Daily Brief Japan: Daikin Industries, Tokyo Stock Exchange Tokyo Price Index Topix, Polaris Holdings and more

In today’s briefing:

Daikin (6367) | Cooling on Heat Pumps
Companies Should Show a Path to Accelerated Profit Growth Rather than Shareholder Returns
Polaris Holdings (3010) – Positioned to Leverage Demand Recovery

Daikin (6367) | Cooling on Heat Pumps

Daikin’s air conditioning business continues to benefit from the secular trends of urbanization, climate change, and rising incomes.
However, the same logic might not apply to heat pumps, which face far more “structural” issues, warranting a lower valuation.
Overall, we believe that Daikin deserves to trade at its historical multiple of 15x EV/EBIT and see 20% downside from here.

Metrical’s past analysis also shows that a company’s capital allocation to investors is effective in raising valuations, so a proper allocation between investment and shareholder return is a baseline.
The correlation analysis between TOPIX and nominal GDP suggests that the shift from deflation to inflation has triggered overseas investors to focus on the further expansion of company profits.
While average P/B and ROE have remained flat, the rise in P/E has boosted the stock recently. This suggests that further share price appreciation will require an increase in profits.

Positioned for a major resurgence in demand – Q1 FY3/2024 results were a culmination of efforts made by management to improve the profit structure of Polaris’ business model, a successful recapitalization strategy, and a recovery in the hotel industry.
Demand was normalizing to pre-pandemic levels for Polaris’ domestic and overseas operations, with the business generating a quarterly operating margin of 6.6%, the highest since Q1 FY3/2017.
Newly disclosed KPIs highlight robust activity in the domestic market, with Q1 FY3/2024 domestic RevPAR rising 84.9% YoY.

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