BRIDGE REPORT
(4205)

東証1部

ZEON CORPORATION (4205)
President Naozumi Furukawa
President
Naozumi Furukawa
Corporate Profile
Company
ZEON CORPORATION
Code No.
4205
Exchange
TSE 1st Section
Industry
Chemicals
President
Naozumi Furukawa
HQ Address
Marunouchi 1-6-2, Chiyoda-ku, Tokyo
Year-end
March
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥1,134 231,162,241 shares ¥262.137 billion 10.1% 1,000 share
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥13.00 1.1% ¥73.54 15.4x ¥685.64 1.6x
* Share price as of closing on May 15, 2013. Number of shares outstanding as of most recent quarter end; does not include treasury shares.
ROE and BPS based on previous term results.
 
Consolidated Earnings Trends
Fiscal Year Net Sales Operating Income Current Income Net Income EPS (¥) Dividend (¥)
March 2009 268,857 2,936 3,848 2,478 10.49 9.00
March 2010 225,878 9,319 9,448 5,020 21.24 6.00
March 2011 270,383 35,295 33,623 18,303 78.77 10.00
March 2012 262,842 32,123 31,487 19,127 82.75 11.00
March 2013 250,763 23,696 25,212 14,750 63.81 12.00
March 2014 Est. 290,000 27,000 27,000 17,000 73.54 13.00
* Estimates are those of the Company.
 
This Bridge Report provides details of ZEON CORPORATION and a review of its fiscal year March 2013 earnings, fiscal year March 2014 earnings estimates, and review of progress on the Mid-term Management Plan "SZ-20".
 
Key Points
 
 
 
Company Overview
 
ZEON CORPORATION is a petrochemical manufacturer that boasts of numerous products with large share of the global markets including synthetic rubber used in automobile parts and tires, synthetic latex used in medical gloves, and other products. The Company's strengths include its creative technology development function, research and development structure, and high earnings generation capability. Many of the products and materials manufactured by ZEON are used in a wide variety of products including automobile parts and tires, rubber gloves, disposable diapers, cellular telephones, liquid crystal televisions, perfumes and other products commonly used in everyday life. The ZEON Group is comprised of the parent company, 43 subsidiaries and eight affiliated companies. The Company operates manufacturing facilities in five locations in Japan and eight overseas. ZEON also has manufacturing and marketing facilities in 16 countries around the world.
 
 
(Company Name and Management Vision)
The company name "ZEON" is derived from the Greek word for earth "geo" (phonetically pronounced "zeo" in Japanese) and the English word reflecting eternity "eon", and reflects the Company's principle of "deriving ingredients from the earth and perpetually contributing to human prosperity" through the development and application of creative technologies. (ZEON's original name "Geon," used at the time of its establishment, was derived from the trademark acquired for the vinyl chloride resin "Geon" from the Goodrich Corporation, with which it had capital and collaborative technological agreements. The company name was changed to "ZEON" when the capital agreement was dissolved in 1970.)
 
(Corporate History)
ZEON was established as a joint venture company formed by the Furukawa Group companies Nippon Light Metal Co., Ltd., Furukawa Electric Co., Ltd., and Yokohama Rubber Co., Ltd. in April 1950 to acquire and use the vinyl chloride resin technology from Goodrich Corporation. In 1951, Goodrich acquired 35% of the shares of ZEON for full-scale technological and capital partnership, and in 1952 mass production of vinyl chloride resin began in Japan for the first time. In 1959, Goodrich transferred synthetic rubber manufacturing technologies to ZEON for mass production of synthetic rubber in Japan for the first time. Manufacturing facilities were also expanded to match the growing demand for tires and other products for use in automobiles. In 1965, use of the Company's unique technology called Geon Process of Butadiene (GPB) for the efficient manufacture of butadiene (main ingredient in synthetic rubber) from C4 distillate was begun.


Goodrich transferred its specialty synthetic rubber business to ZEON along with the shift in its main business focus toward vinyl chloride resins, and capital ties were dissolved in 1970. Along with these changes, the Company name was changed from Geon to Zeon in 1971.

