Overview#

Morgan Stanley has identified four Japanese chemical stocks as top picks in the sector, highlighting their potential despite challenges posed by the ongoing U.S.-Israel conflict involving Iran. The recommendations follow recent discussions with institutional investors in Asia.

Shin-Etsu#

Shin-Etsu is highly favored among institutional investors, according to Morgan Stanley. The company's strengths include: - Competitive advantages from U.S. ethane-based PVC (polyvinyl chloride) operations, which are essential for various applications. - Strong demand for semiconductor wafers, crucial components in electronics. - Positive trends in other semiconductor materials and anticipated growth in rare-earth magnet earnings. However, investors are concerned about the possibility of reduced shareholder returns due to a significant capital investment in the U.S.

Sumitomo Chemical#

Morgan Stanley sees Sumitomo Chemical as a hidden gem, benefiting from the dynamics of the Middle East conflict. The company’s joint venture in Saudi Arabia utilizes fixed-price ethane gas, which provides a cost advantage as crude oil prices rise. This structure is expected to enhance profit margins significantly. Nonetheless, geopolitical tensions currently overshadow this positive outlook and the company’s ongoing restructuring efforts.

Asahi Kasei#

Asahi Kasei enjoys broad support from investors, with its strengths lying in the healthcare and electronic materials sectors. These divisions are seen as defensive during times of economic uncertainty. The main risk for Asahi Kasei is the potential decline in earnings from its lithium-ion battery separator business, which is crucial for electric vehicles and portable electronics.

Toray Industries#

Morgan Stanley's analysis of Toray Industries highlights its focus on improving returns on invested capital and its ability to pass on higher input costs to customers, even in the competitive textile market. Investors are waiting for a new medium-term plan set to be announced on March 25. Potential risks include a weaker demand for aviation carbon fiber and pressures from rising fuel and material costs. Additionally, a weaker yen could significantly boost operating profits, adding about ¥1 billion for every ¥1 depreciation against the U.S. dollar.