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1、September 27,2012ACTIONBuyNitto Denko(6988.T),Return Potential:25%,Equity Research,Technology shift,new growth phase:Raising TP,reiterating CL-Buy,Source of opportunity,Investment Profile,We expect the stock market to start pricing in a new growth phase for NittoDenko driven by a technology shift fo
2、r tablet touch panels.We haverevised our main scenario to include supply of Nitto Denko film for theiPad.We raise our estimates from FY3/14,thereby raising our 12-month,LowGrowthReturns*MultipleVolatility,HighGrowthReturns*MultipleVolatility,target price to 4,600,from 4,100,reiterating our Buy ratin
3、g,and keeping,Percentile,20th,40th,60th,80th,100th,the stock on our Conviction List and Japan Sustain List.The company iscurrently in transition,in our view,tasting the first fruits of smartphoneand tablet growth after optimizing profits on its LCD TV products.,Nitto Denko(6988.T)Japan Electronic Co
4、mponents Peer Group Average*Returns=Return on Capital For a complete description of theinvestment profile measures please refer tothe disclosure section of this document.,Catalyst,Key dataPrice(),Current3,685,In the tablet technology space,film solutions are starting to gain ground dueto difficultie
5、s with SOC and in-cell technologies(performance enhancement,costs,specs).We see Nitto Denko,which holds a 70-80%global share in ITOfilm,strengthening its position through its ability to provide customersolutions with innovative technologies such as Double ITO andpolarizing/adhesive film combinations
6、.Our new assumption is that iPad andother major tablets will use film from FY3/15,more than doubling the ITOfilm sales outlook and substantially boosting Nitto Denkos earnings givenits dominance in this field.We cut our op.profit forecast 6%for FY3/13 tofactor in upfront costs and raise it 2%for FY3
7、/14 and 11%for FY3/15.We,12 month price target()Market cap(bn)Consolidated(bn)Revenue NewOp.profit NewOp.profit OldOp.profit CoE NewOp.profit CoE OldEPS()Newyoy%chg.EPS()OldP/E(X)P/B(X)EV/EBITDA(X)CROCI(%)EV/GCI(X),3/12607.656.556.571.071.0186.5(44.3)186.519.81.45.08.20.6,3/13E656.868.573.071.071.02
8、92.356.8309.112.61.33.912.80.6,3/14E714.085.583.50.00.0360.123.2345.110.21.23.114.30.5,4,600613.93/15E764.596.587.00.00.0408.213.3360.19.01.12.614.70.5,introduce FY3/16 estimates.We watch for details of the medium term plan,(starts in FY3/14)and changes to production capacity plans.,Price performanc
9、e chart,4,000,890,ValuationWe maintain EV/GCI vs.CROCI/WACC,but change our base year to FY3/16,when we assume a full earnings contribution from the technology shift.We discount FY3/16 DACF using 7%WACC.Target equals 13X FY3/14 P/E.Key risks,3,8003,6003,4003,2003,0002,8002,600,860830800770740710680,Y
10、en appreciation,non-adoption of ITO film,swings in LCD production.,Sep-11,Jan-12,Apr-12,Jul-12,INVESTMENT LIST MEMBERSHIP,Nitto Denko(L),TOPIX(R),Japan Buy List,Share price performance(%),3 month,6 month 12 month,Japan Conviction Buy List,AbsoluteRel.to TOPIX,11.311.3,9.528.1,15.916.3,Coverage View:
