BRIDGE REPORT
(4205)

東証1部

ZEON CORPORATION (4205)
Kimiaki Tanaka, President
Kimiaki Tanaka,
President
Corporate Profile
Company
ZEON CORPORATION
Code No.
4205
Exchange
TSE 1st Section
Industry
Chemicals
President
Kimiaki Tanaka
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
¥879 226,791,941 shares ¥199.350 billion 11.7% 1,000 share
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥14.00 1.6% ¥74.96 11.7x ¥783.11 1.1x
* Share price as of closing on May 23, 2014. Number of shares outstanding as of most recent quarter end, does not include treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Net Sales Operating Income Ordinary 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 296,427 29,901 32,561 19,650 85.15 13.00
March 2015 Est. 310,000 25,000 25,000 17,000 74.96 14.00
* Estimates are those of the Company.
 
This Bridge Report provides details of ZEON CORPORATION and reviews of its fiscal year March 2014 earnings, fiscal year March 2015 earnings estimates, and progress on the Midterm Management Plan "SZ-20 Phase II".
 
Key Points
 
 
 
Company Overview
 
ZEON CORPORATION is a petrochemical manufacturer that maintains 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, 57 subsidiaries and 10 affiliated companies. The Company operates manufacturing facilities in five locations in Japan and eight overseas. ZEON also has manufacturing and marketing facilities in 17 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 March 2013, a takeover bid of TOHPE CORPORATION was completed and TOHPE became a fully owned subsidiary.

In September 2013, the plant for S-SBR in Singapore was completed and started the commercial operation.
 
(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 foundation 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 was completed in September 2013. Consequently, supply capacity rose during the first stage by 30,000 to 40,000 tons per year after completion in September 2013, and is expected to rise 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 15 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 reached 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 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 material 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 thermoplastics 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 used in smartphones, tablet PCs, digital signage and a wide range of other products in the future.

In addition, ZEON develops and manufactures "diagonally-stretched optical 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 diagonally-stretched optical film in total), a new plant construction in Tsuruga, Fukui Prefecture was completed in October 2013.

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 healthcare 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 gallstone 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 gallstones. ZEON has a lineup of products that can remove gallstones ranging from extremely large stones to sludge and sand with products such as Xemex Crusher Catheter, Xemex Basket Catheter NT, Xemex Balloon Catheter B, and others and has a 50% share of the gallstone removal market.
 
④Petrochemical 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: 
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)".
 
①What 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 "Carbon Nanotubes (CNTs)." CNTs can be divided largely into single-walled and multiple-walled CNTs. Multiple-walled 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-walled CNT is superior to multiple-walled 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 ultra-thin 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-walled CNT are being promoted in the area of electromagnetic wave absorbing materials for use in a wide range of fields including energy, electronics, structural materials, and specialty materials.

Currently, single-walled 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.
 
②ZEON'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-Walled Carbon Nanotubes" technological consortium in May 2010. The aim of the consortium is for the commercialization of applications of single-walled CNT developed in Japan with its numerous superior qualities as new products in response to the worldwide social demands to realize a low-carbon society.

Using the synthesizing technology developed by Dr. Kenji Hata 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-walled CNT.
 
③Future 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 a decision to construct new facilities within the Tokuyama Plant in May 2014 has been made. Mass production is expected to start from the second half of 2015.

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.
At the same time, single-wall CNT is a type of nanomaterial 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.
 
 
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. uFrthermore, 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 2014 Earnings Results
 
