OP breakdown (%)

Japan 71.2 67.3 64.9 54.4 56.3 51.9 52.4 48.2 46.9 44.4

Asia 25.2 28.5 29.8 39.3 42.1 43.3 46.8 48.2 50.0 52.2

(China) - - - 17.5 17.8 15.3 11.8 16.1 13.8 13.3

Other 3.6 4.2 5.3 6.3 1.6 4.8 0.7 3.6 3.1 3.3 Source: Company data, Credit Suisse estimates

28 August 2014

Unicharm (8113 / 8113 JP) 9

(3) Company overview

Domestic market the cash cow, while Asia is the growth story

Unicharm's business centers on products utilizing nonwoven fabric and absorbent material

processing and forming technology. Its mainstay offerings are disposable diapers and

feminine hygiene products. The company has three main business segments: baby care

(infant disposable diapers, etc.), feminine care (feminine hygiene products, etc.), and

health care (adult disposable diapers, etc.). The domestic and overseas operations make

roughly equal contributions to profits, although growth in Southeast Asia and China has

been rapid recently.

Unicharm has been active overseas since the early 1980s, with a particular focus on

expanding its share in Asian markets. As a consequence, Asia accounted for 47% of OP

in FY3/14, up from 25% in FY3/08. The company’s expanding presence in Asia has

resulted in nine consecutive years of record OP.

Primarily because of the declining birthrate, we forecast limited growth in the baby care

and feminine care businesses in Japan. However we think Japan's aging population will

support steady growth in the company's health care business.

In terms of geographic spread, Unicharm is distinguished by the balance struck between

its domestic operation, which should generate stable cash flow, and its overseas business,

which is ideally placed to benefit from growth in Asian markets.

Figure 8: OP breakdown by region (FY3/14) Figure 9: OP breakdown by product (FY3/14)

Japan52%

China12%

Indonesia15%

Thailand13%

Vietnam4%

Other Asia3%

Other1%

Baby care38%

Feminine care34%

Health care21%

Pet care2%

Clean&Fresh4%

Other1%

Source: Company and sector data, Credit Suisse estimates Source: Company data,

Unicharm also draws strength from President Takahara’s hands-on approach

Unicharm’s President and CEO is Takahisa Takahara, eldest son of founder and director

Keiichiro Takahara. The younger Takahara joined Unicharm in 1991, after a stint at Sanwa

Bank beginning in 1986. In 1994 he was appointed deputy general manager of United

Charm (Taiwan). He then served concurrently as general manager of the procurement

division and deputy general manager of the international business division, before being

appointed deputy general manager of both the sales division and marketing division. He

became a managing director in 1997 and after serving as general manager of the feminine

care business division he was appointed to take charge of the international business

division. He then took charge of corporate strategy, before being appointed as president in

2001. Since taking the top post, Mr. Takahara has embarked on restructuring of

businesses deemed to have minimal growth potential, ensuring that resources are instead

channeled into products (disposable diapers, feminine hygiene products, etc.) that utilize

the company’s core technologies in nonwoven fabric and absorbent material processing

and forming. Mr. Takahara also has been behind the company’s overseas expansion,

having identified business opportunities in Asian market growth from the early 2000s.

28 August 2014

Unicharm (8113 / 8113 JP) 10

Demand for disposable diapers and feminine hygiene products is rising in Asia and in

other emerging markets including the Middle East and North Africa, and Eastern Europe.

Unicharm’s strategy is to build production facilities close to the customer so as not to miss

the opportunities presented by market growth in each area. In our view, the strength of

Unicharm’s overseas strategy lies in: (1) its rapid-fire entry into emerging markets; (2) its

emphasis on local manufacturing; and (3) its hands-on approach, ensuring that local

needs are swiftly reflected in product development.

Figure 10: Company history 1961 　Keiichiro Takahara (currently director) establishes Taisei Kako

1963 　Sanitary napkin production and sales begin

1974 　Unicharm established

1976 　Listed on TSE Second Section

1981 　Infant disposable diaper sales begin

1984 　Joint venture established in Taiwan

1985 　Promoted to TSE First Section

1986 　Enters pet care business

1987 　Joint venture established in Thailand

1993 　Technical tie-up established for pull up diapers in Saudi Arabia

1993 　Joint venture established in The Netherlands

1994 　Joint venture in South Korea

1995 　Joint venture in Shanghai

1997 　Joint venture in Indonesia

1997 　Wholly owned subsidiary established in Malaysia

2001 　Keiichiro Takahara becomes Chairman and Takahisa Takahara is appointed president

2002 　Joint venture established in The Philippines

2004 　Subsidiary Unicharm PetCare listed on TSE Second Section

2005 　Unicharm PetCare promoted to TSE First Section

2005 　Gulf Hygienic Industries (Saudi Arabia) becomes subsidiary

2007 　Wholly owned subsidiary established in Vietnam

2008 　Wholly owned subsidiary established in India

2008 　APPP Parent (Australia) acquired and becomes wholly owned subsidiary

2008 　Wholly owned subsidiary established in Russia

2009 　Wholly owned subsidiary established in the US

2010 Unicharm PetCare merged with parent

2011 　The Hartz Mountain Corporation (US pet products/supplies) becomes subsidiary

2011 　 Diana Joint Stock Company (Vietnam hygiene product manufacturer/distributor) acquired

2013 　 Myanmar Care Products Limited (Myanmar hygiene product manufacturer/distributor) acquired Source: Company data, Credit Suisse estimates

28 August 2014

Unicharm (8113 / 8113 JP) 11

(4) Personal care business in Asia

Expect steady growth of over 4% per year in global demand for disposable diapers

Around 140bn disposable diapers were sold worldwide in 2012, with Asia representing the

largest market at nearly 30%. Driven largely by market expansion in China and Southeast

Asia, the market in ex-Japan Asia has sustained double-digit growth over the past five

years, well above the 4.5% growth posted by the global market. We expect demand for

infant disposable diapers to continue to increase rapidly, as in developing nations in

particular we anticipate rising births and think higher per-capita GDP will boost demand for

daily consumer goods. While the disposable diaper market is unlikely to show explosive

growth, for Unicharm it represents a stable, steadily growing market.

