1 Investment opinion
1.1 Investment opinion
We initiate coverage of the hosing sector with an Overweight rating. Data on housing starts
announced by the Ministry of Land, Infrastructure and Transport shows that owner occupied
housing starts (detached housing) are rising due to the economic recovery, but monthly order
trends at housing makers, a leading indicator, have been weak since autumn 2006 due to
receding expectations for higher interest rates. Nevertheless, we expect housing demand to
increase gradually as a result of anticipating further economic expansion from 2H 2007 (see
Figure 2). Although it is hard to expect significant growth in housing starts amid a decline in
the population, we anticipate growth in sales on account of higher prices resulting from an
upturn in the economy.
We expect companies in the following three categories to perform well: 1) strong in landinclusive
housing, 2) pursuing diversification, and 3) having additional room to cut costs.
The first category comprises housing makers with strong orders for land-inclusive housing
(see page 10 for more details), including ready built homes and custom built homes with land,
due to an increase in demand for landed homes from first time buyers, for which acquiring
quality land is difficult due to the rise in land prices in the three main metropolitan areas.
Although replacement demand may also have bottomed, we do not expect replacement
housing to drive detached housing starts as during the bubble years. The second category is
housing makers securing profit growth in businesses other than detached housing. This is
because we believe these manufacturers can seek even higher profit growth in the future as
a result of forward-looking investment for land acquisition and detached housing operations
financed by earnings from businesses other than detached housing such as rental housing
construction and real estate investment operations. The third category is housing makers
with additional room to cut costs. Amid intensifying competition, housing makers need to
develop internal mechanisms to continuously reduce CoGS and SG&A expenses, and we
believe winning companies will be able to secure high profit margins through group
integration and reorganization.
We believe rental housing starts (apartments, rental condominiums, etc.) will remain firm,
although growth on par with the past several years is unlikely. In addition to an increase in the
proportion of single and two-person households, which comprise the main occupants of
rental housing, we also anticipate growing demand from senior citizens. Additionally, we
expect firm demand from continued use as a tax-saving strategy.
We have Buy ratings on Sekisui House (1928), which is likely to have a competitive edge in
winning orders because of its strengths in getting land for customers; Daiwa House Industry
(1925), whose latest orders are strong and which has a solid position as a developer of
roadside and other commercial facilities; Sekisui Chemical (4204), whose chemical division
should contribute to balanced profit growth and which we believe has further potential to cut
costs in its housing division, and Daito Trust Construction (1878), whose share price has
fallen to an attractive level because of a recent slowdown in orders. We have Hold ratings on
Sumitomo Forestry (1911), PanaHome (1924), and Leopalace 21 (8848).

Table of Contents
1 Investment opinion ..................................................................... 3
1.1 Investment opinion.......................................................................................................3
1.2 Valuations .....................................................................................................................5
1.3 Share price trends ........................................................................................................6
1.4 Share price catalysts...................................................................................................10
1.5 Relationship between orders, land acquisition capabilities ........................................10
2 Housing makers: future strategy.............................................. 14
2.1 The housing industry today ........................................................................................14
2.2 Urban infill spreading throughout Japan.....................................................................15
2.3 Strategies for housing makers....................................................................................17
3 Japanese housing industry....................................................... 22
3.1 History ........................................................................................................................22
3.2 Housing starts: scale of investment value, characteristics .........................................26
3.3 Housing contractors: Types, construction methods, sales techniques ......................35
3.4 Trends in the rebuilding and remodeling markets ......................................................40
3.5 The rental housing market ..........................................................................................45
3.6 Mortgage lending, the affordability of housing, and construction costs.....................46
3.7 Principal housing-related taxes and laws....................................................................48
3.8 International comparison ............................................................................................50
4. Comparison of major housing makers..................................... 53
4.1 Sales and RP...............................................................................................................53
4.2 Housing unit sales ......................................................................................................53
4.3 Apartment building sales ratio....................................................................................55
4.4 Housing maker features .............................................................................................57
Company
Daito Trust Construction (1878) ..............................................................................................62
Sumitomo Forestry (1911) ......................................................................................................87
Panahome (1924) ..................................................................................................................110
Daiwa House Industry (1925)................................................................................................130
Sekisui House (1928) ............................................................................................................153
Sekisui Chemical (4204) ........................................................................................................177
Leopalace21 (8848)...............................................................................................................202