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
¥943 226,863,297 shares ¥213,963 billion 9.8% 1,000 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥15.00 1.6% ¥101.42 9.3x ¥931.34 1.0x
* Share price as of closing on December 22, 2015. Number of shares outstanding as of most recent quarter end and does not include treasury shares. ROE and BPS from the last year-end.
 
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 10.50 9.00
March 2010 225,878 9,319 9,448 5,020 21.26 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 307,524 28,245 31,098 19,080 84.13 14.00
March 2016 Est. 320,000 32,000 32,000 23,000 101.42 15.00
* Estimates are those of the Company.
 
This Bridge Report provides a review of ZEON CORPORATION's first half of fiscal year March 2016 earnings results .
 
Key Points
 
 
 
Company Overview
 
ZEON CORPORATION is a petrochemical manufacturer that maintains numerous products with a large share of the global markets including synthetic rubber used in automobile parts and tires, synthetic latex used in surgery-use 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. 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 (then called B.F. Goodrich Company) in the United States, 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 B.F. Goodrich Chemicals Co. 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, which, in turn, started Japan's first mass production of synthetic rubber. Manufacturing facilities were also expanded to match the growing demand for tires and other automobile parts. 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 fraction was operational.

Goodrich transferred its specialty synthetic rubber business to Zeon along with the shift in its main business focus toward vinyl chloride resins. 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 fraction.

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 discontinued production of vinyl chloride resins at the Mizushima Plant, and thus withdrew from the Company's founding business.

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

Zeon Chemical Singapore Pte. Ltd. and Zeon Korea Co., Ltd. were founded, in 2010 and 2011 respectively, as part of the strategy to fortify Zeon's global 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 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: carbon monoxide gas (C1), ethylene (C2), and propylene (C3) by heating naphtha.

Zeon uses butadiene extracted in the GPB method developed in-house from C4 fraction after extracting propylene (C3), isoprene monomer (IPM) extracted from C5 fraction 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 into three segments: 1) the "elastomer business," where manufactured basic materials are sold to customers; 2) the "specialty material business," where basic materials are submitted to primary processing for sale to customers as processed materials, and 3) the "other business."
 
 
<Elastomer Business>
Elastomers are "high molecular compounds that have rubber-like elastic properties," an example of which is synthetic rubber. 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 underlying all of Zeon's businesses. This business can now be divided into synthetic rubber, synthetic latex, and chemical products (petroleum resins, thermoplastic resins) businesses.
 
①Synthetic Rubber Business
<Example of 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 abrasion resistance, aging resistance 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 started operation in September 2013. Consequently, supply capacity rose during the first stage by 30,000 to 40,000 tons per year 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 September 2013's level of 55,000 tons per year.
 
 
Radiator hoses, fuel hoses, fan belts, oil seals, and various other car 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. The new version of Zetpol® is well suited to extrusion 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 more expensive competitive rubber in Japan, Asia, Europe and North America.
Commercial production of the new Zetpol® 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 close to 90% share of latex used in cosmetic puffs.
 
③Chemical Products Business
Zeon uses its unique in-house GPI method to turn C5 fraction into adhesive tapes, hot melt adhesive use materials, traffic 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 materials produced by Zeon are used in "information materials," "energy materials," and "medical devices," which are targeted as three key business areas.
 
①Information Materials
Cyclo-olefin polymer resins extracted and synthesized from C5 fraction 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, and is expected to be used in 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. In contrast, 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 organic EL in reflective light-protective film 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 meters for diagonally-stretched optical film in total), the construction of a new plant 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 efforts for 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 binders 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 water related 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 material 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 biliary 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 in the 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 Band 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 fraction, 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 in the development of "single-wall carbon nanotubes (CNT)".
 
①What is Single-Walled 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-walled 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, the AIST and five companies, namely Zeon, NEC Corporation, Toray Industries, Teijin Limited, and Sumitomo Precision Products Co., Ltd., jointly established the "Technology Research Association for Single-Walled Carbon Nanotubes" technological consortium in May 2010. The consortium aims at establishing technologies that are necessary for the commercialization of new products using single-walled CNT developed in Japan with its numerous superior qualities in response to the worldwide social demands to realize a low-carbon society.