Figure 11: Baby diaper market size (volume-base) Figure 12: Baby diaper market growth by region (volume

base, five-year CAGR)

Asia Pacific28%

Australasia1%

Eastern Europe7%

Latin America20%

Middle East and Africa

14%

North America15%

Western Europe

15%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Source: Euromonitor, Credit Suisse Source: Euromonitor, Credit Suisse

Figure 13 shows our demand outlook for disposable diapers. Based on worldwide

population trends and birthrates, and on certain assumptions (e.g., concerning frequency

of use), we see demand for infant disposable diapers increasing by 4.8% per year from

2010 through 2020. We also forecast 3% average annual growth in demand for adult

disposable diapers, premised on an increase of 3% per year in the global population aged

65 and over. Overall, we expect disposable diaper demand to increase at an average

annual clip of 4.5%.

Figure 13: Assumptions for diapers demand forecasts (CS forecasts an avg. of 4.5% annual rise in diaper demand

during 2010–20)

Total population (2010) 2010-2020 annual avg 2020 total pop Birthrate (2010-2015 est)

(1,000s) growth est (%) est (1,000s) (per 1,000) 2010 2020

Developed countries 1,240,935 0.3 1,274,929 11.2 13,898 14,279 1,848

Developing countries 5,675,249 1.3 6,441,820 21.3 120,883 137,211 65,270

Global 6,916,184 1.2 7,716,749 19.5 134,781 151,490 67,118

■ Assumptions

・Developed countries: Ave. diaper use 3.5yrs from birth, ave. diaper replacement 4 per day

・Nearly 95% of total infants in developed countries wearing disposable diapers, same level in 2020

・Diaper usage rate in developing countries rising from around 10% in 2010 to nearly 20% in 2020

Total population (2010) 2020 total population Est of average growth in

(1,000s) est (1,000s) 2010 2020 (est) 2010 2020 (est) poulation over 65 (%)

Developed countries 1,240,935 1,274,929 15.9 19.0 197,309 242,237 2.1

Developing countries 5,675,249 6,441,820 5.8 7.5 329,164 483,137 3.9

Global 6,916,184 7,716,749 7.6 9.4 526,473 725,373 3.3

■ Conclusions

・We estimate diaper demand at around 140bn pieces in 2012, 80% for infant-use diapers, 20% for adult-use diapers

・We thus calculate that infant-use diaper demand will rise 4.8% over the next five years

・We estimate that the over 65 population will grow by around 3% annually, with demand for adult-use diapers rising at the same rate (3% annually)

・Based on these assumptions, we forecast that diaper demand will rise 4.5% annually in 2010-2020

Assumptions for infant-use diapers

Births per year (1,000s) Est of aggregated growth in consumption for infants'

diapers 2010-2020 (tons)

Assumptions for adult diapers

Population over 65 (%) Population over 65 (1,000s)

Note: Population growth rates, birthrates, population over 65, referenced from IMF, United Nations statistics. DBS future population estimates,

other forecasts based on IMF population data. Source: IMF, UN, Statistics Bureau, Credit Suisse estimates

28 August 2014

Unicharm (8113 / 8113 JP) 12

Indonesia a promising market for disposable diapers

Makers of Unicharm’s core product, disposable diapers, generally accept that demand

takes off once per-capita GDP exceeds $3,000. By this metric Indonesia should be one of

Unicharm's most promising markets as per-capita GDP is now over $3,000 and the

country ranks fourth in the world in terms of annual births.

Among the more populous emerging nations, China, Brazil, and Russia have also joined

the $3,000 club and disposable diaper usage is growing. India is also an attractive market,

given its huge population and high birth rate. However it will likely be some time before

GDP tops $3,000 and we therefore think rapid growth in disposable diaper usage remains

some way off. There is another commonly accepted rule, namely that the sanitary napkin

market takes off and begins to expand once per capita GDP exceeds $1,000. This being

the case, we expect India, Pakistan, and Vietnam to become growth markets for feminine

hygiene products.

Figure 14: Rate of birth, GDP per capita and other basic data for top 20 most populated countries

2010 2013 2015

1 China 1,386 12.1 16.4 8.2 4,423 6,747 7,961

2 India 1,252 22.8 27.9 4.9 1,430 1,505 1,702

3 United States 320 14.0 4.4 13.1 48,294 53,101 57,158

4 Indonesia 250 22.5 5.5 5.6 2,985 3,510 3,529

5 Brazil 200 - - 7.0 11,089 11,311 11,607

6 Pakistan 182 24.0 4.3 4.3 1,034 1,308 1,313

7 Nigeria 174 41.7 6.9 3.4 1,484 1,692 1,895

8 Bangladesh 157 20.9 3.1 4.6 703 904 1,100

9 Russia 143 12.6 1.8 12.8 10,671 14,819 14,769

10 Japan 127 8.5 1.1 23.0 42,917 38,491 39,619

11 Mexico 122 17.0 2.0 6.3 9,194 10,630 11,269

12 Philippines 98 18.9 1.8 3.6 2,155 2,790 3,279

13 Vietnam 92 15.7 1.4 6.0 1,297 1,902 2,234

14 Ethiopia 94 28.8 2.5 3.3 354 542 606

15 Germany 83 8.1 0.7 20.4 40,496 44,999 50,384

16 Egypt 82 23.2 1.9 5.0 2,780 3,226 3,749

17 Iran 77 18.0 1.4 5.2 5,638 4,751 5,306

18 Turkey 75 17.1 1.3 6.0 10,021 10,815 10,504

19 Congo 68 - - 2.7 3,113 3,295 3,574

20 Thailand 67 14.1 0.9 8.9 4,740 5,674 5,704

GDP per capita (USD) Number of births

(mn)

People 65 years of age or

older (%)

Birthrate

(per 1,000)

2013 total

population (mn)

Note: Birthrate (per 1,000) from United Nations statistics. Number of births is equal to 2010 total population (IMF data) multiplied by the birthrate. GDP per capita data from IMF estimates. Source: IMF, UN, Statistics Bureau, Credit Suisse

Shift toward premium products in China’s disposable diaper market

In China’s coastal regions, consumers, especially affluent consumers, continue to value

quality over price. This has resulted in growing popularity for Kao and other imported

brands. The shift toward premium products has gained momentum in recent years.

Unicharm’s offerings in China are mostly of the standard and economy type. The company

until recently had no real presence in the premium products favored by affluent Chinese.

In 2013, however, the company ramped up exports to China of its high-end Moony brand,

which has since been gaining recognition. Unicharm also plans to market locally produced

premium-type diapers to enhance its competitiveness against Kao and Kimberly Clark,

both known for their high-end diapers.