11、AttractiveDaiki Takayama+81(3)6437-9870 Goldman Sachs Japan Co.,Ltd.Takashi Watanabe+81(3)6437-9894 Goldman Sachs Japan Co.,Ltd.Hinako Yoshida+81(3)6437-4061 Goldman Sachs Japan Co.,Ltd.The Goldman Sachs Group,Inc.,Source:Company data,Goldman Sachs Research estimates,FactSet.Price as of 9/27/2012 cl
12、ose.Goldman Sachs does and seeks to do business with companiescovered in its research reports.As a result,investors should beaware that the firm may have a conflict of interest that couldaffect the objectivity of this report.Investors should considerthis report as only a single factor in making thei
13、r investmentdecision.For Reg AC certification and other importantdisclosures,see the Disclosure Appendix,or go Analysts employed by non-US affiliates are not registered/qualified as research analystswith FINRA in the U.S.Global Investment Research,2,September 27,2012Nitto Denko:Summary Financials,Ni
14、tto Denko(6988.T),Profit model(bn)RevenueCost of goods soldGross profitSG&A and otherOperating profitNet interest income/(expense)Equity in earnings of affiliatesNet other nonoperating inc/(exp)Recurring profitExtraordinary income,3/12607.6(439.9)167.7(111.2)56.5(0.6)0.02.658.41.1,3/13E656.8(468.3)1
15、88.5(120.0)68.5(0.6)0.00.668.50.5,3/14E714.0(498.5)215.5(130.0)85.5(0.6)0.00.685.50.5,3/15E764.5(530.0)234.5(138.0)96.5(0.6)0.00.696.50.5,Balance sheet(bn)Cash&equivalentsAccounts receivableInventoryOther current assetsTotal current assetsNet PP&ENet intangiblesTotal investmentsOther long-term asset
16、sTotal assets,3/12209.9126.367.519.3423.0190.19.08.921.0651.9,3/13E229.2139.669.219.3457.3194.19.08.921.0690.2,3/14E253.3151.873.619.3498.0199.19.08.921.0735.9,3/15E287.3162.578.319.3547.3202.19.08.921.0788.3,Extraordinary expense,(9.7),(1.0),(1.0),(1.0),Pretax profitIncome taxMinority interestNet i
17、ncome,49.8(18.5)(0.3)31.1,68.0(19.5)0.248.7,85.0(25.0)0.060.0,96.0(28.0)0.068.0,Accounts payableShort-term debtOther current liabilitiesTotal current liabilities,78.73.056.8138.5,84.93.056.8144.7,90.43.056.8150.2,96.13.056.8155.9,Long-term debt,56.0,56.0,56.0,56.0,Capital expenditures(excl.leases)Ca
18、pital expenditures(incl.leases)Depreciation&amortizationEPS(basic)()EPS(fully diluted)(),(33.8)(33.8)(36.8)186.5186.5,(48.0)(48.0)(44.0)292.3292.3,(55.0)(55.0)(50.0)360.1360.1,(55.0)(55.0)(52.0)408.2408.2,Other long-term liabilitiesTotal long-term liabilitiesTotal liabilitiesMinority interestTotal c
19、ommon equity,21.177.5216.01.4434.5,21.177.5222.21.2466.8,21.177.5227.71.2507.0,21.177.5233.41.2553.6,Total liabilities&equity,651.9,690.2,735.9,788.3,BVPS(),2,608.0,2,801.6,3,043.3,3,323.1,DPS(),100.0,100.0,120.0,130.0,Net debt,(150.9),(170.2),(194.3),(228.3),Dividend payout ratio(%),53.6,34.2,33.3,
20、31.9,Ratios,3/12,3/13E,3/14E,3/15E,Year-on-year change(%),3/12,3/13E,3/14E,3/15E,RevenueOperating profitRecurring profitNet incomeEPS(basic),(4.8)(33.7)(31.4)(44.3)(44.3),8.121.317.256.856.8,8.724.824.823.223.2,7.112.912.913.313.3,CROCI(%)ROE(%)ROA(%)Net debt/equity(%)Interest coverage ratio(X),8.27
21、.34.8(34.6)62.3,12.810.87.3(36.4)79.8,14.312.38.4(38.2)99.6,14.712.88.9(41.1)112.4,EPS(fully diluted),(44.3),56.8,23.2,13.3,Valuation,3/12,3/13E,3/14E,3/15E,Margins(%),3/12,3/13E,3/14E,3/15E,Operating profitEBITDARecurring profitNet income,9.315.49.65.1,10.417.110.47.4,12.019.012.08.4,12.619.412.68.