 
Weak Overseas Pricing Conditions Offset by Higher Sales Volumes and Weaker Yen, Contributed to Double Digit Growth in Both Sales and Profits
Sales rose by ¥45.7 billion from the previous term to ¥296.4 billion. Increases in sale volumes of the elastomer material business to overseas and optical film applications contributed to a sales increase of ¥42.8 billion and Yen depreciation effect contributed to a sales increase of ¥13.8 billion, but declines in pricing of elastomer materials in overseas markets is attributed to a sales decline of ¥10.9 billion.
Operating income rose by ¥6.2 billion from the previous term to ¥29.9 billion. Sales increases and weakening of the yen contributed to increases in operating profit of ¥4.2 and ¥13.8 billion respectively, while weaker pricing contributed to a decline in operating profit of ¥10.9 billion. At the same time, a rise in materials pricing was seen, but higher capacity utilization rates resulting from increased production of optical film related products contributed to a ¥1.2 billion gross income. Non-operating income improved by ¥1.1 billion from the previous term due in part to foreign exchange translation gains of ¥600 million, and reductions in marketable securities valuation losses, allowing both ordinary and net incomes to rise by approximately 30% year-over-year. Net income exceeded fiscal year March 2012 levels by ¥19.1 billion and reached a new record high. Dividends were raised by ¥1 to ¥13.00 per share, for a dividend payout ratio of 15.3%.
 
 
Profits declined despite higher sales. The ¥20.3 billion increase in sales includes ¥4.1 billion of sales from Tohpe Corporation, which was converted to a subsidiary.
On a volume basis, general use rubber rose by 8% year-over-year. Sales to tire applications within Japan declined by 4% year-over-year, but favorable demand from overseas markets allowed exports to rise by 29% year-over-year. Specialty rubber also rose by 5% year-over-year on the back of increases in both domestic and overseas sales of 4% and 11% year-over-year respectively. Export volumes of latex declined due to weaker profitability of gloves applications.
Because most of the higher sales were derived from exports, the weaker overseas market conditions contributed to deterioration in profitability and lower profits.
 
 
Both sales and profits grew.
Looking at the details of the increases within specialty chemical division sales, sales of chemical products and battery materials rose by 10% and 28% year-over-year respectively, but electronic materials and toner fell by 18% and 6% year-over-year respectively. At the same time, Zeon retreated from the magnetic tape materials business due to deterioration in profitability.
Within the specialty resin division, sales of optical film applications rose by a large 54% year-over-year. Optical film sales volumes rose by 2.1 times year-over-year, and demand for television applications remained strong. While demand for applications in small-to-medium sized smartphones and tablets grew, demand slowed after the start of the fourth quarter. Profits grew by a significantly larger margin than the growth in sales volumes of optical film.
 
 
Sales increased, but profits declined. The addition of paint business sales of ¥10.8 billion of Tohpe Corporation contributed to the total increase in sales of ¥13.3 billion.
 
 
During the full year, both sales and profits grew by double digits. However on a quarterly basis, growth in sales and operating income slowed as the year progressed, and both sales and profits during the fourth quarter (January to March) declined from the third quarter (October to December). This decline is attributed to negative factors including ¥3.0 and ¥1.1 billion declines in sales and profits resulting from lower sales volumes, which offset the positive factors of strong pricing and the weaker yen. In addition, operating income was also influenced by the negative influence of materials pricing and headquarter moving costs, which depressed operating income by ¥1.0 billion each.
The decline in profits is attributed to weak market conditions in Southeast Asia, increased costs arising from the launch of a new factory in Singapore in the elastomer material business segment, and weaker demand for high profitability optical film from small-to-medium sized applications after the start of the fourth quarter in the specialty material business segment.
 
 
Capital expenditure in the specialty material business segment grew by a large margin. In fiscal year March 2015, depreciation and amortization resulting from fortification of facilities for skewed extended film in the specialty material business segment are expected to increase.
 
 
Accounts receivables and inventories rose on the back of the increase in sales. At the same time, tangible fixed assets rose by ¥13.7 billion due in part to capital expenditures and foreign exchange translation gains of ¥27.1 and ¥3.1 billion respectively, which were offset by depreciation and amortization and depreciation of ¥17.1 billion. Within capital expenditures, ¥3.6 billion was spent on facilitation of the Singapore Plant, ¥4.4 billion on the small-to-medium sized optical film applications facilities at the Tsuruga Plant, ¥4.4 billion on the Tokuyama boiler facility, and ¥1.4 billion on the petroleum resin plant in Thailand.
Total assets, liabilities, and capital all rose by ¥20.3, ¥1.0 billion, and ¥19.1 billion respectively. Equity ratio rose by 2.7% points from 45.2% at end fiscal year March 2013 to 47.9% at end fiscal year March 2014. Debt to equity ratio declined from 0.42 to 0.37 times.
 