28 August 2014

Unicharm (8113 / 8113 JP) 13

Figure 15: China diaper value basis market breakdown by product category: premium goods growing

2011 2013

Premium16%

Standard47%

Economy21%

Insert13%

Pants3%

Premium10%

Standard52%

Economy23%

Insert13%

Pants2%

Note: Bricks-and-clicks basis


Unicharm losing market share in disposable diapers, but gaining ground in feminine

hygiene products

In China’s disposable diaper market, Kao and Kimberly-Clark are in the ascendancy by

virtue of their strong presence in the premium-type diapers popular among high-income

households. They have taken market share from both P&G and Unicharm. These wealthy

consumers can afford to be safety-conscious, and diapers from Kao and Kimberly-Clark

originally found favor because they are manufactured overseas and exported to China.

There is widespread skepticism over the safety of disposable diapers made in mainland

China.

In the feminine hygiene space, by contrast, Unicharm last year leapfrogged P&G for the

first time, and now ranks second only to local company Hengan. The design and

functionality of Unicharm’s products have contributed to a growing fan base among young

Chinese women in particular. While some observers see limited scope for growth in

China's feminine hygiene market as the market penetration rate is already high, we see

ongoing substantial growth potential as per-capita frequency of use is not high.

Figure 16: Baby care (diaper) market share in China

2013 Jan-Jun 2014 Jan-Jun

P&G32%

Unicharm15%

Kimberly-Clark12%

Hengan9%

Kao5%

Others27%

P&G28%

Unicharm12%

Kimberly-Clark14%

Hengan9%

Kao10%

Others27%



28 August 2014

Unicharm (8113 / 8113 JP) 14

Figure 17: Feminine care (sanitary napkin) market share in China

2013 Jan-Jun 2014 Jan-Jun

Hengan22%

Unicharm15%

P&G14%

Jingxing10%

Others39%

Hengan24%

Unicharm16%

P&G12%

Jingxing11%

Others37%



Figure 18: Per-capita monthly baby diaper and sanitary

napkin use (individual units)

Figure 19: Weighting of e-commerce growing rapidly

among disposable diaper sales channels

Japan China Indonesia Thailand

Baby diaper 140 26 25 48

Sanitary napkin 21 9 6 8

Baby

specialty store29%

E-commerce

28%

Modern channel

(super/hyper-market)

20%

Traditional channel

23%

Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Figure 20 shows each company’s share of the 100 top-selling diaper products on China’s

leading e-commerce sites. The figures do not represent shares of sales volume or value,

as there is no accurate data on either in China’s fast-growing e-commerce market. The

data only serves as a reference. Online retailers sell more high-end merchandise than

bricks-and-mortar stores. E-commerce is therefore a valuable sales channel for premium

products. We will be interested to see how Unicharm manages to convey the quality of its

new premium products over the internet (we think consumers probably will get hands-on

experience in stores, where they will make their initial purchase before making subsequent

purchases online, on a regular basis).

28 August 2014

Unicharm (8113 / 8113 JP) 15

Figure 20: Breakdown by manufacturer of 100 top-selling diaper products on China’s leading e-commerce sites tmall.com (天猫) jd.com (京东)

Premium All type Premium All type

yhd.com (1号店) suning.com (苏宁易购)


dangdang.com (当当网) taobao.com (淘宝网)


E-commerce total (B2C and B2B)

Premium All type

Kao, 35%

K-C, 46%

P&G, 16%

Unicharm, 3% Kao

24%

K-C22%

P&G18%

Unicharm6%

Other30%

Kao, 53%

K-C, 31%

P&G, 8%

Unicharm, 7%

Kao31%

K-C26%

P&G11%

Unicharm20%

Other12%

Kao, 40%

K-C, 29%

P&G, 24%

Unicharm, 7%

Kao19%

K-C29%

P&G31%

Unicharm13%

Other8%

Kao, 41%

K-C, 31%

P&G, 18%

Unicharm, 10%

Kao20%

K-C18%

P&G21%

Unicharm15%

Other26%

Kao, 21%

K-C, 39%

P&G, 21%

Unicharm, 20%

Kao8%

K-C26%

P&G20%

Unicharm38%

Other8%

Kao, 26%

K-C, 47%

P&G, 27%

Unicharm, 0.4%

Kao11%

K-C43%P&G

22%

Unicharm11%

Other13%

Kao, 37%

K-C, 35%

P&G, 18%

Unicharm, 9% Kao

20%

K-C21%

P&G20%

Unicharm15%

Other24%

Note: (1) We screened for the top 100 products in order of popularity on each e-commerce site. (2) We divided the 100 products into 10 groups

and calculated weighted-average market shares, with no adjustment for diaper size or the number of diapers in each pack. Each product

featuring in the rankings is treated as a single item. (3) In premium-type products, we only show the shares of four companies: Kao, Kimberly-

Clark, P&G, and Unicharm. Daio Paper is included in the rankings, but is not shown below. (4) To find each company's share of the overall e-

commerce market, we took market shares for each site and calculated weighted averages, referencing the proportion of net shopping transaction

value accounted for by B2C and B2B, and each company’s share of the B2B and B2C markets.

Source: Credit Suisse, based on company data and data from industry sources including iResearch Japan

28 August 2014

Unicharm (8113 / 8113 JP) 16

Figure 21: Value of monthly exports of infant disposable

diapers and sanitary napkins from Japan to China:

Demand for Japanese-made premium products still robust

Figure 22: Value of monthly exports of infant disposable

diapers and sanitary napkins from Korea to China

Value down in 2014; does Kimberley-Clark’s rising share in

China prove its switch to local manufacturing was successful?

0

50

100

150

200

250

300

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14

JPY (lhs)

CNY (rhs)

(¥mn) (CNYmn)

5

7

9

11

13

15

17(USD, Mn)

Note: Value in Chinese yuan calculated by dividing the yen value of

monthly exports by the monthly average spot exchange rate.

Source: Credit Suisse, based on MoF, Thomson Reuters

Source: Global Trade Atlas, Credit Suisse

Below, we outline three growth scenarios for the period though 2020, based on 2012 data

for China’s disposable diaper market. Our base scenario calls for market growth of 8% per

year, on the assumption that (1) unit prices rise at an average annual rate of 2.5%,

underpinned by inflation and the shift toward premium products; and (2) market

penetration rises from 33% in 2012 to 50% in 2020. Our worst-case scenario calls for

market growth of 4% per year, while in the best-case scenario, the market grows at an

average rate of 14% annually. While we believe relaxation of the one-child policy will have

a limited impact, given implications such as higher child-rearing costs, we see upside to

our growth outlook if the number of births rises by more than we anticipate.

