Industrials

In this briefing:

1. Recruit Holdings Reports Strong 3Q Results; Remains Expensive
2. Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium
3. U.S. Equity Strategy: Upgrading Manufacturing Sector
4. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q
5. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

1. Recruit Holdings Reports Strong 3Q Results; Remains Expensive

Recruit Holdings (6098 JP) reported its 3Q FY03/19 financial results on Wednesday (13th February). Recruit’s revenue and EBITDA were up 6.0% YoY and 11.1% YoY respectively in 3Q FY03/19. This was mostly due to 1) consolidation of the results of Glassdoor Inc. (the company which operates the employment information website glassdoor.com), 2) steady growth in Japanese staffing operations and 3) growth in beauty and real estate app users during the quarter, partially offset by slowdown in global recruitment activity.

2. Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium

Xingfa Aluminium (98 HK) has announced its major shareholder, Guangxin Aluminium (a wholly-owned Guangdong SASAC vehicle), has acquired 5,000 shares, lifting its stake to 30.001%, triggering a mandatory general offer. The offer price is $5.60, a premium of just 2.94% to last close.

Guangxin, together with certain management of Xingfa, attempted to take Xingfa private at $3.70/share back in 1H17. That scheme failed comprehensively, which was a good outcome for minorities as FY17 net income increased 28%. 1H18 profit was also a 25% improvement over the corresponding period.

The offer price is in line to where Xingfa traded last October and 23% below the recent peak back in mid-June 2018. It is also 37% below where China Lesso Group Holdings (2128 HK) acquired its 26.3% stake in April last year.

At a guess, this low-ball offer provides an exit for large(r) investor with regards to Xingfa’s low liquidity. But no irrevocables have been given and the Offer remains conditional on Guangxin holding 50% of the voting votes.

As expected, Xingfa is currently trading 1.4% through terms. For those interested in small-cap, illiquid stocks, I would buy around these levels to play the back-end, or the (remote) possibility of a bump. The offer has not been declared final.

3. U.S. Equity Strategy: Upgrading Manufacturing Sector

The S&P 500 continues to hover below critical resistance at its 200-day moving average while market participants remain in a wait-and-see mode for new developments on U.S.-China trade and details on the latest border security proposal. At the same time, breadth improvements have extended to our Manufacturing Sector – a welcomed sight given its cyclical nature.  We are Upgrading Manufacturing to market weight from underweight. Our cap-weighted Manufacturing Sector has steadily improved in our RSR ranks due in large part to strength in Aerospace & Defense Groups. In today’s report we highlight attractive Groups within Manufacturing and Technology..

4. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

Fujimi’s sales and operating profit increased by only 1.2% and 2.3% year-on-year, respectively, in the three months to December. Sales of hard disc and industrial polishing materials declined. Sales of silicon wafer lapping and polishing materials, and CMP slurry, continued to rise, but at slower rates than in 2Q.

Full-year FY Mar-19 guidance was left unchanged, implying year-on-year declines in both sales and profits in 4Q. We believe that guidance is conservative, but we also expect the slowdown to continue.

At ¥2,368 (Wednesday, February 13, closing price), the shares are selling at 13.3x our EPS estimate for FY Mar-19 and 12.7x our estimate for FY Mar-20. These and other projected valuations are not at the bottom of their historical ranges, but should be low enough to support the share price as long as a U.S.-China trade deal – and, therefore, the implementation of deferred investment plans – seems likely.

5. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

In this briefing:

1. Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium
2. U.S. Equity Strategy: Upgrading Manufacturing Sector
3. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q
4. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position
5. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

1. Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium

Xingfa Aluminium (98 HK) has announced its major shareholder, Guangxin Aluminium (a wholly-owned Guangdong SASAC vehicle), has acquired 5,000 shares, lifting its stake to 30.001%, triggering a mandatory general offer. The offer price is $5.60, a premium of just 2.94% to last close.

Guangxin, together with certain management of Xingfa, attempted to take Xingfa private at $3.70/share back in 1H17. That scheme failed comprehensively, which was a good outcome for minorities as FY17 net income increased 28%. 1H18 profit was also a 25% improvement over the corresponding period.

The offer price is in line to where Xingfa traded last October and 23% below the recent peak back in mid-June 2018. It is also 37% below where China Lesso Group Holdings (2128 HK) acquired its 26.3% stake in April last year.

