<p>16 January 2009<br/>What are leases?<br/>Lease accounting: global trends<br/>and leasing fundamentals<br/>Masamitsu Ohki<br/>Research Analyst<br/>(+81) 3 5156-6683<br/><a href="mailto:masamitsu.ohki@db.com">masamitsu.ohki@db.com</a><br/>Fundamental, Industry, Thematic, Thought leading<br/>Our Research Product Committee has recognized this report as being rich in<br/>unique investment ideas and as meeting its "FITT" (Fundamental, Industry,<br/>Thematic, Thought leading) criteria for investors. We have analyzed revisions in<br/>lease accounting standards in FY07 and their implications for leasing companies<br/>(lessors) ahead.<br/>Deutsche Securities Inc.<br/>All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local<br/>exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche<br/>Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm<br/>may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single<br/>factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research<br/>is available to customers of DBSI in the United States at no cost. Customers can access IR at<br/><a href="http://gm.db.com/IndependentResearch">http://gm.db.com/IndependentResearch</a> or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE<br/>LOCATED IN APPENDIX 1.<br/>FITT Research<br/>Top picks<br/>Hitachi Capital Corp (8586.T),¥1,011 Buy<br/>Mitsubishi UFJ L&F (8593.T),¥2,065 Buy<br/>Companies featured<br/>Hitachi Capital Corp (8586.T),¥1,011 Buy<br/>2008A 2009E 2010E<br/>EPS (¥) 92 99 100<br/>P/E (x) 17.7 10.2 10.1<br/>EV/EBITDA (x) 85.8 47.4 44.3<br/>Mitsubishi UFJ L&F (8593.T),¥2,065 Buy<br/>2008A 2009E 2010E<br/>EPS (¥) 377 222 355<br/>P/E (x) 11.7 9.3 5.8<br/>EV/EBITDA (x) 71.5 80.3 58.3<br/>Fundamental: Japanese lease accounting catching the convergence wave<br/>The trend toward convergence among the different accounting practices used by<br/>countries is gathering strength as international accounting standards increasingly<br/>take hold. This is forcing Japanese accounting practices, now fiercely independent<br/>within their own domain, to change and fall in line with international standards.<br/>Reforms in Japanese accounting standards for lessors in 2007 can be perceived<br/>as one part of the convergence wave.<br/>Industry: Largest reforms in Japanese leasing industry since its inception<br/>causing additional challenges for industry<br/>Leasing services in Japan, started in 1963, have permeated Japanese industry,<br/>particularly through finance leases, which enabled companies to take their assets<br/>off-balance by treating leases as rental transactions. However, new leasing<br/>standards require that lessees keep their assets on the balance sheet as a rule by<br/>treating leases as sales.<br/>Thematic: Gauging conditions for leases and trends for lessors ahead<br/>Our overall conclusion is that the systematic changes are negative for lessors. But<br/>we believe changes have positive attributes as well, including the potential to<br/>serve as an important financing conduit among small and medium-sized<br/>companies for expanding their business domains through tailor-made services.<br/>Thought-Leading: Lease sector a key investment target in financial services<br/>We are initiating coverage on Mitsubishi UFJ Lease & Finance and Hitachi Capital<br/>in light of their funding capabilities, credit-worthiness, and scale of earnings. We<br/>particularly like Mitsubishi UFJ L&F for numerous business opportunities afforded<br/>by its affiliations with Mitsubishi UFJ Financial Group and Mitsubishi Corp. and<br/>Hitachi Capital for earnings stability derived from its dominance as a lessor<br/>affiliated with manufacturers.<br/>Valuation and risks:<br/>Our target prices for leasing companies are set based on a fair P/B, which we<br/>calculate as the forecast ROE divided by cost of equity, as (1) we believe ROE is a<br/>key indicator of how well finance industry firms are leveraging their financial<br/>assets to develop their business; and (2) we expect these firms to display a steady<br/>ROE. Sector risks include, on the upside, operating asset growth due to stronger<br/>finance-lease needs throughout the Japanese domestic market, and on the<br/>downside, an ongoing fall in demand for leases due to changes in lease<br/>accounting and tax practices as well as increases in the cost of credit in line with<br/>deteriorating macroeconomic conditions.</p><p>Table of Contents<br/>1. Introduction................................................................................3<br/>Technical terms for lease accounting and taxation ...................................................................3<br/>2. Accounting convergence ...........................................................4<br/>Accounting convergence under way globally............................................................................4<br/>Japan's response to convergence in lease accounting.............................................................6<br/>3. Gauging actual conditions for leases in Japan........................11<br/>The legal approach ..................................................................................................................11<br/>Taxation and depreciation .......................................................................................................12<br/>4. New lease accounting standards and lease taxation..............15<br/>Implications for lessees ..........................................................................................................15<br/>Impact on leasing companies..................................................................................................20<br/>5. Future developments in lease accounting and implications for<br/>leasing companies .......................................................................28<br/>Need for more changes in lease accounting, to align with changes in international accounting<br/>standards................................................................................................................................28<br/>Future outlook for leasing industry..........................................................................................30<br/>Companies<br/>Hitachi Capital Corp .................................................................................................................33<br/>Mitsubishi UFJ L&F.................................................................................................................56</p><p></p><p> <br/></p><p></p>