Figure 23: China disposable diaper growth scenarios for 2020 (base case 8% annual growth)

8yr CAGR

$3,538 mn Pessimistic 4%

19,173 mn Base 8%

Optimistic 14%

(USD mn)

Penetration Sales

rate volume 0.20 0.21 0.22 0.22 0.23 0.25 0.27

('000) CAGR 1% 1.5% 2.0% 2.5% 3.0% 4.0% 5.0%

30% 17,440 3,480 3,630 3,770 3,920 4,080 4,400 4,750

40% 23,260 4,650 4,830 5,030 5,230 5,440 5,870 6,340

50% 29,070 5,810 6,040 6,280 6,540 6,790 7,340 7,930

60% 34,890 6,970 7,250 7,540 7,840 8,160 8,810 9,510

70% 40,700 8,130 8,460 8,800 9,150 9,510 10,280 11,100

80% 46,520 9,300 9,670 10,060 10,460 10,870 11,750 12,680

90% 52,330 10,460 10,880 11,310 11,760 12,230 13,210 14,270

100% 58,149 11,620 12,090 12,570 13,070 13,590 14,680 15,850

Sales volume

Penetration rate 33.0%

Unit price $0.18

Market size

Retail unit price(USD)

Note: 100% penetration rate equates to use of four disposable diapers/day for babies and infants

Source: Euromonitor and other sector data, Credit Suisse

28 August 2014

Unicharm (8113 / 8113 JP) 17

Unicharm has top share in Indonesia and Thailand, and is making gains in India

Outside of China, Southeast Asia is also an important market for Unicharm. The company

already ranks as the leading disposable diaper supplier in Indonesia and Thailand, with a

market share of roughly 60% in each. In Indonesia, Unicharm has succeeded in growing

its market share through the introduction of disposable diapers targeted specifically at

middle-income households. The company currently holds the No. 1 position. However in

2014, both P&G and Kao are likely to mount serious assaults on the Indonesian market,

and we will be interested to see how they fare in attacking Unicharm's stronghold.

With an eye to consolidating its grip on the Southeast Asian market as a whole, Unicharm

acquired local hygiene product companies in Vietnam and Malaysia in recent years.

Unicharm is also steadily adding to its market share in India, where it has had only a

limited presence to date. We take a positive view of these strategic additions to the

company’s regional portfolio.

Figure 24: Market share breakdown of disposable diapers

in Indonesia


in Thailand

Unicharm65%

Softex Paper 19%

P&G9%

Other7%

Unicharm58%

DSG Int'l30%

SCA 6%

Other6%

Note: Bricks-and-clicks basis, for the last 12 months





in Vietnam


in India

Unicharm38%

Kimberly-Clark 39%

P&G15%

Other8%

P&G58%Unicharm

21%

Kimberly-Clark 18%

Other3%





28 August 2014

Unicharm (8113 / 8113 JP) 18

Figure 28: Unicharm has a strong presence in baby and

feminine care via Indonesia’s traditional warung retailers

Figure 29: P&G has started sales of locally produced

goods through modern channels in cities outside Jakarta,

but its market share has not changed

Source: Credit Suisse (photo taken in Surabaya, Indonesia) Source: Credit Suisse (photo taken in Suryabaya, Indonesia)

28 August 2014

Unicharm (8113 / 8113 JP) 19

(5) Personal care business in Japan

Two straight years of double-digit growth in infant disposable diaper production

Over the past ten years, Unicharm’s domestic production of disposable diapers has risen

at an average annual rate (CAGR) of 5.9% (4.8% for infant diapers, and 8.0% for adult

diapers). We surmise the growth in infant disposable diapers is largely due to brisk exports

to emerging markets. In 2012 and 2013, infant disposable diaper production grew annually

by double figures, probably due to robust demand for high-end diapers in China. We also

expect stable growth in domestic demand for adult disposable diapers, given the outlook

for growth in Japan's elderly population (those aged 65 and over).

Figure 30: Domestic production of disposable diapers

(2003–13 CAGR=5.9%)

Figure 31: Number of births and aging population in

Japan

0

5,000

10,000

15,000

20,000

2003 2005 2007 2009 2011 2013 2015E

(mn pieces)

Infant-use Adult-use

0

500

1,000

1,500

2,000

2,500

3,000

19

50

19

55

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

20

15

20

20

20

25

20

30

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

('000 ppl) ('000 ppl)Aging population (over 65 year old, RHS)

Number of births (LHS)

Source: JHPIA, Credit Suisse estimates Note: Numbers in 2010 and afterwards are based on Ministry of

Internal Affairs and Communications

Source: STAT (MIC) estimates, Credit Suisse

Unicharm commands large share of adult disposable diaper market

Unicharm ranks No. 1 in the infant disposable diaper category with a share of just over

30%. We see the company’s standout feature as its ability to meet the needs of

consumers seeking both value-added and simply value by offering both the premium

Moony brand and lower-priced Mamy Poko brand.

We put Unicharm’s share of Japan’s adult disposable diaper market at around 50%, far

higher than the share of just under 20% commanded by the second-ranked company. As a

specialist manufacturer of sanitary materials, Unicharm can provide a rich lineup of

products with advanced functionality. To meet users’ needs, adult disposable diapers must

be available in a far wider range of sizes, shapes, and functionality (absorption capacity,

odor reduction, etc.) than infant products. We believe the market values Unicharm’s ability

to meet these diverse needs, but think that its market dominance stems not just from a rich

product lineup, but also from its distribution practices and capacity for communicating with

consumers. We therefore foresee no change in Unicharm’s status as Japan’s leading

supplier of both infant and adult disposable diapers in the near term.

28 August 2014

Unicharm (8113 / 8113 JP) 20

Figure 32: Market share breakdown of infant-use

disposable diapers in Japan

Figure 33: Market share breakdown of adult-use

disposable diapers in Japan

Unicharm33%

Kao31%

P&G19%

Daio Paper13%

Others4%

Unicharm50%

Daio Paper15%

Kao10%

Hakujuji8%

PB8%

Livedo8%

Others1%

Note: Local-currency basis, for the last 12 months




Unicharm has the largest share (45%) of Japan’s feminine hygiene market. The market is

shrinking at a rate of 1% or so per year in value terms owing in part to the declining

birthrate. However, Unicharm has managed to grow its market share via increased sales

in value-added areas achieved by strengthening its lineup of products offering greater

protection at night and distinct designs.

