Document BYD1rYE4dER1qD6OyXJOLgvX

*UBS Global Research and Evidence Lab 6 July 2023 Q-Series How will tightening 'forever chemicals' (PFAS) regulation impact the manufacturing sector? Regulation of PFAS (-10k chemicals) is tightening and its scope is expanding Tightening Per- and Polyfluoroalkyl Substances (PFAS) regulation globally has the potential to impact not only PFAS producers, but the majority of manufacturing industry categories. While the fluorochemical market is estimated at only US$20-28bn/yr, roughly half of all industries include companies that use PFAS, amounting to a total market cap of US$30trn. The EU is considering a ban of the PFAS group altogether, the US is considering stringent PFAS level limits for water, 3M has decided to exit from PFAS with clarity on litigation emerging with the recent US$10.3bn settlement, and Japan and the UK are considering regulations as well. In this report we integrate insights from 13 industries across North America, Europe, and Asia on PFAS risks and opportunities. Our base case: a total PFAS ban looks unlikely outside the EU Although countries are in various stages of regulating PEAS, the most important developments to follow in order to gauge impact on companies are 1) water quality regulations in the US, and 2) production/sale regulations in the EU. Our global base case for regulation is that water quality rules tighten significantly in developed countries, and these not only cover the historical pollutants PFOS and PFOA but several other types that are currently in use. Apart from the EU, we think it is unlikely that countries would ban all PFAS production/use/sales at once given the language of current strategies. It would be more likely that several types of PFAS where associations with negative health impacts have been made would be banned in developed countries first and eventually added to the UN list of Persistent Organic Pollutants. Impact not recognized yet for Asia/global PFAS users Although PFAS risk is recognized for EU/US producers of PFAS (3M, Chemours, BASF, etc), it is less recognized in Asia, and less understood for PFAS user industries, substitute producers, and removal & clean-up services. Potential catalysts for pricing in PFAS risks/ opportunities are new PFAS toxicity research results and news on regulatory developments (expected towards late 2023 to early 2024). In a tail risk scenario, these catalysts could trigger consumer boycotts or litigation. Identifying key opportunities and risks Chemicals, multi-industry, and HVAC face lower sales, but more importantly ongoing litigation risks (e.g. Chemours, Daikin). Some chemicals firms (e.g. Tosoh, Dow) are more favourably positioned since they offer substitutes. Semiconductor and tech hardware sectors have the potential to be most negatively impacted among PFAS users due to the lack of PFAS alternatives for semiconductor manufacturing. Other PFAS users such as apparel, cosmetics, food and food packaging will likely face limited impacts overall, but relative positioning within the sector could be impacted as regulations or consumer awareness come into play. Among companies removing and testing for PFAS such as water utilities and environmental services, the largest companies in the sector are favourably positioned due to the regulatory tailwind for industry consolidation. Water treatment companies and filter manufacturers also stand to benefit. We summarize the key sector impacts in Figure 2, as well as most and least favourably exposed companies regarding tightening PFAS regulation looking at the next five years. Equities Global Chemicals Leigha Miyata Analyst -@ubs.com Victoria Kalb Analyst -@ubs.com Geoff Haire Analyst @ubs.com Joshua Spector, CFA Analyst -@ubs.com Shunta Omura Analyst @ubs.com Chris Snyder, CFA Analyst @ubs.com Hikaru Mizuno Analyst -@ubs.com Gregg Orrill Analyst -@ubs.com Jon Windham, CFA Analyst -@ubs.com Francois-Xavier Bouvignies Analyst @ubs.com Kenji Yasui Analyst @ubs.com Shingo Hirata, CFA Analyst @ubs.com This report has been prepared by UBS Securities Japan Co., Ltd.. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, INCLUDING INFORMATION ON THE QUANTITATIVE RESEARCH REVIEW PUBLISHED BY UBS, BEGIN ON PAGE 73. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Contents Executive Summary What are PFAS (in a nutshell) Scenarios Current regulatory landscape Current innovation landscape 4 Leigha Miyata Analyst -@ubs.com 8 Victoria Kalb Analyst 10 @ubs.com 13 Geoff Haire Analyst 17 @ubs.com Sector Impact 19 Global Chemicals 24 US Multi-Industry 26 Global Heating Ventilation and Air Conditioning (HVAC) 28 Joshua Spector, CFA Analyst @ubs.com Shunta Omura Analyst @ubs.com US Water Utilities North America Environmental Services 30 Chris Snyder, CFA Analyst 32 @ubs.com Global Semiconductors Japan Tech Hardware 34 Hikaru Mizuno Analyst 35 @ubs.com Japan Electronic Components US Softlines 36 Gregg Orrill Analyst 37 @ubs.com European Apparel Retail Japan Retail 39 Jon Windham, CFA Analyst 41 @ubs.com Korea Cosmetics Japan Cosmetics China Cosmetics US Household & Personal Care/ US Beverages US Restaurants US Packaged Food China Food and Beverage What is PFAS (in detail) 42 Francois-Xavier Bouvignies Analyst 43 @ubs.com 44 Kenji Yasui 45 -@ubs.cAonm alyst 47 Shingo Hirata, CFA 49 Analyst @ubs.com 51 Jay Sole Analyst 52 @ubs.com Which chemicals are included in the PFAS group? What are the properties of PFAS? 52 Sreedhar Mahamkali Analyst 53 @ubs.com What is PFAS used for? 53 How much PFAS are used and emitted? 55 Q-Series 6 July 2023 *UBS 2 What are the main PFAS substitutes? 57 What are the Health & Environmental Effects of PFAS 59 Regulation (by country/region) 61 PFAS Litigation 65 PFAS Levels Data 68 Appendix 70 Main PFAS subgroups 70 PFAS related UBS publication list 71 Q-Series 6 July 2023 Nozomi Moriya Analyst -@ubs.com Jaehyung Choi Analyst @ubs.com Hisae Kawamoto Analyst -@ubs.com Ingrid Zhang Analyst 51460517080003 @ubs.com Peter Grom Analyst -@ubs.com Dennis Geiger, CFA Analyst @ubs.com Cody Ross Analyst @ubs.com Mark Yuan Analyst 51460521050001 @ubs.com Shneur Z. Gershuni, CFA Analyst -@ubs.com Camille Wynter Analyst @ubs.com Neal Burk Analyst @ubs.com Damian Karas, CFA Analyst @ubs.com Amily Guo Analyst 51460518050002 @ubs.com Harry Blaiklock, CFA Analyst -@ubs.com Mauricio Serna, CFA Analyst -@ubs.com *UBS 3 Q-Series Executive Summary What's changing? Regulation of PFAS, a group of ~10,000 chemicals, is tightening in many developed countries, and the way the chemicals are regulated is changing in Europe. Around 250 types of PFAS are said to be commercially relevant and are currently used throughout the global economy from semiconductors to cosmetics. Overall, the fluorochemical market is estimated to be US$20-28bn per year(1) . Roughly half of all industries include companies that use PFAS, and the total market cap of these industries amounts to approximately US$30trn(2) . Even though 3 specific chemical substances (let us call them "Stockholm 3") known as PFOS, PFOA, and PFHxS (e.g. used in firefighting foam, nonstick cookware, metal plating) have already been banned or are being phased out in most countries, tightening PFAS regulation can have significant impacts on companies through the following channels. 1. reduced demand for PFAS (chemicals & HVAC(3) sector), 2. increased demand for PFAS alternatives (chemicals & HVAC sector), 3. increased compliance costs (removal, testing/developing substitutes in most sectors including water utilities, semis/tech hardware, apparel, cosmetics, food processing/ packaging, automotive, HVAC), 4. increased demand for PFAS management and removal (environmental services & filter-makers), 5. litigation and remediation costs from both past and current production and use of PFAS (chemicals & HVAC sector), 6. changes in market share based on early adoption of PFAS-free products (most sectors such as those mentioned in 3). Scenarios - How could this play out? We explore four theoretical scenarios going forward depending on the level of regulation and the level of innovation globally. We see High innovation & High regulation as likely, Low innovation & High regulation as even chance, Low innovation & Low regulation as unlikely, and High innovation & Low regulation as very unlikely (see Figure 1otc;aihvlnd&fLgkempsury for our reasoning). We also suggest a global base case scenario based on prior regulatory tends, although in reality, the level of regulation will differ by country and the speed of innovation will differ by type of use. Our global base case is that there will be significantly stricter water limits for PFAS in most countries, but outright production/use bans for only a limited number of PFAS outside of the EU. Only a handful of large corporations globally have started preparing for PFAS regulations (Inditex, 3M etc.), and the potential impact from tightening regulation is high for a limited number of companies with high exposure to the issue. Most sectors such as apparel, cookware, and cosmetics have viable alternatives to PFAS even if some will be more costly or less functional. The expected regulatory timeline assuming regulation proceeds is shown in Figure 8. The atiuomregpdnExclsy US drinking water limits are expected to become effective first in 2026, followed by the EU blanket ban on PFAS use and sale from 2026/27. UBS Research 1. Estimates from 9 market reports (2018-22) collected by chemsec (https://chemsec.org/reports/the-top-12-pfas-producers-in-the-worldand-the-staggering-societal-costs-of-pfas-pollution/) 2. Bloomberg market cap as of 2023/6/19 for 16 industry/sub-industry categories within 6 BICS sectors (Consumer discretionary, consumer staples, healthcare, industrials, materials, and technology). 3. Heating Ventilation and Air Conditioning Q-Series 6 July 2023 ab 4 Figure 1: Likelihood and implications of each scenario; high innovation & high regulation looks the most likely of the four Source: UBS Sector impact - How to position? Although countries are in various stages of regulating PFAS, the most important developments to follow in order to gauge impact on companies is 1. water quality regulations in the US, and 2. production, use, sale, and trade regulations in the EU. We summarize the key sector impacts in Figure 2, as well as most and least favourably itosSecrmupay exposed companies regarding tightening PFAS regulation looking at the next five years. Chemicals, multi-industry, and HVAC face lower sales, but more importantly ongoing litigation risks. Some companies in these sectors that produce alternatives to PFAS and PFAS removal technologies are more favourably positioned. Environmental services stand to benefit, and we expect regulations to be a tailwind for M&A among water utilities. Semiconductor and tech hardware sectors have the potential to be most negatively impacted among PFAS users due to the lack of PFAS alternatives for semiconductor manufacturing. We think semiconductors are likely to receive a 12-year derogation under the ECHA PFAS ban as explained in Sector Impact on p19. Other PFAS users such as apparel, cosmetics, food and food packaging will likely face limited impacts overall, but relative positioning within the sector could be affected as regulations or consumer awareness come into play. Given how wide-reaching the proposed PFAS ban in the EU is, it may be surprising that many of the arrows in the table below are flat (yellow, no significant change). However, it is important to note that Figure 2itosSecrmupay does not show tail risks. Significant tail risks are possible for PFAS producers in the form of litigation, PFAS users in the form of sudden boycotts or litigation (see PFAS Litigation for examples), and all related sectors in the form of sudden or extremely strict regulations (e.g. PFAS ban in the US, no derogation for semiconductors in the EU). Although these scenarios are not our base case, they are not so far fetched either. For example, the US EPA published its "PFAS Strategic Roadmap" in October 2021, which includes the objectives "Use and harmonize actions under all available statutory authorities to control and prevent PFAS contamination and minimize exposure to PFAS during consumer and industrial uses," and "Establish voluntary programs to reduce PFAS use and release." Q-Series 6 July 2023 ab 5 Figure 2: Sector impact summary Source: UBS This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multi-year period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Q-Series 6 July 2023 ab 6 Figure 3: High-level summary of types of base case regulation impact on each sector Source: UBS based on Sector Impact pages and ECHA Evidence Review Note: The number of check marks denotes the significance of potential impact on the sector based on contributions from sector analysts and the ECHA Evidence Review. Q-Series 6 July 2023 ab 7 What are PFAS (in a nutshell) 'Forever chemicals' is a term coined by Harvard University Professor Joseph Allen to refer to manufactured chemicals that do not easily break down and can build up in people, animals, and the environment. Alhough several groups of chemicals can be described this way, this report focuses on PFAS. Per- and Polyfluoroalkyl Substances (PFAS) are a group of manufactured chemicals, used since the 1940s. The European Chemicals Agency defines the scope of the PFAS restriction similarly to the OECD definition. "Any substance that contains at least one fully fluorinated methyl (CF3-) or methylene (-CF2-) carbon atom (without any H/Cl/Br/I attached to it)" with a few fully degradable subgroups excluded (ECHA proposal). The carbon-fluorine bond is the strongest known covalent bond in organic chemistry and complete breakdown of PFAS takes years to thousands of years(4) . Of the thousands of PFAS types, around 250 are commercially relevant and 3 are listed as Stockholm Convention Persistent Organic Pollutants (see Figure 5). In this report, we refer to these 3 types of PFAS as "Stockholm 3". The most Peransl"CtoAdiSkhm(uFcO,f23v5gy0) commonly used and studied examples in the PFAS group are Perfluorooctanoic Acid (PFOA) and Perfluorooctane Sulfonate (PFOS). The EU ban proposal estimates that "around 4.5 million tonnes of PFASs would end up in the environment over the next 30 years unless action is taken." (EU ECHA) What are PFAS used in? Products and processes where water and oil-repellent properties are needed, especially in high temperature, high pressure, or acidic environments. Some examples include waterproof textiles, plastics, paint, cookware, cosmetics, fire extinguishers and electronic equipment. See Figure 24 & Figure 25 for a sUeSAPF cnsUti(eSAPFud)o more comprehensive list. Public awareness and concern are likely rising due to media reporting on PFAS in freshwater fish, food packaging, dental floss, and contact lenses. Figure 4: Estimated PFAS use in the EU over the next 30 years Source: UBS based on ECHA PFAS Restriction Proposal Annex XV, European Chemicals Agency, http:// echa.europa.eu/ Note: * Transport PFAS use and emissions are mostly counted under "Applications of fluorinated gases." Cosmetics assumes a worst case scenario with 100% going to waste water 4. ECHA proposal Annex B Q-Series 6 July 2023 ab 8 What are the health-effects of PFAS in humans? While health effects are difficult to determine, we note the potential seriousness of health conditions identified by peerreviewed research. The main research challenges include: the existence of many types of PFAS, the types of PFAS used having changed overtime, PFAS accumulation overtime, and the many different ways PFAS exposure can occur. Health impacts cited by the EPA include: lower fertility, developmental effects in children, increased risk of prostate, kidney, and testicular cancer, reduced immunity and vaccine response, among others. See health impacts for a more comprehensive explanation. What are the environmental effects of PFAS? Although health effects of less studied PFAS types are unclear, the persistence of almost all PFAS in one form or another is well established. The EU proposal classifies PFAS as "highly persistent," and emphasizes the need to restrict PFAS at the source due to the problem of PFAS accumulation in the environment and organisms. To date, PFAS has been detected in mammals, fish, plant leaves, water bodies, and arctic ice among others (ECHA proposal Annex B). Although activated carbon and high pressure membranes are recognized as ways to remove some PFAS from drinking water (US EPA proposal), the EU proposal states that PFAS can be highly mobile, that it is difficult to decontaminate water or sites at a large scale, and that an end-of-pipe solution is unachievable since PFAS is contained in many industrial and consumer products. See environmental impacts for a more comprehensive explanation. Figure 5: Of the thousands of PFAS, around 250 are commercially relevant and 3 are listed as Stockholm Convention Persistent Organic Pollutants ("Stockholm 3") Source: UBS based on ITRC (Interstate Technology & Regulatory Council). 2022. PFAS Technical and Regulatory Guidance Document and Fact Sheets PFAS-1. Washington, D.C.: Interstate Technology & Regulatory Council, PFAS Team. https://pfas-1.itrcweb.org/. Q-Series 6 July 2023 ab 9 Scenarios We explore four theoretical scenarios going forward depending on the level of regulation and the level of innovation. We suggest a global base case scenario based on prior regulatory tends, although in reality, the level of regulation will differ by country and the speed of innovation will differ by type of use. Our base case is that there will be significantly stricter water limits for PFAS in most countries, but outright production/use bans for only a limited number of PFAS. 1. Low innovation & Low regulation In this scenario, regulation continues along its trajectory prior to 2021. PFAS bans are only adopted as specific chemicals in the group are added to the Stockholm Convention on Persistent Organic Pollutants (POPs). Currently, PFOS, PFOA, and PFHxS are on the POPs list, and are banned in most developed countries. Chemicals will only be banned if sufficient evidence of persistence and accumulation is compiled for that specific chemical, so only those that have been widely used for a significant number of years would be at risk of a ban. PFAS in drinking water is a more sensitive topic so even in a low regulation scenario, we expect some countries to further restrict PFAS levels in drinking water. However, such changes will be slow and limited to a handful of developed countries. Partly due to the low regulation, substitute development lags for semiconductor manufacturing, firefighting foams for defence, textiles for industrial and medical use, and hard chrome plating. Technology for PFAS breakdown is not commercialized, and various types of PFAS continue to accumulate in the environment. 2. High innovation & Low regulation Regulation is low as described in the previous scenario. However, innovation takes place despite the lack of pressure from regulators due to pressure from the demand side. Consumers and workers may push for PFAS-free products, similarly to an increasing preference for BPA-free plastic containers and concern from firefighters (demanding PFAS-free gear and work exposure) and local communities on health hazards. Given Apple's commitment to phase out PFAS and H&M's ban on PFAS in clothing and cosmetics it produces, similar actions by major corporations are possible and would encourage suppliers to develop alternatives. See Current innovation landscape for a list of PFAS alternatives. In addition to chemical alternatives to PFAS, more companies may offer chemical-free alternatives that meet the same consumer needs (e.g. PFAS-free dental floss or pressurized water flossers). In some applications such as semiconductor manufacturing and firefighting foams for defence, alternatives may take time to develop, so there will be a need for technology that removes PFAS from water and soil, and technology for breaking down PFAS once it is collected. In this scenario, PFAS removal and breakdown technologies such as the one developed by Canadian researchers are commercialized and widely available. 