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.


Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, 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

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