Using the synthesizing technology developed by Dr. Kenji Hata (Ph.D.) of the AIST as a base, the above-mentioned consortium has been conducting research and development for mass production and application development for compound materials at a validation plant that was established in December 2010 on the premises of the Tsukuba Center of the AIST. 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 Furukawa reflects the importance of Zeon in this project to realize commercial applications of single-walled CNT.
 
③Future Endeavors
Having established the technology necessary for mass production based on the method called "super growth", ZEON will start mass production, the first in the world, at its Tokuyama plant 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.
 
2.Characteristics and Strengths
 
1. World's Leading Creative Technology Development Capability
The GPB method used to manufacture butadiene from C4 fraction 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 fraction 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 fraction 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 -on 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.
 
 
First Half of Fiscal Year March 2016 Overview
 
 
Sales Trend Sideways on Lower Pricing, Profits Still Rise by Double Digits
Sales declined by ¥0.9 billion year-on-year to ¥152.4 billion. Declines in elastomer product pricing accompanying lower crude oil prices and demands for reductions in optical film prices are estimated to have negatively impacted sales by ¥12.7 billion, while increases in volumes of general-use rubber, latex, and petroleum resin and the weaker yen are estimated to have positively influenced sales by ¥6.9 and ¥4.9 billion respectively.
Operating income rose by ¥2.0 billion year-on-year to ¥16.5 billion. Foreign exchange and raw materials pricing are estimated to have positively influenced profits by ¥4.9 and ¥9.9 billion respectively, while product pricing negatively influenced profits by ¥12.7 billion. Ordinary and net incomes rose by ¥1.6 and ¥1.9 billion year-on-year to ¥17.2 and ¥10.9 billion respectively.
 
 
Sales declined but profits rose. Operating income margin rose by 2.1% points from 9.5% in the previous first half to 11.6% in the current first half. General-use rubber sales volumes rose by 5%, and aggressive marketing activities allowed exports to rise significantly by a large 38% year-on-year.
Specialty rubber declined by 2% on the back of weak demand both in Japan and from export markets.
Specialty rubber sales volumes declined by 2% of to 32% of sales, but in value terms rose by 1% to 58%.
Exports of latex rubber gloves trended strongly. Also, exports of chemical products and petroleum resin trended favorably, but prices of thermoplastic elastomer declined.
Consequently, operating income rose by 21% year-on-year.
 
 
Both sales and profits grew. Operating income margin rose by 1.9% points year-on-year from 12.7% to 14.6%.
Within the specialty chemicals division, weak exports of synthetic fragrances contributed to a 4% year-on-year decline in chemical products, and electronic materials fell by 3% year-on-year. At the same time, battery materials used in lithium batteries rose by 2% year-on-year.
Within the specialty resins division, sales of optical films rose by6% year-on-year while sales of COP resins fell by 6% year-on-year.
Optical film sales volume rose by 7% year-on-year. In particular, the share of small to medium sized applications to overall sales rose from 29% in the previous first half to 31%.
 
 
Sales declined but profits rose. Marketing activities focused upon improving profitability of paint materials were implemented. Consequently, operating income margins rose by 0.4% points year-on-year from 4.1% in the previous first half to 4.5% in the current term.
 
 
On a quarter-on-quarter basis, both sales and profits grew.
The factors influencing sales included the negative factor of pricing, which is estimated to have amounted to ¥1.2 billion, and the positive factors of volumes and foreign exchange, estimated to amount to ¥1.3 and ¥0.4 billion respectively.
While market conditions of elastomer materials negatively influenced operating income, increases in small to medium sized optical film applications within the specialty materials division contributed positively to operating income.
 
 
The main capital outlays, including investments for construction of a second line at the Singapore Plant, diagonally stretched film facilities at the Himi Plant, and battery materials facilities at the Kawasaki Plant, rose on a year-on-year basis during the first half. However, capital outlays during the first quarter actually fell below the target of ¥50.3 billion of the full year plan. At the same time, depreciation is on the rise, while research and development is in line with the previous fiscal year.
 
 
Current assets rose by ¥14.1 billion from the end of the previous fiscal year on the back of increases in cash and equivalents and inventories, due in part to the issuance of a corporate bond in June 2015. Despite a rise in tangible fixed assets due to capital investments, fixed assets declined by ¥6.1 billion on the back of a decline in investment securities. Subsequent to these changes, total assets rose by ¥7.9 billion.
Increases in accounts payables and interest bearing liabilities caused total liabilities to rise by ¥4.3 billion. Increases in retained earnings allowed net assets to rise by ¥3.6 billion. Consequently, capital adequacy ratio declined by 0.2% from the end of the previous fiscal year to 52.7%. An increase in short term debt and issuance of a corporate bond caused interest bearing liabilities to rise by ¥3.4 billion.
 