Also in 1971, ZEON developed a unique technology called Geon Process of Isoprene (GPI) and began using it to manufacture ingredients including high-purity isoprene, petroleum resins, and synthetic perfume ingredients from C5 distillates.

After entering the 1980s, ZEON aggressively launched new businesses in various fields including photoresists and other information materials, and medical related applications in addition to its main synthetic rubber business.

In 1984, production of hydrogenated nitrile rubber Zetpol®, which currently has top share of the worldwide market, began at the Takaoka Plant.

In 1990, manufacture of synthetic cyclo-olefin polymer resin (COP) ZEONEX®, which is the main product of the specialty material business using the GPI method to extract and synthesize products, was started at the Mizushima Plant.

In 1993, ZEON entered China with its electronics materials business.

In 1999, ZEON Chemicals L.P. (Consolidated subsidiary in the United States) acquired the special rubber business of Goodyear Tire & Rubber Company of the United States to become the world's top manufacturer of specialty rubber.

In 2000, ZEON withdrew from its founding business of vinyl chloride resins and discontinued production at the Mizushima Plant.

In 2002, ZeonorFilm® was launched as a liquid crystal display (LCD) use optical film.

In 2010, ZEON Chemical Singapore Pte. Ltd. was founded as part of the strategy to fortify ZEON's production and sales structure.

In 2011, ZEON KOREA CO., LTD. was founded as part of the strategy to fortify ZEON's production and sales structure.

In March 2013, a takeover bid of TOHPE CORPORATION was completed and it is expected to become a fully owned subsidiary.
 
(Business Description)
ZEON's main products use different forms of carbon heat extracted from naphtha, which is extracted by distillation of crude oil. The following substances are extracted in the order of carbon monoxide gas (C1), ethylene (C2), propylene (C3) by heating naphtha.

ZEON uses butadiene extracted in the GPB method developed in-house from C4 distillate after extracting propylene (C3), isoprene monomer (IPM) extracted from C5 distillate using the GPI method, high-boil monomer (HB), dicyclopentadiene (DCPD), and 2-butyne as raw materials to be processed into synthetic rubber, synthetic latex and various other materials.
 
 
ZEON's business can be divided between the "elastomer business", where manufactured basic materials are sold to customers, and the "specialty material business," where basic materials are submitted to primary processing for sale to customers as processed materials, and the "other business" segments.
 
 
<Elastomer Business>
Synthetic rubber is one example of products with "high molecular compounds that have rubber-like elastic properties" in the "elastomer business." As described in the corporate history section of this report, in 1959 ZEON became the first company in Japan to mass produce synthetic rubber, which became the foundations supporting all of ZEON's overall businesses. This business can now be divided into the synthetic rubber, synthetic latex, and chemical products (Petroleum resins, thermoplastic resins) businesses.
 
①Synthetic Rubber Business
<Product: Tires>
ZEON provides the world's leading tire manufacturers with the world's highest-quality synthetic rubber for use in tires. Among the various types of synthetic rubber manufactured are styrene butadiene rubber (SBR), which promotes superior wear, aging and mechanical strength properties, butadiene rubber (BR), which includes a superior balance between elasticity, wear and low-temperature properties, and isoprene rubber (IR), which features similar high levels of quality, consistency and other properties as natural rubber.

In the future, the characteristics of SBR will be further refined for use in low-fuel-consumption S-SBR as demand is expected to rapidly expand, and capacity is expected to be increased along with the Singapore plant, which is currently being constructed and expected to be completed in September 2013. Consequently, supply capacity is expected to rise during the first stage by 30,000 to 40,000 tons per year after completion in September 2013, and in the second stage from the second half of 2016 by another 30,000 to 40,000 tons from the current level of 55,000 tons per year.
 
 
Radiator hoses, fuel hoses, fan belts, oil seals, and various other engine parts use specialty synthetic rubber that has superior oil resistance and heat deterioration resistant qualities. ZEON is the world's number one manufacturer of specialty synthetic rubber and features high quality levels and high market share of specialty synthetic rubber automobile parts. In particular, ZEON's "Zetpol®" hydrogenated nitrile rubber timing belts display superior heat and oil resistance and claims approximately 70% share of the worldwide fan belts market. Furthermore, a new version of "Zetpol®" has vastly improved the performance of products using the original versions of "Zetpol®".

