Global Automotive Stocks/EV Focus/Event Driven, SC Capital

SC Capital

Global Automotive Stocks/EV Focus/Event Driven

Over 22 years covering Japanese equities on both the sell side and the buy side. 

Bottom-up Japan Equities Research

Equity Bottom-Up

<ul><li>Yamaha Corp (7951) had a weaker than expected Q1 due to one-off inventory valuation issues, but momentum should be strong from Q2, which is scheduled to be announced on November 1st. The company is forecasting Q2 OP of Y14.9bn and consensus is at Y15.3bn. Our estimates are at Y16.5bn due to higher currency gains and stronger digital piano sales. </li><li>Yamaha is one of the greatest "bad company becomes good company" stories we've seen in Japan, having shed many loss-making businesses and focused on growing its prestigious musical equipment brand name and market share. The company has gone from generating only 3.5% OP margins back in FY10 to around 12% this fiscal year, while RoE has gone from 2% to 11% during the same period. And there is ample room for further improvements.</li><li>Profits should continue growing higher than consensus due to Yamaha's dominance in the digital piano and professional sound equipment markets in the developed world, while China and other emerging markets provide growth for Yamaha's musical instrument sales. Sales in China--where household budgets for musical education is growing--should have grown by +40% between FY12 and the end of FY17. </li><li>Because of this, valuations are increasing at Yamaha, with the FY17 PER at 20x (in line with the 5-year average) and the EV/EBITDA multiple at 11x versus the 5-year average of 7x. </li><li>There could be a further increase in valuations due to rising pressure for Yamaha to unload some of its massive cash and securities holdings. Yamaha has roughly Y100bn ($885m) in net cash and a Y203bn ($1.8bn) investment securities account (of which legacy holdings of Yamaha Motor accounts for $1.4bn).</li><li>Combined, this amounts to 77% of shareholders equity. Free cash flow as a percentage of equity has averaged at 7% over the past 5 years, so we expect some type of major shareholder return event by the time the company's current mid-term plan comes to an end in FY19.  </li><li>While the stock is trading near all-time highs, we would be buyers at Y3,800, roughly 13% lower than where it is now. Yamaha is the largest musical equipment maker in the world and continues to grow its brand value and market share at the behest of rivals, who are all much smaller players. </li></ul>

Yamaha Corp (7951) had a weaker than expected Q1 due to one-off inventory valuation issues, but momentum should be strong from Q2, which is scheduled to be announced on November 1st. The company is forecasting Q2 OP of Y14.9bn and consensus is at Y15.3bn. Our estimates are at Y16.5bn due to higher currency gains and stronger digital piano sales. Yamaha is one of the greatest "bad company becomes good company" stories we've seen in Japan, having shed many loss-making businesses and focused on growing its prestigious musical equipment brand name and market share. The company has gone from generating only 3.5% OP margins back in FY10 to around 12% this fiscal year, while RoE has gone from 2% to 11% during the same period. And there is ample room for further improvements.Profits should continue growing higher than consensus due to Yamaha's dominance in the digital piano and professional sound equipment markets in the developed world, while China and other emerging markets provide growth for Yamaha's musical instrument sales. Sales in China--where household budgets for musical education is growing--should have grown by +40% between FY12 and the end of FY17. Because of this, valuations are increasing at Yamaha, with the FY17 PER at 20x (in line with the 5-year average) and the EV/EBITDA multiple at 11x versus the 5-year average of 7x. There could be a further increase in valuations due to rising pressure for Yamaha to unload some of its massive cash and securities holdings. Yamaha has roughly Y100bn ($885m) in net cash and a Y203bn ($1.8bn) investment securities account (of which legacy holdings of Yamaha Motor accounts for $1.4bn).Combined, this amounts to 77% of shareholders equity. Free cash flow as a percentage of equity has averaged at 7% over the past 5 years, so we expect some type of major shareholder return event by the time the company's current mid-term plan comes to an end in FY19.  While the stock is trading near all-time highs, we would be buyers at Y3,800, roughly 13% lower than where it is now. Yamaha is the largest musical equipment maker in the world and continues to grow its brand value and market share at the behest of rivals, who are all much smaller players. 

Yamaha Corp (7951)--Stronger Momentum to Lead to Better Shareholder Returns

Japan

Kawai Musical Instruments Manufacturing Co., Ltd. produces musical instruments including classic pianos, electrical pianos, synthesizers, and stringed musical instruments.  The Company also makes metallic parts for electronic equipment.

Kawai Musical Instruments Manufacturing (7952 JP)

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Yamaha Corp (7951)--Stronger Momentum to Lead to Better Shareholder Returns

Yamaha Corp (7951) had a weaker than expected Q1 due to one-off inventory valuation issues, but momentum should be strong from Q2, which is...

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