 
The net inflow of operating cash flow increased due to increases in profits and depreciation. Acquisition of tangible assets contributed to an expansion in the net outflow of investing cash flow. But this expansion was exceeded by the large expansion in operating cash flow, the net inflow of free cash flow also expanded. A decline in the repayment of long term debt and the issuance of a corporate bond allowed the net outflow in financing cash flow to turn to a net inflow. Consequent to these changes, cash and equivalents also rose.
 
 
Fiscal Year March 2016 Earnings Estimates
 
 
 
Full Year Earnings Estimates Remain Unchanged, Both Sales and Profits Expected to Grow
Zeon maintained its outstanding earnings estimates, which call for a 4.1% year-on-year increase in sales to ¥320.0 billion.
The elastomer business is expected to benefit from efforts to raise capacity utilization rates at the Singapore Plant. In addition, latex and chemical products are also expected to grow.
Results of efforts to increase the output capacity of optical films for television applications are expected to appear in the specialty material business. Sales of small to medium sized film applications which had entered an adjustment phase from the fourth quarter of the previous fiscal year are expected to begin to recover and trend sideways. Furthermore, sales of lithium battery use materials are expected to continue to trend favorably.
Based upon these assumptions, operating income is expected to rise by 13.3% year-on-year to ¥32.0 billion, and operating margin to recover to 10%.
The rise in capacity utilization rates is expected to allow fixed cost burden to decline in the elastomer business. Growth in depreciation burden is anticipated to remain low, but downward pressures upon pricing is also expected in the specialty material business. In addition, favorable factors of the weak yen and low raw materials pricing are expected to contribute to the higher sales and profits.
Dividend is expected to be raised by ¥1 to ¥15.00 per share, for an anticipated dividend payout ratio of 14.8%.
 
 
Regarding Progress in the "New Mid-term Management Plan "SZ-20 Phase II"
 
We provide comments of President Kimiaki Tanaka regarding progress in the "Mid-term Management Plan "SZ-20 Phase II" (From fiscal year March 2015 to 2017).
While achieving the numerical targets outlined in the Mid-term Management Plan are important, I believe that the need to fundamentally "change" our Company over the course of the three years of the plan through reviews of the conventional practices and philosophies with which we conduct business and to reflect upon the current status of our Company are also important.
By achieving "change", I believe we can go on to realize the vision of our Company in 2020 as "ZEON that realizes the future today through the strength of chemistry, ¥500.0 billion in consolidated sales."
 
 
◎Elastomer Business
◆Progress in S-SBR at the Singapore Plant
Output at the first line of the four main grades of products is being expanded.
Construction of the second line to supply global customers is being conducted as planned and expected to begin commercial production from April 2016.
 
◆Zetpol® High Heat Resistant Product Usage Started
Zetpol®, which is being commercially produced at new facilities within the Kawasaki Plant, has been selected for new usages in automobile applications including gaskets, seals and core line treatment for timing belts due to its high heat resistance properties.
 
◆Local Subsidiary Established in India
A local subsidiary called "Zeon India Private Limited" designed to cultivate demand in the growing market of India began marketing operations from October 1, 2015.
Zeon had conducted marketing efforts to customers in India from Japan and Singapore until now, but the opening of this local company will enable Zeon to create and deploy a business strategy that more closely matches the needs of the local market.
The automobile-related market in India, which is growing rapidly, will be targeted.
 
◆Overseas Deployment of the C5 Chemical Business
The Mizushima Plant is the world's only plant extracting high-purity isoprene and petroleum resin from C5 fraction 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.
Efforts will be promoted to launch this business in overseas markets by leveraging this isoprene extraction technology. The usages of this products produced through this unique technology include hot melt adhesive materials, traffic paints, and adhesive tapes, which are expected to grow strongly in Asian regions in the future.
Therefore, the production capacity for thermoplastic elastomer (SIS) will be raised from the current level of 42,000 tons per year to 60,000 tons in May 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.
 