Products using the new version of "Zetpol®" are heat resistant at temperatures that exceed the limits for the original version of "Zetpol®" by 20 degrees centigrade, thereby extending the life of seals and gaskets, and are in strong demand for use in next generation bio-fuel engines. Furthermore, the new version of "Zetpol®" is well suited to extruded processing which is being leveraged to expand its usage in various hoses. Products using "Zetpol®" have also been well received by customers, and are being used increasingly as a replacement material for expensive rubber within Japan, Asia, Europe and North America.

Commercial production of the new "Zetpol®" was started in November 2012 at ZEON's Kawasaki Plant and expected to reach full scale production in 2013.
 
②Synthetic Latex Business
Synthetic latex is basically synthetic rubber dispersed in water to form liquid rubber and is used to manufacture gloves, processed paper, textile processing, adhesives, paints, cosmetic puffs and other products. ZEON has about 15% share of the worldwide market for latex gloves, and close to 90% share of latex used in cosmetic puffs.
 
 
③Chemical Products Business
ZEON uses its unique in-house GPI method to turn C5 distillate into adhesive tapes, hot melt adhesive use materials, traffic use paint binder, concrete admixture and a wide variety of other products.
 
<Specialty Material Business>
Research and development activities are being promoted for the "realization of an advanced information society", "conservation, storage, and creation of energy", and "improvements in quality of life." Furthermore, specialty materials produced by ZEON are used in "information materials", "energy materials", and "medical devices", which are targeted as three key business realms.
 
①Information Materials
Cyclo-olefin polymer resins extracted and synthesized from C5 distillate using GPI methods are thermoplastic plastics developed using ZEON's own unique technologies and include the commercial products ZEONEX® and ZEONOR®.

ZEONEX® leverages its superior optical properties for use in compact lenses for cameras used in cellular telephones, and as optical parts used in printers, optical pickups, and mirrors. ZEONOR® leverages its high transparency, transfer capabilities, and heat resistance to be made into transparent general use engineering plastics for use in lighted panels, automobile parts, containers, discs and a wide range of applications.

ZeonorFilm® optical film is made from cyclo-olefin polymer resin using the world's first melt extrusion manufacturing process for applications in LCD televisions, and is expected to be used in smartphones, tablet PCs, digital signage and a wide range of other products in the future.
 
 
In addition, ZEON develops and manufactures "skewed extended phase differentiated film." Conventional three dimensional television screens allow viewers to see images in three dimensions when both eyes are horizontally aligned, but when their eyes are not aligned the screen appears dark and the images are unclear. Compared with this, the new film allows viewers a much wider range of viewing positions with clarity of the three-dimensional images being maintained even when the viewers' eyes are not horizontally aligned.

The use of reflective light protective film in organic EL applications is progressing, and demand for small-to medium-sized flat panel display applications is expected to grow in the future. In addition to the current plants in Takaoka and Himi (an annual output of 15 million square meter for skewed extended phase differentiated film in total), a decision to construct a new plant in Tsuruga, Fukui Prefecture was made in November 2012, to be completed in March 2014, and total investments of ¥7.0 billion are projected including additional investment in Himi Plant.

ZEOCOAT® applied organic insulation film is also used in cellular telephones, smartphones, and LCD televisions. ZEOCOAT® was successful in improving both the picture quality and reliability of displays because of its high transparency, extremely low water absorption and low gas generation properties. In the future, ZEON will aggressively expand its marketing to organic EL displays because they can be made thinner than LCD displays, and to thin membrane transistors using new semiconductors and insulating materials for flexible displays.
 
②Energy Materials
Materials will be provided for use as positive and negative terminal materials in lithium ion batteries, functional layer (heat-resistant separator), binders, and sealing agents.

Currently, lithium ion batteries are used in cellular telephones, laptop PCs, and as energy sources for other mobile equipment. In addition, the rapid diffusion of smartphones is creating demand for large-capacity applications. Furthermore, lithium ion batteries are being used in hybrid cars, plug-in hybrid cars, electric vehicles, smart grid and other industrial applications because of their lightweight, compact size and large energy storage capacity. At the same time, deterioration in battery life when used in high-ambient-temperature conditions is a major issue.

