Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

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

Harmonic Drive Systems / Equity Bottom-Up

<ul>
<li>Harmonic Drive posted revenue that was a touch above guidance but just below consensus and rather weak OP of just ¥2.23bn. </li>
<li>While that was just below consensus it represented a deviation from typical gross margin and SG&amp;A trends that is concerning. </li>
<li>More troubling however is the drop in orders and particularly the composition thereof.</li>
</ul>


Harmonic Drive posted revenue that was a touch above guidance but just below consensus and rather weak OP of just ¥2.23bn. 
While that was just below consensus it represented a deviation from typical gross margin and SG&amp;A trends that is concerning. 
More troubling however is the drop in orders and particularly the composition thereof.


Independent Insight Provider, Japanese equities, LightStream Research

Scott Foster

Independent Insight Provider, Japanese equities

<ul>
<li>Nidec plans to nearly triple speed reduction gear capacity this fiscal year and aims to overtake market leader HDS by 2025. That would require another tripling of capacity.</li>
<li>The investments look manageable. The issues are price competition and profit margins, particularly for HDS.</li>
<li>Positive for Nidec, in the long term. Negative for HDS. More details expected when Nidec announces results on Thursday.</li>
</ul>


Nidec plans to nearly triple speed reduction gear capacity this fiscal year and aims to overtake market leader HDS by 2025. That would require another tripling of capacity.
The investments look manageable. The issues are price competition and profit margins, particularly for HDS.
Positive for Nidec, in the long term. Negative for HDS. More details expected when Nidec announces results on Thursday.


Nidec (6594 JP): Robot Gear Expansion to Put Pressure on HDS (6324 JP)

<ul>
<li>Demand for speed reduction gears is rebounding from the COVID downturn, but sales and profits are likely to be restrained by an increasingly difficult operating environment.</li>
<li>HDS faces growing competition from Nidec in Japan and Leaderdrive in China, both of which want to lead the market. For HDS, a return to peak margins is unlikely.</li>
<li>The shares have dropped 31% since last September, but at 81x EPS guidance are still quite expensive. Consider alternative factory automation investments. </li>
</ul>


Demand for speed reduction gears is rebounding from the COVID downturn, but sales and profits are likely to be restrained by an increasingly difficult operating environment.
HDS faces growing competition from Nidec in Japan and Leaderdrive in China, both of which want to lead the market. For HDS, a return to peak margins is unlikely.
The shares have dropped 31% since last September, but at 81x EPS guidance are still quite expensive. Consider alternative factory automation investments. 


Harmonic Drive Systems (6324 JP): Consider the Competition

<ul>
<li>Harmonic Drive posted relatively good numbers in 3Q on account of strong SG&amp;A controls but neglected to raise guidance. </li>
<li>That looks conservative and backlog hit a new high, but valuations remain stretched. </li>
<li>Ultimately we still see significant risk for next FY and expect guidance to be significantly weaker than consensus expects.</li>
</ul>


Harmonic Drive posted relatively good numbers in 3Q on account of strong SG&amp;A controls but neglected to raise guidance. 
That looks conservative and backlog hit a new high, but valuations remain stretched. 
Ultimately we still see significant risk for next FY and expect guidance to be significantly weaker than consensus expects.


Harmonic Drive – Good 3Q But No Guidance Revision

Event-Driven

<ul>
<li>After initially grinding up slowly but underperforming the Nikkei our suggested skew trade gave up ground during the new year sell off.</li>
<li>It did so slowly, however and was outperforming Nikkei when last we checked despite being down slightly. </li>
<li>Thankfully, a lot of the idiosyncratic volatility hurting the skew trade has reversed now and it is positive and outperforming Nikkei consistently.</li>
</ul>


After initially grinding up slowly but underperforming the Nikkei our suggested skew trade gave up ground during the new year sell off.
It did so slowly, however and was outperforming Nikkei when last we checked despite being down slightly. 
Thankfully, a lot of the idiosyncratic volatility hurting the skew trade has reversed now and it is positive and outperforming Nikkei consistently.


TOPIX-Nikkei Skew Trade Starting to Work Nicely

Japan

ORGANO CORPORATION manufactures water treatment equipment and other related peripherals and supplies.  The Company also produces industrial chemical products such as activated carbon and charcoal, water treatment compounds, and ion exchange resins.  Organo's water treatment systems are used for ultra-pure water production in nuclear power and semiconductor manufacturing processes.

SUMITOMO HEAVY INDUSTRIES, LTD. manufactures and markets heavy electric machinery.  The Company's operations include heavy machinery, shipbuilding, mass-production machinery, environmental equipment, and construction machinery divisions.  Sumitomo Heavy Industries also produces equipment for semiconductor and laser technologies.

NSK Ltd. manufactures ball and roller bearings.  The Company's parts are applied in equipment such as precision machinery, electronic devices, and industrial machinery.  NSK also produces automotive products including transmission bearings, power steering systems, and wheel hub units.