◆Information Technology Materials (Opt Use): ZeonorFilm®
Demand for ZeonorFilm® from small to medium sized television applications is expected to grow.
Demand is expected to expand due to the outlook for all televisions over 50 inches in size to adopt the 4K format, and with anticipated increases in television sizes as 4K and 8K high resolution formats being adopted increasingly.
Furthermore, demand from small to medium sized display applications is expected to grow along with the expansion in larger sized high definition smartphones and tablet PCs.
With these conditions acting as a tailwind, the decision has been made to invest in the construction of a sixth line for television applications at the Himi Plant. This line is expected to begin operating from January 2017 and have a capacity of 24.00 million square meters.
 
◆Energy Use Materials
The lithium ion battery market is expected to continue to grow as the applications of this technology expand from the personal computer applications to include automobile applications. Against this backdrop, battery material sales are growing at a faster than expected pace.
In addition, this business is expected to grow by leveraging technologies developed in the binder business in response to the needs of the market.
 
◆Medical Devices
In keeping with our reputation as "gem hunting Zeon", our Company will continue to increase our market share by developing and launching new products such as stone lithotripsy devices that match the needs of growth markets.
 
◆Plant Growth Regulating Agent
The Ministry of Agriculture, Forestry and Fisheries has identified Prohydrojasmon plant growth regulating agent, which was developed using Zeon's unique technologies, as a technology that can respond to the diffusion of the "National Plan for Adaptation to the Impacts of Climate Change".
The "National Plan for Adaptation to the Impacts of Climate Change," released in August 2015, is a plan that calls for development of comprehensive technologies that can help reduce deterioration in agricultural product production and quality levels arising from global climate change.
Prohydrojasmon was selected to be mixed with Gibberrellin and used on mandarin oranges to treat skin diseases that are caused by high heat and precipitation conditions during the growth phase and leads to separation of the skin and pulp of the fruit. Usage of this agent is expected to spread rapidly from 2015 onwards.
Plant growth regulating agents are used to control the growth and productivity of fruits, vegetables and plants that are crucial to both agriculture and human lives. They are a type of agricultural chemical also used to improve the quality, output, and stability of agricultural products and to reduce the burden of the overall agricultural process. Prohydrojasmon was developed out of a technology transfer project from RIKEN and its manufacturing technology of jasmine-type scent.
The active ingredient in Prohydrojasmon is called "Jasmomate®" and is sold by both Meiji Seika Pharma Co., Ltd. and Kyowa Hakko Bio Co., Ltd.
 
◆Super Growth Method Carbon Nanotube
The Super Growth Method Carbon Nanotube (SGCNT) has multiple differentiating characteristics including "long length", "high purity" and "large surface area".
Mass production has been started from the second half of 2015 at the Tokuyama Plant.
In addition to the "integration with existing businesses" performed within the specialty rubber parts business, Zeon is also promoting the "creation of new businesses" including power storage and electronic devices as a significant part of its "SZ-20 Phase II" Plan.
 
◎Improving Cost Competitiveness
In addition to the promotion of both of the business strategies mentioned above, Zeon will implement aggressive efforts to raise its cost competitiveness.
Management exchanges with Daicel Corporation are being promoted as part of ongoing efforts to pursue a top-down approach using the highly refined "Daicel type manufacturing reforms".
At the same time, a bottom up "ZΣ activities" approach is also being pursued to achieve large results in every term.
 
 
The corporate vision for Zeon calls for fundamental "changes" to be implemented with targets for "consolidated sales of ¥500.0 billion and consolidated operating margin of 10%" to be achieved by 2020.

Furthermore, our Company will uphold the concepts of "speed", "sincerity" and "social contribution" as highly important factors in our business, and will endeavor to build strong relationships based upon trust to realize the above mentioned goals.
 
 
Conclusions
 
While earnings during the first half were mixed with profits rising on the back of a decline in sales, on a quarterly basis both sales and profits appear to have bottomed during the fourth quarter of the previous term and are now trending favorably.
In the medium term perspective, the start of production at the second line at the Singapore Plant, expansion of SIS output capacity at the Mizushima Plant and investments for the sixth line at the Himi Plant are favorable factors that are expected to begin to yield results from the next term onwards, therefore they should be watched closely.
 
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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>
 
 
 
 
 
 
 
 
 
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