 
Fiscal Year March 2015 Earnings Estimates
 
 
 
Elastomer Material Business Expected to Trend Strongly, but Adjustments by Customers of Small-to-Medium Sized Optical Film Applications Expected to Contribute to Profit Declines Despite Higher Sales
Sales are expected to grow by 4.6% year-over-year to ¥310.0 billion due to growth in sales of both the elastomer material and specialty material business segments. Sales of optical films are expected to rise by 2% year-over-year.
Operating income is expected to decline by 16.4% year-over-year. Despite deterioration in overseas market conditions in the elastomer material business, profits are expected to increase on the back of higher sales. Specialty material business segment is expected to benefit from continued strong demand for optical film applications for televisions, but weaker demand for small-to-medium sized applications that appeared since the start of the fourth quarter is expected to continue in the coming term. In addition, segment operating income is expected to decline by 64.8% year-over-year due to increases in depreciation arising from fortification of skewed extended film manufacturing facilities. However, signs of improvements in demand for small-to-medium sized applications of optical film have appeared since the start of May, and Zeon is expected to implement measures to leverage these improvements to raise profitability.
Dividends of ¥7 are expected to be paid at the end of the midterm and the full fiscal year, bringing the anticipated full year dividend payment to ¥14 per share, and marking the fifth consecutive term of higher dividends.
 
 
New Midterm Management Plan "SZ-20 Phase II"
 
The "Midterm Management Plan SZ-20" covering the years from 2011 to 2013 ended during the current term, and a new plan called "New Midterm Management Plan SZ-20 Phase II" has been created (Covering fiscal years March 2015 to 2017). An overview of the New Plan's concept, fundamental strategy and other highlights as explained by President Kimiaki Tanaka are provided below.
 
① "Midterm Management Plan "SZ-20" Overview (From Fiscal Year March 2012 to 2014)
 
Fell short of ¥3.2 billion sales target despite various efforts.
Capital expenditures also fell short of targets due to delays and revisions.
 
◎Segment Sales
Elastomer material business achieved its sales target, but the specialty material business fell ¥20.0 billion shy of its target.

◎Creating a Strong Global Structure
The major overseas capital expenditures in manufacturing facilities include investments for the Vietnam processing facility (Operations started in June 2013), expansion of Zetpol® and acrylic rubber manufacturing facilities in the United States (Operations started in July 2013), the S-SBR manufacturing facility in Singapore (Operations started in September 2013), and expansion of the powder slush material (PSC) manufacturing facility in China (Operations started in November 2013).
◎Economic Environment
While the weaker yen was a positive influence, market conditions for synthetic rubber stagnated and Zeon was not yet able to come up with adequate responses to this deterioration in the market.
 
① "New Midterm Management Plan SZ-20 Phase II" (From Fiscal Year March 2015 to 2017)
◎Concept
The global market environment is confronted by various issues including "globalization and growth of emerging markets," "information technology trends and the spread of the information society," "sustainability of the environment and energy resources," in addition to other problems such as the declining population, persistent low economic growth, continued high electric utility prices, and declines in Japan's competitive standing in the world. Against this backdrop and in reflection of Zeon's inability to achieve all of the targets of its previous Management Plan, the Company has created the "New Midterm Management Plan SZ-20 Phase II."
And while the vision of the corporate shape that Zeon seeks to achieve by 2020 entitled "ZEON Realizing the Future Today through the Power of Chemistry" remains unchanged, the New Plan focuses upon the concept of "change" as a means of achieving this vision.
Zeon has identified a number of issues to be resolved, and is reviewing its traditional business methods and philosophies to implement fundamental "changes" during the coming three years covered by the new plan.
 
◎Positioning of SZ-20 Phase II
In order to realize the vision that Zeon has for itself in 2020 and to achieve its targets of "consolidated sales of ¥500.0 billion" in its second growth stage, the Company will start operations at overseas plants, stabilize manufacturing processes, and expand sales of specialty materials business.
Zeon will promote further reforms and improvements, review its overall structure, and cultivate a stronger corporate culture to achieve its various goals.
Reviews of the pace of implementation of its measures will be conducted on a monthly, or if needed daily, basis in order to achieve the Company's numerical targets.
 
