In this briefing:
- Aisin Takes a 50% Cut in OP This Quarter; A Downward Revision in FY03/19E Target
- Denso Revises Earnings Guidance Downwards After a 22% YoY Decline in OP as of 3QFY03/19
- Exxon and Qatar Proceed with US$10bn Golden Pass LNG Terminal: Positive for Chiyoda and MDR US
- A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies
- Hamamatsu Photonics (6965 JP): 1Q Sales Growth Led by Medical, Semiconductor & Factory Automation
1. Aisin Takes a 50% Cut in OP This Quarter; A Downward Revision in FY03/19E Target
On Friday, Aisin Seiki (7259 JP) reported 3QFY03/19 results posting a slight decline in revenue by -0.5% YoY, below our estimates by -5.6%, although above consensus estimates by +1.4%. On profitability, Aisin failed to meet market expectations, posting OP significantly down by almost -51% YoY falling below market expectations by a significant -33%. However, the results for the nine-months ended FY03/19 reported revenue up by +4.7% YoY supported by the increase in AT and Brake and Body parts sales. OP, however, was still disappointing, declining by nearly -13% YoY for the period, on the back of increasing depreciation costs for advanced investments alongside the rising R&D costs.
Following the quite significant decline in OP this quarter, Aisin has revised its guidance for FY03/19E revenue and OP downwards. Aisin now expects FY03/19E revenue to increase by only +1.3% YoY (cf. previous guidance of +2.3% YoY) and OP to decline by -17.3% YoY (cf. previous guidance of -7.8% YoY), expecting an OPM pf 5.3%. This downward revision is despite the fact that the company has achieved almost 76% of its revised revenue target and 77% of the revised OP target as of 3Q FY03/19. Aisin could be expecting its depreciation on investments and R&D costs to increase further over the last quarter and may also the quarters in the next financial year, for the company to be on track to compete with leading players like Denso in the competitive automotive field. However, we feel that Aisin is being quite conservative by revising its revenue guidance downwards this quarter and we still believe that the company’s steady revenue growth could continue over the last quarter, alongside its business restructuring efforts driving margins to about at least 6% for FY03/19E cf. 6.1% for FY03/18. Following the release, Aisin closed 3.0% down on Friday from Thursday’s close, however, rallied up almost 6% on Monday’s open.
2. Denso Revises Earnings Guidance Downwards After a 22% YoY Decline in OP as of 3QFY03/19
Denso Corp (6902 JP) failed to deliver as strong growth in revenue during its 3QFY03/19, compared to the first two-quarters of FY03/19. Denso reported a growth of only +1% YoY during 3QFY19, -1% below both consensus and our own estimate. Profitability of the company seemed more disappointing witnessing a decline of -17% YoY, falling below market expectations by -24%. The nine months ended cumulative figures for the company also looked depressing on the OP front, with Denso experiencing a -22% YoY decline, delivering an OPM of 6.1% (down from 8.1% during the same period last year).
However, Denso’s nine-month revenue looked relatively steady at 7.6% YoY growth. Denso has managed to make steady growth in revenue during the period despite the market slowdown in its key business regions, especially Europe and China. Revenue across all regions increased over the nine-months, supported by the overall increase in global car production and sales expansion from its recently consolidated subsidiaries (DENSO TEN and TD mobile). However, Denso’s OP over the current financial year has been on a downtrend citing its investments for future growth as the key reason. As we have previously mentioned, we consider this to be consistent with the company’s recent moves, having witnessed the company’s investment in companies such as Renesas, Metawave, Tohoku Pioneer, JOLED, ThinCI (Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI). The stock moved down 5% from pre-release to post-release low.
3. Exxon and Qatar Proceed with US$10bn Golden Pass LNG Terminal: Positive for Chiyoda and MDR US
Qatar Petroleum and Exxon Mobil (XOM US) have taken a positive final investment decision (FID) on the Golden Pass LNG export facility on the US Gulf Coast, one of 25 projects up for FID this year globally. Golden Pass awarded the engineering, procurement and construction (EPC) contracts for the project to a joint venture of Chiyoda Corp (6366 JP), Mcdermott Intl (MDR US) and Zachry Group, with the project expected to cost US$10bn and come on line in 2024. We discuss the company impacts, the project detail and market impacts
4. A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies
Our analysis shows that there are an unbelievable 25+ LNG developers that have stated (within the last year) they will take a final investment decision (FID) on their LNG liquefaction plants in 2019. Unless demand surprises to the upside, the expected LNG supply deficit in the mid-2020s could easily turn into a glut. In total there is almost 250 million tonnes per annum (mtpa) of capacity that plans to take FID this year – the equivalent of 80% of current global supply. In total there are ~US$180bn of contracts up for grabs – it should be a bumper year for the oil service (E&C) companies. This should be positive for the LNG contractors such as Mcdermott Intl (MDR US), TechnipFMC PLC (FTI FP), Chiyoda Corp (6366 JP) and Jgc Corp (1963 JP) .
Exxon Q4’18 conference call, “While we see a lot of high growth opportunities in LNG, capacity will come on in big chunks. It won’t be necessarily coordinated, so we’ll see, I suspect, periods of oversupply.”
5. Hamamatsu Photonics (6965 JP): 1Q Sales Growth Led by Medical, Semiconductor & Factory Automation
Consolidated sales were up 4.1% year-on-year in the three months to December, supported by demand from the medical, semiconductor and factory automation sectors, to which sales were up 8.7%, 11.0% and 8.2%, respectively. Gross profit was up 4.5%, but higher S,G&A expenses resulted in a 1.8% decline in operating profit (the operating margin was, however, up from the previous quarter). Net profit was up 4.9% after a decline in extraordinary losses. It was a relatively good performance in view of the cyclical downturns in the semiconductor and factory automation markets, and medical sales growth of only 3.2% in FY Sep-18.
Management’s three-year plan calls for 4.2% growth in sales and 0.9% growth in operating profit this fiscal year, followed by acceleration in FY Sep-20 and FY Sep-21. This is predicated on investment in new production capacity, which should be largely completed over the coming year, sufficient demand to absorb that capacity, and depreciation leveling off in FY Sep-21. Sales growth was on target in 1Q while operating profit fell short, but management has a record of cutting R&D and other expenses in order to achieve profit guidance.
At ¥3,985, the shares are selling at 29x management’s implied EPS estimate for this fiscal year (net profit guidance/ current shares outstanding), 26x next year’s estimate and 22x the estimate for FY Sep-21.
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