Unicharm’s products for light incontinence aid in leakage prevention for people who do not

require nursing care. Nearly 40% of people in their 60s and more than 50% of those in

their 70s are said to have experienced incontinence. The market is expanding due to

growth in the number of elderly people who do not require nursing care and because of

lifestyle changes that have seen seniors become more active in society. We believe

double-digit growth could continue for some time. Unicharm has a market-leading 60%

share in adult incontinence products, which we attribute to a broad lineup ranging from

slim-line products to thicker products with greater absorbency.

Figure 34: Market share breakdown of sanitary products

in Japan

Figure 35: Market share breakdown of incontinence article

in Japan

Unicharm45%

Kao32%

Daio Paper12%

P&G8%

Others3%

Unicharm60%

Nippon Paper Group15%

Kao10%

Daio Paper5%

Others10%





28 August 2014

Unicharm (8113 / 8113 JP) 21

Naphtha prices determine disposable diaper manufacturing cost

Figure 36 shows a break-down of disposable diaper manufacturing costs. We surmise that

a large portion of the cost is associated with pulp and with chemical products derived from

naphtha, namely, nonwoven cloth, superabsorbent polymer (SAP), and hot-melt adhesives.

Margins are therefore heavily influenced by market prices for naphtha. In FY3/14, sharply

higher input costs squeezed profits by ¥6.4bn, with devaluation of emerging market

currencies also driving up the cost of imported materials. Naphtha prices have now

stabilized, however, as have Indonesia and Thailand’s currencies. Should this remain the

case, we think the effects of higher input costs could fall within the ¥3bn figure assumed

by the company. Unicharm’s Indonesian plant has begun manufacturing some materials

in-house, and we think this might boost earnings slightly from FY3/16.

Figure 36: Breakdown of manufacturing costs for

disposable diapers

Figure 37: Naphtha Singapore historical price

Nonwoven fabric 32%

SAP12%Pulp

8%

Hot melt8%

Other materials

20%

Labor & fixed costs

20%

0

20

40

60

80

100

120

140

160

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

(USD/barrel)

Source: Company data, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates

28 August 2014

Unicharm (8113 / 8113 JP) 22

Figure 38: Consolidated balance sheet and changes in net assets (¥mn) FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY12/14E FY12/15E FY12/16E

(Assets)

Cash,cash equivalents & securities 78,583 93,756 80,159 101,374 119,270 86,864 85,533 111,914 102,975 121,052 136,684

Account receivable 38,011 38,287 40,929 41,643 46,038 50,404 60,349 67,687 62,455 75,396 75,857

Inventories 20,376 19,299 22,690 20,085 22,392 33,660 44,784 51,627 49,264 56,773 58,350

Other 5,616 6,405 10,510 9,146 17,017 19,706 20,059 33,959 33,959 33,959 33,959

Allowance for doubtful accounts -71 -83 -84 -75 -33 -86 -85 -90 -88 -88 -88

Total current assets 142,588 157,751 154,290 172,251 204,719 190,637 210,728 265,191 248,564 287,092 304,763

Tangible fixed assets 86,725 86,463 84,247 95,356 98,389 116,821 163,129 204,417 225,417 244,417 263,417

Depreciable PP&E 72,415 72,570 66,417 73,017 81,786 95,485 130,615 164,920 －－－

Land 9,975 9,715 10,253 12,021 11,685 11,905 17,501 18,661 －－－

Construction in progress 4,332 4,176 7,574 10,316 4,917 9,429 15,011 20,834 －－－

Intangible fixed assets 4,027 3,745 16,228 14,612 67,489 97,709 97,394 95,485 90,505 86,183 81,861

Goodwill 2,724 2,542 12,734 12,029 65,022 78,905 76,686 73,463 69,141 64,819 60,497

Other 1,302 1,202 3,493 2,582 2,467 18,804 20,707 22,021 21,364 21,364 21,364

Investments & other assets 35,422 27,476 23,546 25,552 73,416 67,329 63,803 55,326 55,325 55,325 55,325

Investment securities 29,516 20,360 15,609 18,052 13,027 14,299 19,664 22,105 22,105 22,105 22,105

Other 5,906 7,116 7,937 7,500 60,389 53,028 44,137 33,220 33,220 33,220 33,220

Total fixed assets 126,175 117,684 124,022 135,521 239,295 281,859 324,326 355,228 371,247 385,925 400,603

Total assets 268,763 275,435 278,313 307,773 444,015 472,497 535,055 620,419 619,811 673,017 705,366

(Liabilities) 12,380

Account payable 32,721 38,481 37,676 36,135 37,991 45,778 53,185 78,433 64,062 88,496 78,950

Short-term debt 6,981 3,427 4,666 6,305 8,371 8,267 6,228 7,709 10,014 1,235 623

Other 35,668 40,525 38,179 49,884 43,781 52,316 62,134 62,761 62,761 62,761 62,761

Total current liabilities 75,370 82,433 80,521 92,324 90,143 106,361 121,547 148,903 136,838 152,492 142,334

Long-term debt 1,738 1,451 1,206 943 127,996 115,804 76,333 21,000 18,900 11,340 1,134

Other 14,605 12,380 10,994 7,092 6,244 7,123 7,973 18,362 9,168 9,168 9,168

Total fixed liabilities 16,343 13,831 12,200 8,035 134,240 122,928 84,306 39,364 28,068 20,508 10,302

Total liabilities 91,714 96,265 92,722 100,359 224,383 229,290 205,854 188,267 164,906 173,000 152,636

(Net assets)

Capital stock 15,992 15,992 15,992 15,992 15,992 15,992 15,992 15,992 15,992 15,992 15,992

Capital surplus 18,590 18,590 18,802 18,802 18,802 18,802 29,782 46,385 46,385 46,385 46,385

Retained earnings 140,547 154,331 168,283 188,696 217,111 238,568 275,609 306,974 330,284 368,895 415,108

Treasury stock -23,119 -28,129 -29,829 -36,329 -43,924 -52,925 -43,030 -21,110 -21,110 -21,110 -21,110

Total shareholders' equity 152,010 160,784 173,248 187,161 207,981 220,437 278,354 348,242 371,551 410,162 456,375

Valuation and translation adjustments 9,153 1,466 -5,580 -3,273 -6,047 -7,362 11,413 25,893 19,341 19,341 19,341

Total equity capital 161,163 162,250 167,668 183,888 201,934 213,075 289,767 374,135 390,892 429,503 475,716

Share warrant 0 0 0 0 288 958 677 295 295 295 295

Minority interests 15,883 16,919 17,923 23,524 17,408 29,174 38,755 57,719 63,719 70,219 76,719