ZEON is conducting efforts to advance the function of lithium ion battery binders, and has been successful in developing a functional binder that contributes to greatly extending the life span of positive terminal use binders. Positive and negative binders, functional layer (heat-resistant separators), and sealing agents are important in ensuring the "safety", extending the "life span", and "increasing the battery capacity" so that batteries can be used more widely in hybrid cars.
 
Focused upon the future potential of lithium ion batteries, ZEON has implemented various measures at an early stage including the creation of a strategy to realize the energy materials business vision in 2020 that entails goals of "acquiring the top share of the lithium ion battery binder market", contributing to the diffusion and expansion of new functions for rapid charging automobile use applications, and proposing specialty materials that can be used to realize next generation batteries.
 
 
③Medical Device
The medical device market is relatively well insulated from fluctuations in the economy, and is anticipated to grow with the aging society in Japan and expansion in developing countries. Furthermore, medical equipment and sales companies are subject to strict laws and regulations, and they need to submit approval applications to regulatory bodies. In addition, the need to develop relationships with health care professionals is critical and the subsequent high barriers to entry make this a highly attractive market.

Along with the start of development of artificial kidneys in 1974, ZEON aggressively promoted its medical device business. In 1989, a subsidiary called ZEON Medical Inc. was established to conduct development, manufacturing, sales and all other functions of the medical field for the ZEON Group. ZEON has shown bountiful development track record with "offset balloon catheter" as a means of differentiation in the gall stone removal process with Japan's first bile duct covered stent "Zeostent Covered" in the area of digestive system products, and the world's smallest diameter "XEMEX IABP Balloon PLUS" as a device to aid the heartbeat at times of cardiac infarction in the area of circulatory products.
 
 
Currently ZEON is focusing efforts upon development of devices that eliminate gallstone pain by removal of gallstone. ZEON has a lineup of products that can remove gall stones ranging from extremely large stones to sludge and sand with products such as Xemex Crusher Catheter, Basket Catheter NT Balloon Catheter, and others and has a 50% share of the gallstone removal market.
 
Petrochemical Products Business
ZEON deals in specialty chemicals including synthesized fragrances used in foods, fragrances and cosmetics that use ingredients derived from C5 distillates, and solvents and vegetation conditioning agents. The Company also holds the world's top share of the ecological synthesized fragrances, and provides a wide range of specialty products including ingredients for intermediary bodies used in medical and agricultural chemicals, fluorocarbon replacement solvents, cleaning agents, urethane expanding agent, and functional ether agents.
 
New Specialty Materials Development: Carbon Nanotubes (CNT)
Aggressive research and development activities have allowed ZEON to launch various new materials into the market, but particularly high expectations are placed upon "single wall carbon nanotubes (CNT)".
 
What is Single Wall CNT?
In 1993, Sumio Iijima, Ph.D., head of the Applied Nanotube Research Center of the National Institute of Advanced Industrial Science and Technology (AIST), discovered a roll shaped molecular structure that was able to form a beehive lattice of carbon atoms for the first time in the world, which he named "Single Wall CNT." The acronym CNT is derived from the words carbon, nano, and tube. CNTs can be divided largely into single wall and multiple wall CNTs. Multiple wall CNT is relatively easy to manufacture and applied development is being promoted within Japan for commercial applications.
 
 
At the same time, single wall CNT exhibits the following properties:
-  20 times stronger than steel
-  10 times more heat conductive than copper
-  Half as dense as aluminum
-  10 times the electron mobility of silicon
Consequently single wall CNT is superior to multiple wall CNT because it is "lightweight but highly flexible" and has "extremely high electric and heat conductivity" properties. CNT is believed to have applications as an electrical conductivity assistance agent in lithium ion batteries, as transparent conductive film used in electronic paper and ultrathin touch panel because of its high elasticity and strength, and as a heat dissipating material. And because of its ability to absorb a wide spectrum of light, practical applications of single wall CNT are being promoted in the realm of electromagnetic wave absorbing materials for use in a wide range of fields including energy, electronics, structural materials, and specialty materials.
 
