Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

<ul>
<li>FY Mar-22 sales and profits exceeded guidance, as expected. New orders declined slightly in 4Q but remained above sales.</li>
<li>Unfortunately, Disco has decided to stop disclosing orders and the order backlog. A cynic would say this signals the peak of the cycle. </li>
<li>1Q guidance looks conservative. That should be no surprise and no catalyst for the stock price. Shipments of blade dicers are forecast to decline by 10%. Beware. </li>
</ul>


FY Mar-22 sales and profits exceeded guidance, as expected. New orders declined slightly in 4Q but remained above sales.
Unfortunately, Disco has decided to stop disclosing orders and the order backlog. A cynic would say this signals the peak of the cycle. 
1Q guidance looks conservative. That should be no surprise and no catalyst for the stock price. Shipments of blade dicers are forecast to decline by 10%. Beware. 


Disco (6146 JP): Orders Peaking, Blade Dicer Shipments Forecast to Decline

<ul>
<li>3Q results were above guidance, as expected. Full-year guidance looks conservative, as usual. New orders ahead of sales, pointing to one or two good quarters ahead. </li>
<li>Shares down 10% since the beginning of January. Valuation reasonable but not compelling given the risk of a cyclical peak in SPE demand this year.</li>
<li>Uncertainty likely to keep the shares in a trading range.</li>
</ul>


3Q results were above guidance, as expected. Full-year guidance looks conservative, as usual. New orders ahead of sales, pointing to one or two good quarters ahead. 
Shares down 10% since the beginning of January. Valuation reasonable but not compelling given the risk of a cyclical peak in SPE demand this year.
Uncertainty likely to keep the shares in a trading range.


Disco (6146 JP): Valuation Reasonable but Not Compelling

<p>Disco's share price has rebounded by 10% since October 5 in conjunction with the announcement of record quarterly sales and profits on October 21 (results for 2Q of FY Mar-22).</p><p>But new orders received peaked six months earlier (in 4Q of FY Mar-21) and management is guiding for declines in sales, operating profit and the operating margin in the three months to December.</p><p>Even assuming a tendency to low-ball and a conservative forex assumption (¥105/$), further sustainable growth looks unlikely.</p><p>The shares are now selling at 20x management's EPS guidance for the nine months to December, extrapolated out to Mar-22 on the assumption that 4Q EPS will be the average of 1Q, 2Q and 3Q. </p><p>However, operating profit gearing to changes in sales is nearly 50%, leaving substantial risk on the downside as the semiconductor shortage eases and orders for silicon wafer dicing and grinding equipment plateaus and then retreats. </p>

Disco's share price has rebounded by 10% since October 5 in conjunction with the announcement of record quarterly sales and profits on October 21 (results for 2Q of FY Mar-22).But new orders received peaked six months earlier (in 4Q of FY Mar-21) and management is guiding for declines in sales, operating profit and the operating margin in the three months to December.Even assuming a tendency to low-ball and a conservative forex assumption (¥105/$), further sustainable growth looks unlikely.The shares are now selling at 20x management's EPS guidance for the nine months to December, extrapolated out to Mar-22 on the assumption that 4Q EPS will be the average of 1Q, 2Q and 3Q. However, operating profit gearing to changes in sales is nearly 50%, leaving substantial risk on the downside as the semiconductor shortage eases and orders for silicon wafer dicing and grinding equipment plateaus and then retreats. 

<p>The Nikkei reports that order-to-delivery lead times for silicon wafer dicing machines, most of which are made by Disco, have expanded from 1 to 3 months to 5 to 8 months. And since Disco recognizes revenue on an acceptance basis, the order-to-sales lag could be even longer. </p><p>Disco told the media, <em>"We are making individual adjustments with clients and striving to meet the delivery time."</em> (<em>Nikkei Asia</em>, April 15, 2021)</p><p>This implies that the company is at full capacity, and that sales and profits are likely to remain strong for another two quarters. FY Mar-21 guidance looks conservative. FY Mar-22 guidance is likely to be front-loaded, 1H stronger than 2H due to lack of visibility more than six months out.</p><p>Lead times for wire bonders and other equipment are reportedly as long as 12 months and there is widespread concern about double ordering in the semiconductor supply chain. With growth hitting physical limits and valuations having gone to new highs at what appears to be the top of the cycle, we continue to recommend selling into strength.</p>

The Nikkei reports that order-to-delivery lead times for silicon wafer dicing machines, most of which are made by Disco, have expanded from 1 to 3 months to 5 to 8 months. And since Disco recognizes revenue on an acceptance basis, the order-to-sales lag could be even longer. Disco told the media, "We are making individual adjustments with clients and striving to meet the delivery time." (Nikkei Asia, April 15, 2021)This implies that the company is at full capacity, and that sales and profits are likely to remain strong for another two quarters. FY Mar-21 guidance looks conservative. FY Mar-22 guidance is likely to be front-loaded, 1H stronger than 2H due to lack of visibility more than six months out.Lead times for wire bonders and other equipment are reportedly as long as 12 months and there is widespread concern about double ordering in the semiconductor supply chain. With growth hitting physical limits and valuations having gone to new highs at what appears to be the top of the cycle, we continue to recommend selling into strength.