◎SZ-20 Phase II Basic Strategy
No changes from the previous plan.
 
 
◎Elastomer Material Business
◆Business Structure Reforms
Production of ethylene within Japan is contracting. At the same time, efforts to optimize product lineup, review manufacturing structure, and develop responses to conditions within the raw materials sourcing environment will be implemented to leverage the manufacturing capability for synthetic rubber, which is large within the global context.
Demand for nitrile rubber specialty rubber in Asia continues to expand, but efforts to optimize manufacturing function at four plants in North America and Europe are currently being conducted. While the development of the specialty use Zetpol® business is a bit slow, it is steadily growing.
 
◆Acrylic Rubber Business Expansion
Due to the integration of Tohpe Corporation's business, Zeon now commands a large 30% share of the global acrylic rubber market.
Zeon is now able to provide customers with new high value added products through the integration of both company's research structure and their respective technologies.
Expansion in fuel conserving turbocharger systems for automobiles is contributing an increase in heat resistant acrylic rubber hoses. In response to this growing market, Zeon is considering expanding its manufacturing capacity.
 
◆Polyisoprene Rubber Emulsion (E-IR)
Because "polyisoprene rubber emulsion (E-IR)" synthetic rubber used in surgical gloves can prevent protein allergies caused by natural rubber materials, sales have grown by over 10%and are expected to continue to grow at similar rates.
Expansion of existing facilities was completed in October 2013, and sales are expected to expand to 500 tons in 2014.
Further expansion of manufacturing facilities and the addition of new plants will be considered in response to continued growth in demand.
 
◆Overseas Deployment of the C5 Chemical Business
Zeon's Mizushima Plant is the only facility in the world with extracting capabilities for high purity isoprene and petroleum resins derived from C5 intermediate distillates and synthetic fragrance raw materials manufactured using GPI methods developed by Zeon, which are proprietary and not shared with any other companies.
 
Zeon will use its isoprene extraction technology to deploy its business overseas. Demand in Asia is expected to grow in applications such as adhesive tapes, elastic film, traffic paint and others.
 
◆Global Responses for Growth markets
Based upon the outlook for a rapid expansion in demand for S-SBR used in energy conserving automobile tires, operations at the expanded manufacturing facilities of the Singapore Plant were started in September 2013. The Singapore Plant is responsible for mass production of four main products, and some products manufactured at the Tokuyama Plant will be transferred to the Singapore Plant. The Tokuyama Plant conducts mass production of specialty grade products and is used as a pilot plant for test manufacture and mass production of new products.
Currently, products manufactured at the Singapore Plant are undergoing assessment by clients, and sales to clients who have approved the products will begin.
In response to growing demand, a second line is expected to be added and begin production from 2016.
 
◎Specialty Material Business
◆Basic Strategy
Based upon comprehensive uses of C5 intermediate distillates as differentiating materials, development of products in the three key realms of "information technology use materials," "energy use materials," and "medical devices" will be promoted.
 
Marketing and research and development functions will be established globally.
Zeon will develop high value-added products that are resistant to fluctuations in the economic environment by leveraging its strength.
 
◆Information Technology Materials (Optical Use): ZeonorFilm®
everaging its ability to conduct integrated processes ranging from resin design to processed product manufacture, Zeon will provide speedy feedback regarding market demand to its design function to develop superior products.
Because demand for two axis extended film for use in high definition 4K and 8K LCD televisions is expected to steadily grow, facilities at the Himi Plant are being expanded and expected to begin operations from April 2015. At the same time, efforts for development and manufacture of anti-reflection diagonally stretched optical film for use in organic light emitting diode (OLED) television applications are being conducted.
In addition, manufacturing capacity for diagonally stretchedfilm is being expanded, and new view angle improving multiple-layer extruded and touch panel use film products are being introduced into the market due to the outlook for expansion in demand for not only smartphone and tablet withsmall-to-medium sized film applications, but also for OLED applications.
 