 
Currently, single wall CNT has several major issues including high levels of impurities, low levels of productivity and high manufacturing costs, which are about several tens of thousands to hundreds of thousands of yen per gram.
 
ZEON's Efforts and Position
Against this backdrop, ZEON and the National Institute of Advanced Industrial Science and Technology, NEC Corporation, Toray Industries, Teijin Limited, and Sumitomo Precision Products Co., Ltd. have jointly established the "Technology Research Association for Single Wall Carbon Nanotubes" technological consortium in May 2010. The aim of the consortium is for the commercialization of applications of single wall CNT developed in Japan with its numerous superior qualities as new products in response to the worldwide societal demands to realize a low-carbon society.

Using the synthesizing technology developed by Dr. Hata (Ph.D.) of the National Institute of Advanced Industrial Science and Technology as a base, the Tsukuba Center of the AIST was established in December 2010 as a validation plant where research and development for mass production and application development for compound materials can be conducted by the above mentioned consortium. Among the main reasons that the AIST Nanotube Applied Research Center selected ZEON to become its partner were the impressive track record and results obtained by ZEON's Managing Director Kohei Arakawa as a researcher in CNT research and development. Furthermore, the fact that the consortium director is ZEON President Naozumi Furukawa reflects the importance of ZEON in this project to realize commercial applications of single wall CNT.
 
Future Endeavors
The technology necessary for mass production called super growth process is close to being established. Currently, the Tsukuba validation plant is able to produce 600 grams per day, and this volume can be increased considerably if production is transferred to ZEON's own manufacturing facilities. ZEON is the only company in the world that has established mass production technologies for single wall CNT, and requests for product samples have been received from about 100 Japanese and foreign companies in addition to those within the consortium mentioned above. Consequently, shipments of samples have already begun. Moreover, ZEON has already begun to propose practical applications of this product and is targeting full-scale commercialization to begin in 2014. At the same time, single wall CNT is a type of nano-materials that is extremely small in size and takes the form of textile. Therefore, there are some fears that it may have some impact upon biological processes depending upon its size and shape. Currently, the AIST is conducting standardization of the evaluation process, and activities for the OECD endpoint measurement are being conducted, with global standardization and legal and regulatory aspects being considered.
 
<Other Business>
Large formation processing using the ingredient dicyclopentadiene (DCPD) is used to conduct reaction injection molding (RIM) and RIM compound fluid processes.
 
(President Profile)
President Naozumi Furukawa was born in 1944 and is 67 years old. He joined ZEON in 1967, and worked in the accounting and finance division, vinyl chloride division, latex division, materials division and others. In 2000, he was instrumental in the decision to retreat from the polyvinyl resin business. In 2002, he was appointed as a senior managing director responsible for the specialty material business, and took leadership for new business entry. After his career of responsibilities for various management tasks and a wide range of divisions, Furukawa was appointed as President and CEO in June 2003.

Furuwaka places a high priority upon the ability to quickly achieve goals through teamwork and the concepts of "speed," "dialogue," and "social contribution." In addition, he recognizes the ongoing generation of creative technologies as the lifeblood of ZEON, and takes it upon himself to implement aggressive measures designed to invigorate research and development. More specifically, Furukawa personally meets with researchers on a monthly basis to hold discussions and debates, and provides advice to the younger researchers.
 
 
Characteristics and Strengths
 
1. World's Leading Creative Technology Development Capability
The GPB method used to manufacture butadiene from C4 distillate is the most important development in Japan's postwar history of chemicals, and is provided to 49 plants in 19 different countries around the world including America and Korea.

In addition, the Mizushima Plant is the world's only plant extracting high-purity isoprene and petroleum resin from C5 distillate and basic ingredients used in synthesized fragrances manufactured using the GPI method created by ZEON, and is a completely unique technology which is not provided to other companies.

These two technologies represent the creative technological capabilities that are among the strengths of ZEON. They also are highly regarded by customers around the world and have received numerous awards within Japan and in overseas markets. With regard to technologies, ZEON has received 48 awards since 1960 for its GPB and GPI methods, in addition to 26 awards since 1982 for its environment conservation and safety efforts.
 