Disco (6146 JP): 5-To-8 Month Lead Times in the Price

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

<p style="text-align: center;"><strong>• BEST &amp; WORST •</strong></p><p style="text-align: left;">Our best and worst pair from Tuesday's 23 results and 17 forecasts/revisions announcements is <a href="https://www.smartkarma.com/entities/nitto-denko-corp" target="_blank" data-smartkarma-citation="entities:3666:1" rel="noopener">Nitto Denko (6988 JP)</a> and <a href="https://www.smartkarma.com/entities/disco-corp" target="_blank" data-smartkarma-citation="entities:15817:1" rel="noopener">DISCO (6146 JP)</a>.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/184/761/original/2021-01-27_05-58-12.png?1611694720" class="editor-image img-responsive" data-smartkarma-image-id="184761"></figure></section><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/184/762/original/2021-01-27_05-59-03.png?1611694753" class="editor-image img-responsive" data-smartkarma-image-id="184762"></figure></section><section></section><section><div style="text-align: center;" class="content-caption"> Source for all charts &amp; tables: Japan Analytics</div>
<section></section></section>

• BEST &amp; WORST •Our best and worst pair from Tuesday's 23 results and 17 forecasts/revisions announcements is Nitto Denko (6988 JP) and DISCO (6146 JP). Source for all charts &amp; tables: Japan Analytics


🇯🇵 JAPAN • Results & Revisions ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​01/​​​​​​​​​​26 Nitto Denko & Disco

Japan

DISCO CORPORATION manufactures abrasive and precision industrial machinery for cutting and grinding purposes.  The Company's products are applied in the semiconductor, electronics, and construction industries to produce consumer goods such as personal computers, digital cameras, video game systems, and Digital Video Disc (DVD) players.

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DISCO Corp (6146 JP)

Disco (6146 JP): Orders Peaking, Blade Dicer Shipments Forecast to Decline

4Q results were above guidance and 1Q guidance looks conservative, but shipments of blade dicers are forecast to drop 10% in 1Q and consumables to...

Scott Foster

Disco (6146 JP): Valuation Reasonable but Not Compelling

3Q results ahead of guidance and FY guidance looks conservative, but this should have been expected. Valuation reasonable but not compelling due to...

Scott Foster

Disco (6146 JP): Sell into the Rebound

Disco reported record sales and profits in the three months to September, but new orders peaked six months earlier. Demand should decline as the...

Scott Foster

Disco (6146 JP): 5-To-8 Month Lead Times in the Price

With growth hitting physical limits, double-ordering in the semiconductor supply chain, and valuations at new highs, we recommend selling into...

Scott Foster

🇯🇵 JAPAN • Results & Revisions 01/26 Nitto Denko & Disco

Our best and worst pair from Tuesday's 23 results and 17 forecasts/revisions announcements is Nitto Denko (6988 JP) and DISCO (6146 JP).

Campbell Gunn

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52-week Range

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Disco (6146 JP): Orders Peaking, Blade Dicer Shipments Forecast to Decline

4Q results were above guidance and 1Q guidance looks conservative, but shipments of blade dicers are forecast to drop 10% in 1Q and consumables to...

Scott Foster

Disco (6146 JP): Valuation Reasonable but Not Compelling

3Q results ahead of guidance and FY guidance looks conservative, but this should have been expected. Valuation reasonable but not compelling due to...

Scott Foster

Disco (6146 JP): Sell into the Rebound

Disco reported record sales and profits in the three months to September, but new orders peaked six months earlier. Demand should decline as the...

Scott Foster

Disco (6146 JP): 5-To-8 Month Lead Times in the Price

With growth hitting physical limits, double-ordering in the semiconductor supply chain, and valuations at new highs, we recommend selling into...

Scott Foster

🇯🇵 JAPAN • Results & Revisions ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​01/​​​​​​​​​​26 Nitto Denko & Disco

Our best and worst pair from Tuesday's 23 results and 17 forecasts/revisions announcements is Nitto Denko (6988 JP) and DISCO (6146 JP).

Campbell Gunn

🇯🇵 JAPAN • Results & Revisions 01/26 Nitto Denko & Disco