Morgan Stanley's Four Recommended Japanese Chemical Stocks

Investing.com – Morgan Stanley has listed four Japanese chemical stocks as its top picks in the sector, despite potential headwinds from the US-Israel conflict with Iran, the firm believes there are still investment opportunities.

Morgan Stanley stated that after recent meetings with Asian institutional investors, it recommends these four stocks.

Shin-Etsu Chemical

Morgan Stanley says Shin-Etsu Chemical has received near-unanimous support from institutional investors. Its investment thesis is based on three core advantages: a competitive edge in the US ethylene-based PVC business, strong demand for semiconductor silicon wafers, and positive momentum in other semiconductor materials and rare earth magnet businesses’ profit expansion expectations. The main concern centers on the company’s recent disclosure of large-scale US capital investments, which could deprioritize shareholder returns.

Sumitomo Chemical

Morgan Stanley believes Sumitomo Chemical is an underestimated beneficiary amid Middle East conflict dynamics. The company’s Saudi joint venture uses fixed-price ethane gas feedstock, and as oil prices rise, this structural cost advantage will create profit margins. This fixed-cost structure should significantly improve the joint venture’s profitability. However, geopolitical concerns currently dominate investor sentiment, overshadowing this profit benefit and the progress of the company’s broader restructuring plans.

Asahi Kasei

Morgan Stanley states that investors generally recognize Asahi Kasei’s investment value, with its investment thesis centered on strong trends in healthcare and electronic materials, providing defensiveness amid current macro volatility. The main risk remains the potential further deterioration of the lithium-ion battery separator business.

Toray Industries

Morgan Stanley notes that Toray’s investment rationale focuses on its increasingly disciplined management of return on invested capital, as well as its pricing power even in the highly competitive textile sector, enabling it to pass on higher input costs. Most investors are waiting for the new mid-term plan, scheduled for release on March 25, before establishing positions. Upside risks include a weaker yen, with a ¥1 depreciation against the dollar potentially adding about ¥1 billion to operating profit. Downside risks include weak demand for aerospace carbon fibers and profit pressure from rising fuel and material costs.

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