3. Low innovation & High regulation In this scenario, the ban for all types of PFAS goes ahead in the EU with some sectors exempted for 6.5 or 13.5 years, and several other countries/states/provinces follow the EU's path. PFAS levels allowed in drinking water are set at a very low level such as those proposed by the US EPA. Drinking water regulation covers all PFAS in countries with a blanket ban, although the difficulty in measuring low PFAS levels and specific types of PFAS will likely shape how drinking water PFAS limits are defined. If stricter drinking water regulation is supported, it is likely that discharge of water and waste from manufacturing plants in countries without blanket bans would be regulated as well. This would be a supportive environment for adding several other types of PFAS in the UNEP POP list, thus restricting a wider range of PFAS use over time in the 186 parties that have ratified the Stockholm Convention. Despite high levels of regulation, substitute and removal/breakdown technology development may lag due to technical barriers. For example, the International Semiconductor Association states that "Research is actively ongoing into substitutes for Q-Series 6 July 2023 ab 10 PFAS in the semiconductor industry, but to date, no suitable alternatives have been found that successfully replace many of the essential uses of PFAS in the chip manufacturing, equipment, and infrastructure. (...) A typical semiconductor process technology change timeline is at least 10-15 years to fully qualify and integrate solutions". In this Low innovation & High regulation scenario, industries that face technical barriers to alternative development are either successful in lobbying for delayed implementation of the rule, or face high PFAS removal and destruction costs as well as high litigation risk. 4. High innovation & High regulation As explained above, a high regulation scenario entails a blanket ban on PFAS in the EU and several other areas, much lower PFAS levels allowed in drinking water than current guidelines, and development of regulations of PFAS in waste. High regulation will accelerate the development and use of PFAS alternatives, removal and breakdown technology. If this scenario plays out in even a single major economic area, it is likely to make PFAS regulations easier to adopt elsewhere since high regulation will increase resources allocated to alternative development, alternatives become increasingly available, and this lowers the cost and opposition to regulation. Base Case Of the four scenarios, we see High innovation & High regulation as likely, Low innovation & High regulation as even chance, Low innovation & Low regulation as unlikely, and High innovation & Low regulation as very unlikely (see Figure 6oc;atiHvndfhg&msueLlkrpy for our reasoning). However, since these are all extreme cases to highlight the universe of possibilities, we suggest a baseline scenario below and in Figure 7. elratgihuo"sbnRcdmy Although the situation will differ by country, our global base case on the regulation axis is "moderately high regulation." Innovation will differ by product type, but given alternatives already exist for most applications for PFAS, it seems unlikely that alternatives will be impossible to develop. The challenge seems to be the time it would take for substitute development, testing, certification in industries where safety and precision are extremely important such as healthcare, food processing, automotive, aviation, and semiconductors. See Current innovation landscape p.17 for a list of PFAS alternatives. Base case level of regulation for water quality: The US and Canada have set out proposals for new PFAS limits in water. We expect similar proposals in most other developed countries. Water level limits will not only cover PFOS and PFOA but several other types such as PFHxS, GenX, PFNA, PFHxA and PFBS. Base case level of regulation for production, use and trade: The UNEP Persistent Organic Pollutants (POP) list already includes PFOS, PFOA and PFHxS, so these are mostly already banned (production/use) in developed countries and some developing countries. Apart from the EU, it is unlikely that most countries will ban all PFAS at once. It is more likely that several types of PFAS where associations with negative health impacts have been made (e.g. PFDA, PFNA) will be banned in developed countries before they are added to the POP list. See Figure 32anohdSAielPFsEvbtufwcm for a summary of studies on PFAS toxicity. Q-Series 6 July 2023 ab 11 Q-Series 6 July 2023 Figure 6: Likelihood and implications of each scenario; High innovation & High regulation is the most likely of the four Source: UBS ab 12 Figure 7: Regulation base case "moderately high regulation" and regulations in selected countries Source: UBS based on OECD, EU (ECHA), US (EPA), UK (HSE), China (Enviliance), Canada (report), Asia (Cosmetics Regulations), Japan (MoE) Current regulatory landscape The two main types of PFAS regulation are 1. water quality regulations and 2. production, use, sale, and trade regulations. Although countries are in various stages of regulating PFAS, the most important developments to follow in order to gauge impact on companies is 1. water quality regulations in the US, and 2. production, use, sale, and trade regulations in the EU. The expected regulatory timeline assuming regulation proceeds is shown in Figure 8. The atiuomregpdnExclsy US drinking water limits are expected to become effective first in 2026, followed by the EU blanket ban on PFAS use and sale from 2026/27. The EU ban is expected to enter into force in 2025, but all sectors have an 18-month window for preparation before the restriction becomes effective, and some sectors will have an extra 5 or 12 years to develop alternatives to PFAS. Other countries such as Japan, the UK, and Canada are also considering regulations. Q-Series 6 July 2023 ab 13 Figure 8: Expected regulatory timeline assuming regulation proceeds Source: UBS, based on EU ECHA, US EPA, Japan MoE, UK HSE Figure 9: PFAS regulations by country/region (* denotes proposal) Source: UBS based on OECD, Vietnam (Enviliance, SGS), China (Enviliance), Canada (report), Thailand (Chemical watch), Asia (Cosmetics Regulations), Japan (MoE) Q-Series 6 July 2023 ab 14 Water quality regulations in the US Most developed countries have guidelines or advisories for the amount of certain types of PFAS in drinking water and/or water bodies (e.g. lakes, ground water). The US Environmental Protection Agency (EPA) included PFOS, PFOA, PFNA, PFHxS, PFHpA, and PFBS in its Third Unregulated Contaminant Monitoring Rule for drinking water in 2013, mandating the monitoring of these chemicals by public water systems that serve more than 10,000 customers. In 2016, the EPA reduced the lifetime drinking water health advisory limit for PFOA and PFOS from 400 and 200 respectively to a combined level of 70 parts per trillion (=nano grams per liter). As of January 2023, eight states (Massachusetts, Michigan, New Hampshire, New Jersey, New York, Pennsylvania, Vermont, and Washington) had set maximum contaminant levels for one or more PFAS. For example, in January 2023, Pennsylvania passed a maximum contaminant limit for PFOS and PFOA of 18 and 14 nano grams per liter respectively, to be effective in most areas from January 2024 (PA rule). Health advisories on PFAS levels in water mostly focused on PFOA and PFOS but the advisories became stricter (lower) by almost an order of magnitude at the federal level, and maximum contaminant limits were set by some states at an even lower level. Despite the known general direction of lowering limits, the latest proposal in March 2023 by the US EPA was the most thoroughgoing and surprising from a layperson's view. The points to note are that 1. the new proposed limits are substantially lower than the previous advisory level, and 2. limits are proposed for 4 more types of PFAS other than PFOS and PFOA (namely, PFNA, PFHxS, HFPO-DA, PFBS). The first point is important as these limits make litigation and the need for clean-up/removal more likely and costly. It is also difficult to detect PFAS at very low levels, so there will be a need for testing equipment and services. The second point is especially important for a wide range of companies since the 4 types of PFAS mentioned above are currently produced and used, as opposed to PFOS and PFOA that have been banned in most developed countries. The proposal includes maximum contaminant limits (MCL) and maximum contaminant goals (MCLG) for 6 types of PFAS. Figure 10: PFAS definition Source: UBS Figure 11: US water quality regulations Source: UBS based on US EPA, Pennsylvania Safe Drinking Water PFAS MCL Rule Q-Series 6 July 2023 ab 15 In Figure 12kitevsbarn;owgmuCdcyxl we compile selected standards for PFAS in drinking water and the environment. While this is not an exhaustive analysis, it illustrates the potential for future regulatory tightening, in our view, on the basis that some jurisdictions have maximum contaminant levels that cannot be exceeded, while others have advisories or guidelines, and that these levels vary widely on a global basis. It cannot be the case that all of these varied PFAS levels are "correct" from the perspective of toxicity for humans. The trend for developed countries is to 1. lower PFAS guideline levels, 2. introduce limits rather than just guidelines, 3. expand the scope of water level limits from PFOS and PFOA to other PFAS, a group of PFAS, or all PFAS. Figure 12: Current drinking water advisory and maximum contaminant levels; many being reexamined Source: UBS, based on US EPA, EU ECHA, Japan Ministry of Environment, Pennsylvania DEP, California Water Board MCL: Maximum Contaminant Level, MCLG: Maximum Contaminant Level Goal Production, use, sale and trade regulations in the EU The European Chemicals Agency (ECHA) put forward a proposal in February 2023 to restrict the manufacture, use, and sale/import of PFAS or substances/articles containing PFAS above a certain concentration. The proposal includes two options (blanket ban only or blanket ban with longer transition periods for some uses), but the option recommended by ECHA is a "ban with use-specific derogations." As shown in Figure 13EU , there will be a 1.5 year transition period following entry into force, after which all rcnetPaoiJpI2vSRAml0sF(y5uf) manufacture, use and placement on the market is banned. After the transition period ends, some uses will have an additional 5 or 12 years before the ban is applicable. The proposal currently suggests 26 uses that should be eligible for derogations, and 20 uses that are "potential derogations". Whether or not "potential derogations" become actual derogations in the final version of the regulation will depend on evidence received during the public consultation. Derogations are proposed based on the "non-existence of technically and economically feasible alternatives" before entry into force. Most of the proposed derogations can be grouped into those related to health (medical devices), safety (textiles for personal protective equipment), existing regulation (housing codes for air-conditioning), and extreme temperatures/conditions (refrigerants for -50C or lower). See Figure 34RansedoSAptriPFclHEChg for a full list of proposed derogations and potential derogations. The key questions regarding the ECHA proposal to determine impacts on PFAS-using sectors are: 1. how quickly can PFAS alternatives be developed and at what cost; 2. how many "proposed derogations" or completely new derogations will be included in the final version of the regulation; and 3. could the derogations be extended beyond 12 years. If the opinions of industry and regulators are far apart on the first question, the Q-Series 6 July 2023 ab 16 final regulation is more likely to cause a disruption by not having a derogation for an industry that is ill-prepared or face high switching costs. We take a closer look at the availability of PFAS alternatives in Figure 14.du-tesnAHEComcfSibPFarvyw Figure 13: EU PFAS Restriction Proposal (Illustrative timeline for entry into force in Jan 2025) Source: UBS, based on EU ECHA Annex XV p24-28, European Chemicals Agency, http://echa.europa.eu/ Current innovation landscape Evidence collected by the ECHA suggests that non-PFAS substitutes exist for most uses of PFAS as shown in Figure 14, but the substitutes differ widely by use. Some uses do not du-tesnAHEComcfSibPFarvyw have technically and economically feasible alternatives when looking at a time span of 2-4 years. Some such examples include industrial food and feed preparation, refrigeration below -50C, insulating gas in high voltage electrical equipment, most medical devices, most uses in transport (seals, gaskets, hydraulic fluids), and the semiconductor manufacturing process. Note that this does not translate into an automatic derogation in the ECHA PFAS restriction proposal. Semiconductor manufacturing and applications affecting the safe functioning of transport vehicles currently do not have a derogation proposed, and any derogation is subject to debate during the public comment period. That said, given the fact that the ECHA will have many parties lobbying for derogations at the same time, we believe that it will be difficult to scrutinize the evidence provided by industry during the limited time period, and the relative importance of some industries (i.e. semiconductors) may make it more likely that "potential derogations" will become actual derogations. As mentioned above, PFAS substitutes differ widely by use, but the most commonly mentioned substances are dendrimers, hydrocarbons, and polyurethanes for textiles, silicones for textiles and cleaners, and ammonia (NH3), carbon dioxide (CO2) and hydrocarbons (propane or isobutane) for refrigerants. Areas of research and development by the chemicals sector range from bio-based materials (from sugars and plant oils) to materials science / nanotechnologies using inorganic products (eg using tio2 and siloxanes). Some companies are also exploring petrochemicals-based alternatives, which include polyurethane and polyester-based technologies. As specific examples, Solvay is working on a new polymerization process which is non-fluorosurfactant, and Perimeter Solutions has increasing sales of non- Q-Series 6 July 2023 ab 17 fluorinated firefighting foams. Besides using PFAS substitutes, companies can also innovate by shifting their product portfolio. In cosmetics for example, some companies market "natural" product lines and offer utility to customers by communicating safety and trustworthiness, even though shiny and smooth characteristics may be less due to lack of PFAS use. Similarly, in restaurants and food packaging, responding to environmental concerns of packaging waste by doing away with some packaging altogether might leave companies less exposed to any impacts of a PFAS ban. Figure 14: PFAS substitutes - summary of ECHA evidence review Source: UBS based on ECHA PFAS Restriction Proposal Annex XV, European Chemicals Agency, http://echa.europa.eu/ Note: Checkmark signifies yes/available, "some" signifies yes/available for some uses, "?" signifies unknown, "X" signifies no/unavailable, and "-" signifies no information. Q-Series 6 July 2023 ab 18 Sector Impact The points to note on the US proposal are that 1. the new proposed limits are substantially lower than the previous advisory level, and 2. limits are proposed for 4 types of PFAS other than PFOS and PFOA. The first point is important as these limits make litigation and the need for clean-up/removal more likely and costly. It is also difficult to detect PFAS at very low levels, so there will be a need for testing equipment and services. The second point is especially important for a wide range of companies since the additional 4 types of PFAS are still currently produced and used globally, as opposed to PFOS and PFOA, which have been banned in most developed countries. The European Chemicals Agency (ECHA) put forward a proposal in February 2023 to restrict the manufacture, use, and sale/import of PFAS or substances/articles containing PFAS above a certain concentration. In essence the proposal is a blanket ban with usespecific 5-year and 12-year derogations. The key questions regarding the ECHA proposal to determine impacts on PFAS-using sectors are: 1. how quickly PFAS alternatives can be developed and at what cost; 2. how many "proposed derogations" or completely new derogations will be included in the final version of the regulation; and 3. whether the derogations could be extended beyond 12 years. For companies producing PFAS, the main concern is not reduced revenue/profit, but significant ongoing litigation and remediation risks. These risks have been well understood in the US and European markets, but have been less of a concern in the rest of the world thus far. See Figure 21itosSecrmupay for relative positioning. Companies producing alternatives to PFAS such as Tosoh are favourably positioned, but it is still too early to judge which of the current producers of PFAS could benefit given the early stage of development. Among companies removing and testing for PFAS such as water utilities and environmental services, the largest companies in the sector are favourably positioned due to the regulatory tailwind for industry consolidation. Water treatment companies and filter manufacturers also stand to benefit. Finally, the largest group of companies to be impacted by tightening PFAS regulation are those using PFAS in production or in their products. Potential cost impact is most significant for semiconductors and air-conditioning sectors, but semiconductors might become eligible for a 12-year derogation under the ECHA proposal depending on the result of the public consultation. Apparel, cosmetics, HPC, and food packaging are also impacted but since alternatives to PFAS are readily available, cost impact is generally limited. However, companies that have been early adopters of PFAS-free production are more favourably positioned in terms of future market share growth. Q-Series 6 July 2023 ab 19 Figure 15: High-level summary of types of base case regulation impact on each sector Source: UBS based on Sector Impact pages and ECHA Evidence Review Note: The number of check marks denote the significance of potential impact to the sector based on contributions from sector analysts and the ECHA Evidence Review. Companies producing PFAS: The main concern for companies producing PFAS is not reduced revenue/profit, but significant ongoing litigation and remediation risks. These risks have been well understood in the US and European markets, but less understood in the rest of the world thus far. In our base case scenario, we would expect a shrinking market for PFAS starting with the EU, but since the share of PFAS in chemical/HVAC companies' overall sales is limited (1-7% of sales), many PFAS producers (3M, Chemours, Daikin, Arkema, BASF, Clariant and Solvay etc.) are unlikely to face significant impacts in terms of lost revenue/profits. Our 3M coverage team comments that a more challenging regulatory environment has pressured OP margins to ~16% (vs ~26% companywide) so the removal of PFAS should be a modest positive for margins. Daikin's chemicals business OP margin of 17% is significantly higher than its overall business at 9.5%, so PFAS regulations may have a negative impact on overall margins. Margins of PFAS sold to the semiconductor sector appear to be higher than other uses, but since we see semiconductor manufacturing as a sector that is more likely to be given a 12-year derogation in the EU PFAS ban, margin impact would be further down the road. Market share data for PFAS as a group is unavailable, but data exists for fluoropolymer (also known as fluoroplastics) consumption and production capacity as shown below. Fluoropolymers such as PTFAs are used for tubing and gaskets for aviation and automotive applications, membranes and coatings for construction, non-stick coatings for household products, packaging, food processing, and protective clothing among others. Q-Series 6 July 2023 ab 20 Figure 16: Production capacity for a subgroup of PFAS Figure 17: Consumption by type for a subgroup of PFAS Figure 18: Consumption by region for a subgroup of PFAS Source: UBS based on AGC website Source: UBS based on AGC website Source: UBS based on AGC website Companies producing PFAS alternatives: PFAS alternatives range from dendrimers, hydrocarbons, and polyurethanes for textiles, silicones for textiles and cleaners, and ammonia (NH3), carbon dioxide (CO2) and hydrocarbons (propane or isobutane) for refrigerants. UBS's Global Chemicals team has identified Tosoh as a supplier of CF3I, a substitute for SF6, HPC and Fluoro Ketone used in magnesium casting, and Dow, Wacker Chemie, and Shin-Etsu are suppliers of silicone (see Figure 19alSi20(oGpCcn)teyb for global capacity). Current PFAS producers are also in a position to develop and supply non-PFAS alternatives to buyers, but it is still too early to judge which of these companies could benefit from increased demand for alternatives given the current stage of R&D. See Global Chemicals p.24 for examples of early R&D. Figure 19: Global Silicone Capacity (2022) Source: UBS based on IHS Companies removing and testing for PFAS: Water utilities needing to remove PFAS from drinking water face a US$8.5bn cost of compliance (based on the US EPA proposal, excluding cost of disposal). UBS's Water Utilities team thinks the US EPA regulation will likely increase acquisition opportunities for the largest companies in the sector. UBS's Environmental Services team see increasing regulation as a tailwind for further industry consolidation. PFAS regulation will drive higher landfill and leachate management costs, while also driving higher customer pricing and an opportunity to charge for PFAS management, treatment and disposal. UBS's US Multi-industry team has identified Pentair and AO Smith as providers of commercial and residential water treatment solutions that may stand to benefit. Similarly, the Global Chemicals team has also identified Kuraray as a potential beneficiary given that their subsidiary Calgon Carbon is a supplier of activated carbon (used in the removal of PFAS). Given the monitoring and management requirements in the ECHA proposal, as well as increased scrutiny globally on PFAS levels in drinking water (Canada, UK, Japan etc.), there is clearly an opportunity for PFAS testing services, but UBS does not currently cover companies with significant Q-Series 6 July 2023 ab 21 exposure to this business area. Companies using PFAS: Although the use of PFAS is widespread in many sectors, evidence collected by the ECHA suggests that non-PFAS substitutes exist for most uses. That said, shifting to substitutes may pose significant costs (R&D, testing, process changes, per unit cost) to some sectors and the majority of companies in our coverage have not prepared to shift to non-PFAS alternatives. We think companies using PFAS can be grouped into the following five categories with regard to the impact of a PFAS ban. 1. Alternatives are not readily available, thus the ban may be delayed but high R&D and pollution control costs are expected. 