At a guess, this low-ball offer provides an exit for large(r) investor with regards to Xingfa’s low liquidity. But no irrevocables have been given and the Offer remains conditional on Guangxin holding 50% of the voting votes.

As expected, Xingfa is currently trading 1.4% through terms. For those interested in small-cap, illiquid stocks, I would buy around these levels to play the back-end, or the (remote) possibility of a bump. The offer has not been declared final.

2. U.S. Equity Strategy: Upgrading Manufacturing Sector

The S&P 500 continues to hover below critical resistance at its 200-day moving average while market participants remain in a wait-and-see mode for new developments on U.S.-China trade and details on the latest border security proposal. At the same time, breadth improvements have extended to our Manufacturing Sector – a welcomed sight given its cyclical nature.  We are Upgrading Manufacturing to market weight from underweight. Our cap-weighted Manufacturing Sector has steadily improved in our RSR ranks due in large part to strength in Aerospace & Defense Groups. In today’s report we highlight attractive Groups within Manufacturing and Technology..

3. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

Fujimi’s sales and operating profit increased by only 1.2% and 2.3% year-on-year, respectively, in the three months to December. Sales of hard disc and industrial polishing materials declined. Sales of silicon wafer lapping and polishing materials, and CMP slurry, continued to rise, but at slower rates than in 2Q.

Full-year FY Mar-19 guidance was left unchanged, implying year-on-year declines in both sales and profits in 4Q. We believe that guidance is conservative, but we also expect the slowdown to continue.

At ¥2,368 (Wednesday, February 13, closing price), the shares are selling at 13.3x our EPS estimate for FY Mar-19 and 12.7x our estimate for FY Mar-20. These and other projected valuations are not at the bottom of their historical ranges, but should be low enough to support the share price as long as a U.S.-China trade deal – and, therefore, the implementation of deferred investment plans – seems likely.

4. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

5. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

• Tsubakimoto Chain Co’s (6371 JP) 3QFY03/19 results were strong, with revenue continuing to witness double-digit growth at +13.1% YoY, although fell slightly below consensus estimates. On OP, Tsubakimoto witnessed only +5.2% YoY growth for 3Q. This was, however, above consensus and our estimates.
• Nine-months cumulative figures look attractive as well, with both revenue and OP witnessing double-digit growth rates at 13.2% YoY and 16.0% YoY respectively as of The company’s revenue continues to trend upwards in a healthy fashion, while margins managed to reach 10.1% this quarter slightly below the 10.8% OPM achieved in 3Q last year.
• A majority of revenue growth came from the company’s Materials Handling Equipment segment, which has witnessed strong recovery thanks to the recently acquired Central Conveyor Company in this segment. The growth was followed by the company’s steadily growing business segments, Chain segment and Power Transmission segment. This was true for the company’s OP as well. The Materials Handling Equipment segment continued to make operating profits this quarter, followed by the Chain segment and the Power Transmission segment. The Auto Parts segment, however, continued to witness slow growth in revenue and pressure in its margins this quarter as well.
• Despite strong results, post-release, Tsubakimoto opened -9.9% down on Friday from Thursday’s close. The stock, however, rallied 8% by Tuesday’s close.

In this briefing:

1. U.S. Equity Strategy: Upgrading Manufacturing Sector
2. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q
3. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position
4. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

1. U.S. Equity Strategy: Upgrading Manufacturing Sector

The S&P 500 continues to hover below critical resistance at its 200-day moving average while market participants remain in a wait-and-see mode for new developments on U.S.-China trade and details on the latest border security proposal. At the same time, breadth improvements have extended to our Manufacturing Sector – a welcomed sight given its cyclical nature.  We are Upgrading Manufacturing to market weight from underweight. Our cap-weighted Manufacturing Sector has steadily improved in our RSR ranks due in large part to strength in Aerospace & Defense Groups. In today’s report we highlight attractive Groups within Manufacturing and Technology..

2. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

Fujimi’s sales and operating profit increased by only 1.2% and 2.3% year-on-year, respectively, in the three months to December. Sales of hard disc and industrial polishing materials declined. Sales of silicon wafer lapping and polishing materials, and CMP slurry, continued to rise, but at slower rates than in 2Q.

