Innovation 90

A New Mid-range Management Plan

In April, 2006, marking our 90th year of business, our Group embarked on a new five-year mid-range management plan called “Innovation 90”.

· Group Management Reorganization
As the first step in our plan, we made a partial assignment of Nippon Polyurethane Industry Co., Ltd. stock to Tosoh Corporation in April, and issued new shares to Tosoh as part of a third-party allocation. This transaction will be explained in further detail as follows:

1. Group Reorganization
1) Partial assignment of Nippon Polyurethane Industry Co., Ltd. stock
Having determined that the strategic strengthening of Nippon Polyurethane Industry Co. Ltd.’s relationship with Tosoh Corporation would increase its short- and mid-range competitive position, and thereby contribute to our corporate value as a whole, we assigned 500,000 of our 1,950,000 shares of Nippon Polyurethane stock to Tosoh on April 14th.
With this assignment, our ownership of Nippon Polyurethane dropped from 65.0% to 48.3%, changing its legal status from a consolidated subsidiary to an equity method affiliate. Further, the shares were sold for 8,000 million yen, resulting in a 6,700 million yen stock sale profit on a non-consolidated basis, and 4,800 million yen on a consolidated basis.

2) Allocation of New Shares to a Third Party
In order to strengthen our connection with Tosoh Corporation, and to secure funds for new investment in our growth segments, thereby improving our overall financial strength, we issued 10,050,000 new third-party shares to Tosoh on April 19th. With this transaction, we procured 6,200 million yen in funds. Following this capitalization, the number of shares issued rose to about 84million and Tosoh’s ownership in Hodogaya rose from24.29% to 33.34%.

2. Changes Resulting from the Group Reorganization
A preliminary calculation of the effects of the Group reorganization on our results as of March, 2006 is shown in the following graphs:
(Note: “Former Organization” refers to the previous structure in which Nippon Polyurethane Industry Co. Ltd. was a consolidated subsidiary. “New Organization” refers to the reorganized structure in which Nippon Polyurethane is an equity method affiliate.)

Profit and loss are affected as follows: (Fig. 1)
(1) Sales are reduced by nearly two-thirds, from 112,700 million yen to 39,500 million yen.
(2)Ordinary income drops by 60%, from 8,400 million yen to 3,600 million yen.
(3)Net income for the period drops by only 10%, from 4,600 million yen to 4,100 million yen. This is because a portion of Nippon Polyurethane’s earnings, corresponding to the percentage of Hodogaya Chemical’s holdings(from 65.0% to 48.3%), is included in the company’s consolidated earnings as per accounting regulations.

(Figure1)

Regarding our financial status, please refer to Figure 2.
(1)Interest-bearing debt is cut nearly in half, from 48,400 million yen to 26,800 million yen, and our Debt/Equity Ratio improves, going from 1.79 to 1.0. (We expect our interest-bearing debt to be further reduced to 17,000 million yen, and our debt/equity ratio to reach 0.46 by the end of fiscal 2006 (March, 2007). )
(2)The ratio of shareholders’ equity to total assets is improved, reaching 39.8% from 22.8%. We expect this to improve further in fiscal 2006, reaching 55.2% by March, 2007.

As described above, the scale of our operations has been reduced, but this move dramatically improves both profitability and our financial standing.
By restructuring in this way, we are better prepared to deal with fluctuations in profitability brought on by such factors as rising raw materials prices, a stronger yen, increasing interest rates and other changes to our business environment. This reorganization gives us a solid foundation and a measure of stability on which to build future growth.

(Figure2)

About “Innovation 90”

Basic Concept

“Innovation 90” is based on the concept that a strong and profitable foundation is necessary as the basis for future growth, and is designed to help us achieve our goals of becoming a highly functional value added entity.
The plan is divided into two parts, Phase I which covers the first two years (2006-2007), and Phase II, which covers the latter three years (2008-2010).
1)Phase 1
The initial phase of our plan focuses on identifying the role of each business in the formation of a “growth-oriented management foundation”, strengthening core and developing businesses, initiating new businesses and reorganizing our business base in a proactive manner.
2)Phase 2
In this phase, we will build on the results of our Phase I efforts in order to speed up the transformation into a highly profitable organization. In the final year 2010, we plan to reach sales of 50,000 million yen, with an operating profit margin of 13%.