2. Alternatives are readily available, switching costs are high (testing, process changes, unit cost), and the company has been an early adopter of non-PFAS substitutes, so is relatively advantaged versus peers in future market share and costs. 3. Alternatives are readily available, switching costs are high, but the company has not prepared to shift away from PFAS, so is relatively disadvantaged versus peers in future market share and costs. 4. Alternatives are readily available, switching costs are low, and the company has been an early adopter of non-PFAS alternatives, so is relatively advantaged versus peers in future market share. 5. Alternatives are readily available, switching costs are low, but the company has not prepared to shift away from PFAS, so is relatively disadvantaged versus peers in future market share. In some cases, we also see opportunities for increased revenue if PFAS-free alternatives require more frequent maintenance or replacement. Figure 20: Impact of a PFAS use ban on companies that use PFAS Source: UBS In Figure 21, we summarize the key sector impacts, examples of innovations, as well as itosSecrmupay most and least favourably exposed companies regarding tightening PFAS regulation looking at the next 5-years. Q-Series 6 July 2023 ab 22 Figure 21: Sector impact summary Source: UBS This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multi-year period, whereas UBS equity analysts' basecase views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Tail Risks: Although the following tail risks are not our base case, they are not so far fetched either. For example, the US EPA published its "PFAS Strategic Roadmap" in October 2021, which includes the objectives "Use and harmonize actions under all available statutory authorities to control and prevent PFAS contamination and minimize exposure to PFAS during consumer and industrial uses," and "Establish voluntary programs to reduce PFAS use and release." PFAS producers - litigation PFAS users - sudden boycotts or litigation (see PFAS Litigation for examples) all related sectors - sudden or extremely strict regulations (e.g. PFAS ban in the US, no derogation for semiconductors in the EU). Q-Series 6 July 2023 ab 23 Q-Series UBS Research THESIS MAP EXPOSURE Global Chemicals Production and use of PFAS chemicals: Approx. 1% of sales impact on sector Growth: Margins: ROIC: UBS Research Valuation: SECTOR IMPACT (Regulation) SECTOR innovation SECTOR IMPACT (Financial) Relative position MOST FAVOURABLY EXPOSED Q: How are the companies likely to respond to tightening PFAS regulation? PFAS regulation and associated legal and environmental costs of previous production footprints have been at the top of investors' minds since the back half of the last decade. As we move towards some greater regulation, however, companies will have to replace these chemicals in a wide range of areas such as cookware, cosmetics, firefighting foams & electrical components. By mid-decade EU-based producers will have to phase out production albeit the exact timetables & full extent are not clear at this stage. Tightening water standards (ie US EPA) will likely increase ongoing remediation costs for exposures at certain sites, and for any existing current users result in tighter emissions controls, perhaps requiring further investments. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? Yes; the industry, partly driven by a voluntary decarbonisation agenda, and partly driven by regulatory necessity, is seeking to find alternative technologies. Many companies have formulated away PFAS materials of most concern over a decade ago (e.g. PFOA), but other PFAS materials remain in use. Areas of research and development range from bio-based materials (from sugars and plant oils) to materials science / nanotechnologies using inorganic products (eg using tio2 and siloxanes). Some companies are also exploring petrochemicals-based alternatives, which include polyurethane and polyester-based technologies. As specific examples, Solvay is working on a new polymerization process which is non-fluorosurfactant, and Perimeter Solutions has increasing sales of nonfluorinated firefighting foams. Tosoh is a supplier of CF3I, a substitute for PFAS used in magnesium casting. For some current high end use cases for PFAS materials (e.g. semis, membranes), it is not clear there is currently an effective substitute for those industrials. Several companies also provide technologies for PFAS removal. Asahi Kasei supplies removal technologies for fluorine in water. The technology is described as reducing fluorine levels in water to 0.8mg per liter. Kuraray produces activated carbon, which can be used to remove PFAS. Q: What will be the likely financial impact on the industry in the next 5 years? The tail risk is related to both accelerated environmental and legal timetables and the deterioration of ROCE and cash flows as a consequence of remediation work to water systems and/or unsuccessful legal defences. As we reported here, Chemours, Dupont, and Corteva reached an agreement with US Water Systems on June 2, 2023 regarding the majority of PFAS-related drinking water claims in the US for US$1.185bn. This was at the low end range of market expectations. Some cities and towns with the strongest cases are more likely to hold out, and can increase these costs further. See PFAS Litigation on p65 for details. Q: Which companies are most/least favourably exposed in the scenario above? In EU Chemicals Arkema, BASF, Clariant and Solvay are currently all named in several PFAS/PFOA legal actions in the US. Arkema and Solvay (and BASF and Clariant) did not produce PFAS/PFOAs, unlike US peers Chemours and 3M, but used them as raw materials during their production processes. Chemours (CC) has the most acute risk, with ~20% of sales fluoropolymers (not producing/selling PFOS/PFOA), which fall into PFAS family chemistry. 3M has indicated its intent to exit the market, while Chemours has focused on higher value/growth markets (deselecting from consumer, more at risk industries). However, outright bans with no separation of risk/benefit could impact its broader portfolio. Among Japanese companies, Asahi Kasei and AGC entities in the US have also been named in legal actions, but much less frequently than the major US players. Company Kuraray Tosoh Comment Subsidiary Calgon Carbon is a supplier of activated carbon used in removal of PFAS Supplier of CF3I, a substitute for SF6, HPC and Fluoro ketone for magnesium casting Q-Series 6 July 2023 ab 24 LEAST FAVOURABLY EXPOSED PAST EXAMPLES Wacker Chemie Dow Supplier of silicone for medical, textile, personal care, electronics, and transport uses Supplier of silicone for building, consumer goods/appliances, tape, paint, textile uses Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Company Arkema BASF Clariant Solvay Chemours DuPont Comment Exposed to litigation risk; previous owner Total may share costs in negative outcome. Defending itself against 2,200 lawsuits as of Jan 2023. Exposed to litigation. Exposed to litigation, taking a 93m provision for remediation work. Exposed to litigation risks and material sales risks in a scenario of outright PFAS ban. Capped liability risk (residual owned by Chemours), minor sales/materials risk. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Q: What past events/themes would you draw parallels to? Typically the sector has been adept at moving to new technologies, with examples across pesticides. However we should also be cognisant of the more significant impacts of outsized litigation fines, for example the impact of glyphosate litigation on Bayer. Geoff Haire Joshua Spector Charles Eden Amily Guo Shunta Omura @ubs.com COubs.com @ubs.com (gubs.com (gubs.com UBS Research THESIS MAP Q-Series 6 July 2023 4UBS 25 Q-Series UBS Research THESIS MAP EXPOSURE impact on sector US Multi-Industry UBS Research PFAS-related revenues are increasingly irrelevant for our coverage (share of sales for 3M: 3-4%). Litigation resulting from past sale/use of PFAS is far more important. Growth: Margins: ROIC: Valuation: SECTOR IMPACT (Regulation) SECTOR innovation SECTOR IMPACT (Financial) Relative position MOST FAVOURABLY EXPOSED Q: How are the companies likely to respond to tightening PFAS regulation? 3M plans to wind down its manufacture and use of PFAS by the end of 2025. 3M's ca. US$1.3bn in annual revenue from PFAS represents 3-4% of total revenues, however a more challenging regulatory environment has pressured op. margins to ~16% (vs ~26% companywide) so the removal of PFAS should be a modest positive for margins. That said, the company will likely continue to face litigation for years to come due to its past use of PFAS chemicals, which should have a far larger impact on cash flows and valuation than the loss of PFAS revenues. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? Innovation will likely not be an important factor related to PFAS as evidenced by 3M's plan to phase out PFAS production by year-end 2025. We think this decision reflects an increasingly stringent regulatory environment that in practice could make any presence of PFAS in water an ongoing issue for 3M and others. Q: What will be the likely financial impact on the industry in the next 5-years? It will be difficult to predict the timing of lawsuits but over the coming years we expect legal fees & charges to continue with potentially large cash settlements related to PFAS clean-up, medical monitoring, and/or personal injury. 3M has ca. US$0.6bn in other environmental liabilities, in our view understating the potential costs which we estimate to be US$31bn--all of which we assign to 3M in our price target calculation. Our estimates are based on conversations with experts, the US PFAS Water Contamination Tracker, and analysis of prior settlements (link). In early June 2023, we reported on 3M's US$10bn+ tentative settlement with a host of US cities and towns, separate settlements with Rome, Georgia (US$100mn) and progress towards a settlement with Stuart, Florida. We see ongoing progress and mediation as a positive for 3M as it provides some visibility and could allow the overhang to be lifted quicker than previously thought. Q: Which companies are most/least favourably exposed in the scenario above? 3M is least favourably exposed. While other companies / subsidiaries of companies in our coverage (CARR, JCI, HON) have been named in lawsuits related to PFAS chemicals, we believe the vast majority of liability would fall on 3M, and based on our conversations with legal & technical experts the government contractor defense(5) is least likely to apply to 3M. Pentair (PNR) and AO Smith (AOS) provide residential and commercial water treatment solutions, and hence should be beneficiaries of rising consumer awareness and focus on water quality as a result of regulatory review of PFAS. That said, should wider scale removal of PFAS from public water occur at the municipal level, it could limit the need for homeowners and businesses to purchase their own filtration products/systems. Company Pentair AO Smith Comment Provider of commercial and residential water treatment solutions Provider of commercial and residential water treatment solutions 5. Used to protect the interests of the federal government by giving private contractors (e.g. chemical manufacturers) liability protections for manufacturing products for the government (e.g. for the military). Q-Series 6 July 2023 ab 26 LEAST FAVOURABLY EXPOSED Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Company 3M Comment PEAS-related revenues are increasingly irrelevant, but litigation risks remain important. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Chris Snyder Neal Burk Damian Karas @ubs.com @ubs.com @ubs.com UBS Research THESIS MAP Q-Series 6 July 2023 SUBS 27 Q-Series UBS Research THESIS MAP EXPOSURE UBS Research Global Heating Ventilation and Air Conditioning (HVAC) Production and use of PFAS chemicals: Overall chemical business approx. 7% of salesfor Daikin. impact on sector SECTOR IMPACT (Regulation) SECTOR innovation SECTOR IMPACT (Financial) Relative position LEAST FAVOURABLY EXPOSED Growth: Margins: ROIC: Valuation: Q: How are the companies likely to respond to tightening PFAS regulation? PFAS are used to produce fluorinated gases, which are used in refrigeration, air-conditioning, and heat-pumps. A major fluorinated chemical and air conditioner manufacturer, Daikin Industries, is enhancing PFAS collection rates as an environmental measure. The collection rate is 99.0% at present and the company is aiming to raise the rate further to 99.9% by 2025. Daikin uses many types of refrigerants in its air-conditioners. Note that one of Daikin's key refrigerants, R-32 (CH2F2), is excluded from the EU and OECD definition of PFAS, while R-410A, R-134A, and 454B are included. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? The ECHA's evidence review suggests that PFAS use for air-conditioning and heat-pumps may be continued in cases where building regulations and fire codes do not allow for use of alternatives such as hydrocarbon refrigerants, CO2, and ammonia. c.91% of Daikin's business is related to the refrigerant R-32(CH2F2), a greenhouse gas which contains a F-C bond, but is not considered persistent because it has an atmospheric lifetime of only 5.4 years and and degrades into CO2 and HF (not a PFAS arrowhead). Daikin has not disclosed information on how its chemicals business will be impacted by or will respond to the ECHA proposal. Currently, the company's information disclosure is limited, except that it is avoiding outflows from its factories as much as possible, and that it aims to expand its chemicals offering to non-fluorine materials as well (e.g. silicone, next gen materials for semiconductors, biomass based materials). Q: What will be the likely financial impact on the industry in the next 5-years? Daikin's chemical business accounted for 7% of sales and 12% of OP in FY3/23. The chemical business OP margin of 17% is significantly higher than its overall business at 9.5%. Its medium-term plan targets chemicals OP growing by 21% by FY3/26 (OP margin 18%). Daikin's regional chemicals sales exposure is highest in Japan (27%), followed by the Americas (23%), then China (21%), and Europe (16%). The direct impact on Daikin of a PFAS ban would be refrigerant development/ replacement cost and a reduced market for its chemicals business. Given Daikin's high exposure to the US market, litigation and remediation risks based on past production cannot be ruled out even though the current plant PFAS collection rate is 99.0% (the company has been named as a defendant in Michigan, Georgia, and Ohio). The end-client industries for Daikin's chemical business include semiconductors, automobiles, IT & handsets, renewable energy, and air conditioners. Any major air conditioner refrigerant manufacturers that use PFAS are likely to be required to accelerate replacement and development of next-generation refrigerants. Q: Which companies are most/least favourably exposed in the scenario above? As we mentioned above, Daikin Industries is likely to be heavily affected in the global HVAC sector. On the other hand, the air conditioner market is likely to continue to grow over the medium term regardless of the PFAS regulations. Accordingly, the companies that develop more economically rational and useful next-generation refrigerants that do not have a greenhouse gas effect earlier than peers are expected to become even more competitive in the market. Company Daikin Industries Comment One of the leading fluorine chemical suppliers. One of Daikin's key A/C refrigerants is not included in the PFAS definition used by the OECD and EU, while others are included. Q-Series 6 July 2023 ab 28 Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Hikaru Mizuno @ubs.com Q-Series 6 July 2023 *UBS 29 Q-Series UBS Research THESIS MAP EXPOSURE US Water Utilities Management of PFAS levels in water. Potentially affects all water supply. UBS Research impact on sector Growth: Margins: ROIC: Valuation: SECTOR IMPACT (Regulation) SECTOR innovation SECTOR IMPACT (Financial) Relative position MOST FAVOURABLY EXPOSED LEAST FAVOURABLY EXPOSED milestones Q: How are the companies likely to respond to tightening PFAS regulation? Companies will complete testing over the next 1-2 years in anticipation of a compliance deadline by 2027 from the US Environmental Protection Agency's proposed rule. Rate cases or tracking mechanisms would recover the costs for investor owned utilities. The regulation will likely increase acquisition opportunities for the largest companies in the sector. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? Yes. American Water Works (AWK) and Essential Utilities (WTRG) have identified investments in PFAS compliance technology. AWK is piloting ion exchange resins along side granular activated carbon to compare PFAS removal and media performance. AWK has installed GAC to remove PFAS at five locations that have elevated source water levels. Q: What will be the likely financial impact on the industry in the next 5 years? Based on the EPA proposal water systems face an US$8.5bn cost of compliance. This excludes costs of co-occurrence of PFAS with other contaminants and the cost of disposing of spent filtration materials. EPA estimated that the per person cost to comply at larger systems (greater than 3,300 people to 10,000 people) for granular activated carbon is US$136-US$239, for ion exchange US $121-US$218 and for reverse osmosis US$326-US$462. The penalty for non-compliance falls under the Section 1433 of the Safe Drinking Water Act, up to US$27,500/day per occurrence. Q: Which companies are most/least favourably exposed in the scenario above? AWK and WTRG could experience an increase in their acquisition contribution to EPS growth. AWK's 8% EPS growth rate includes 1% to 2% from acquisitions. Company American Water Essential Utilities Comment 2023 environmental budget: US$195mn. PFAS compliance spending disclosed: US$1bn in capex and US$50mn in operating expenditure over the next 3-5 years. 