Full-year FY Mar-19 guidance was left unchanged, implying year-on-year declines in both sales and profits in 4Q. We believe that guidance is conservative, but we also expect the slowdown to continue.

At ¥2,368 (Wednesday, February 13, closing price), the shares are selling at 13.3x our EPS estimate for FY Mar-19 and 12.7x our estimate for FY Mar-20. These and other projected valuations are not at the bottom of their historical ranges, but should be low enough to support the share price as long as a U.S.-China trade deal – and, therefore, the implementation of deferred investment plans – seems likely.

3. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

4. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

• Tsubakimoto Chain Co’s (6371 JP) 3QFY03/19 results were strong, with revenue continuing to witness double-digit growth at +13.1% YoY, although fell slightly below consensus estimates. On OP, Tsubakimoto witnessed only +5.2% YoY growth for 3Q. This was, however, above consensus and our estimates.
• Nine-months cumulative figures look attractive as well, with both revenue and OP witnessing double-digit growth rates at 13.2% YoY and 16.0% YoY respectively as of The company’s revenue continues to trend upwards in a healthy fashion, while margins managed to reach 10.1% this quarter slightly below the 10.8% OPM achieved in 3Q last year.
• A majority of revenue growth came from the company’s Materials Handling Equipment segment, which has witnessed strong recovery thanks to the recently acquired Central Conveyor Company in this segment. The growth was followed by the company’s steadily growing business segments, Chain segment and Power Transmission segment. This was true for the company’s OP as well. The Materials Handling Equipment segment continued to make operating profits this quarter, followed by the Chain segment and the Power Transmission segment. The Auto Parts segment, however, continued to witness slow growth in revenue and pressure in its margins this quarter as well.
• Despite strong results, post-release, Tsubakimoto opened -9.9% down on Friday from Thursday’s close. The stock, however, rallied 8% by Tuesday’s close.

In this briefing:

1. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q
2. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position
3. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19
4. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc

1. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

Fujimi’s sales and operating profit increased by only 1.2% and 2.3% year-on-year, respectively, in the three months to December. Sales of hard disc and industrial polishing materials declined. Sales of silicon wafer lapping and polishing materials, and CMP slurry, continued to rise, but at slower rates than in 2Q.

Full-year FY Mar-19 guidance was left unchanged, implying year-on-year declines in both sales and profits in 4Q. We believe that guidance is conservative, but we also expect the slowdown to continue.

At ¥2,368 (Wednesday, February 13, closing price), the shares are selling at 13.3x our EPS estimate for FY Mar-19 and 12.7x our estimate for FY Mar-20. These and other projected valuations are not at the bottom of their historical ranges, but should be low enough to support the share price as long as a U.S.-China trade deal – and, therefore, the implementation of deferred investment plans – seems likely.

2. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

3. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

• Tsubakimoto Chain Co’s (6371 JP) 3QFY03/19 results were strong, with revenue continuing to witness double-digit growth at +13.1% YoY, although fell slightly below consensus estimates. On OP, Tsubakimoto witnessed only +5.2% YoY growth for 3Q. This was, however, above consensus and our estimates.
• Nine-months cumulative figures look attractive as well, with both revenue and OP witnessing double-digit growth rates at 13.2% YoY and 16.0% YoY respectively as of The company’s revenue continues to trend upwards in a healthy fashion, while margins managed to reach 10.1% this quarter slightly below the 10.8% OPM achieved in 3Q last year.
• A majority of revenue growth came from the company’s Materials Handling Equipment segment, which has witnessed strong recovery thanks to the recently acquired Central Conveyor Company in this segment. The growth was followed by the company’s steadily growing business segments, Chain segment and Power Transmission segment. This was true for the company’s OP as well. The Materials Handling Equipment segment continued to make operating profits this quarter, followed by the Chain segment and the Power Transmission segment. The Auto Parts segment, however, continued to witness slow growth in revenue and pressure in its margins this quarter as well.
• Despite strong results, post-release, Tsubakimoto opened -9.9% down on Friday from Thursday’s close. The stock, however, rallied 8% by Tuesday’s close.

4. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc

Following a long period of weakness, robotics related stocks are displaying stronger performance recently as 3Q results have come in weak, but generally done so with management reassurances that this is the bottom.