22、9,P/E(X)EV/EBITDA(X)EV/GCI(X)P/B(X),19.85.00.61.4,12.63.90.61.3,10.23.10.51.2,9.02.60.51.1,Dividend yield(%),2.7,2.7,3.3,3.5,Cash flow statement(bn),3/12,3/13E,3/14E,3/15E,FCF yield(%),4.0,5.8,7.2,9.0,Net incomeD&A add-backMinority interest add-backNet(inc)/dec in working capitalOther operating cash
23、 flowCash flow from operationsCapital expenditures(incl.leases)Purchases of long-term securitiesSales of long-term securitiesOther investing cash flowCash flow from investmentsDividends paid(common&preferred)Incr./(decr.)in debtCommon stock issuanceOther financing cash flow,31.136.80.3(1.6)(8.1)58.5
24、(33.8)0.00.0(4.2)(37.9)(16.4)(7.7)0.00.1,48.744.0(0.2)(8.7)0.083.8(48.0)0.00.00.0(48.0)(16.4)0.00.00.0,60.050.00.0(11.1)0.098.9(55.0)0.00.00.0(55.0)(19.7)0.00.00.0,68.052.00.0(9.7)0.0110.3(55.0)0.00.00.0(55.0)(21.4)0.00.00.0,Cash flow from financingTotal cash flow,(24.0)(3.4),(16.4)19.3,(19.7)24.1,(
25、21.4)33.9,Note:Last actual year may include reported and estimated data.Source:Company data,Goldman Sachs Research estimates.,Analyst ContributorsDaiki TTakashi WHinako YGoldman Sachs Global Investment Research,3,September 27,2012,Nitto Denko(6988.T),Executive summary:Entering growth phase;raise TP
26、to 4,600,reiterate CL-BuyShift in tablet touch panel technology could favor filmThe position of film-based touch panels has previously been viewed as weak becauseSOC(Sensor On Cover glass,or One-glass Solution)was considered to betechnologically superior.However,film solutions may be gaining an adva
27、ntage as tabletPC demand grows.SOC solutions are facing hurdles in terms of performanceenhancement,cost,and specs,while the outlook for film solutions is improving.We seebenefits for Nitto Denko(which has 70%-80%global share in ITO film)as customersincreasingly demand customization.Scenario analysis
28、:Size of business will depend on iPad adoptionWe have formulated four scenarios to calculate the business potential of ITO film.In ourmain scenario,we now assume that film solutions will be adopted for iPad,first beingadopted into the iPad mini and then being carried over to the main iPad product.iP
29、addominates the sector in terms of volume/area and the business scale of ITO film will differmarkedly depending on iPad adoption.If adopted,our FY3/16 sales assumption is 129.4bn;on non-adoption we previously(“GS old”scenario in Exhibit 3)projected 68 bn.Even if adoption proceeds,we would expect ear
30、nings impact in 2H of FY3/14 at theearliest,given development/mass production lead times.This is our base caseassumption,in which we assume a gradual contribution from FY3/15 with fullcontribution from FY3/16.Our Bull case scenario assumes the same adoption rate for ITO film technology(100%inFY3/16
31、given Nitto Denkos dominance in the ITO film field),but less price deteriorationand higher profitability.Our bear case scenario assumes only minimal adoption of ITOtechnology into the iPad mini and no carry-over into the main iPad product.We will monitor the medium-term plan,slated to start from FY3
32、/14,and progress oncapacity expansion.From transitional phase to growth:Record FY3/15 op.profitsWe forecast record operating profits in FY3/15,topping the 89.2 bn high reached inFY3/06 during the period of strong LCD TV penetration.Nitto Denko has been in atransitional phase from FY3/11,optimizing i
33、ts LCD TV product line-up(securing decentprofits)and seeing new business opportunities emerge in smartphones/tablets.We nowsee a new growth phase from FY3/14-FY3/16.Cash returns(CROCI)are lower than levels in FY3/05-FY3/06,during global LCD TVexpansion(15%-20%)but we think they can improve to around
34、 15%in the next growthphase.Nitto Denko is in the top sector quartile and is on our GS SUSTAIN Japan List.See“Disclosing Japans potential:Beyond the headwinds The 2020 winners”by RichardManley,September 27,2011.We think annual share buybacks of around 3%-8%are feasibleWe forecast cash holdings risin
35、g to 328.6 bn at end-FY3/16 from 209.9 bn at end-FY3/12.Based on three scenarios(cash staying flat,falling to 180 bn,falling to 160 bn)wecalculate Nitto Denko could conduct annual share buybacks of around 3%-8%.Goldman Sachs Global Investment Research,1.,2.,3.,1.,4,September 27,2012,Nitto Denko(6988
