Independent Insight Provider, Japanese equities, LightStream Research

Scott Foster

Independent Insight Provider, 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

Harmonic Drive Systems / Equity Bottom-Up

<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

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

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

<ul>
<li>Operating profit declined in 3Q despite a 15% YoY increase in sales. FY Mar-22 profit guidance now looks too high. </li>
<li>The Automotive division is suffering from the semiconductor shortage, high materials prices and the cost of ramping up EV motor production - which is scheduled to continue until 2025.</li>
<li>But the share price has dropped 31% since the beginning of January. Long-term investors may now choose when to buy in.</li>
</ul>


Operating profit declined in 3Q despite a 15% YoY increase in sales. FY Mar-22 profit guidance now looks too high. 
The Automotive division is suffering from the semiconductor shortage, high materials prices and the cost of ramping up EV motor production - which is scheduled to continue until 2025.
But the share price has dropped 31% since the beginning of January. Long-term investors may now choose when to buy in.


<ul>
<li>Nidec missed 3Q consensus as OP of ¥44.3bn came in 12.6% below consensus despite a 5.8% beat at the top line.</li>
<li>The deterioration in profitability across the Existing Auto, Machinery, and Appliance, Commercial and Industry businesses is a significant concern. </li>
<li>It also suggests that consensus expectations for 22.6% OP growth next year may prove highly optimistic.</li>
</ul>


Nidec missed 3Q consensus as OP of ¥44.3bn came in 12.6% below consensus despite a 5.8% beat at the top line.
The deterioration in profitability across the Existing Auto, Machinery, and Appliance, Commercial and Industry businesses is a significant concern. 
It also suggests that consensus expectations for 22.6% OP growth next year may prove highly optimistic.


Nidec – Machinery and Appliance, Commercial and Industry Segments Rolling Over

1H results turned out to be conservative, as we had expected, but both year-on-year sales growth and the gross &amp; operating profit margins declined in 2Q. Gross profit itself was down slightly and operating profit up only 2.4% sequentially in the three months to September.The main reasons for this were the collapse of HDD spindle motor sales and the upfront cost of entering the EV motor business. Demand for the company's other products was generally strong.In <a href="https://www.smartkarma.com/insights/nidec-early-results-for-the-ev-business-look-terrible" target="_blank" data-smartkarma-citation="insights:59569" rel="noopener">Nidec – Early Results for the EV Business Look Terrible</a> , Mio Kato noted that Nidec faces the issue of a decline in volumes for HDD motors and appears to be betting the farm on capturing the top share for EV traction motors. We aren’t at all convinced that they can, but even if they do, the early signs are that that might not be as lucrative as they imagined.And it might take longer than some investors have thought. As  noted in <a href="https://www.smartkarma.com/insights/nidec-6594-jp-good-1q-but-ev-motors-face-tough-competition-and-severe-pricing" target="_blank" data-smartkarma-citation="insights:54923" rel="noopener">Nidec (6594 JP): Good 1Q, but EV Motors Face Tough Competition and Severe Pricing</a> , EV power trains are not expected to become cheaper than Internal Combustion Engine power trains until 2025, In the meantime, Nidec faces rapidly growing competition from Hitachi and demanding customers in China.Considering the risks, at 49x our EPS estimate for FY Mar-22 and 41x our estimate for FY Mar-24, the shares look Overvalued.

1H results turned out to be conservative, as we had expected, but both year-on-year sales growth and the gross &amp; operating profit margins declined in 2Q. Gross profit itself was down slightly and operating profit up only 2.4% sequentially in the three months to September.The main reasons for this were the collapse of HDD spindle motor sales and the upfront cost of entering the EV motor business. Demand for the company's other products was generally strong.In Nidec – Early Results for the EV Business Look Terrible , Mio Kato noted that Nidec faces the issue of a decline in volumes for HDD motors and appears to be betting the farm on capturing the top share for EV traction motors. We aren’t at all convinced that they can, but even if they do, the early signs are that that might not be as lucrative as they imagined.And it might take longer than some investors have thought. As  noted in Nidec (6594 JP): Good 1Q, but EV Motors Face Tough Competition and Severe Pricing , EV power trains are not expected to become cheaper than Internal Combustion Engine power trains until 2025, In the meantime, Nidec faces rapidly growing competition from Hitachi and demanding customers in China.Considering the risks, at 49x our EPS estimate for FY Mar-22 and 41x our estimate for FY Mar-24, the shares look Overvalued.

Nidec (6594 JP): HDD & EV Motors Drag Down Profit Margins

Japan

NIDEC CORPORATION is the world's leading manufacturer of small precision motors mainly used in HDD and optical disk drives. The company has extended its focus to the home appliance and automotive markets. NIDEC is active in M&A and its subsidiaries include the world's leading manufacturers of LCD panel handling robots and camera shutters.

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Nidec Corp (6594 JP)

Harmonic Drive Systems (6324 JP): Consider the Competition

Sales are rebounding, but the stock is expensive and profits are likely to be capped by growing competition from Nidec and Leaderdrive. Consider...

Scott Foster

TOPIX-Nikkei Skew Trade Starting to Work Nicely

After initially grinding up slowly but underperforming the Nikkei our suggested skew trade gave up ground during the new year sell off. It is now...

Mio Kato

Nidec (6594): Catch a Falling Knife

Nidec's share price has dropped 31% since the start of the year, wiping out over-optimism regarding how fast EV motors and other initiatives might...

Scott Foster

Nidec – Machinery and Appliance, Commercial and Industry Segments Rolling Over

Nidec missed 3Q consensus as OP of ¥44.3bn came in 12.6% below consensus. The deterioration in profitability suggests that consensus expectations...

Mio Kato

Nidec (6594 JP): HDD & EV Motors Drag Down Profit Margins

HDD motors in decline, EV motors losing money, and growth prospects limited without M&A. Overvalued at 49x projected earnings this fiscal year and...

Scott Foster

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