Total net assets 177,049 179,170 185,590 207,413 219,632 243,207 329,201 432,152 454,906 500,017 552,730

Total liabilities & net assets 268,763 275,435 278,313 307,773 444,015 472,497 535,055 620,419 619,811 673,017 705,366

FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY12/14E FY12/15E FY12/16E

(Changes in net assets)

Beginning balance 165,484 177,049 179,170 185,590 207,413 219,632 243,207 329,201 432,152 454,906 500,017

Capital stock 0 0 0 0 0 0 0 0 0 0 0

Capital surplus 0 0 212 0 0 0 10,980 16,603 0 0 0

Net profits 15,058 16,683 17,127 24,463 33,560 26,981 43,121 38,216 31,000 47,000 55,000

Dividends from surplus -2,461 -2,903 -3,199 -3,941 -4,844 -5,957 -6,272 -7,552 -7,690 -8,388 -8,788

Treasury stock -6,014 -5,010 -1,700 -6,500 -7,595 -9,001 9,895 21,920 0 0 0

Valuation and translation adjustments 3,556 -7,687 -7,046 2,307 -2,774 -1,315 18,775 14,480 -6,552 0 0

Minority interests 1,579 1,036 1,004 5,601 -6,116 11,766 9,581 18,964 6,000 6,500 6,500

Other -153 2 22 -107 -12 1,101 -86 320 -4 0 0

Final balance 177,049 179,170 185,590 207,413 219,632 243,207 329,201 432,152 454,906 500,017 552,730 Source: Company data, Credit Suisse estimates

28 August 2014

Unicharm (8113 / 8113 JP) 23

Figure 39: Consolidated profit and loss and cash flow statements (¥mn) FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY12/14E FY12/15E FY12/16E

Sales revenue 301,880 336,864 347,849 356,825 376,947 428,391 495,771 599,455 538,000 706,000 777,000

CGS 173,238 196,130 206,209 193,012 203,394 233,936 268,743 331,807 300,000 393,000 432,000

Gross profit 128,641 140,734 141,640 163,813 173,553 194,455 227,028 267,647 238,000 313,000 345,000

SG&A 98,711 107,002 106,756 118,747 126,991 142,554 167,539 200,407 182,000 233,000 255,000

OP 29,929 33,731 34,883 45,066 46,561 51,900 59,488 67,240 56,000 80,000 90,000

Interest and dividend income 852 1,023 966 752 867 1,013 1,210 1,664 1,500 1,500 1,500

Interest expense and Sales discount 1,634 2,031 2,196 2,681 3,606 4,649 4,011 3,267 3,000 3,000 3,000

Other 924 -396 -2,046 2,718 -685 97 8,324 2,276 1,500 1,500 1,500

RP 30,071 32,327 31,607 45,855 43,137 48,361 65,012 67,913 56,000 80,000 90,000

Extraordinary gains 225 398 26 81 3,131 17 45 5,684 0 0 0

Extraordinary losses 1,218 832 4,178 1,988 2,973 2,805 774 5,695 2,000 2,000 2,000

Pretax profit 29,078 31,893 27,456 43,948 43,295 45,573 64,283 67,902 54,000 78,000 88,000

Income taxes 11,952 12,382 6,806 13,911 6,261 14,875 15,371 23,905 17,000 24,500 27,500

Minority interests 2,067 2,827 3,521 5,572 3,473 3,716 5,790 5,780 6,000 6,500 6,500

NP 15,058 16,683 17,127 24,463 33,560 26,981 43,121 38,216 31,000 47,000 54,000

Tax rate 41.1% 38.8% 24.8% 31.7% 14.5% 32.6% 23.9% 35.2% 31.5% 31.4% 31.3%

Depreciation expense (incl. goodwill) 13,431 15,040 17,101 16,393 17,380 17,156 21,053 31,304 25,000 25,000 25,000

Capital expenditure 20,916 17,238 14,402 24,344 27,485 26,137 52,340 51,908 42,000 40,000 40,000

R&D expense 4,331 4,504 4,459 4,558 4,953 4,733 5,098 5,265 5,265 5,265 5,265

To sales ratio (%)

CGS 57.4 58.2 59.3 54.1 54.0 54.6 54.2 55.4 55.8 55.7 55.6

Gross profit 42.6 41.8 40.7 45.9 46.0 45.4 45.8 44.6 44.2 44.3 44.4

Depreciation expense (incl. goodwill) 4.4 4.5 4.9 4.6 4.6 4.0 4.2 5.2 4.6 3.5 3.2

R&D expense 1.4 1.3 1.3 1.3 1.3 1.1 1.0 0.9 1.0 0.7 0.7

SG&A 32.7 31.8 30.7 33.3 33.7 33.3 33.8 33.4 33.8 33.0 32.8

OP 9.9 10.0 10.0 12.6 12.4 12.1 12.0 11.2 10.4 11.3 11.6

RP 10.0 9.6 9.1 12.9 11.4 11.3 13.1 11.3 10.4 11.3 11.6

Pretax profit 9.6 9.5 7.9 12.3 11.5 10.6 13.0 11.3 10.0 11.0 11.3

NP 5.0 5.0 4.9 6.9 8.9 6.3 8.7 6.4 5.8 6.7 6.9

YoY (%)

Sales revenue 11.7 11.6 3.3 2.6 5.6 13.6 15.7 20.9 - - 10.1

Gross profit 9.8 9.4 0.6 15.7 5.9 12.0 16.8 17.9 - - 10.2

OP 4.9 12.7 3.4 29.2 3.3 11.5 14.6 13.0 - - 12.5

RP 4.5 7.5 -2.2 45.1 -5.9 12.1 34.4 4.5 - - 12.5

Pretax profit 1.8 9.7 -13.9 60.1 -1.5 5.3 41.1 5.6 - - 12.8

NP -1.5 10.8 2.7 42.8 37.2 -19.6 59.8 -11.4 - - 14.9

FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY12/14E FY12/15E FY12/16E

(Operating activities)

NP 15,058 16,683 17,127 24,463 33,560 26,981 43,121 38,216 31,000 47,000 54,000

Depreciation(+) 13,431 15,040 17,101 16,393 17,380 17,156 21,053 31,304 25,000 25,000 25,000

Account receivable(-) -4,851 -276 -2,642 -714 -4,395 -4,366 -9,945 -7,338 5,232 -12,941 -461

Inventories(-) -4,200 1,077 -3,391 2,605 -2,307 -11,268 -11,124 -6,843 2,363 -7,510 -1,577