We had been negative on the sector for some time before turning more constructive in mid January following Yaskawa’s earnings. We concur with the general messaging that this is the bottom based on our analysis of order levels for the companies and regional trend breakdowns. We do not expect a particularly sharp rebound in orders and sales in the near future and believe there is still some risk of these stocks returning toward the lows over the course of the year. However, we believe that the next significant move should be upwards and longer term investors should be looking for entry timings.

In this briefing:

1. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position
2. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19
3. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc
4. Fanuc Bullish Trade Points off of Base Line Support

1. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

2. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

• Tsubakimoto Chain Co’s (6371 JP) 3QFY03/19 results were strong, with revenue continuing to witness double-digit growth at +13.1% YoY, although fell slightly below consensus estimates. On OP, Tsubakimoto witnessed only +5.2% YoY growth for 3Q. This was, however, above consensus and our estimates.
• Nine-months cumulative figures look attractive as well, with both revenue and OP witnessing double-digit growth rates at 13.2% YoY and 16.0% YoY respectively as of The company’s revenue continues to trend upwards in a healthy fashion, while margins managed to reach 10.1% this quarter slightly below the 10.8% OPM achieved in 3Q last year.
• A majority of revenue growth came from the company’s Materials Handling Equipment segment, which has witnessed strong recovery thanks to the recently acquired Central Conveyor Company in this segment. The growth was followed by the company’s steadily growing business segments, Chain segment and Power Transmission segment. This was true for the company’s OP as well. The Materials Handling Equipment segment continued to make operating profits this quarter, followed by the Chain segment and the Power Transmission segment. The Auto Parts segment, however, continued to witness slow growth in revenue and pressure in its margins this quarter as well.
• Despite strong results, post-release, Tsubakimoto opened -9.9% down on Friday from Thursday’s close. The stock, however, rallied 8% by Tuesday’s close.

3. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc

Following a long period of weakness, robotics related stocks are displaying stronger performance recently as 3Q results have come in weak, but generally done so with management reassurances that this is the bottom.

We had been negative on the sector for some time before turning more constructive in mid January following Yaskawa’s earnings. We concur with the general messaging that this is the bottom based on our analysis of order levels for the companies and regional trend breakdowns. We do not expect a particularly sharp rebound in orders and sales in the near future and believe there is still some risk of these stocks returning toward the lows over the course of the year. However, we believe that the next significant move should be upwards and longer term investors should be looking for entry timings.

4. Fanuc Bullish Trade Points off of Base Line Support

Fanuc Corp (6954 JP) shows increasing signs of a basing process and opportunities on weakness.

Macro retracements display clear synergy with the low at 15,570, suggesting this is a key low.

Use weakness back toward base line support to buy for a medium term rise to press on outlined resistance targets.

Risk lies with the signs of rally fatigue in the near term tactical cycle as the daily RSI fails to confirm recent highs that are knocking on pivotal resistance at 19,000 that acts as the immediate make or break level.

Pivot levels, action points and targets are outlined.

In this briefing:

1. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19
2. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc
3. Fanuc Bullish Trade Points off of Base Line Support

1. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

• Tsubakimoto Chain Co’s (6371 JP) 3QFY03/19 results were strong, with revenue continuing to witness double-digit growth at +13.1% YoY, although fell slightly below consensus estimates. On OP, Tsubakimoto witnessed only +5.2% YoY growth for 3Q. This was, however, above consensus and our estimates.
• Nine-months cumulative figures look attractive as well, with both revenue and OP witnessing double-digit growth rates at 13.2% YoY and 16.0% YoY respectively as of The company’s revenue continues to trend upwards in a healthy fashion, while margins managed to reach 10.1% this quarter slightly below the 10.8% OPM achieved in 3Q last year.
• A majority of revenue growth came from the company’s Materials Handling Equipment segment, which has witnessed strong recovery thanks to the recently acquired Central Conveyor Company in this segment. The growth was followed by the company’s steadily growing business segments, Chain segment and Power Transmission segment. This was true for the company’s OP as well. The Materials Handling Equipment segment continued to make operating profits this quarter, followed by the Chain segment and the Power Transmission segment. The Auto Parts segment, however, continued to witness slow growth in revenue and pressure in its margins this quarter as well.
• Despite strong results, post-release, Tsubakimoto opened -9.9% down on Friday from Thursday’s close. The stock, however, rallied 8% by Tuesday’s close.

2. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc

Following a long period of weakness, robotics related stocks are displaying stronger performance recently as 3Q results have come in weak, but generally done so with management reassurances that this is the bottom.

We had been negative on the sector for some time before turning more constructive in mid January following Yaskawa’s earnings. We concur with the general messaging that this is the bottom based on our analysis of order levels for the companies and regional trend breakdowns. We do not expect a particularly sharp rebound in orders and sales in the near future and believe there is still some risk of these stocks returning toward the lows over the course of the year. However, we believe that the next significant move should be upwards and longer term investors should be looking for entry timings.

3. Fanuc Bullish Trade Points off of Base Line Support

Fanuc Corp (6954 JP) shows increasing signs of a basing process and opportunities on weakness.

Macro retracements display clear synergy with the low at 15,570, suggesting this is a key low.

Use weakness back toward base line support to buy for a medium term rise to press on outlined resistance targets.

Risk lies with the signs of rally fatigue in the near term tactical cycle as the daily RSI fails to confirm recent highs that are knocking on pivotal resistance at 19,000 that acts as the immediate make or break level.

Pivot levels, action points and targets are outlined.

In this briefing:

1. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc
2. Fanuc Bullish Trade Points off of Base Line Support

1. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc

Following a long period of weakness, robotics related stocks are displaying stronger performance recently as 3Q results have come in weak, but generally done so with management reassurances that this is the bottom.

We had been negative on the sector for some time before turning more constructive in mid January following Yaskawa’s earnings. We concur with the general messaging that this is the bottom based on our analysis of order levels for the companies and regional trend breakdowns. We do not expect a particularly sharp rebound in orders and sales in the near future and believe there is still some risk of these stocks returning toward the lows over the course of the year. However, we believe that the next significant move should be upwards and longer term investors should be looking for entry timings.

2. Fanuc Bullish Trade Points off of Base Line Support

Fanuc Corp (6954 JP) shows increasing signs of a basing process and opportunities on weakness.

Macro retracements display clear synergy with the low at 15,570, suggesting this is a key low.

Use weakness back toward base line support to buy for a medium term rise to press on outlined resistance targets.

Risk lies with the signs of rally fatigue in the near term tactical cycle as the daily RSI fails to confirm recent highs that are knocking on pivotal resistance at 19,000 that acts as the immediate make or break level.

Pivot levels, action points and targets are outlined.

In this briefing:

1. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc
2. Fanuc Bullish Trade Points off of Base Line Support
3. NYT: Property Tax Expense Pressured 4Q18 Earnings to Its Trough in 2018

1. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc

Following a long period of weakness, robotics related stocks are displaying stronger performance recently as 3Q results have come in weak, but generally done so with management reassurances that this is the bottom.

We had been negative on the sector for some time before turning more constructive in mid January following Yaskawa’s earnings. We concur with the general messaging that this is the bottom based on our analysis of order levels for the companies and regional trend breakdowns. We do not expect a particularly sharp rebound in orders and sales in the near future and believe there is still some risk of these stocks returning toward the lows over the course of the year. However, we believe that the next significant move should be upwards and longer term investors should be looking for entry timings.

2. Fanuc Bullish Trade Points off of Base Line Support

Fanuc Corp (6954 JP) shows increasing signs of a basing process and opportunities on weakness.

Macro retracements display clear synergy with the low at 15,570, suggesting this is a key low.

Use weakness back toward base line support to buy for a medium term rise to press on outlined resistance targets.

Risk lies with the signs of rally fatigue in the near term tactical cycle as the daily RSI fails to confirm recent highs that are knocking on pivotal resistance at 19,000 that acts as the immediate make or break level.

Pivot levels, action points and targets are outlined.

3. NYT: Property Tax Expense Pressured 4Q18 Earnings to Its Trough in 2018

NYT reported 4Q18 net profit of Bt90m (-11%YoY, -24%QoQ), the lowest level in the past eight quarters. The 2018 result was in-line with our forecast.

• A drop in 4Q18 earnings was caused by one-time expense on property tax, which we expected at around Bt10-13m.
• 4Q18 revenue also remained flat at Bt368m (-1%YoY, +3.5%YoY) as number of vehicles that passed through the A5 terminal slightly dropped along the country’s car export unit to 281,853 units (-3%YoY, -5%QoQ).
• The company announced Bt0.30 of annual dividend or equivalent to 5.7% (XD on 3th of May 2019)

We maintain our 2019-20E earnings forecast and still rank NYT as a BUY with a target price of *Bt7.60 based on DCF (8.8%WACC, 1%TG) which implies 20xPE’2019E

*We make no changes to forecast, recommendation, and target price at the time of result announcement.