2023 PFAS related budget: US$40mn. Has company PFAS control targets. (Guidance on 2Q'23 results call) Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Company Public Water Systems Comment 3,400-3,600 water systems expected to be non-compliant according to US EPA. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Q: What milestones are we watching in US regulation? Q-Series 6 July 2023 ab 30 Completion of the EPA proposed rule. We expect a ruling as early as 3Q'23 but by early 2024. Gregg Orrill Ross Fowler @ubs.com + @ubs.com + UBS Research THESIS MAP Q-Series 6 July 2023 SUBS 31 Q-Series UBS Research THESIS MAP EXPOSURE North America Environmental Services Removal tech/services; less than 5% of sales impact on sector Growth: Margins: ROIC: UBS Research Valuation: SECTOR IMPACT (Regulation) SECTOR innovation SECTOR IMPACT (Financial) Relative position MOST FAVOURABLY EXPOSED LEAST FAVOURABLY EXPOSED Past Examples Q: How are the companies likely to respond to tightening PFAS regulation? PFAS remediation is an opportunity for the North America Environmental Services sector. In our view, increasing regulation is likely to drive a tailwind for further industry consolidation in the medium term with smaller, less well capitalised companies potentially opting to sell to avoid compliance costs. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? Clean Harbors (CLH) recently completed an environmental study for PFAS elimination through hightemperature thermal destruction. The 2021 study demonstrated 99.9999% PFAS elimination and stack emissions that were well below federal ambient air limits. The company is in dialogue with regulators to position its network of hazardous waste incineration capacity. Q: What will be the likely financial impact on the industry in the next 5-years? In 2022, the US EPA proposed designating two PFAS compounds as hazardous substances. PFAS compliance will likely drive higher landfill and leachate management expenses for the industry. However, the consolidated nature of US landfill capacity will likely drive higher customer pricing and an opportunity for the waste companies to charge for PFAS management, treatment, and disposal services. Q: Which companies are most/least favourably exposed in the scenario above? Within our coverage, we see Clean Harbors Inc (CLH), Waste Management Inc (WM), and Republic Services Inc (RSG) as well positioned to benefit from new compliance rules given their existing hazardous waste treatment & disposal assets. Company Clean Harbors Inc Waste Management Inc Republic Services Inc Comment Existing network of hazardous waste incineration. Existing network of hazardous waste treatment and disposal. Existing network of hazardous waste treatment and disposal. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Company OPAL Inc Comment PFAS compliance cost potentially crowding out some incremental renewable natural gas investment. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Q: How have environmental regulations impacted the sector in the past? Historically, environmental regulation and higher compliance thresholds create cost and complexity in the waste industry, which has enabled consolidation and limited competition from the long tail of waste services companies. Q-Series 6 July 2023 ab 32 Jon Windham William Grippin UBS Research THESIS MAP @ubs.com @ubs.com Q-Series 6 July 2023 SUBS 33 Q-Series UBS Research THESIS MAP Global Semiconductors EXPOSURE Current/Past use. Approx. 50 - 100% of sales. IMPACT ON SECTOR Growth: Margins: ROIC: UBS Research Valuation: SECTOR IMPACT (REGULATION) SECTOR INNOVATION SECTOR IMPACT (FINANCIAL) RELATIVE POSITION Q: How are the companies likely to respond to tightening PFAS regulation? PFAS play a critical role at several stages in the manufacturing process of a semiconductor, from lithography to packaging, so substitution will be the likely path that companies follow. However, in many cases the materials that currently contain PFAS have such unique and specific technical requirements that substitution will be challenging. Not only does a substitute need to be found, developed and readied for high volume manufacturing (HVM) but the change may require additional tooling or process changes that will further lengthen timelines for implementation of alternatives. In a report commissioned by the Semiconductor Industry Association (SIA), RINA Tech estimate that timelines for substitution could stretch from 3 years to beyond 20 years, if a viable alternative is even achievable. In the short term companies are likely to push for exemptions (seen recently) to any bans given the criticality of semiconductor supplies to the wider global economy, as exhibited during the COVID-pandemic related supply disruption. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? Many companies in the sector have joined SIA's Semiconductor PFAS Consortium, which is a group formed to formulate an industry-wide approach and better inform public policy and legislation related to the semiconductor industry's use of PFAS. Members include 10 device manufacturers, 8 equipment suppliers and 21 chemical/ material suppliers. In terms of the device manufacturers and equipment suppliers, they scarcely mention PFAS directly, beyond flagging them as a potential regulatory risk to the business. Q: What will be the likely financial impact on the industry in the next 5 years? If bans are phased in, it is likely to have a negative impact on margins, ROIC and potentially valuation. There would be an associated R&D cost of finding and developing alternatives, potentially higher capex if investments are needed to adjust processes and machinery, potentially higher cost of alternatives and potential fines for not complying with new regulations. It is likely that some of these costs would be passed on to customers through higher prices. Q: Which companies are most/least favourably exposed in the scenario above? The impact is likely to be felt across the industry, whether directly through higher costs or indirectly through higher prices. Foundries, OSATs and IDMs are likely to be the most directly impacted, given their position in the manufacturing process exposes them to the point of use of PFAS. Equipment suppliers will be impacted by any changes to the manufacturing process necessitated by PFAS substitutes, while fabless companies would likely be impacted through higher prices. Francois Bouvignies Harry Blaiklock (gubs.com @ubs.com Q-Series 6 July 2023 4UBS 34 Q-Series UBS Research THESIS MAP Japan Tech Hardware EXPOSURE Current/Past use (Approx 20-100% of sales) IMPACT ON SECTOR Growth: Margins: 4 UBS Research ROIC: 4 Valuation: SECTOR IMPACT (REGULATION) SECTOR INNOVATION SECTOR IMPACT (FINANCIAL) RELATIVE POSITION LEAST FAVOURABLY EXPOSED Q: How are the companies likely to respond to tightening PFAS regulation? Semiconductor related players would be negatively impacted due to usage of PFAS in the semiconductor manufacturing process, from lithography to packaging, most intensively in the dry etching process. The restriction requires additional cost for semiconductor players, semiconductor users and equipment vendors. One of the heaviest usages of PFAS occurs in the dry etching process, where PFAS is used to keep surface temperatures on wafers during process. The control of temperature is critical as it directly relates to process quality. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? Many companies in the sector have joined SIA's Semiconductor PFAS Consortium, which is a group formed to formulate an industry-wide approach and better inform public policy and legislation related to the semiconductor industry's use of PFAS. Q: What will be the likely financial impact on the industry in the next 5 years? If bans are phased in, it is likely to have a negative impact on margins, ROIC and potentially valuation. There would be an associated R&D cost of finding and developing alternatives, potentially at a higher cost than currently. It is likely that some of these costs would be passed on to customers such as tech conglomerates that produce infrastructure equipment. Q: Which companies are most/least favourably exposed in the scenario above? The negative impact would be felt by semiconductor players first, and next would be customers such as tech conglomerates that buy semis at a higher price. Incremental R&D costs would be incurred by semi equipment vendors. We see no winners from tightening PFAS regulation in this sector. Company Renesas Sony Tokyo Electron Comment One of the biggest semiconductor firms in Japan (100% of its revenue is semiconductors). A big CMOS sensor player in the global market, but the division is 20% at the corporate level. One of the biggest suppliers in dry etching so probably needs to spend more on R&D. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Kenji Yasui Sean Park kenji.yasui @ubs.com @ubs.com UBS Research THESIS MAP Q-Series 6 July 2023 4UBS 35 Q-Series UBS Research THESIS MAP Japan Electronic Components EXPOSURE Likely being used in a wide range of electronic components (no disclosure) UBS Research IMPACT ON SECTOR SECTOR IMPACT (REGULATION) SECTOR INNOVATION SECTOR IMPACT (FINANCIAL) RELATIVE POSITION LEAST FAVOURABLY EXPOSED Growth: Margins: 4 ROIC: 4 Valuation: 4 Q: How are the companies likely to respond to tightening PFAS regulation? As products handled by electronic component companies vary by company, exposure to PFAS also differs from company to company. Many avoid detailed disclosure, making it difficult for us to ascertain all the facts, but PFAS appear to be used in making a wide range of electronic components in electrical equipment, such as refrigerants for power semiconductor production, insulation cases, sealing materials, and lead cable films for components. If regulation is tightened, companies are likely to consider substitutes, but if they find it difficult to find substitutes, they may ask the authorities for a moratorium or exemption from regulations via industry organisations or others. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? In our interviews with industry companies, we received answers from some that they do not use PFOS or PFOA, which are currently subject to European REACH regulations. Given the large number of substances on the PFAS list, however, many of the companies simply answered that they are currently investigating, or that they choose not to disclose details. These companies are likely to cope with regulation by considering substitutes or, if that is impractical, to plead with authorities for moratoria or exemptions. Q: What will be the likely financial impact on the industry in the next 5 years? If the scope of the PFAS regulations is widened, companies will be required to switch to substitute materials. In order to do so, they will have to spend more on R&D. It is difficult to estimate the scale of impact given limited disclosures, but we expect changes to depress profit margins and ROIC. Q: Which companies are most/least favourably exposed in the scenario above? In the tech hardware sector, the semiconductor industry, which uses PFAS in processes ranging from lithography to packaging, is most exposed to the scenario. In our coverage, power semiconductor companies and package substrate manufacturers are likely to be affected significantly. It is difficult at this stage to predict which companies will benefit from tightened regulations, but those that can respond flexibly to regulation may expand market share, mainly among European clients. Depending on how companies cope with regulations, disparities among them may widen. Company Rohm Ibiden Shinko Electric Comment Major manufacturer of analogue and power semiconductors. Some 90% of sales are generated by semiconductors, about 7% in Europe Major manufacturer of semiconductor package substrates; about 50%-60% of sales are estimated to be generated by package substrates, about 8% in Europe About 65% of sales are generated by IC package substrates; exposure to Europe is roughly zero. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analyst base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Shingo Hirata @ubs.com Q-Series 6 July 2023 4UBS 36 Q-Series EXPOSURE impact on sector SECTOR IMPACT (Regulation) SECTOR innovation SECTOR IMPACT (Financial) Relative position MOST FAVOURABLY EXPOSED LEAST FAVOURABLY EXPOSED US Softlines Approx 60% of sales of our coverage universe based on apparel sales. UBS Research Growth: Margins: ROIC: Valuation: Q: How are the companies likely to respond to tightening PFAS regulation? Most US companies have developed their own guidelines on usage of chemicals or follow a national association's guidelines. We therefore believe companies will invest in processes to gradually phase out the use of PFAS across all products if US regulation on PFAS tightens. In fact, many companies in our coverage universe have either already established targets to eventually stop using PFAS in their product lines or eliminated PFAS from their supply chain. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? Yes. Softline companies are looking for substitutes to comply with PFAS regulation, while preserving the key attributes provided by these substances, such as water repellence. For instance, LEVI has banned the use of PFAS in its products and already eliminated these chemicals from its supply chain. Q: What will be the likely financial impact on the industry in the next 5-years? We think initial investments to improve manufacturing processes could mildly pressure short-term margins and returns, but do not believe these will have a material effect on long-term metrics. At the same time, we see potential market share opportunities for ESG-focused companies that stand out for being early adopters. Consumers are increasingly paying attention to ESG matters, particularly Gen Z consumers, and will likely favour brands and retailers with an environmental focus. We therefore think these companies' growth would outperform. Q: Which companies are most/least favourably exposed in the scenario above? Overall, we believe companies with strong balance sheets will have the financial flexibility to invest and transition more rapidly than those with financial constraints. We think Levi's (LEVI) and Deckers (DECK) will be among the most favoured names given a high ESG-focus and early elimination of PFAS from their supply chains. Since PFAS regulation is most related to apparel, we believe companies with a higher skew towards footwear and accessories categories will be relatively less impacted by this issue. Some companies we believe fall under this criteria include Signet Jewelers (SIG) and On Holding (ONON). At the same time, we underscore several companies where we have a bearish view on their fundamentals and lack a clear timeline to phase out all types of PFAS. These include Macy's, Kohl's, and Nordstrom. Company Comment Deckers High exposure to footwear and already phased out PFAS usage. Levi's High ESG focus and already stopped making products with PFAS. Signet Jewelers No exposure to apparel as 100% of sales comes from jewelry. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Company Macy's Nordstrom Kohl's Comment No clear commitment on PFAS elimination timeline. No clear commitment on PFAS elimination timeline. Limited restriction of PFAS usage on its supply chain. Q-Series 6 July 2023 ab 37 Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Jay Sole Mauricio Serna Tiffany Agard Natalie Koltermann @ubs.com @ubs.com @ubs.com @ubs.com UBS Research THESIS MAP Q-Series 6 July 2023 SUBS 38 QSe-cSteorrieIsmpact UBS Research THESIS MAP EXPOSURE European Apparel Retail Past use only impact on sector Growth: Margins: ROIC: UBS Research Valuation: SECTOR IMPACT (Regulation) SECTOR innovation SECTOR IMPACT (Financial) Relative position MOST FAVOURABLY EXPOSED Q: How are the companies likely to respond to tightening PFAS regulation? European apparel/fashion retailers have banned the intentional use of PFAS. With water use being an important step in production for dyeing/washing, etc. the garments may however still be exposed to PFAS if the water source itself may be contaminated with traces of PFAS. Given that retailers generally rely on the supply chains in Asia, the companies have undertaken control measures such as regular proficiency tests for substances including PFOS, PFOA, PFHxA, PFHxS and related salts. Companies have strictly outlined in their chemical management policies not to merchandise garments containing PFAS above certain thresholds. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? Players such as H&M (HMB), Inditex (ITX), Zalando (ZAL), Asos (ASC), Next (NXT) among others have come together to become signatories/contributors of the Zero Discharge of Hazardous Chemicals Program (ZDHC). The ZDHC creates a `Manufactured Restricted Substances List' or MRSL which lays out the maximum thresholds for PFAS and other hazardous substances. The main goal of the ZDHC is to certify players in the value chain based on garment testing and thresholds so that players sourcing from ZDHC certified suppliers may be assured that garments are in adherence to the PFAS regulation. There is limited disclosure on innovation with respect to substitutes for PFAS. Q: What will be the likely financial impact on the industry in the next 5 years? We do not see material near-term/medium-term direct financial impact specifically from PFAS given most players have already banned intentional use in adherence to regulation. That said, companies may potentially step up their testing intensity for PFAS, which may not be a meaningful direct cost but lengthen the lead time taken from on-site production to merchandising, which may have an indirect financial impact due to higher fashion risk. This would also eliminate the risks in the supply chain over time of unintentional/indirect usage as we point to below. Q: Which companies are most/least favourably exposed in the scenario above? In our view ITX is the most favourably positioned given its proximity sourcing strategy. Given ITX sources 60-70% from suppliers in and close proximity to Europe, more of their suppliers (especially those in the EU) are likely complying with any anticipated EU requirements on PFAS and the water quality thresholds. Marketplaces selling partner brands like AboutYou (YOU) and ZAL may see little or no impact as the partner brands would bear the quality and testing responsibilities. It is difficult to have a view on least favourably positioned stocks given the apparel industry's own efforts to identify and eliminate direct `intentional' usage of PFAS as explained above. We are also seeing countries in the supply chain outside Europe (for example China) banning the production and use of PFOA and PFOS. Exposure from less well-regulated supply chains than EU supply chain standards could potentially increase the risk; however, this may be different even on an individual supplier basis, which may be difficult to detect and map. Company Inditex Zalando AboutYou Comment Proximity sourcing strategy with EU based suppliers likely complying with PFAS/water quality requirements. Selling partner brands with limited own brand exposure. Q-Series 6 July 2023 ab 39 Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Sreedhar Mahamkali Yashraj Rajani UBS Research THESIS MAP (gubs.com COubs.com Q-Series 6 July 2023 SUBS 40 Q-Series UBS Research THESIS MAP Japan Retail EXPOSURE Likely used for water-repellent apparel and food packaging (no disclosure) UBS Research IMPACT ON SECTOR Growth: Margins: R01C: 0 Valuation: SECTOR IMPACT (REGULATION) SECTOR INOVATION SECTOR IMPACT (FINANCIAL) RELATIVE POSITION MOST FAVOURABLY EXPOSED Q: How are the companies likely to respond to tightening PFAS regulation? If PFAS regulations are introduced or tightened, Japanese retail companies may be required to cope with 1) indirect risk from sustainability of merchandise procurement and COGS increases, and 2) direct impacts from review of materials and managing supply chains for products developed inhouse, including PB (private brand) products. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? Environmental awareness has grown in recent years in Japan's retail sector as a whole, but companies do not appear to have made much progress toward serious discussions or making adequate preparations for PFAS regulation. Since Europe and the US are ahead of Japan in terms of regulations and action, we assume Japanese retail companies that are active overseas, including in Europe and the US, are ahead of their peers in PFAS-related measures. Q: What will be the likely financial impact on the industry in the next 5 years? Since retailers generally handle a wide variety of merchandise, it should be comparatively less difficult for them to find substitutes. Therefore, we do not anticipate a serious impact on earnings. Still, we assume there is a risk of higher COGS alongside the shift to substitutes, and that they have a relatively high risk of losing customers if differences in domestic and overseas regulations cause infringements, or if they do not mount an adequate response, particularly in the case of in-house-developed PB products. Q: Which companies are most/least favourably exposed in the scenario above? In Japan's retail sector, Fast Retailing (9983), which operates globally, is ahead of its peers in terms of response to PFAS regulations. We therefore think it is positioned relatively well. The company made a commitment in 2013 to fully eliminating discharge of hazardous chemical substances and disclosed guidelines for partner manufacturers and a list of the substances subject to its rules. Also, in order to contribute to the resolution of issues that affect the entire sector, the company has joined the Zero Discharge of Hazardous Chemicals (ZDHC) group, consisting of major European and US brands. It is the only Japanese company belonging to the ZHDC. Nitori (9843) and Ryohin Keikaku (7453), which manufacture their own merchandise, as Fast Retailing does, monitor factories and manage supply chains in ways that require subcontracted producers to monitor and reduce the use of chemical substances. At present, however, they have not joined any international group such as ZHDC. Company Fast Retailing (9983) Comment Leading Japan's retail sector in PFAS measures as a global brand Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analyst base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Nozomi Moriya Yusuke Isogai Xuening Wen @ubs.com l@ubs.com @ubs.com UBS Research THESIS MAP Q-Series 6 July 2023 4UBS 41 Q-Series UBS Research THESIS MAP Korea Cosmetics EXPOSURE Current/Past use: Approx. less than 1% of sales. IMPACT ON SECTOR Growth: Margins: R0IC: UBS Research 4 Valuation: SECTOR IMPACT (REGULATION) SECTOR INNOVATION SECTOR IMPACT (FINANCIAL) RELATIVE POSITION MOST FAVOURABLY EXPOSED Q: How are the companies likely to respond to tightening PFAS regulation? There have been no PFAS regulations implemented yet for Korea cosmetics firms. However, according to major Korea cosmetics players, they have been trying to reduce exposure to PFAS considering customers' concerns about human and environmental safety. Accordingly, they have established and applied their own global-leading quality standards for using ingredients. However, small to mediumsized cosmetics firms have not closely monitored PFAS regulation yet, while the Ministry of Food and Drug Safety has been trying to closely monitor Korean cosmetics firms' PFAS usage. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? According to Amorepacific management, it restricts the use of PFAS in raw materials and products given the problem of accumulation in the environment or living organisms has been an issue due to the hard-to-decompose characteristics. Even if certain ingredients can be used legally, Amorepacific manages them as prohibited or restricted according to Amorepacific's internal criteria relating to safety assessment studies. LG H&H has also been trying to reduce PFAS in its raw materials and products, but does not provide a timeline towards elimination. Q: What will be the likely financial impact on the industry in the next 5 years? We expect limited financial impact for Korean major cosmetics players considering 1) limited exposure to PFAS, 2) their focus on the skincare category rather than the makeup category, which uses more PFAS as an ingredient. If regulations are implemented, we think it could have a negative impact for mass brands, which have focused on the makeup category. Q: Which companies are most/least favourably exposed in the scenario above? We think there should be limited impact on the Korea cosmetics sector overall, while Amorepacific / LG H&H should partially benefit if tightening regulations are implemented as 1) Amorepacific already prohibited using PFAS in its products/ raw materials and 2) both Amorepacific and LG H&H have been focusing on the skincare category. Company Amorepacific LG H&H Comment Focus on premium skincare category; already restrict using PFAS. Leading domestic skincare / household / beverage company; trying to reduce PFAS exposure. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Jaehyung Choi Jiwoo Hong ubs.com COubs.com + 82-2-3702 8172 + 82-2-3702 8807 UBS Research THESIS MAP Q-Series 6 July 2023 4UBS 42 Q-Series UBS Research THESIS MAP EXPOSURE Japan Cosmetics Current/Past use (no disclosure on exposure) IMPACT ON SECTOR Growth: Margins: UBS Research ROIC: 4 Valuation: SECTOR IMPACT (REGULATION) SECTOR INNOVATION SECTOR IMPACT (FINANCIAL) RELATIVE POSITION MOST FAVOURABLY EXPOSED Q: How are the companies likely to respond to tightening PFAS regulation? In the cosmetics sector, regulations are already moving forward in overseas markets. Laws have been established in California, and interest is surging in the EU, Australia, New Zealand, and Asia. Japan is not yet considering PFAS regulations as broad as those in Europe and the US, and there has so far been no material impact on business. Shiseido has already eliminated many PFAS substances, and is taking action to eliminate substances in the broader definition of the PFAS. Kose may make adjustments to comply with these regulations in the development process of products that use PFAS, but there will be no impact on the final product. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? Shiseido is preparing for development of products without PFAS that nevertheless perform the same way as current products that do use PFAS. Kose has long been trying to minimise the use of PFAS but is also working to create products with the same functions as existing products using substitute substances. Q: What will be the likely financial impact on the industry in the next 5 years? PFASs have water-repellent and oil-repellent properties that contribute greatly to the functionality and useability of various products. If changes to prescriptions or new product development are required to comply with laws introduced to restrict the use of PFAS, we may see temporary cost inflation. Q: Which companies are most/least favourably exposed in the scenario above? Shiseido already has a track record and know-how in PFAS measures in overseas markets and is most likely in the sector to be able to maintain product performance without PFAS. Kose is not seeing any impact on its earnings from regulations at present, but the company is aiming to take action in anticipation of future regulations. Company Shiseido (4911) Kose (4922) Comment The company has a track record in complying with regulations in countries overseas, and can cope with tighter regulations in Japan. The company has a track record in complying with regulations, and can cope with tighter regulations in Japan. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analyst base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Hisae Kawamoto @ubs.com UBS Research THESIS MAP Q-Series 6 July 2023 4UBS 43 Q-Series UBS Research THESIS MAP China Cosmetics EXPOSURE Current/Past use (Approx. 1.5% of sales) IMPACT ON SECTOR Growth: Margins: R01C: UBS Research Valuation: SECTOR IMPACT (REGULATION) SECTOR INNOVATION SECTOR IMPACT (FINANCIAL) RELATIVE POSITION MOST FAVOURABLY EXPOSED Q: How are the companies likely to respond to tightening PFAS regulation? China has not yet implemented any PFAS regulations on the cosmetics sector. In 2019, the Ministry of Ecology and Environment (MEE) issued regulations to prohibit the production, circulation, use, import and export of PFOS and PFOSF. PFOS and PFOA are included in MEE's "list of key controlled new pollutants (2023)" for enhanced regulation, including prohibition of production, process and use. We have not seen regulations on key PFAS used in cosmetics, such as PTFE. Domestic cosmetics companies have not yet started to watch for PFAS, in our view. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? Unlikely. Leading domestic cosmetics companies are emphasizing R&D more, yet the focus is on product efficacy and functionality of raw materials. The discussion about PFAS in general remains minimal in China. We expect limited research on PFAS substitutes for domestic cosmetics companies at this stage. Yet the increasing popularity of "clean beauty" among the younger generation should be beneficial on this front. Q: What will be the likely financial impact on the industry in the next 5 years? We expect limited financial impact on the industry if no specific regulation on cosmetics sector is implemented by the regulators, or there is no significant shift in consumer mindset. Yet if industrywide regulation is implemented, we expect downside to sales growth and margins, mainly in the colour cosmetics category where the usage of PFAS is more common. Q: Which companies are most/least favourably exposed in the scenario above? We expect no significant impact of PFAS regulation on China's cosmetics sector at current stage. However, if we do observe tightening regulation, we would expect 1) international cosmetics companies (such as those in Japan, the EU and the US) that have a high level of preparedness due to local regulations to be favourably exposed, and 2) companies with less sales contribution from the colour cosmetics category to be more favourably exposed. Company Botanee Proya Bloomage Comment Company focuses on products using plant extracts and for sensitive skin. Leading domestic company and increasingly emphasizing R&D. Strong R&D capabilities in cosmetics raw materials through synthetic biology. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Ingrid Zhang Xin Chen Nate Zhou @ubs.com COubs.com @ubs.com UBS Research THESIS MAP Q-Series 6 July 2023 4UBS 44 Q-Series UBS Research THESIS MAP EXPOSURE US Household & Personal Care/ US Beverages Current/Past use (insignificant as % of sales) impact on sector Growth: Margins: ROIC: UBS Research Valuation: SECTOR IMPACT (Regulation) SECTOR innovation SECTOR IMPACT (Financial) Relative position MOST FAVOURABLY EXPOSED Q: How are the companies likely to respond to tightening PFAS regulation? In the US Household & Personal Care sector, companies that sell products that are primarily related to personal hygiene (dental floss, shampoo, shaving cream), sun and skin care, cosmetics, cookware, and cleaning products, are most directly impacted by tightening PFAS regulation. For example, soaps and detergents, which make up ~5% of COGS for the HPC sector, have been found to be slightly exposed to PFAS products during the manufacturing process. Thus far, a US$5mn settlement early in 2023 by Thinx (brand under Kimberly-Clark) is the first major class action settlement related to PFAS within the space. However, we do not see widespread issues across our coverage universe, with some claims arising on a brand-specific basis. In such cases, companies could conceivably have to incorporate more expensive changes to their manufacturing processes to be compliant with regulation, but we expect the impact to be mostly de minimis. For Beverage companies PFAS are less of a concern given the nature of the category, although there have historically been claims made around trace levels of PFAS in the sparkling water category, as well as some juices. As such, we do not expect a major response will be required. For Beverage Alcohol companies, PFAS appear to be essentially a non-issue. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? While most HPC and Beverage companies have laid out ambitious targets around more sustainable packaging and reducing the use of virgin plastics, concrete targets to reduce the use of PFAS are more difficult to find. Some have though - YETI has removed long-chain PFAS from all products, and is in the process of identifying replacements for short chain PFAS (which are currently used as a water repellant). Companies like Yeti have talked about a multi-year goal of eliminating PFAS from their products by finding substitutes. With outstanding claims facing the likes of PG, CLX and CL around the use of PFAS, we expect more companies to take a more proactive approach on reducing their exposure to these chemicals. As mentioned above, we believe this issues is less applicable for Beverage companies. However, given the relative prevalence of this issue within the Packaged Food space, we expect it will be more top of mind for the likes of PepsiCo (who owns Frito Lay, Quaker Foods). Q: What will be the likely financial impact on the industry in the next 5 years? We would not expect tightening PFAS regulations to have a meaningful financial impact on either the HPC or Beverage industry in the next 5 years. While we do not have an estimate for the significance of PFAS in companies' packaging for HPC, we see little reference within ESG reports, which leads us to believe that this will be more of a select, case-specific issue. Q: Which companies are most/least favourably exposed in the scenario above? Companies who are most favourably exposed to this scenario are those with either (1) little-to-no exposure to categories where PFAS are of elevated concern, or (2) plans already in place to pursue replacement materials. Company Beverage Alcohol Companies (STZ, BF.B, TAP, SAM) Non-Alcoholic Beverage Companies Comment Would not be impactful to business. Very limited perceived impact to the business. Q-Series 6 July 2023 ab 45 LEAST FAVOURABLY EXPOSED Yeti Company is taking a front-footed approach to addressing the issue. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Company Estee Lauder Procter & Gamble Comment Cosmetics industry is likely to be one of the more impacted industries. Broad portfolio exposed to categories where PEAS are an elevated concern. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Peter Grom Bryan Adams Allison LaFleur @ubs.com @ubs.com @ubs.com UBS Research THESIS MAP Q-Series 6 July 2023 *UBS 46 Q-Series UBS Research THESIS MAP EXPOSURE US Restaurants Current/Past use (low exposure) impact on sector Growth: Margins: UBS Research ROIC: Valuation: SECTOR IMPACT (Regulation) SECTOR innovation SECTOR IMPACT (Financial) Relative position MOST FAVOURABLY EXPOSED LEAST FAVOURABLY EXPOSED Q: How are the companies likely to respond to tightening PFAS regulation? Restaurant companies have low to no exposure from the tightening PFAS regulations. PFAS usage is found mostly in food packaging such as paper wraps and cardboard boxes. Quick service restaurants (QSR) such as RBI (Ticker: QSR), YUM and MCD aim to eliminate intentionally added PFAS from guest packaging in the near future (by 2025), while CMG, SHAK and WEN claim there is currently no intentionally added PFAS in their food packaging. SBUX has eliminated PFAS from US stores in 2022, and aims to do the same for all stores in 2023. We were unable to confirm plans around PFAS for most casual dining restaurants and pizza companies, but these companies either generally have even lower PFAS exposure than QSR restaurants due to lower food takeout rate, or use packaging that does not contain PFAS (pizza boxes). Q: Are companies innovating today in ways that will prepare them for PFAS regulations? Restaurant companies that already eliminated PFAS from their food packaging should keep monitoring their supply chain for any added PFAS, while others should continue to work on phasing out PFAS by finding substitute material for food packaging, such as PLA (Polylactic Acid) or reusable packaging. Q: What will be the likely financial impact on the industry in the next 5 years? We expect low financial impact on the restaurant industry given the low exposure. Q: Which companies are most/least favourably exposed in the scenario above? Although the exposure to PFAS regulations is very low, we view QSR and fast casual restaurants as less favourably exposed given the higher usage of food packaging, whereas casual dining restaurants are most favourable given the lower usage of food packaging. Company The Cheesecake Factory (CAKE) Bloomin' Brands (BLMN) Texas Roadhouse (TXRH) Comment Casual dining restaurants have lower exposure to PFAS than QSR due to lower takeout and delivery ratio. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Company Restaurant Brands International (QSR) Yum! Brands (YUM) McDonald's (MCD) Comment QSR restaurants have slightly higher exposure to PFAS given the higher usage of food packaging. Q-Series 6 July 2023 ab 47 Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Dennis Geiger Paul Hao Alexander Leach @ubs.com @ubs.com @ubs.com UBS Research THESIS MAP Q-Series 6 July 2023 SUBS 48 Q-Series UBS Research THESIS MAP EXPOSURE US Packaged Food Current/Past use (insignificant as a % of COGS) UBS Research impact on sector Growth: Margins: ROIC: Valuation: SECTOR IMPACT (Regulation) SECTOR innovation SECTOR IMPACT (Financial) Relative position MOST FAVOURABLY EXPOSED LEAST FAVOURABLY EXPOSED Q: How are the companies likely to respond to tightening PFAS regulation? Tightening PFAS regulations would primarily impact how Packaged Food companies source packaging materials. We estimate packaging is ~10% of most of our companies' COGS. While this is material, we do not think stricter PFAS regulations would have an outsized impact on increased packaging costs. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? The majority of Food companies have set ambitious 5- to 10-year targets to achieve 100% recyclable, reusable or compostable packaging as well as increase the share of post-consumer recycled content (usually 25%). Food packaging containing PFAS is likely to be difficult/impossible to compost, so such initiatives may also reduce PFAS exposure. With that said, we have not seen any meaningful action from Food companies to reduce PFAS exposure in food packaging. Although there hasn't been meaningful legislation in the US for PFAS at the federal level, we expect the policy landscape to continue to evolve as a number of US states have begun to prohibit intentionally added PFAS in food packaging (link). Thus, we think the companies that begin to take early action on this front will be better insulated from future policy actions and improve consumer perceptions of their brands. Q: What will be the likely financial impact on the industry in the next 5 years? We do not expect tightening PFAS regulations to have a meaningful financial impact on Packaged Food companies in the next 5 years. While we do not have an estimate for the significance of PFAS in companies' packaging, we do not think it is meaningful given that we have not seen any reference to PFAS in annual ESG reports. Q: Which companies are most/least favourably exposed in the scenario above? We think companies with higher sales exposure to Europe are most favourably exposed over the long term to increasing PFAS regulations. While these companies may be impacted earlier on, we think they will make a concerted effort to source healthier packaging materials, which will aid both consumer brand perception and long term cost targets. Company Nomad Foods (NOMD) Mondelez International (MDLZ) Comment 100% of sales in Europe. Likely to respond to environmental policies the quickest. Significant EU exposure - would likely respond to regulations early on. Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Company The Hershey Company (HSY) Conagra Brands (CAG) Comment ~8% international exposure - would be a late responder to international regulations. ~9% international exposure - would be a late responder to international regulations. Q-Series 6 July 2023 ab 49 Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Cody Ross Brandon Cohen COubs.com COubs.com UBS Research THESIS MAP Q-Series 6 July 2023 SUBS 50 Q-Series UBS Research THESIS MAP EXPOSURE China Food and Beverage Current/Past limited use, since Stockholm 3 are already banned IMPACT ON SECTOR Growth: Margins: R01C: 4 UBS Research Valuation: SECTOR IMPACT (REGULATION) SECTOR INNOVATION SECTOR IMPACT (FINANCIAL) RELATIVE POSITION MOST FAVOURABLY EXPOSED Q: How are the companies likely to respond to tightening PFAS regulation? We think stricter PEAS regulation will have limited impact on domestic food and beverage companies, since Chinese Food Contact Materials (FCMs) have already banned the use of some PFAS since October 19, 2017. According to the National Food Safety Standard for the Use of Additives in FCMs and Articles (GB 9685-2016), the usage of PFAS, especially PFOS and PEOA, in FCMs and products is strictly prohibited, and only certain fluorine-containing small molecules or polymers can be used under certain restrictions. Moreover, related test standards on PFOS and PFOA in FCMs (GB 31604.35-2016) have been established and were implemented on April 19, 2017. Chinese F&B companies have been well prepared for Chinese domestic PFAS regulation, in our view. Q: Are companies innovating today in ways that will prepare them for PFAS regulations? The leading F&B companies have set targets to achieve green packaging, but there are few examples of specific innovations in reducing the usage of PFAS in China. Companies like Mengniu and Yili are taking actions such as developing 100% recyclable packaging material, purchasing raw materials with sustainable certification, and recycling used packages. Q: What will be the likely financial impact on the industry in the next 5 years? We do not expect tightening PFAS regulation to have a substantial financial impact on Chinese packaged food companies, given most companies have already banned the usage of some PFAS (Stockholm 3: PFOS, PFOA, PFHxS). If the scope of test standards is expanded to other PFAS, we expect the relevant testing cost to increase but still have a limited financial impact on the leading companies. Q: Which companies are most/least favourably exposed in the scenario above? As mentioned above, we expect no impact of tightening regulation on Chinese F&B sector overall. We believe Mengniu and Yili will be among the most favourably exposed names given a high focus on supply chain sustainability and product safety. Company Yili Mengniu Comment Already restrict using some PFAS (Stockholm 3); low exposure to the EU market; achieved carbon peak in 2012 and aiming to achieve carbon neutrality in the whole industrial chain in 2050 Already restrict using some PEAS (Stockholm 3); low exposure to the EU market; aim to achieve carbon peak and carbon neutrality in 2030 and 2050 Source: UBS estimates Note: This list contains stocks that may be impacted by specific scenarios. The scenarios described herein may play out over a multiyear period, whereas UBS equity analysts' base-case views are based on the next 12 months. All ratings are current, as shown in the most recent published UBS Research report relating to each company. These reports are available on UBS Neo. Mark Yuan (gubs.com Q-Series 6 July 2023 *UBS 51 Q-Series What is PFAS (in detail) Which chemicals are included in the PFAS group? There is currently no globally accepted common definition for PFAS. The European Chemicals Agency defines the scope of the PFAS restriction similarly to the OECD definition. "Any substance that contains at least one fully fluorinated methyl (CF3-) or methylene (-CF2-) carbon atom (without any H/Cl/Br/I attached to it)" with a few fully degradable subgroups excluded (ECHA proposal). Canada's State of PFAS Report (May 2023) uses this same definition, but the UK's Analysis of the most appropriate regulatory management options for PFAS (April 2023) uses a narrower definition that excludes substances with only a single methylene group (-CF2-). The carbon-fluorine bond is the strongest known covalent bond in organic chemistry and complete breakdown of PFAS takes years to thousands of years (ECHA proposal Annex B). Of the thousands of PFAS types, around 250 are commercially relevant and 3 are listed as Stockholm Convention Persistent Organic Pollutants (see Figure 5). The Peransl"CtoAdiSkhm(uFcO,f23v5gy0) most commonly used and studied examples in the PFAS group are Perfluorooctanoic Acid (PFOA) and Perfluorooctane Sulfonate (PFOS). Figure 22: PFAS definition used by the European Chemicals Agency is in line with the latest OECD definition UBS Research Source: UBS, based on ECHA Annex XV, European Chemicals Agency, http://echa.europa.eu/ Figure 23: PFAS subgroups and examples Source: UBS, based on ECHA Annex XV, European Chemicals Agency, http://echa.europa.eu/ Q-Series 6 July 2023 ab 52 What are the properties of PFAS? Common properties of PFAS are that they are water repellent, oil repellent, dirt repellent, and resistant to extreme temperatures, pressures and pH. This makes them very useful in cookware, food packaging, firefighting, and semiconductor manufacturing among many other uses. The time and pathway for various types of PFAS to break down have been studied but vary widely. It appears that complete breakdown of PFAS takes years to thousands of years. PFAS can be persistent in its original form, or persistent as an "arrowhead PFAS" after a "precursor PFAS" degrades into an arrowhead. For example, PFAAs (a type of PFAS arrowhead) degrade too slowly to be observable, so their half-lives could be decades, centuries or longer (Parsons et al.). What is PFAS used for? Figure 24 shows common uses for PFAS according to the Interstate Technology & sUeSAPF Regulatory Council. Those in the list would mostly be considered intentionally added or used PFAS, but it is also possible to have unintentionally added PFAS in final products. One example is using water or recycled materials that contain PFAS, and another example is where final moulded products contain traces of PFAS because PFAS polymers are commonly used to help stop materials from sticking to moulds. Figure 24: PFAS uses Source: UBS based on ITRC (Interstate Technology & Regulatory Council). 2022. PFAS Technical and Regulatory Guidance Document and Fact Sheets PFAS-1. Washington, D.C.: Interstate Technology & Regulatory Council, PFAS Team. https://pfas-1.itrcweb.org/. Q-Series 6 July 2023 ab 53 Figure 25: PFAS uses (continued) Source: UBS based on ITRC (Interstate Technology & Regulatory Council). 2022. PFAS Technical and Regulatory Guidance Document and Fact Sheets PFAS-1. Washington, D.C.: Interstate Technology & Regulatory Council, PFAS Team. https://pfas-1.itrcweb.org/. Q-Series 6 July 2023 ab 54 How much PFAS are used and emitted? Figure 26: Estimated PFAS use in the European Economic Area in 2020 Source: UBS based on ECHA PFAS Restriction Proposal Annex XV, European Chemicals Agency, http:// echa.europa.eu/ Note: Mid level estimates shown. * Transport PFAS use and emissions are mostly counted under "Applications of fluorinated gases." Figure 27: Estimated PFAS use in the European Economic Area (EEA) over 30 years Figure 28: Estimated PFAS emissions in the EEA over 30 years Source: UBS based on ECHA PFAS Restriction Proposal Annex XV, European Chemicals Agency, http://echa.europa.eu/, Note: * Transport PFAS use and emissions are mostly counted under "Applications of fluorinated gases." Cosmetics assumes a worst case scenario with 100% going to waste water Source: UBS based on ECHA PFAS Restriction Proposal Annex XV, European Chemicals Agency, http://echa.europa.eu/ Note: * Transport PFAS use and emissions are mostly counted under "Applications of fluorinated gases." Q-Series 6 July 2023 ab 55 Figure 29: Time paths of expected emissions from PFAS use over 30 years (20252055) Source: ECHA PFAS Restriction Proposal Annex XV, European Chemicals Agency, http://echa.europa.eu/ Note: * Transport PFAS use and emissions are mostly counted under "Applications of fluorinated gases." Cosmetics assumes a worst case scenario with 100% going to waste water Q-Series 6 July 2023 ab 56 What are the main PFAS substitutes? Figure 30: PFAS substitutes - summary of ECHA evidence review Source: UBS based on ECHA PFAS Restriction Proposal Annex XV, European Chemicals Agency, http://echa.europa.eu/ Note: checkmark signifies yes/available, "some" signifies yes/available for some uses, "?" signifies unknown, "X" signifies no/unavailable, and "-" signifies no information. Q-Series 6 July 2023 ab 57 Figure 31: PFAS substitutes (Cont'd) - summary of ECHA evidence review Source: UBS based on ECHA PFAS Restriction Proposal Annex XV, European Chemicals Agency, http://echa.europa.eu/ Note: checkmark signifies yes/available, "some" signifies yes/available for some uses, "?" signifies unknown, "X" signifies no/unavailable, and "-" signifies no information. Q-Series 6 July 2023 ab 58 What are the Health & Environmental Effects of PFAS While health effects are difficult to determine, we note the potential seriousness of health conditions identified by peer-reviewed research. The main research challenges include: the existence of many types of PFAS, the types of PFAS used having changed overtime, PFAS accumulation overtime, and many different ways to be exposed to PFAS (drinking water, workplace exposure, food/packaging, and personal care products). Health impacts cited by the EPA include: lower fertility, developmental effects in children, increased risk of prostate, kidney, and testicular cancer, reduced immunity and vaccine response, among others. Although health effects of less studied PFAS types are unclear, the persistence of almost all PFAS is well established. Either persistence in its original form, or persistence as "arrowhead PFAS" after a "precursor PFAS" degrades into an arrowhead. The EU proposal classifies PFAS as "highly persistent," and emphasizes the need to restrict PFAS at the source due to the problem of PFAS accumulation in the environment and organisms. To date, PFAS has been detected in mammals, fish, plant leaves, water bodies, and arctic ice among others (ECHA proposal Annex B). Although activated carbon and high pressure membranes are recognized as ways to remove some PFAS from drinking water (US EPA proposal), the EU proposal states that PFAS can be highly mobile, that it is difficult to decontaminate water or sites at a large-scale, and that an end-of-pipe solution is unachievable since PFAS is contained in many industrial and consumer products. What we know and don't know What we know PFOS and PFOA are harmful to human health Several types of PFAS including PFOS and PFOA are harmful to animal health PFAS accumulate in the environment and some wildlife PFAS are found all over the world, even in remote locations PFAS do not occur naturally except in some rare circumstances What we don't know Limited evidence of the effects of PFAS other than PFOA, PFOS, PFHxS on human health Governments currently have different guidance on levels of PFAS considered safe for human health Impacts of higher PFAS levels on species and ecosystems Limited evidence on the ways humans are exposed to PFAS (associations have been made) Q-Series 6 July 2023 ab 59 The health effects of PFOS, PFOA and other PFAS Figure 32: Evidence of association between PFAS and health outcomes Source: UBS based on White House Office of Science and Technology Policy report Note: X (associated specific PFAS): outcomes where organizations have made a conclusion that the epidemiological evidence indicates there is an association. (-): determined not sufficient to make a conclusion on the association between any specific PFAS or PFAS as a class and the outcome Figure 33: Significantly affected health endpoints in animal toxicity studies Source: UBS based on White House Office of Science and Technology Policy report reflecting studies until June 10, 2022 Note: Y = Significantly affected health endpoints in animal studies, (#) in the header row denotes the carbon number Q-Series 6 July 2023 ab 60 Regulation (by country/region) EU The EU has acknowledged the dangers of PFAS chemicals, and the importance of reducing exposure to them, through the EU Chemicals Strategy (here). The regulation concerning the Registration, Evaluation, Authorisation and Restriction of chemicals (REACH, here) was first published in 2006 in part to "ensure a high level of protection of human health and the environment". This was amended in 2021 to effectively ban some PFAS chemicals as they had been identified as "persistent" and "bioaccumulating". These substances were associated with firefighting foam, high performance filters, implantable medical devices, and aspects of semiconductor manufacturing. This comes into effect from late February 2023. Recently, the European Chemicals Agency (ECHA) published a broad proposal to ban all PFAS in Europe following increasing evidence of human and environmental impacts. This will also come under the REACH regulation. The proposal suggests an 18-month transition period, after which a full ban would come into effect. An alternate suggestion includes two time-limited derogations depending on the availability of alternatives. A six-month consultation started in March 2023. Other incoming regulations targeting PFAS include revisions of pollution legislations (including water and wastewater), proposals for which were published in October 2022. In the same month, the EU adopted a regulation to reduce the concentration of Persistent Organic Pollutants (POPs), including PFOA, in waste, highlighting that while POPs are usually no longer used in new products, they can be found in waste from some products. Q-Series 6 July 2023 ab 61 Figure 34: Proposed and potential derogations in the ECHA PFAS Restriction Proposal Source: UBS based on ECHA PFAS Restriction Proposal Annex XV US Our US Electrical Equipment & Multi-Industry analyst points out that PFAS has become a bigger and bigger issue in recent years as the number of litigations increased steadily (see our deep dive: How Large is the PFAS Problem?). Also the EPA's assessment of PFAS chemicals could potentially lead to clean up requirements (should there be enforceable max contamination levels). Past settlements & cleanup cost/reserves have been high (in aggregate in the billion USD). Further settlements / litigation outcomes are likely as our data shows that an estimated 6.3m people in the US alone live in an area of 5 miles Q-Series 6 July 2023 ab 62 around a 'high contamination site' (>500ppt). Potential financial impacts could come from 1) bodily injury payments, 2) medical monitoring, 3) environmental cleanup and 4) litigation expenses - in addition to reputational damage. In August 2022, the EPA proposed designating PFAS chemicals as "hazardous substances". This would require entities to report any releases of the substances that meet or exceed thresholds. This followed the EPA's announcement of more stringent guidelines on PFAS in the water supply, with the new threshold set at 0.02 parts per trillion (ppt) for PFOS, 0.004 ppt for PFOA, and 10 ppt for GenX (2022/6, EPA). The EPA also added 5 PFAS chemicals, HFPO-DA (aka GenX), PFOS, PFOA, PFNA, PFHxS, to the List of Regional Screening & Removal Management Levels (2022/5, EPA). Figure 35: Number of PFAS entries in the US EPA Chemical Data Reporting Database 2016 Source: UBS based on OECD Comprehensive Global Database of PFAS which lists PFAS entries for US EPA CDR 2016 UK In April 2023, the UK published an Analysis of the most appropriate regulatory management options for PFAS. This report uses a narrower definition that excludes substances with only a single methylene group (-CF2-) compared with the OECD/EU definition. The report concludes that the following options should be considered: 1. Prepare background dossiers to potentially support one or more UK REACH restrictions of PFAS a. Use and disposal of fire fighting foam where non-PFAS alternatives are available b. Other wide dispersive uses such as the application of coatings or use of cleaning agents c. Manufacture and placing on the market of consumer articles from which PFAS are likely to be emitted (e.g. textiles, upholstery, leather, apparel, rugs and carpets, paints, varnishes, waxes and polishes, cleaning products, and food contact materials) 2. UK REACH authorization of PFAS used in processing aids used in manufacture and processing of fluorinated polymers 3. Further evaluation and investigation of substances that have been highlighted to be of concern a. arrowhead substance TFA has been identified as a concern for developmental toxicity (HFCs, HFEs and HFOs group substances (i.e. a commercially significant, high tonnage group in the UK) are F-gases that may transform to TFA.) The Drinking Water Inspectorate (England and Wales) has a guideline value of 0.1 micrograms per liter (100 ng/L) for PFOS and PFOA, and instructs companies to monitor 45 types of PFAS in drinking water (DWI Report). In Scotland, there is a standard of 0.1 micrograms per (100 ng/L) for the sum of 20 PFAS. Q-Series 6 July 2023 ab 63 Japan Following community calls for measurement of PFAS levels near US military bases in Japan that used PFAS for firefighting training, media interest in the issue has increased. Japan's Ministry of Environment convened a series of Expert Meetings on PFAS and Water Quality Targets for PFOS and PFOA in January. The two meetings will consider the latest scientific knowledge and domestic PFAS levels to make science-based recommendations on measures and water quality targets. Given that Japanese consumers see product quality and ingredients as the second and third most important factors after value for money when grocery shopping (PulseCheck), and have a high awareness around health impacts, we expect further PFAS restriction to be likely in Japan as well. The current government expert meetings as well as media interest are focused on PFOS and PFOA, but since PFOS production and import was banned in 2010, and most PFOA use was voluntarily phased out prior to the ban becoming effective in 2021, the key focus from investors' perspectives is likely to primarily be on other types of PFAS. Japanese companies manufacturing PFAS include Daikin Industries, AGC, AsahiKasei, Chemours Japan, Chemours-Mitsui Fluoroproducts (ownership: Mitsui Chemicals 50%, Chemours 50%), and DIC. Asahi Kasei also supplies removal technologies for fluorine in water. The technology is described as reducing fluorine levels in water to 0.8mg per liter on its website. We held an expert event with Professor Koji Harada on June 23, where he explained that although Japanese PFAS regulation is being reconsidered, it is unlikely that Japan will follow the path taken by the EU to ban the whole PFAS group. He also expects research findings on the toxicity of PFAS other than the Stockholm 3 to be released over the next few years as research interest in the subject has increased. Australia Forever chemicals have been garnering more attention in the Australian media over the few years and the management of these chemicals is a high priority for federal and state environmental regulators. A Fairfax investigation in 2018 revealed PFAS contaminated sites around Australia and in 2020 the federal government agreed to settle three class actions over the contamination of communities affected by firefighting chemicals (link here). The Australian PFAS National Environmental Management Plan (NEMP) provides nationally determined guidance on the management of PFAS contamination in the environment. NEMP 2.0 was published in May 2020 and the federal government is currently consulting on the Draft NEMP 3.0 due to be released later this year. The plan recognises that in Australia, PFAS have been utilised for many decades in a wide range of consumer products and industrial processes. The NEMP panel of experts alludes to "fairly consistent reports of an association with several health effects" while explaining they are "generally small and within normal ranges for the whole population". The plan also talks about improved valuation, pricing and incentive mechanisms for example ensuring that the polluter pays and the price of goods and services be calculated on the whole life cycle costs including impact of PFAS on the environment and humans. The plan identifies many activities associated with PFAS contamination including aviation, automotive, agriculture, construction, manufacturing, telecommunications and waste management (see page 147 of the draft plan). Positively, in 2021 the 27th Australian Total Diet Study, undertaken annually by the Food Standards ANZ body, found that levels of PFAS in the Australian food supply were "very low" and "consistently lower" than those found in overseas studies conducted in the EU, US, UK and China. Given these findings, we expect the new legislation to take a cautious approach and avoid being overly prescriptive; however, we will review the final plan closely once it is released. Q-Series 6 July 2023 ab 64 PFAS Litigation PFAS litigation is the most significant risk for PFAS producers, and though a number of cases have been settled recently, these cases mostly regarding past emissions of Stockholm 3 chemicals. If PFAS regulations are tightened further to other types of PFAS beyond the Stockholm 3, as is being proposed in the EU, and through water regulations in the US, there could be more scope for litigation. In this respect, the recent US$10.3bn 3M settlement in June 2023 with US public water suppliers that covers PFOA, PFOS as well as all other PFAS, is comprehensive and improves visibility (report). Note however that personal injury settlements related to PFAS (i.e., medical monitoring & compensation) would be incremental to clean-up costs. Legal experts we spoke with view this as a slower moving process and do not expect personal injury bellwether cases to start until the later part of 2024. In addition, potential EU liabilities remain a concern for investors. According to the filings, 3M will have the option to terminate the settlement if enough class members opt out, so this deal could ultimately exclude a high number of hold-outs, particularly the municipalities who feel they have the best & strongest cases. The EPA has proposed to regulate some PFAS as hazardous under the Superfund law (CERCLA). In January 2022, the EPA proposed to add PFOS and PFOA to the hazardous substances list, and in April 2023, the EPA started seeking public input on whether 7(6) additional PFAS should be added to the list (source). This would allow the government and private entities to date are mostly chemicals companies, but also include HVAC, fluoropolymer materials, and plastics companies. Manufacturers of firefighting products have also been named in litigation over the last few years, and more recently, food & beverage, cosmetic and public utilities have also been sued. Most recently, on May 31, Washington State filed a lawsuit against 20 PFAS manufacturers listed below (link). 