Account payable(+) 3,174 5,760 -805 -1,541 1,856 7,787 7,407 25,248 -14,371 24,434 -9,546

Minority interests(+) 2,067 2,827 3,521 5,572 3,473 3,716 5,790 5,780 6,000 6,500 6,500

Other 3,678 4,197 -8,933 8,254 -66,806 19,564 12,456 9,292 0 0 0

Operating cashflow 28,357 45,308 21,978 55,032 -17,239 59,570 68,758 95,659 55,225 82,483 73,916

(Investing activities)

Capital expenditures(-) -23,046 -14,778 -14,885 -27,502 -20,413 -35,588 -67,361 -72,592 -46,000 -44,000 -44,000

Other 2,718 4,687 -29,431 5,263 -49,114 -23,273 14,057 14,372 0 0 0

Investing cashflow -20,328 -10,091 -44,316 -22,239 -69,527 -58,861 -53,304 -58,220 -46,000 -44,000 -44,000

(Financing activities)

Debt (+) -634 -3,841 994 1,376 129,119 -12,296 -14,903 -7,048 205 -16,339 -9,818

Dividends (-) -2,461 -2,903 -3,199 -3,941 -4,844 -5,957 -6,272 -7,552 -7,690 -8,388 -8,788

Other -7,700 -5,841 -992 -6,890 -7,303 -18,260 -7,478 2,095 -8,000 0 0

Financing cashflow -10,795 -12,585 -3,197 -9,455 116,972 -36,513 -28,653 -12,505 -15,485 -24,728 -18,606

(Cash & cash equivalents)

Increases -2,766 22,632 -25,535 23,338 30,206 -35,804 -13,199 24,934 -6,260 13,755 11,311

Beginning balance 80,555 78,583 93,756 80,159 101,374 119,270 86,864 85,533 111,914 102,975 121,052

Final balance 77,789 101,215 68,221 103,497 131,580 83,466 73,665 110,467 105,654 116,730 132,362

Adjustments 794 -7,459 11,938 -2,123 -12,310 3,398 11,868 1,447 -2,679 4,322 4,322 Source: Company data, Credit Suisse estimates

28 August 2014

Unicharm (8113 / 8113 JP) 24

Figure 40: Financial indicators FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY12/14E FY12/15E FY12/16E

(Safety)

Current ratio (%) 189.2 191.4 191.6 186.6 227.1 179.2 173.4 178.1 181.6 188.3 212.6

Quick ratio (%) 154.7 160.2 150.4 154.9 183.4 129.1 120.0 120.6 120.9 128.8 148.3

Adjusted quick ratio (%) 1,125.7 2,735.8 1,717.9 1,607.8 1,424.8 1,050.7 1,373.4 1,451.7 1,028.3 9,802.2 8,421.9

Fixed ratio (%) 78.3 72.5 74.0 73.7 118.5 132.3 111.9 94.9 95.0 89.9 84.4

Interest-bearing debt (¥mn) 8,719 4,878 5,872 7,248 136,367 124,071 82,561 28,709 28,914 12,575 2,757

Average debt interest rate (%) 4.6 6.7 5.8 2.3 0.4 0.2 0.3 0.6 1.1 1.5 4.0

Dependence on debt (%) 3.2 1.8 2.1 2.4 30.7 26.3 15.4 4.6 4.7 1.9 0.4

Net debt (¥mn) -69,864 -88,878 -74,287 -94,126 17,097 37,207 -2,972 -83,205 -74,060 -108,477 -133,927

Equity capital ratio (%) 60.0 58.9 60.2 59.7 45.5 45.1 54.2 60.3 63.1 63.8 67.3

D/E ratio (%) 5.4 3.0 3.5 3.9 67.5 58.2 28.5 7.7 7.4 2.9 0.6

Long-term debt ratio (%) 19.9 29.7 20.5 13.0 93.9 93.3 92.5 73.1 65.4 90.2 41.1

Working capital (¥mn) 67,218 75,318 73,769 79,927 114,576 84,276 89,181 116,288 111,727 134,600 161,429

Net interest expense (¥mn) -782 -1,008 -1,230 -1,929 -2,739 -3,636 -2,801 -1,603 -1,500 -1,500 -1,500

Cash plus marketable securities (¥mn) 78,583 93,756 80,159 101,374 119,270 86,864 85,533 111,914 102,975 121,052 136,684

Interest coverage ratio (x) 18.84 17.11 16.32 17.09 13.15 11.38 15.13 21.09 19.17 27.17 30.50

Financial leverage (x) 1.67 1.70 1.66 1.67 2.20 2.22 1.85 1.66 1.59 1.57 1.49

A/R to A/P ratio (%) 116.2 99.5 108.6 115.2 121.2 110.1 113.5 86.3 97.5 85.2 96.1

Dividend on equity (%) 1.6 1.8 1.9 2.2 2.5 2.9 2.5 2.3 2.0 2.0 1.9

(Profitability)

ROE (%) 9.6 10.3 10.4 13.9 17.4 13.0 17.2 11.5 8.1 11.5 11.9

ROA (%) 11.5 12.4 12.6 15.4 12.4 11.3 11.8 11.6 9.0 12.4 13.1

Inventory turnover ratio (x) 16.5 17.0 16.6 16.7 17.7 15.3 12.6 12.4 10.7 13.3 13.5

A/R turnover ratio (x) 8.5 8.8 8.8 8.6 8.6 8.9 9.0 9.4 8.3 10.2 10.3

A/P turnover ratio (x) 9.7 9.5 9.1 9.7 10.2 10.2 10.0 9.1 7.6 9.3 9.3

Inventory turnover days (days) 22.1 21.5 22.0 21.9 20.6 23.9 28.9 29.4 34.2 27.4 27.0

A/R turnover days (days) 43.0 41.3 41.6 42.2 42.5 41.1 40.8 39.0 44.1 35.6 35.5

A/P turnover days (days) 37.6 38.6 40.0 37.8 35.9 35.7 36.4 40.1 48.3 39.4 39.3

Sales per employee (¥mn) 49.1 52.9 52.1 50.9 52.3 48.7 48.2 56.7 49.6 65.0 71.6

OP per employee (¥mn) 4.9 5.3 5.2 6.4 6.5 5.9 5.8 6.4 5.2 7.4 8.3

(Per share data)

EPS (¥) 77.4 86.5 89.4 128.6 178.1 144.9 233.7 192.3 154.0 235.3 270.4

BPS (¥) 834 849 878 974 1,083 1,156 1,522 1,858 1,957 2,151 2,377

Sales per share (¥) 1,552 1,746 1,816 1,875 2,001 2,301 2,687 3,016 2,672 3,535 3,890