In this briefing:

1. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc
2. Fanuc Bullish Trade Points off of Base Line Support
3. NYT: Property Tax Expense Pressured 4Q18 Earnings to Its Trough in 2018
4. Ecopro BM IPO: Valuation Analysis

1. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc

Following a long period of weakness, robotics related stocks are displaying stronger performance recently as 3Q results have come in weak, but generally done so with management reassurances that this is the bottom.

We had been negative on the sector for some time before turning more constructive in mid January following Yaskawa’s earnings. We concur with the general messaging that this is the bottom based on our analysis of order levels for the companies and regional trend breakdowns. We do not expect a particularly sharp rebound in orders and sales in the near future and believe there is still some risk of these stocks returning toward the lows over the course of the year. However, we believe that the next significant move should be upwards and longer term investors should be looking for entry timings.

2. Fanuc Bullish Trade Points off of Base Line Support

Fanuc Corp (6954 JP) shows increasing signs of a basing process and opportunities on weakness.

Macro retracements display clear synergy with the low at 15,570, suggesting this is a key low.

Use weakness back toward base line support to buy for a medium term rise to press on outlined resistance targets.

Risk lies with the signs of rally fatigue in the near term tactical cycle as the daily RSI fails to confirm recent highs that are knocking on pivotal resistance at 19,000 that acts as the immediate make or break level.

Pivot levels, action points and targets are outlined.

3. NYT: Property Tax Expense Pressured 4Q18 Earnings to Its Trough in 2018

NYT reported 4Q18 net profit of Bt90m (-11%YoY, -24%QoQ), the lowest level in the past eight quarters. The 2018 result was in-line with our forecast.

• A drop in 4Q18 earnings was caused by one-time expense on property tax, which we expected at around Bt10-13m.
• 4Q18 revenue also remained flat at Bt368m (-1%YoY, +3.5%YoY) as number of vehicles that passed through the A5 terminal slightly dropped along the country’s car export unit to 281,853 units (-3%YoY, -5%QoQ).
• The company announced Bt0.30 of annual dividend or equivalent to 5.7% (XD on 3th of May 2019)

We maintain our 2019-20E earnings forecast and still rank NYT as a BUY with a target price of *Bt7.60 based on DCF (8.8%WACC, 1%TG) which implies 20xPE’2019E

*We make no changes to forecast, recommendation, and target price at the time of result announcement.

4. Ecopro BM IPO: Valuation Analysis

• The bookbuilding of the Ecopro BM Co Ltd (247540 KS) IPO starts on February 14th. Ecopro BM Co Ltd (247540 KS) specializes in making cathode active materials for rechargeable batteries that are used in EVs and electrical energy storage systems (ESS). Ecopro BM is the second largest global player after Sumitomo in the NCA high nickel-based cathode materials with market share of nearly 35%.
• Our base case valuation of the company suggests a market cap of 1.2 trillion won or implied price per share of 56,003 won, which is 31% higher than the high end of the IPO price range of 42,900 won. Therefore, we would take this deal. We used an estimated P/E of 25.3x (10% premium to the comps’ average of 23x) and an estimated net profit of 49.3 billion won in 2019 to derive our base case valuation. The high end of the valuation sensitivity analysis is 67,764 won, which would be 58% higher than the high end of the IPO price range of 42,900 won. 
• Ecopro BM has stronger sales growth and operating margins than its peers. However, its peers have stronger balance sheet with slightly higher returns on equity. We would give special points to the company’s stronger sales growth which is an indication of greater customer demand. Therefore, we think it is appropriate to provide a 10-20% premium valuation to Ecopro BM versus its peers based on the P/E analysis. 

In this briefing:

1. Fanuc Bullish Trade Points off of Base Line Support
2. NYT: Property Tax Expense Pressured 4Q18 Earnings to Its Trough in 2018
3. Ecopro BM IPO: Valuation Analysis
4. Shimadzu (7701 JP): 3Q Results Suggest a Trading Range

1. Fanuc Bullish Trade Points off of Base Line Support

Fanuc Corp (6954 JP) shows increasing signs of a basing process and opportunities on weakness.