3M Company, AGC Chemicals Americas Inc., Amerex Corporation, Archroma U.S. Inc., Arkema Inc., BASF Corporation, Buckeye Fire Equipment Company, Carrier Fire & Security Americas Corporation, Carrier Global Corporation, ChemDesign Products Inc., Chemguard Inc., Clariant Corporation, Dynax Corporation, EIDP Inc. f/k/a E. I. du Pont de Nemours and Company, Kidde PLC Inc., National Foam Inc., The Chemours Company, Tyco Fire Products LP, Corteva Inc., DuPont de Nemours Inc. Based on prior cases and expert discussions, we see costs arising for 1) clean-up, 2) medical monitoring, 3) medical compensation, and 4) diminished property values. 6. PFBS, PFHxS, PFNA, HFPO-DA, PFBA, PFHxA, and PFDA Q-Series 6 July 2023 ab 65 Figure 36: Number of significant developments in court cases in the US between January 2021 to March 2023 Source: UBS based on Alston & Bird Note: The data above count both individuals and governments suing corporations and the other way around. If no corporate is involved in the case, but government is involved, that is counted under "Government." Figure 37: PFAS & CAEv2 liability scenarios (US Multi-industry team base case estimate in gray) Source: UBS estimates, original report: First Read: 3M Company "More PFAS Headlines: Mediation w/ City of Stuart FL..." Figure 38: PFAS environmental cleanup costs: settled case, remediation, or estimated Source: UBS analysis and estimates based on court filings (3,7), news sources (1,2,4), and expert discussions (5,6). Note: due to data availability, in 3 and 4 we present our estimate of cleanup costs based on publicly available settlement amounts.Original report: First Read: 3M Company "More PFAS Headlines: Mediation w/ City of Stuart FL..." Q-Series 6 July 2023 ab 66 Figure 39: US PFAS Litigation Summary (as of 2021) Source: Company Filings, UBS Q-Series 6 July 2023 ab 67 PFAS Levels Data UBS Evidence Lab has published a US PFAS Water Contamination Tracker (> Access Dataset) to estimate the population living near high-PFAS sites. PFAS levels are generally high near airports, army bases and PFAS manufacturing sites, but is also detected at lower levels far from these sites or even far from human populations. When using PFAS levels data, it is important to compare the detected levels with health advisory levels and also to have sufficient data points to ensure that erroneous outliers are not mistakenly interpreted as representative. The Environmental Working Group has put together a global map based on studies of PFAS levels in wildlife. https://www.ewg.org/interactive-maps/pfas_in_wildlife/map/ US The UBS Evidence Lab data shows utility water service areas and known or potential PFAS contaminations based on 70 ppt or greater PFAS levels. We include American Water, American States Water, California Water, Eversource Energy's Aquarion and SJW Group. Essential Utilities had already had a plan to to ensure that unfinished water would not exceed 13 parts per trillion for PFOA, PFOS and PFNA compounds. (See US Water Utilities "UBS Evidence Lab Inside: PFAS Mapping and Proposed..." for details.) The UBS Multi-Industry team found that there were 6.3 million Americans living within 5 miles of a high contamination site (See US Electrical Equipment & Multi-Industry "How large is the PFAS problem?..." for details). Figure 40: Known and Potential PFAS Contamination Sites and Water Utility Service Areas Source: UBS Evidence Lab, US EPA Site for Drinking Water Contamination Sites, Base Realignment and Closure (BRAC) Sites, Air Force Administration Record for Military Sites, State of Michigan PFAS Sites, State of California PFAS sites, HydroShare.org, (> Access Dataset) The Environmental Working Group has also mapped PFAS levels data. https:// www.ewg.org/interactive-maps/pfas_contamination/ EU & UK A map of PFAS levels in Europe was produced by Le Monde, followed by maps for individual countries as well. The map for Europe shows 17,000 sites where PFAS was detected at or above 10 nanograms per liter. Q-Series 6 July 2023 ab 68 https://foreverpollution.eu/maps-and-data/maps/ Japan The Japanese public broadcaster, NHK, mapped PFOS and PFOA levels in rivers/lakes and groundwater based on Ministry of Environment and other data sources. Higher levels of PFOS and PFOA are found in Okinawa and Kanagawa for rivers/lakes, and Osaka, Okinawa, and Tokyo for groundwater. Water utilities have policies to check PFOS+PFOA levels and stop sourcing water from a location if the level exceeds the current guidance of 50 nanograms per liter. https://www.nhk.jp/p/gendai/ts/R7Y6NGLJ6G/blog/bl/pkEldmVQ6R/bp/pyD6dG2wOM/ Data on PFAS levels other than PFOS and PFOA are very limited. The Ministry of Environment published some figures here that shows PFHxS was detected in 32 of 47 sites tested, but levels were generally low ranging from less than 0.1 to 28 nanograms per liter. China Liu, Qu and Huang studied PFAS in drinking water based on 526 drinking water samples from 66 cities. The mean sum of PFAS in drinking water ranged from 0.1 to 502.9 nanograms per liter in various cities. The different colours in each bar on the map in Figure 41 different types of PFAS. ab,touwgiydSnArhCPF2cH0QkLse1 Figure 41: PFAS in drinking water in China according to a 2021 study by Liu, Qu and Huang Source: Liu, L., Qu, Y., Huang, J. et al. Per- and polyfluoroalkyl substances (PFASs) in Chinese drinking water: risk assessment and geographical distribution. Environ Sci Eur 33, 6 (2021). https://doi.org/10.1186/s12302-02000425-3 https://enveurope.springeropen.com/articles/10.1186/s12302-020-00425-3#rightslink Q-Series 6 July 2023 ab 69 Q-Series 6 July 2023 Appendix Main PFAS subgroups Figure 42: Main PFAS subgroups according to the European Chemicals Agency Source: ECHA Annex XV, European Chemicals Agency, http://echa.europa.eu/ Note: Main PFAS subgroups , including the subgroup of stable metabolites (PFAAs) or `arrowheads' (pink) and the precursors to the PFAAs (red). ab 70 PFAS related UBS publication list First Read: 3M Company "PFAS Settlement Improves Visibility & Comes...", 23 June 2023 First Read: 3M Company "More PFAS Headlines: Mediation w/ City of...", 5 June 2023. First Read: 3M Company "Litigation Channel Check Post PFAS Latest", 2 June 2023. N.A. Chems & Pkg'g "Agreement reached on US PFAS water contamination;...", 2 June 2023. N.A. Chems & Pkg'g "Nearing potential PFAS settlement catalyst re CC/DD", 29 May 2023. California Water Service Group "1Q'23 Light on Regulatory Timing; PFAS Update", 27 April 2023. Chemicals Sector "PFAS - what do the Report and Accounts say?", 12 April 2023. UBS Evidence Lab inside Video: PFAS Mapping and Proposed Rule, 23 March 2023. US Water Utilities "UBS Evidence Lab Inside: PFAS Mapping...", 15 March 2023. Global Sustainability "(PFAS): //", 14 February 2023. Global Sustainability "Forever Chemicals (PFAS): Developments pick up...", 14 February 2023. US Water Utilities "PA Issues PFAS Rules", 23 January 2023. First Read: 3M Company "Plan to Phase Out PFAS Production by YE 2025", 20 December 2022. First Read: US Electrical Equipment & Multi-Industry "EPA Adds More PFAS...", 19 May 2022. 3M Company "3M - Takeaways from our PFAS Expert Call", 24 June 2021. Johnson Controls International plc "JCI - Takeaways from our PFAS Expert Call", 24 June 2021. The Chemours Company "UBS Expert Update re PFAS", 21 June 2021. US Electrical Equipment & Multi-Industry "Sector Weekly: Recap of our PFAS...", 18 June 2021. US Electrical Equipment & Multi-Industry "Expert Call on PFAS: ...", 15 June 2021. US Electrical Equipment & Multi-Industry "How large is the PFAS problem?", 10 June 2021. Video: Chemicals: 2Q21 prospects, CEO pay, Wacker, PFAS litigation & battery ..", 27 May 2021. Consumer Chemicals Sector "ESG in focus: PFAS in cosmetics ...", 14 May 2021. Chemicals Sector "PFAS litigation risks - who is affected and what...", 3 May 2021. Q-Series 6 July 2023 ab 71 Valuation Method and Risk Statement Valuations for Media are based on multiples analysis. Key risks for media networks include the health and sustainability of the Pay TV ecosystem as well as advertising, particularly television advertising, which is sensitive to overall macroeconomic conditions (GDP and consume spending). Changes in growth expectations for the global economy, either positive or negative, could impact our forecasts, ratings and price targets. Q-Series 6 July 2023 ab 72 Required Disclosures This document has been prepared by UBS Securities Japan Co., Ltd., an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates, including Credit Suisse AG and its subsidiaries, branches and affiliates are referred to herein as "UBS". For information on the ways in which UBS manages conflicts and maintains independence of its UBS Global Research product; historical performance information; certain additional disclosures concerning UBS Global Research recommendations; and terms and conditions for certain third party data used in research report, please visit https://www.ubs.com/disclosures. Unless otherwise indicated, information and data in this report are based on company disclosures including but not limited to annual, interim, quarterly reports and other company announcements. 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Short-Term Rating Definition Buy Sratoticnkgpwraicseaesxspigenceteddbteocariusseewoitfhainsptherceifeicmcaotnatlhysstfroormevtehnet.time the Sell Sratoticnkgpwraicseaesxspigenceteddbteocafaulsl ewoitfhainstpherceieficmcoantathlysstfroormevtheentt.ime the Coverage' IB Services2 54% 22% 36% 21% 10% 18% Coverage3 IB Services4 <1% <1% <1% <1 Source: UBS. Rating allocations are as of 31 March 2023. 1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Q-Series 6 July 2023 4UBS 73 KEY DEFINITIONS: Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. In some cases, this yield may be based on accrued dividends. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. 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Limited: Amily Guo, Ingrid Zhang, Mark Yuan.UBS Securities Japan Co., Ltd.: Hikaru Mizuno, Hisae Kawamoto, Kenji Yasui, Leigha Miyata, Nozomi Moriya, Shingo Hirata, CFA, Shunta Omura.UBS Securities LLC: Chris Snyder, CFA, Cody Ross, Damian Karas, CFA, Dennis Geiger, CFA, Gregg Orrill, Jay Sole, Jon Windham, CFA, Joshua Spector, CFA, Mauricio Serna, CFA, Neal Burk, Peter Grom, Shneur Z. Gershuni, CFA.UBS Securities Pte. Ltd., Seoul Branch: Jaehyung Choi. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research. Additional Prices: BASF SE, 44.69 (04 Jul 2023); Bloomin' Brands Inc, US$27.34 (03 Jul 2023); Nomad Foods Ltd, US$17.58 (03 Jul 2023); Zalando SE, 25.95 (04 Jul 2023); Restaurant Brands International, US$77.26 (03 Jul 2023); The Chemours Company, US $37.23 (03 Jul 2023); Proya Cosmetics, Rmb110.83 (05 Jul 2023); Bloomage Biotechnology, Rmb91.17 (05 Jul 2023); Yunnan Botanee Bio-Technology, Rmb90.99 (05 Jul 2023); China Mengniu Dairy, HK$30.50 (05 Jul 2023); A.O. Smith Corporation, US$72.37 (03 Jul 2023); Honeywell International Inc, US$208.30 (03 Jul 2023); 3M Company, US$101.14 (03 Jul 2023); Kohl's Corp, US$24.50 (03 Jul 2023); Carrier Global Corp, US$50.04 (03 Jul 2023); LG Household & Health Care, Won444500 (05 Jul 2023); Shin-Etsu Chemical, 4827 (05 Jul 2023); Macy's Inc, US$16.48 (03 Jul 2023); Asahi Kasei, 990 (05 Jul 2023); Eversource Energy, US$71.05 (03 Jul 2023); Rohm, 14070 (05 Jul 2023); Chipotle Mexican Grill, US$2123.54 (03 Jul 2023); The Cheesecake Factory Inc, US$35.35 (03 Jul 2023); Levi Strauss & Co, US$14.40 (03 Jul 2023); Apple Inc., US$192.46 (03 Jul 2023); Colgate-Palmolive, US$77.14 (03 Jul 2023); Boston Beer Company Inc, US$309.54 (03 Jul 2023); Conagra Brands Inc., US$34.09 (03 Jul 2023); Essential Utilities Inc, US$40.32 (03 Jul 2023); McDonald's, US$294.84 (03 Jul 2023); Shiseido, 6436 (05 Jul 2023); Solvay, 101.45 (04 Jul 2023); Kimberly-Clark Corp, US $137.48 (03 Jul 2023); Procter & Gamble, US$152.50 (03 Jul 2023); Shake Shack Inc., US$78.10 (03 Jul 2023); Clariant, CHF12.96 (04 Jul 2023); Ryohin Keikaku, 1401 (05 Jul 2023); Fast Retailing, 35700 (05 Jul 2023); Johnson Controls International plc, US$67.67 (03 Jul 2023); Ibiden, 8424 (05 Jul 2023); PepsiCo Inc, US$185.60 (03 Jul 2023); Lanxess AG, 28.15 (04 Jul 2023); American States Water Co, US$87.58 (03 Jul 2023); Daikin Industries, 30720 (05 Jul 2023); Waste Management Inc, US$171.40 (03 Jul 2023); OPAL Fuels Inc., US$7.61 (03 Jul 2023); Constellation Brands Inc, US$247.47 (03 Jul 2023); Corteva Inc, US$58.00 (03 Jul 2023); California Water Service Group, US$51.88 (03 Jul 2023); KOSE, 13975 (05 Jul 2023); Molson Coors Beverage Company, US$66.61 (03 Jul 2023); ABOUT YOU Holdings SE, 4.94 (04 Jul 2023); DuPont de Nemours Inc, US$71.57 (03 Jul 2023); On Holding AG, US$33.16 (03 Jul 2023); Clean Harbors Inc, US$163.17 (03 Jul 2023); Next, 6974p (04 Jul 2023); The Wendy's Co, US$21.80 (03 Jul 2023); Asos, 369p (04 Jul 2023); Amorepacific, Won96200 (05 Jul 2023); Pentair Plc, US$63.97 (03 Jul 2023); Yum! Brands, US$137.27 (03 Jul 2023); Arkema, 87.84 (04 Jul 2023); Sony Group, 13310 (05 Jul 2023); American Water Works Co, US$143.97 (03 Jul 2023); Republic Services Inc, US$151.40 (03 Jul 2023); The Este Lauder Companies Inc, US$198.00 (03 Jul 2023); Shinko Electric Industries, 6200 (05 Jul 2023); Mondelez International Inc, US$73.51 (03 Jul 2023); Deckers Outdoor Corp, US$531.46 (03 Jul 2023); Inditex SA, 35.29 (04 Jul 2023); Dow Inc, US$53.78 (03 Jul 2023); The Clorox Company, US$160.34 (03 Jul 2023); Inner Mongolia Yili Industrial, Rmb28.77 (05 Jul 2023); SJW Group, US$70.37 (03 Jul 2023); Renesas Electronics, 2835 (05 Jul 2023); Nordstrom Inc, US $20.63 (03 Jul 2023); Wacker Chemie, 128.60 (04 Jul 2023); YETI Holdings Inc, US$38.85 (03 Jul 2023); The Hershey Company, US $251.73 (03 Jul 2023); Tokyo Electron, 21315 (05 Jul 2023); Mitsui Chemicals, 4260 (05 Jul 2023); Starbucks, US$99.15 (03 Jul 2023); H & M, SKr185.30 (04 Jul 2023); Signet Jewelers, US$66.96 (03 Jul 2023); Texas Roadhouse Inc, US$113.26 (03 Jul 2023); Brown-Forman Corp, US$66.82 (03 Jul 2023); Nitori Holdings, 15930 (05 Jul 2023); Source: UBS. 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The relevant investments will be subject to restrictions and obligations on transfer as set forth in the Material, and by receiving the Material you undertake to comply fully with such restrictions and obligations. You should carefully study and ensure that you understand and exercise due care and discretion in considering your investment objective, risk appetite and personal circumstances against the risk of the investment. You are advised to seek independent professional advice in case of doubt. Any and all advice provided on and/or trades executed by UBS pursuant to the Material will only have been provided upon your specific request or executed upon your specific instructions, as the case may be, and may be deemed as such by UBS and you. Israel: UBS is a premier global financial firm offering wealth management, asset management and investment banking services from its headquarters in Switzerland and its operations in over 50 countries worldwide to individual, corporate and institutional investors. In Israel, UBS Switzerland AG is registered as Foreign Dealer in cooperation with UBS Wealth Management Israel Ltd., a wholly owned UBS subsidiary. UBS Wealth Management Israel Ltd. is an Investment Marketing licensee which engages in Investment Marketing and is regulated by the Israel Securities Authority. This publication is intended for information only and is not intended as an offer to buy or solicitation of an offer. Furthermore, this publication is not intended as an investment advice. No action has been, or will be, taken in Israel that would permit an offering of the product(s) mentioned in this document or a distribution of this document to the public in Israel. In particular, this document has not been reviewed or approved by the Israeli Securities Authority. The product(s) mentioned in this document is/are being offered to a limited number of sophisticated investors who qualify as one of the investors listed in the first supplement to the Israeli Securities Law, 5728-1968. This document may not be reproduced or used for any other purpose, nor be furnished to any other person other than those to whom copies have been sent. Anyone who purchases the product(s) mentioned herein shall do so for its own benefit and for its own account and not with the aim or intention of distributing or offering the product(s) to other parties. Anyone who purchases the product(s) shall do so in accordance with its own understanding and discretion and after it has received any relevant financial, legal, business, tax or other advice or opinion required by it in connection with such purchase(s). The word "advice" and/or any of its equivalent terms shall be read and construed in conjunction with the definition of the term "investment marketing" as defined under the Israeli Regulation of Investment Advice, Investment Marketing and Portfolio Management Law. The Swiss laws and regulations require a number of mandatory disclosures to be made in independent financial research reports or recommendations. Pursuant to the Swiss Financial Market Infrastructure Act and the Financial Market Infrastructure Ordinance-FINMA, banks must disclose the percentage of voting rights they hold in companies being researched, if these holdings are equal to or exceed the statutory thresholds. In addition, the Directives on the Independence of Financial Research, issued by the Swiss Bankers Association, mandate a number of disclosures, including the disclosure of potential conflicts of interest, the participation within previous 12 months in any securities issues on behalf of the company being researched, as well as the fact that remuneration paid to the financial analysts is based generally upon the performance of (i) the new issues department or investment banking; or (ii) securities trading performance (including proprietary trading) or sales. Italy: This publication is not intended to constitute a public offer under Italian law. It is distributed only for information purposes to clients of UBS Europe SE, Succursale Italia, with place of business at Via del Vecchio Politecnico, 3-20121 Milano. UBS Europe SE, Succursale Italia is subject to the joint supervision of the European Central Bank, the German Central Bank (Deutsche Bundesbank), the German Federal Financial Services Supervisory Authority (Bundesanstalt fr Finanzdienstleistungsaufsicht, "BaFin"), as well as of