Operating cashflow per share (¥) 145.8 234.8 114.8 289.2 -91.5 320.0 372.7 481.3 274.3 413.0 370.1

DPS (¥) 15.0 15.0 18.0 23.0 28.0 32.0 34.0 38.0 38.2 42.0 44.0

Dividend ratio (%) 19.4 17.3 20.1 17.9 15.7 22.1 14.5 19.8 24.8 17.8 16.3

(Growth)

EPS growth (%) 0.0 11.7 3.4 43.7 38.5 -18.6 61.3 -17.7 -19.9 52.8 14.9

BPS growth (%) 8.2 1.8 3.5 10.9 11.2 6.8 31.6 22.1 5.3 9.9 10.5

Total assets growth (%) 7.4 2.5 1.0 10.6 44.3 6.4 13.2 16.0 -0.1 8.6 4.8

Sustainable growth rate (%) 7.8 8.5 8.3 11.4 14.7 10.1 14.7 9.2 6.1 9.4 10.0

(Investment profitability)

Capital invested (¥ mn) 177,506 176,081 179,868 191,923 336,174 336,003 374,073 413,499 418,960 450,011 485,018

NOPAT (¥ mn) 18,171 20,393 24,697 32,659 39,242 35,025 51,598 45,043 39,398 55,901 62,906

ROIC (%) 10.2 11.6 13.7 17.0 11.7 10.4 13.8 10.9 9.4 12.4 13.0

WACC (%) 4.1 4.1 4.1 4.0 2.6 2.7 3.2 3.8 3.9 4.0 4.1

EVA (¥ mn) 10,939 13,098 17,281 24,914 30,465 25,950 39,508 29,147 23,123 37,732 42,915

EVA spread (%) 6.2 7.4 9.6 13.0 9.1 7.7 10.6 7.0 5.5 8.4 8.8

(Cashflow)

EBITDA (¥mn) 43,360 48,771 51,984 61,459 63,941 69,056 80,541 98,544 81,000 105,000 115,000

EBITDA margin (%) 14.4 14.5 14.9 17.2 17.0 16.1 16.2 16.4 15.1 14.9 14.8

FCF (¥mn) 8,029 35,217 -22,338 32,793 -86,766 709 15,454 37,439 9,225 38,483 29,916

Operating C/F to Investment C/F rate (%) 139.5 449.0 49.6 247.5 -24.8 101.2 129.0 164.3 120.1 187.5 168.0

(Other)

Employees numbers 6,265 6,461 6,904 7,108 7,317 10,287 10,287 10,855 10,855 10,855 10,855

Consolidated subsidiaries numbers 26 24 30 29 31 40 43 47 47 47 47

Equity method affiliates numbers 1 2 2 2 2 2 2 2 2 2 2

Average shares outstanding (mn) 194.5 193.0 191.5 190.3 188.4 186.1 184.5 198.7 201.3 199.7 199.7

End-of-period shares outstanding (mn) 193.3 191.2 191.0 188.8 186.4 184.2 190.4 201.3 199.7 199.7 199.7 Source: Company data, Credit Suisse estimates

28 August 2014

Unicharm (8113 / 8113 JP) 25

HOLT analysis

Using our growth assumptions for FY14 to FY16, and thereafter assuming HOLT’s long-

run mean reversion assumptions, the HOLT discounted cash flow model suggests

Unicharm has 38% potential downside.

Figure 41: HOLT analysis

Source: Company data, Credit Suisse estimates, HOLT estimates

28 August 2014

Unicharm (8113 / 8113 JP) 26

Companies Mentioned (Price as of 27-Aug-2014)

Hengan International (1044.HK, HK$82.3) Kao Corporation (4452.T, ¥4,474) Kimberly-Clark Corporation (KMB.N, $108.92) Pigeon (7956.T, ¥6,200) Procter & Gamble Co. (PG.N, $83.31) Unicharm Corporation (8113.T, ¥6,773, UNDERPERFORM, TP ¥5,900)

Disclosure Appendix

Important Global Disclosures

I, Masashi Mori, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Kao Corporation (4452.T)

4452.T Closing Price Target Price

Date (¥) (¥) Rating

28-Nov-11 2,003 2,070 N *

03-Apr-12 2,156 2,120

07-May-12 2,148 *

27-Aug-12 2,368 2,400 N

05-Feb-13 2,581 2,650

03-Apr-13 3,035 2,700

21-May-13 3,445 3,600

29-Jul-13 3,005 3,400

15-Jan-14 3,300 3,500

18-Apr-14 3,653 NR

* Asterisk signifies initiation or assumption of coverage.

N EU T RA L

N O T RA T ED

3-Year Price and Rating History for Pigeon (7956.T)



26-Jan-12 1,479 1,720 O

07-May-12 1,618 *

23-Aug-12 1,798 2,020 O


O U T PERFO RM

28 August 2014

Unicharm (8113 / 8113 JP) 27

3-Year Price and Rating History for Unicharm Corporation (8113.T)



28-Nov-11 3,610 4,200 O *

07-May-12 4,605 *

24-Jul-12 4,430 5,000 O

12-Feb-13 5,170 5,600

03-Apr-13 5,460 5,800

21-May-13 6,370 7,200

03-Jul-13 5,700 6,500

20-Nov-13 6,410 7,400

10-Jan-14 5,910 7,000

18-Apr-14 5,757 NR


O U T PERFO RM

N O T RA T ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

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*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For La tin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating defin ition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

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Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 44% (53% banking clients)

Neutral/Hold* 40% (51% banking clients)

Underperform/Sell* 13% (44% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most clo sely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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Unicharm (8113 / 8113 JP) 28

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Price Target: (12 months) for Unicharm Corporation (8113.T)

Method: Our ¥5,900 target price for Unicharm is based on an EV/EBITDA of roughly 10x applied to our FY12/15 estimates. This is the bottom for

2013, when sales momentum in Unicharm’s disposable diaper business in China deteriorated.

Risk: Risks to our ¥5,900 target price for Unicharm include: (1) stronger-than-expected sales growth for premium and standard products in China, and (2) the possibility of maintaining strong sales growth of over 20%, and its high market share in Indonesia.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (8113.T, 7956.T, 4452.T) within the next 3 months.

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The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (8113.T, 7956.T, 4452.T) within the past 12 months

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Credit Suisse Securities (Japan) Limited ............................................................................................................................................. Masashi Mori

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