2. High Profit Margins
While ZEON ranks below other chemical manufacturers as shown in the graph below in terms of sales, it enjoys one of the highest operating income margins within the industry.
 
 
ZEON seeks to develop and provide products in niche markets that can be differentiated and avoids general-use products. Furthermore, the Company can manufacture products such as synthetic rubber that match the needs of customers at the molecular structure level because of their superior extraction and synthesizing technologies. In particular, the GPI method is ZEON's own unique technology and allows it to manufacture materials from C5 distillate that are unique and cannot be duplicated by other companies. This ability to differentiate its products allows ZEON to achieve high levels of profitability.
 
3. High Worldwide Share
Zetpol®, ZEONEX®, and ZEONOR® are representative of the products born from ZEON's highly creative technologies, which have allowed it to acquire high shares of worldwide markets. In addition to these products, ZEON also maintains the world's top share in "leaf alcohol" used in cosmetics and food flavorings, "polymerization method toner" printer toner manufactured using suspension polymerization method, and "ZEORORA®" used in semiconductor etching gas.
 
4. Research and Development Structure that Continues to Yield Creative Technologies
ZEON seeks to conduct research and development activities based upon its basic corporate philosophy of "developing creative technologies in special fields of strength that enables ZEON to contribute to society by generating the world's leading businesses."

The "Comprehensive Research Center," the Company's main research facility, is located in Kawasaki City, Kanagawa Prefecture. But because of the potential for more efficient research and development activities to be conducted closer to the manufacturing sites, ZEON has also established the Precision Optical Research Center and Medical Research Center at the Takaoka Plant, and the Chemical Product Research Facility at the Yonezawa Plant. In addition, research groups have been established in overseas markets including the United States and United Kingdom.

Researchers must never be satisfied with current conditions, and should always be reminded of the threat that their competitors pose in their research activities. Furthermore, ZEON bases its valuation on a positive point awarding system that places high priority upon speed and creativity. R&D expenses were formerly measured as a percentage of sales, but for the future it has established an annual value amount of ¥12.0 billion as an investment budget to ensure that stable research and development activities can be maintained in the future.
 
 
Fiscal Year March 2013 Earnings Results
 
 
Lower Sales, Profits due to Weaker Volume and Pricing Despite Cost Reduction Efforts
While the specialty material business trended favorably, weakness in market conditions in the elastomer business and increases in raw materials pricing caused both sales and profits to decline. Of the ¥12.1 billion decline in sales, lower sales volume and pricing caused sales to decline by ¥12.5 and ¥1.0 billion respectively. At the same time an increase in sales of ¥1.4 billion was derived from the weakening of the yen at the end of the term. Of the ¥8.4 decline in operating income, increases in raw materials and cost of SG&A expenses, and declines in sales volumes led to a reduction in operating income of ¥6.1, ¥3.7, and ¥1.3 billion respectively. At the same time, effective cost reductions and the weaker yen contributed to increases in operating income of ¥2.3 and ¥1.4 billion respectively. During the second half of the current term, the weakening of the yen also contributed to a ¥1.3 billion foreign exchange translation profit at the non-operating level.
 
 
Declines in volumes and weakness in overseas market conditions caused both sales and profits to decline. Sales volumes for specialty rubber and general-use rubber for tires and car parts declined on the back of stagnant economies in Europe and China, and the conclusion of the eco-car tax reductions. Efforts to maintain profitability of latex products due to fierce competition in the realm of gloves led to declines in sales volumes.
 
 
Specialty material business saw growth in both sales and profits. In the realm of special chemicals, synthetic fragrances and other chemical products encountered difficult conditions during the first half of the fiscal year, but recovered to the previous year's levels during the second half. Demand for lithium ion battery related materials trended favorably, but demand for toner materials trended weakly. In the realm of specialty resins, optical film grew by a large 27%. Demand for film benefitted from a recovery in televisions shipments from the third quarter forward and continued to see strong demand from smartphones and tablet PCs.
 