FUJITEC CO., LTD. mainly manufactures elevators, escalators, and sky-parking systems by the orders from customers.  The Company also provides installation and repair services.  Fujitec has manufacturing bases in overseas including the USA, Singapore, Taiwan, and South Korea.

JTEKT Corporation manufactures bearings for motor vehicles and electronic equipment.  The Company also produces steering systems and oil seals for automobiles, electronic control units, and machine tools.

The Japan Steel Works Ltd produces machinery for casts, forged steel, and plastics.  The Company, serving both the public and private sectors, manufactures industrial equipment utilized in facilities such as oil refineries, manufacturing plants, and petrochemical plants.

Nabtesco Corporation manufactures Aircraft and Hydraulic products, Precision equipment, and transportation equipment. The Company's products include landing gear system for aircrafts, railroad vehicle brake system, and precision reduction gears for industrial robots.

THK CO., LTD. manufactures industrial linear motion systems, applied in such products as robots, machine tools, and semiconductor equipment.  The Company also produces feed screws, bearings, joints, actuators, and other mechanical parts and equipment.

MIURA CO., LTD. manufactures, inspects, and maintains industrial boilers and related equipment.  The Company offers a variety of boilers including steam, hot water, marine, and waste heat recycling types.  Miura also produces non-boiler products such as pumps, refrigerators, ice makers, sterilizers, and water treatment systems.

HINO MOTORS, LTD. develops, manufactures and markets diesel buses and trucks. The Company also produces heavy duty trucks, special purpose vehicles, and diesel engines for industrial and marine applications.

Zhengzhou Coal Mining Machinery Group Co., Ltd. develops and manufactures hydraulic support in coal industry.  The Company's products include two legs hydraulic support, four legs hydraulic support, caving support, and hydraulic valve.

Zhengzhou Coal Mining Machinery Group Co (601717 CH)

Hyundai Rotem Company Ltd. manufactures railroad equipment and defense vehicles. The Company produces high-speed trains, light rail vehicles, locomotives, and passenger coaches, main battle tanks, armored recovery vehicles, and related defense equipment. Hyundai Rotem operates worldwide.

Hyundai Mipo Dockyard Co., Ltd. is shipbuilders in the sectors of medium-sized conventional ships and specialized vessels. The Company constructs and delivers medium-ranged product carriers, chemical tankers, containerships, LPG carriers, pure car truck carriers and others.

China First Heavy Industries develops, manufactures, and sells heavy industry equipment.  The Company's products include metallurgical equipment, heavy container, nuclear island equipment, large-scale power generation equipment, castings and forgings, mining parts, heavy forging equipment, mining equipment and special products.

BEML Limited produces and sells earthmoving equipment, including railway rolling stock, heavy duty vehicles, wheel loaders, trailers, excavators and heavy recovery vehicles.

Titagarh Wagons Ltd. manufactures railroad cars.  The Company produces railway wagons, Bailey bridges, earth moving and mining equipment, and steel and iron castings.

Kirloskar Brothers Limited manufactures agricultural implements, power-driven pumps, sugarcane crushers, sluice valves, concrete mixers, ploughs, turbines, iron and steel castings and machine tools. The Group provides its customers with Finite Element Modelling and Computational Fluid Dynamics packages for Hydraulic analysis.  Kirloskar also supplies several turnkey Mini-Hydel power projects.

Commercial Engineers & Body Builders Company Ltd. builds truck and locomotive bodies.  The Company produces dump truck, tanker, cargo box, skip-loader, garbage, troop carrier, prison van, fire engine and ambulance bodies; and locomotive, boxcar and passenger coach bodies.

Mueller Water Products, Inc. manufactures a broad range of water infrastructure and flow control products for use in water distribution networks, water and wastewater treatment facilities, gas distribution systems and fire protection piping systems. The Company's product portfolio includes engineered valves, hydrants, pipe fittings and ductile iron pipe.

CNHTC Jinan Truck Co., Ltd. manufactures and retails heavy duty trucks.

Harmonic Drive Systems Inc. manufactures speed reducers used in industrial robots, semiconductor manufacturing equipment, and other precision instruments. The Company offers cup type, hollow-shaft type, and rotary type speed reducers. Harmonic Drive Systems also produces gear heads and harmonic drive actuators.

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Harmonic Drive Systems (6324 JP)

Harmonic Drive – Orders Rolling Over

Harmonic Drive has been squeezy over the last two days despite weak earnings and so-so guidance but order trends are rolling over and valuations...

Mio Kato

Nidec (6594 JP): Robot Gear Expansion to Put Pressure on HDS (6324 JP)

Nidec planning to nearly triple output of speed reduction gears this year and overtake HDS by 2025. That would require another tripling of...

Scott Foster