Basic Strategy

1. Establishment of a business portfolio that will contribute to dramatic growth
Imaging materials and construction materials will be designated as core businesses, while OLED materials and carbon nanotube products will be designated as developing businesses.
Management resources will be allocated accordingly to ensure the fortification and growth of each business.
Other existing businesses will be restructured and reorganized to maximize profitability.

1) Development of a Growth Strategy
(1)Accelerated Growth in Core Business Areas
(1.1) Imaging Materials
Regarding charge control agents for toner, we will continue to expand our product line and develop products that address both environmental issues and the proliferation of color systems. Regarding organic photoconductor (OPC) materials, we will strive for synergy through business acquisition. By adding new materials that build on our current competitive advantage in this way, we will be able to expand the scope of our imaging materials business.
(1.2) Construction Materials
It will be expanded through the proactive development of environmentally friendly products.

(2)Increased Focus on Developing Businesses
(2.1) OLED Materials
This business will be expanded as we refine our ability to supply key components for OLED, such as hole transport and electron transport materials.
(2.2)Establishment of Carbon Nanotube Business
We intend to be a world leader in the promising field of multilayered carbon nanotubes through the manufacturing and sales of nanotubes and nanotube composite products.

2) Increasing Profitability of Basic Businesses
By promoting optimization, cost-cutting and alliances, we will strive for the expansion of high value-added and differentiated product lines.

2.Fortifying Research & Development Efforts to Promote Growth
In addition to allocating resources to our core businesses (imaging materials & construction materials), and our developing businesses of the future (OLED materials & carbon nanotubes, etc.), we will reevaluate our research and development efforts, with the goal of having new products account for more than 20% of our non-consolidated sales by 2010.

3.Financial Health and Investment Strategy
1)Financial Health
With the recent reorganization of our Group management, we will continue to pursue profitability and asset efficiency, to insure that our financial standing is on a par with the top companies and continues on an upward trajectory.

2)Investment Strategy
Using the results of our fiscal improvement efforts as an underlying asset, we will undertake a course of strategic investments. In order to aggressively promote our growth plan, we are prepared to strategically invest a total of 15,000 million yen in the development of new businesses, and in the fortification of our core businesses. This plan may include M&A activity.

As we began FY2006, we carried out the following strategic investments:
1)Establishment of Nanocarbon Technologies Co., Ltd.
On April 3rd of this year, we established a joint venture company with Mitsui & Co., Ltd., dedicated to the development, manufacture and sales of multilayer carbon nanotubes and nanotube-composite polymer products.

2)Acquisition of OPC Materials Business
On June 1st of this year, in order to strengthen the competitive and technical position of OPC materials as one of our core businesses, and to better meet customer needs, we acquired Mitsubishi Paper Mills, Ltd’s OPC Materials business.

3)Underwriting of Nippon Polyurethane Industry Co. Ltd.’s Capital Increase through Shareholder Allocation

Nippon Polyurethane Industry Co. Ltd. has started on a project to expand production of MDI, an ingredient of polyurethane materials. In order to help Nippon Polyurethane secure investment funds and strengthen its financial standing, on June 15th of this year we underwrote its capital increase through shareholder allocation in accordance with our percentage of ownership (roughly 48%). The underwritten amount was approximately 4,800 million yen.

Management Objectives

By undertaking the measures described above, we hope to achieve the following goals:
Before this mid-range plan is completed, we will have achieved our objective of transforming into a highly functional, high-value added organization, top class in both profitability and financial standing.
By faithfully carrying out the “Innovation 90” plan, the new Hodogaya Group will improve its corporate value as a whole, establish a stable management base for future growth, and meet the expectations of stockholders and other stakeholders.

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