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Equity Bottom-Up

No-moat Daikin’s record high net profit of JPY 51 billion for first-quarter fiscal 2018 (year ending March 2018) was up 4% year over year and accounted for 32% of our full-year forecast. The strong results were mainly attributed to the launch of high-value-added products and the firm’s cost-cutting efforts. We deem the results as within expectations, given that first-half results are seasonally stronger for Daikin, and we largely retain our earnings estimates. We increase our fair value estimate to JPY 7,400 from JPY 7,200 to take into account the time value of money. In our view, the company remains overvalued at the current stock price, given its lackluster earnings growth outlook.Despite rising raw material prices, Daikin overcame the challenge and increased net profit by raising selling prices through the expansion of high-value-added products and the implementation of stringent cost controls. Nevertheless, Daikin’s operating margin has decreased to 12.7% from 13.3% a year ago. We expect Daikin’s operating margin to stay at around 11.0% in fiscal 2018-19, but it will eventually fall to 10% by fiscal 2022 due to intense competition, especially in China.The Americas is the largest market for Daikin’s air conditioning business, with sales in local-currency terms having increased by 12.1% year over year, underpinned by an improving sales network and its focus on the high-end market. Meanwhile, China has outgrown Japan as the second-largest market for Daikin, with sales growing by 17.3% in local-currency terms on the back of enhanced direct sales, expansion into the mid- to high-end residential market, and promotion of highly energy-efficient designs in commercial-use market. On the other hand, sales in Asia were down slightly by 0.4% in yen terms year over year, owing to a reversal from the sharp increase in demand in Vietnam, Thailand, Indonesia, and Malaysia in the previous year.Analyst: Chokwai Lee, CFA

No-moat Daikin’s record high net profit of JPY 51 billion for first-quarter fiscal 2018 (year ending March 2018) was up 4% year over year and accounted for 32% of our full-year forecast. The strong results were mainly attributed to the launch of high-value-added products and the firm’s cost-cutting efforts. We deem the results as within expectations, given that first-half results are seasonally stronger for Daikin, and we largely retain our earnings estimates. We increase our fair value estimate to JPY 7,400 from JPY 7,200 to take into account the time value of money. In our view, the company remains overvalued at the current stock price, given its lackluster earnings growth outlook.Despite rising raw material prices, Daikin overcame the challenge and increased net profit by raising selling prices through the expansion of high-value-added products and the implementation of stringent cost controls. Nevertheless, Daikin’s operating margin has decreased to 12.7% from 13.3% a year ago. We expect Daikin’s operating margin to stay at around 11.0% in fiscal 2018-19, but it will eventually fall to 10% by fiscal 2022 due to intense competition, especially in China.The Americas is the largest market for Daikin’s air conditioning business, with sales in local-currency terms having increased by 12.1% year over year, underpinned by an improving sales network and its focus on the high-end market. Meanwhile, China has outgrown Japan as the second-largest market for Daikin, with sales growing by 17.3% in local-currency terms on the back of enhanced direct sales, expansion into the mid- to high-end residential market, and promotion of highly energy-efficient designs in commercial-use market. On the other hand, sales in Asia were down slightly by 0.4% in yen terms year over year, owing to a reversal from the sharp increase in demand in Vietnam, Thailand, Indonesia, and Malaysia in the previous year.Analyst: Chokwai Lee, CFA

Daikin's Strong 1Q Fiscal 2017 Results Within Expectations; Shares Overvalued

Daikin Industries

Daikin's Strong 1Q Fiscal 2017 Results Within Expectations; Shares Overvalued