 
 
The impact from the turning of TOHPE CORPORATION into a subsidiary has only been accounted for in the balance sheet. Total assets rose by ¥38.5 billion from the end of the previous term to ¥350.5 billion at the end of the current term. The consolidation of TOHPE contributed to increases in accounts receivables and inventories, as well as a ¥11.1 billion increase in tangible fixed assets arising from the inclusion of the Singapore Plant. While short-term interest-bearing liabilities rose on the back of the consolidation of TOHPE, long-term interest-bearing liabilities declined by ¥11.8 billion and contributed to the ¥1.1 billion decline in total interest-bearing liabilities. At the same time, capital rose by a large margin ¥26.0 billion on the back of an increase in retained earnings, and equity ratio rose from 42.5% at the end of the previous term to 45.2% at the end of the current term.
 
(3) Takeover Bid of TOHPE CORPORATION
A decision was made during the Board of Directors' Meeting held on February 6, 2013 to conduct a takeover bid (TOB) of TOHPE CORPORATION (Stock code: 4614, TSE First Section, OSE First Section Listings).
 
Overview of the TOB
A TOB of all of the outstanding shares issued by TOHPE CORPORATION was conducted and all of the procedures necessary to turn TOHPE into a fully owned subsidiary will be conducted. If all of the outstanding shares issued by TOHPE are acquired at the offer price of ¥125 per share, the TOB will amount to approximately ¥3.8 billion. The TOB will be funded entirely from cash on hand. Furthermore, an agreement to sell shares owned by Furukawa Co., Ltd., the parent company of TOHPE, as part of the TOB was signed on February 6, 2013.
 
Background and Objectives of TOB
TOHPE is a paint manufacturer established in 1919, and possesses a long history of operation of nearly 90 years. It has leveraged its technologies to aggressively develop paints that respond to market demand for high functionality and environmentally friendly products, with an eye to the development of new technologies that are competitive in global markets. In addition to the paint division, efforts are being undertaken to fortify the chemical products division, including the main products of oil and heat resistant acrylic rubber, in order to respond to demands of the next generation industrial structure. Furthermore, a business strategy where the value addition of both the paint and chemical products divisions will be raised to expand sales to the automobile industry will be implemented.

Manufacture and sales of acrylic rubber and similar products are conducted in ZEON's elastomer business and TOHPE's chemical business. However, it is believed that both companies can derive synergies by effectively combining their business resources in raw materials sourcing, manufacturing and product distribution to efficiently and effectively capture the growing demand for acrylic rubber going forward. By optimizing product supplies in this manner, both companies can maintain each of their respective manufacturing facilities within Japan as part of the strategy to create a stable supply structure for specialty rubber and to capture increases in future demand from the automobile industry.

Further fortification of ZEON's main elastomer business will be conducted because the importance of specialty rubber and other products within this business is growing along with increases in performance of automobiles, and because it has been identified as a key strategic area within the company's Mid-term Management Plan "SZ-20." Therefore, the turning of TOHPE into a completely owned subsidiary and subsequent promotion of efforts to effectively leverage business resources and to implement an efficient management strategy are expected to contribute to large improvements in the corporate value of the ZEON Group overall.
 
TOB Results
As a result of the completion of the TOB on March 21, 2013, ZEON was able to acquire 88.34% of total outstanding shares issued in TOHPE (Excluding treasury shares held by TOHPE). The remaining shares are expected to be acquired to turn TOHPE into a 100% owned subsidiary in the future.
 
 
Fiscal Year March 2014 Earnings Estimates
 
 
 
Sales, Profit Expected to Rise for First Time in Three Terms despite Lingering Uncertainties
ZEON calls for both its sales and profits to rise for the first time in three years. The elastomer business is expected to see an increase in its sales coupled with volume growth in general use rubber driven by strong demand for tires as Japanese automobile production increases. However, raw materials costs and cost of sales are also expected to rise, so one major uncertainty will be ZEON's ability to pass along these higher materials prices to its customers. Another uncertainty is how much impact any fluctuations in the yen will have upon earnings. Consequently, the estimate for a decline in operating income of the elastomer business appears to take these uncertainties into consideration. The specialty material business has begun to recover since the latter half of the current fiscal year with favorable demand for optical film for television applications a factor contributing to the strong rise in operating income estimates. A dividend of ¥7 per share is expected to be paid at the end of the first half and ¥6 per share at the end of the full fiscal year for a total dividend of ¥13 per share, a ¥1 per share increase over the previous term and the fourth consecutive term of increases in dividends.
 