◆Energy Use Materials
The market for lithium-ion batteries is growing along with the expansion in applications from personal computers to include automobile use batteries. Zeon's battery materials sales are also expanding at a faster pace than the overall market, and the Company has been able to exceed its targets defined in the previous Midterm Management Plan "SZ-20." Consequently, aggressive new targets have been established within the "New Midterm Management Plan SZ-20 Phase II."
Zeon will leverage its leading technologies in the binder business to realize large-capacity applications.
 
◆Medical Devices
Growth had been gradual until the previous term, but "SZ-20 Phase II" expects high growth to be achieved.
"1) New and improved product market launch," "2) product quality improvements," and "3) overseas business deployment" are important issues within the inter-aortic balloon pumping (IABP, catheters to support weakened heart function) and percutaneous transluminal coronary angioplasty balloon catheter (PTCA, coronary use catheter) applications in the cardiovascular realm and stone removal use apparatus applications in the gastrointestinal realm.
 
◆Carbon Nanotubes
Zeon maintains a large advantage with regards to the previously mentioned carbon nanotube (CNT) business. And in order to respond to market needs, Zeon has announced its decision on May 15, 2014 to facilitate manufacturing facilities for high quality single-walled carbon nanotubes within its Tokuyama Plant using the super growth method derived from technologies validated for mass production by the National Institute of Advanced Industrial Science and Technology (AIST). Mass production is expected to begin from the second half of 2015.
And while the 2020 sales target of ¥500.0 billion does not include sales from the CNT business, Zeon seeks to achieve this target through fusion of existing businesses and fortification and creation of new businesses.
 
◎Improving Cost Competitiveness
In addition to the promotion of a strategy based upon both of the above-mentioned businesses, Zeon will implement aggressive efforts to raise its cost competitiveness. Based on "SZ-20", "SZ-20 Phase II" calls for top down approach using innovative manufacturing methods, and continuation of bottom up "ZΣ activities" for cost reductions. "ZΣ activities" are expected to contribute to cost reductions of between ¥5.0 to ¥6.0 billion per year.
 
◎Earnings Targets
 
Just as in "SZ-20," "SZ-20 Phase II" also calls for "consolidated sales targets of ¥500.0 billion and consolidated operating margin of 10%" to be achieved by 2020.
 
◎Corporate Culture: Promoting "Torchlight" Activities
Zeon realizes that achieving these targets will be difficult by merely promoting its traditional corporate culture. Therefore, it will cultivate a new corporate culture based on "visualization" in order to achieve its "vision for 2020."
As part of the "changes to its corporate culture", the Company will promote discussions about and improvements in its operations and implement a speedy decision making process.
And while the concepts of "strict pursuit of safety and healthiness" are part of the basic philosophy of Zeon, strict management and the prevention of labor related accidents and major problems in the manufacturing processes will also be pursued. Another important issue is the "promotion of torchlight activities."
 
 
"Torch" is a guiding light for our future goals; a light that makes our uncertain foothold visible and that provides warmth, heat, energy and brightness (joy); a flame keeps us moving.
These torchlight activities were started two years ago, and are designed to instill a strong sense of responsibility in each employee.

Zeon identifies these activities as critical in fundamentally "changing the company."

In addition to these activities, Zeon and its employees will pursue the concepts of "speed," "dialogue," and "societal contribution" in the process of achieving its goals.
 
 
Conclusions
 
During fiscal year March 2014, double-digit growth was achieved in both sales and profits. And while growth in sales is anticipated during fiscal year March 2015, weakness in small-to-medium sized applications of optical film is expected to lead to a decline in profits. In the near term, some improvements for small-to-medium sized film applications have appeared in May, but these trends must be watched closely as the year progresses.

Over the medium- to long-term, start of full scale production of synthetic rubber for use in energy conserving automobile tires at the Singapore Plant, start of mass production of single-layer CNT, and other factors are expected to contribute to Zeon's achievement of its 2020 targets.

Furthermore, Zeon's efforts to raise profitability under the direction of the "New Midterm Management Plan SZ-20 Phase II" must also be watched closely.
 
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.

Copyright(C) 2014, All Rights Reserved by Investment Bridge Co., Ltd.
 
 
 
<Reference: Fact Sheet>
 
 
 
 
 
 
 
 
 
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