the Bank of Italy (Banca d'Italia) and the Italian Financial Markets Supervisory Authority (CONSOB - Commissione Nazionale per le Societ e la Borsa), to which this publication has not been submitted for approval. UBS Europe SE is a credit institution constituted under German law in the form of a Societas Europaea, duly authorized by BaFin. Jersey: UBS AG, Jersey Branch, is regulated and authorized by the Jersey Financial Services Commission for the conduct of banking, funds and investment business. Where services are provided from outside Jersey, they will not be covered by the Jersey regulatory regime. UBS AG, Jersey Branch is a branch of UBS AG a public company limited by shares, incorporated in Switzerland whose registered offices are at Aeschenvorstadt 1, CH-4051 Basel and Bahnhofstrasse 45, CH 8001 Zurich. UBS AG, Jersey Branch's principal place of business is 1, IFC Jersey, St Helier, Jersey, JE2 3BX. Luxembourg: This publication is not intended to constitute a public offer under Luxembourg law. It is distributed only for information purposes to clients of UBS Europe SE, Luxembourg Branch ("UBS Luxembourg"), R.C.S. Luxembourg n B209123, with registered office at 33A, Avenue J. F. Kennedy, L-1855 Luxembourg. UBS Europe SE is a credit institution constituted under German law in the form of a Societas Europaea (HRB n 107046), with registered office at Bockenheimer Landstrasse 2-4, D-60306 Frankfurt am Main, Germany, duly authorized by the German Federal Financial Services Supervisory Authority (Bundesanstalt fr Finanzdienstleistungsaufsicht, "BaFin") and subject to the joint prudential supervision of BaFin, the European Central Bank and the central bank of Germany (Deutsche Bundesbank). UBS Luxembourg is furthermore supervised by the Luxembourg prudential supervisory authority (Commission de Surveillance du Secteur Financier), in its role as host member state authority. This publication has not been submitted for approval to any public supervisory authority. Malaysia: This communication and any offering material term sheet, research report, other product or service documentation or any other information (the "Material") sent with this communication was done so as a result of a request received by UBS from you and/or persons entitled to make the request on your behalf. Should you have received the Material erroneously, UBS asks that you kindly delete the e-mail and inform UBS immediately. The Material, where provided, was provided for your information only and is not to be further distributed in whole or in part in or into your jurisdiction without the consent of UBS. The Material may not have been reviewed, approved, disapproved, endorsed, registered or filed with any financial or regulatory authority in your jurisdiction. UBS has not, by virtue of the Material, made available, issued any invitation to subscribe for or to purchase any investment (including securities or derivatives products). The Material is neither an offer nor a solicitation to enter into any transaction or contract (including future contracts) nor is it an offer to buy or to sell any securities or derivatives products. The relevant investments will be subject to restrictions and obligations on transfer as set forth in the Material, and by receiving the Material you undertake to comply fully with such restrictions and obligations. You should carefully study and ensure that you understand and exercise due care and discretion in considering your investment objective, risk appetite and personal circumstances against the risk of the investment. You are advised to seek independent professional advice in case of doubt. Any and all advice provided on and/or trades executed by UBS pursuant to the Material will only have been provided upon your specific request or executed upon your specific instructions, as the case may be, and may be deemed as such by UBS and you. Mexico: This information is distributed by UBS Asesores Mxico, S.A. de C.V. ("UBS Asesores"), an affiliate of UBS Switzerland AG, incorporated as a non-independent investment advisor under the Mexican regulation due to the relation with a Foreign Bank. UBS Asesores is registered under number 30060-001-(14115)-21/06/2016 and subject to the supervision of the Mexican Banking and Securities Commission ("CNBV") exclusively regarding the rendering of (i) portfolio management services, (ii) securities investment advisory services, analysis and issuance of individual investment recommendations, and (iii) anti-money laundering and terrorism financing matters. This UBS publication or any material related thereto is addressed only to Sophisticated or Institutional Investors located in Mexico. Research reports only reflect the views of the analysts responsible for the report. The compensation of the analyst(s) who prepared this report is determined exclusively by research management and senior management of any entity of UBS Group to which such analyst(s) render(s) services. Monaco: This document is not intended to constitute a public offering or a comparable solicitation under the Principality of Monaco laws, but might be made available for information purposes to clients of UBS (Monaco) S.A., a regulated bank having its registered office at 2 avenue de Grande Bretagne 98000 Monaco operating under a banking license granted by the "Autorit de Contrle Prudentiel et de Rsolution" (ACPR) and the Monegasque government which authorizes the provision of banking services in Monaco. UBS (Monaco) S.A. is also licensed by the "Commission de Contrle des Activits Financires" (CCAF) to provide investment services in Monaco. The latter has not approved this publication. Nigeria: The investment products mentioned in this material are not being offered or sold by UBS to the public in Nigeria and they have not been submitted for approval nor registered with the Securities and Exchange Commission of Nigeria. If you are interested in products of this nature, please let us know. The investment products mentioned in this material are not being directed to, and are not being made available for subscription by any persons within Nigeria other than the selected investors to whom the offer materials have been addressed as a private sale or domestic concern within the exemption and meaning of Section 69(2) of the Investments and Securities Act, 2007 (ISA). This material has been provided to you at your specific unsolicited request and for your information only. Philippines: This communication was done so as a result of a request received by UBS from you and/or persons entitled to make the request on your behalf. Should you have received the Material erroneously, UBS asks that you kindly delete the e-mail and inform UBS immediately. The Material, where provided, was provided for your information only and is not to be further distributed in whole or in part in or into your jurisdiction without the consent of UBS. The Material may not have been reviewed, approved, disapproved, endorsed, registered or filed with any financial or regulatory authority in your jurisdiction. UBS has not, by virtue of the Material, made available, issued any invitation to subscribe for or to purchase any investment (including securities or derivatives products). The Material is neither an offer nor a solicitation to enter into any transaction or contract (including future contracts) nor is it an offer to buy or to sell any securities or derivatives products. The relevant investments will be subject to restrictions and obligations on transfer as set forth in the Material, and by receiving the Material you undertake to comply fully with such restrictions and obligations. You should carefully study and ensure that you understand and exercise due care and discretion in considering your investment objective, risk appetite and personal circumstances against the risk of the investment. You are advised to seek independent professional advice in case of doubt. Any and all advice provided on and/or trades executed by UBS pursuant to the Material will only have been provided upon your specific request or executed upon your specific instructions, as the case may be, and may be deemed as such by UBS and you. Portugal: UBS Switzerland AG is not licensed to conduct banking and financial activities in Portugal nor is UBS Switzerland AG supervised by the portuguese regulators (Bank of Portugal "Banco de Portugal" and Portuguese Securities Exchange Commission "Comisso do Mercado de Valores Mobilirios"). Qatar: UBS Qatar LLC is authorized by the Qatar Financial Centre Regulatory Authority, with QFC no. 01169, and has its registered office at 14th Floor, Burj Alfardan Tower, Building 157, Street No. 301, Area No. 69, Al Majdami, Lusail, Qatar. UBS Q-Series 6 July 2023 ab 80 Qatar LLC neither offers any brokerage services nor executes any order with, for or on behalf of its clients. A client order will have to be placed with, and executed by, UBS Switzerland AG in Switzerland or an affiliate of UBS Switzerland AG, that is domiciled outside Qatar. It is in the sole discretion of UBS Switzerland AG in Switzerland or its affiliate to accept or reject an order and UBS Qatar LLC does not have authority to provide a confirmation in this respect. UBS Qatar LLC may however communicate payment orders and investment instructions to UBS Switzerland AG in Switzerland for receipt, acceptance and execution. UBS Qatar LLC is not authorized to act for and on behalf of UBS Switzerland AG or an affiliate of UBS Switzerland AG. This document and any attachments hereto are intended for eligible counterparties and business customers only. Russia: This document or information contained therein is for information purposes only and constitutes neither a public nor a private offering, is not an invitation to make offers, to sell, exchange or otherwise transfer any financial instruments in the Russian Federation to or for the benefit of any Russian person or entity and does not constitute an advertisement or offering of securities in the Russian Federation within the meaning of Russian securities laws. The information contained herein is not an "individual investment recommendation" as defined in Federal Law of 22 April 1996 No 39-FZ "On Securities Market" (as amended) and the financial instruments and operations specified herein may not be suitable for your investment profile or your investment goals or expectations. The determination of whether or not such financial instruments and operations are in your interests or are suitable for your investment goals, investment horizon or the acceptable risk level is your responsibility. We assume no liability for any losses connected with making any such operations or investing into any such financial instruments and we do not recommend to use such information as the only source of information for making an investment decision. Saudi Arabia: UBS Saudi Arabia is authorised and regulated by the Capital Market Authority to conduct securities business under licence number 08113-37. Singapore: Clients of UBS AG Singapore branch are asked to please contact UBS AG Singapore branch, an exempt financial adviser under the Singapore Financial Advisers Act (Cap. 110) and a wholesale bank licensed under the Singapore Banking Act (Cap. 19) regulated by the Monetary Authority of Singapore, in respect of any matters arising from, or in connection with, the analysis or report. UBS AG is incorporated in Switzerland with limited liability. UBS AG has a branch registered in Singapore (UEN S98FC5560C). This communication and any offering material term sheet, research report, other product or service documentation or any other information (the "Material") sent with this communication was done so as a result of a request received by UBS from you and/or persons entitled to make the request on your behalf. Should you have received the Material erroneously, UBS asks that you kindly delete the e-mail and inform UBS immediately. The Material, where provided, was provided for your information only and is not to be further distributed in whole or in part in or into your jurisdiction without the consent of UBS. The Material may not have been reviewed, approved, disapproved or endorsed by any financial or regulatory authority in your jurisdiction. UBS has not, by virtue of the Material, made available, issued any invitation to subscribe for or to purchase any investment (including securities or products or futures contracts). The Material is neither an offer nor a solicitation to enter into any transaction or contract (including future contracts) nor is it an offer to buy or to sell any securities or products. The relevant investments will be subject to restrictions and obligations on transfer as set forth in the Material, and by receiving the Material you undertake to comply fully with such restrictions and obligations. You should carefully study and ensure that you understand and exercise due care and discretion in considering your investment objective, risk appetite and personal circumstances against the risk of the investment. You are advised to seek independent professional advice in case of doubt. Any and all advice provided on and/or trades executed by UBS pursuant to the Material will only have been provided upon your specific request or executed upon your specific instructions, as the case may be, and may be deemed as such by UBS and you. Sweden: This publication is not intended to constitute a public offer under Swedish law. It is distributed only for information purposes to clients of UBS Europe SE, Sweden Bankfilial, with place of business at Regeringsgatan 38, 11153 Stockholm, Sweden, registered with the Swedish Companies Registration Office under Reg. No 516406-1011. UBS Europe SE, Sweden Bankfilial is subject to the joint supervision of the European Central Bank, the German Central Bank (Deutsche Bundesbank), the German Federal Financial Services Supervisory Authority (Bundesanstalt fr Finanzdienstleistungsaufsicht, "BaFin"), as well as of the Swedish supervisory authority (Finansinspektionen), to which this publication has not been submitted for approval. UBS Europe SE is a credit institution constituted under German law in the form of a Societas Europaea, duly authorized by BaFin. Taiwan: This material is provided by UBS AG, Taipei Branch in accordance with laws of Taiwan, in agreement with or at the request of clients/prospects. Thailand: This communication and any offering material, term sheet, research report, other product or service documentation or any other information (the "Material") sent with this communication were done so as a result of a request received by UBS from you and/or persons entitled to make the request on your behalf. Should you have received the Material erroneously, UBS asks that you kindly delete the e-mail and inform UBS immediately. The Material, where provided, was provided for your information only and is not to be further distributed in whole or in part in or into your jurisdiction without the consent of UBS. The Material may not have been reviewed, approved, disapproved, endorsed, registered or filed with any financial or regulatory authority in your jurisdiction. UBS has not, by virtue of the Material, made available, issued any invitation to subscribe for or to purchase any investment (including securities or derivatives products). The Material is neither an offer nor a solicitation to enter into any transaction or contract (including future contracts) nor is it an offer to buy or to sell any securities or derivatives products. The relevant investments will be subject to restrictions and obligations on transfer as set forth in the Material, and by receiving the Material you undertake to comply fully with such restrictions and obligations. You should carefully study and ensure that you understand and exercise due care and discretion in considering your investment objective, risk appetite and personal circumstances against the risk of the investment. You are advised to seek independent professional advice in case of doubt. Any and all advice provided and/or trades executed by UBS pursuant to the Material will only have been provided upon your specific request or executed upon your specific instructions, as the case may be, and may be deemed as such by UBS and you. Turkey: The information in this document is not provided for the purpose of offering, marketing or sale of any capital market instrument or service in the Republic of Turkey. Therefore, this document may not be considered as an offer made, or to be made, to residents of the Republic of Turkey in the Republic of Turkey. UBS Switzerland AG is not licensed by the Turkish Capital Market Board (the CMB) under the provisions of the Capital Market Law (Law No. 6362). Accordingly, neither this document nor any other offering material related to the instrument/service may be utilized in connection with providing any capital market services to persons within the Republic of Turkey without the prior approval of the CMB. However, according to article 15 (d) (ii) of the Decree No. 32 residents of the Republic of Turkey are allowed to purchase or sell the financial instruments traded in financial markets outside of the Republic of Turkey. Further to this, pursuant to article 9 of the Communiqu on Principles Regarding Investment Services, Activities and Ancillary Services No. III-37.1, investment services provided abroad to residents of the Republic of Turkey based on their own initiative are not restricted. United Arab Emirates (UAE): UBS is not a financial institution licensed in the UAE by the Central Bank of the UAE nor by the Emirates' Securities and Commodities Authority and does not undertake banking activities in the UAE. UBS AG Dubai Branch is licensed by the DFSA in the DIFC. This document is provided for your information only and does not constitute financial advice. United Kingdom: This document is issued by UBS Wealth Management, a division of UBS AG which is authorised and regulated by the Financial Market Supervisory Authority in Switzerland. In the United Kingdom, UBS AG is authorised by the Prudential Regulation Authority and is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of regulation by the Prudential Regulation Authority are available from us on request. A member of the London Stock Exchange. This publication is distributed to retail clients of UBS Wealth Management. Ukraine: UBS is not registered and licensed as a bank/financial institution under Ukrainian legislation and does not provide banking and other financial services in Ukraine. UBS has not made, and will not make, any offer of the mentioned products to the public in Ukraine. No action has been taken to authorize an offer of the mentioned products to the public in Ukraine and the distribution of this document shall not constitute financial services for the purposes of the Law of Ukraine "On Financial Services and State Regulation of Financial Services Markets" dated 12 July 2001. Any offer of the mentioned products shall not constitute an investment advice, public offer, circulation, transfer, safekeeping, holding or custody of securities in the territory of Ukraine. Accordingly, nothing in this document or any other document, information or communication related to the mentioned products shall be interpreted as containing an offer, a public offer or invitation to offer or to a public offer, or solicitation of securities in the territory of Ukraine or investment advice under Ukrainian law. Electronic communication must not be considered as an offer to enter into an electronic agreement or other electronic instrument within the meaning of the Law of Ukraine "On Electronic Commerce" dated 3 September 2015. This document is strictly for private use by its holder and may not be passed on to third parties or otherwise publicly distributed. USA: Distributed to US persons by UBS Financial Services Inc. or UBS Securities LLC, subsidiaries of UBS AG. UBS Switzerland AG, UBS Europe SE, UBS Bank, S.A., UBS Brasil Administradora de Valores Mobilirios Ltda., UBS Asesores Mxico, S.A. de C.V., UBS SuMi TRUST Wealth Management Co., Ltd., UBS Wealth Management Israel Ltd. and UBS Menkul Degerler AS are affiliates of UBS AG. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere. UBS Financial Services Inc. is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the "Municipal Advisor Rule") and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule. UBS 2023. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. ab Q-Series 6 July 2023 ab 81