Macro retracements display clear synergy with the low at 15,570, suggesting this is a key low.

Use weakness back toward base line support to buy for a medium term rise to press on outlined resistance targets.

Risk lies with the signs of rally fatigue in the near term tactical cycle as the daily RSI fails to confirm recent highs that are knocking on pivotal resistance at 19,000 that acts as the immediate make or break level.

Pivot levels, action points and targets are outlined.

2. NYT: Property Tax Expense Pressured 4Q18 Earnings to Its Trough in 2018

NYT reported 4Q18 net profit of Bt90m (-11%YoY, -24%QoQ), the lowest level in the past eight quarters. The 2018 result was in-line with our forecast.

• A drop in 4Q18 earnings was caused by one-time expense on property tax, which we expected at around Bt10-13m.
• 4Q18 revenue also remained flat at Bt368m (-1%YoY, +3.5%YoY) as number of vehicles that passed through the A5 terminal slightly dropped along the country’s car export unit to 281,853 units (-3%YoY, -5%QoQ).
• The company announced Bt0.30 of annual dividend or equivalent to 5.7% (XD on 3th of May 2019)

We maintain our 2019-20E earnings forecast and still rank NYT as a BUY with a target price of *Bt7.60 based on DCF (8.8%WACC, 1%TG) which implies 20xPE’2019E

*We make no changes to forecast, recommendation, and target price at the time of result announcement.

3. Ecopro BM IPO: Valuation Analysis

• The bookbuilding of the Ecopro BM Co Ltd (247540 KS) IPO starts on February 14th. Ecopro BM Co Ltd (247540 KS) specializes in making cathode active materials for rechargeable batteries that are used in EVs and electrical energy storage systems (ESS). Ecopro BM is the second largest global player after Sumitomo in the NCA high nickel-based cathode materials with market share of nearly 35%.
• Our base case valuation of the company suggests a market cap of 1.2 trillion won or implied price per share of 56,003 won, which is 31% higher than the high end of the IPO price range of 42,900 won. Therefore, we would take this deal. We used an estimated P/E of 25.3x (10% premium to the comps’ average of 23x) and an estimated net profit of 49.3 billion won in 2019 to derive our base case valuation. The high end of the valuation sensitivity analysis is 67,764 won, which would be 58% higher than the high end of the IPO price range of 42,900 won. 
• Ecopro BM has stronger sales growth and operating margins than its peers. However, its peers have stronger balance sheet with slightly higher returns on equity. We would give special points to the company’s stronger sales growth which is an indication of greater customer demand. Therefore, we think it is appropriate to provide a 10-20% premium valuation to Ecopro BM versus its peers based on the P/E analysis. 

4. Shimadzu (7701 JP): 3Q Results Suggest a Trading Range

Shimadzu’s 3Q results were good enough to reassure long-term investors, but not good enough to be called a buy signal. Sales and operating profit were up 4.5% and 4.6% year-on-year, respectively, in the three months to December, an improvement over 2Q but well below the double-digit increases recorded in 1Q and last fiscal year.  Forex losses and other factors led to a 2.2% decline in net profit. 

Sales were up in Japan, Europe and Asia ex-Japan and ex-China, but down in America,  China and Other Regions. Sales of core Analytical & Measuring Instruments were up 2.4%, operating profit on those sales was up 4.1% and the operating margin rose to +15.4% from +15.1% the previous year.

Sales of Industrial Machinery were down 5.7%, but operating profit on those sales was up 2.7% and the division generated a +9.7% operating margin vs. +9.0% the previous year. Sales of turbo-molecular pumps, primarily to semiconductor equipment makers, were down 14.3%.

Medical System sales were up 10.6% and the division generated a +1.5% operating margin vs. + 0.1% the previous year. Aircraft Equipment sales were up 12.1% but the division made a -0.5% operating loss vs. +1.2% profit the previous year. 

At ¥2,659 (Friday, February 8 closing price), the shares are selling at 24x our EPS estimate for FY Mar-19 and 12x EV/EBITDA. The five-year historical P/E range is 13x – 30x, the EV/EBITDA range is 6x – 16x. Over the next several quarters, we expect continued weakness in Industrial Machinery to offset single-digit growth in Instruments, keeping overall growth low.