36、.T),Raise target price to 4,600 from 4,100,reiterate Buy,maintain CLWe raise our 12-month target price to 4,600(equals an FY3/14E P/E of 13X)from 4,100.Our target price is still based on EV/GCI-CROCI/WACC correlation with a 10%discountversus the electronic component sector trend line(we calculate a
37、theoretical value of5,000 assuming a return to the trend line).We change the base year for our target price calculation to FY3/16,when we expect theuse of Nitto Denko products in major tablet PCs to begin making a full-scale earningscontribution.Our previous base was the FY3/13-FY3/14 average.Howeve
38、r,we use aWACC discount of 7%on FY3/16 DACF to calculate our target price.Brighter prospects for film-type touch panels in tablet PCsOf the three technologies,film could provide a distinctive edge intablet PCsBroadly speaking,there are three types of touch panel technology(see Appendix fordetails on
39、 product structure):Add-on film type:Evolving into double ITO/F2Add-on glass type:Evolving into sensor on cover(SOC)glass(one glass solution)New technologies including in-cell and on-cellThe general perception has been that film-type touch panels have a weak position in theindustry and that most tou
40、ch panels will use SOC glass-type technology for the nextseveral years,later replaced by in-cell and on-cell technology.This perception that SOCglass-type technology is superior was based on the belief that film-type technologyresults in relatively inferior product quality because of relatively infe
41、rior transparency andresistance,and that the technologys main advantages of being thin,light-weight,andlow-cost will hold less sway if companies can develop product and mass productiontechnology for SOC and in-cell touch panels.In small display applications such as smartphones,the iPhone 5 uses in-c
42、ell technologyand we do not think film-type touch panels are necessarily the current first choice of thetwo global leaders Apple and Samsung.However,we think prospects have rapidly improved for film-type touch panels in tabletPCs for the reasons stated below.Six reasons why film technology has becom
43、e a stronger contenderWe see several reasons why film has become a much more attractive option for touchpanels and we believe the advantages of film technology are rapidly gaining attention inthe industry.Product technology:Film-type touch panels now have greater transparency andlower resistance,whi
44、ch were previously weak points.Moreover,use ofphotolithography processes at the ITO layer phase by customers(at the sensorformation stage)enables production of thin bezel displays with thinner framesand allowing for a larger display area.This should in turn lead to greater demandfor ITO film.Goldman
45、 Sachs Global Investment Research,2.,3.,4.,5.,6.,1.,2.,3.,5,September 27,2012,Nitto Denko(6988.T),Light/thin:These have always been strengths of film technology,but there hasbeen further evolution with the adoption of double ITO(DITO)technology andthinner PET film.Low cost:Costs have been significan
46、tly reduced because(1)DITO requires onlyone process as opposed to the two processes required in ITO formation with twofilm layers and(2)film can be worked into the manufacturing lines on a roll-to-roll basis(the benefits of this are more readily gained as volume increases).Advantages vs.one-glass so
47、lution(SOC):SOC was seen as the leadingtechnology,but it has been slow to gain traction due to problems related to glassstrength(manufacturing yields and finished product strength)and the costgrowth associated with establishing mass production technology(lack offinancial strength among Taiwan touch
48、panel makers).Advantages vs.in-cell technology:There are still problems achieving larger sizeswith in-cell technology(will likely not be used at all in tablet PCs over the nextseveral years).Background:Calls for thinner,lighter,and cheaper touch panels have beenincreasing with the advent of low-end
49、touch panels.Also,as competition hasintensified,there is an increased need for timely product supply in accordancewith product delivery schedules(mass production capabilities,ability to respondto production fluctuations).Nitto Denko:70%-80%ITO film share,bolstering industry positionFilm-based touch
50、panel manufacturing involves the following steps:(1)supply of PET filmand other materials;(2)ITO film production(Nitto Denko);(3)touch panel production(ITOetching=sensor formation;in some cases,sensor formation and cover glass installationare handled by separate companies);and(4)assembly by the LCD