 
Mid-term Management Plan "SZ-20"
 
ZEON seeks to become a company in 2020 that "creates the future today through the power of chemistry" and "contributes to the realization of our customers' dreams and a hospitable society." As a plan of action to realize this vision for 2020, ZEON released its Mid-term Management Plan "SZ-20" in May 2011 covering the period from fiscal years 2011 to 2013. As part of the strategy to achieve this vision in 2020, ZEON has come up with the "3-S" strategy that includes the principles of "Speed," "Sincerity," and "Social contribution."

ZEON has established earnings targets of "¥500.0 Billion in Consolidated Net Sales in 2020".
 
 
In order to achieve consolidated net sales of ¥500.0 billion, ZEON needs to create a "global business structure" by speedily and steadfastly establishing research and development, manufacturing, and sales structures in high-growth overseas markets. Furthermore, the Company seeks to raise its offshore production ratio from its current level of 20% to 50% by 2020. Because user information is critical in expanding sales of specialty materials products, ZEON has identified the need to facilitate sales offices and increase its sales staff. Plans call for capital investments totaling ¥320.0 billion to be spent over the next 10 years, including spending for the construction of an S-SBR plant in Singapore for the manufacture of high-value-added products. Furthermore, various top-down and bottom-up "reform and improvement activities" will continue to be implemented to raise cost competitiveness despite the contribution that is already being seen from the weakening of the yen.

President Naozumi Furukawa issued the following comments regarding their strategy and progress in various measures at the Company's earnings announcement meeting.
 
<Elastomer Business>
Strategy: "Further fortify our businesses by creating global responses"
While the start date of operations at our S-SBR plant in Singapore has been slightly delayed, we anticipate operations to begin in September 2013.
Our petroleum resin plant in Thailand is scheduled to begin operation in August 2013.
The transportation container processing facility is scheduled to begin operation in June 2013.
The acrylic rubber plant expansion is expected to be completed in July 2013.
The production facility for powder slush compounds (PSC) for automobile interiors in China was completed in April 2012, and full-scale production began in August 2012. PSC has been highly regarded by customers because of its quality and ease of formability and has already been adopted by some manufacturers.
Full scale commercial production of Zetpol® began at the Kawasaki Plant in March 2013.
Commercialization of polyisoprene rubber emulsion (E-IR) products has been achieved. Sales of products for use in surgery-use gloves, which is growing by over 15% per year, began in February 2013, and manufacturing facilities will be expanded in line with growth in the market.
 
<Specialty Material Business>
Strategy: "Achieve Growth by Accelerating Research and Development in the Three Main Business Realms"
Optical film demand bottomed during the second quarter of fiscal year March 2012 and share is expanding in line with plans.
ZEON continues to maintain superior competitive positioning in lithium ion batteries because of its early participation in products for these batteries. Expansion in this business remains above initial plans due to the broadening of the product lineup.
Increases in share are targeted through fortification of the biliary stent product lineup in medical devices.
Carbon nanotubes are as explained previously, with efforts to reduce costs of commercialization being conducted.
In order to raise cost competitiveness, efforts to reduce costs will not be relaxed despite the tailwind of the weaker yen.
 
 
Conclusions
 
ZEON estimates call for both sales and profits to rise for the first time in three years during the coming fiscal year. However, ZEON appears to have adopted conservative earnings estimates due to a number of uncertainties that remain in play including the Company's ability to pass along higher costs in both general-use and specialty rubber products to customers and fluctuations in foreign exchange. Over the near term, materials pricing must be watched closely on a quarterly basis due to the anticipation of improvements in the economy resulting from the economic policies of the new Prime Minister Abe. Over the intermediate term, progress in the implementation of the Mid-term Management Plan "SZ-20" and timing of when synergies in the acrylic rubber business arising from the acquisition of TOHPE will be realized are also points which need to be closely watched.
 
Disclaimer
This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and/or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.

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<Reference: Fact Sheet>
 
<Major Shareholders>
 
 
 
 
 
 
 
 
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