Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Securities analyst covering electronics, precision equipment & robotics, engineering, construction, transport and other sectors for more than 25 years in Japan and 3 years in Korea. Permanent resident of Japan.

Senior Technology Analyst, Japanese Equities

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Equity Bottom-Up

<p>THK's share price has outperformed those of its domestic competitors in the market for linear motion guides - most likely because of THK's higher gearing to demand for semiconductor production equipment - but it is now dropping back even though new orders show signs of bottoming out. The year-on-year declines in domestic orders from each of the company's three main user industries - electronics, machine tools, general industry - have started to shrink. The same is true for orders received from Europe, America, Taiwan and China.</p><p>In the September quarter, sales were 1.5x new orders while the order backlog dropped to 1.05x quarterly sales.  If orders do not pick up, there is enough backlog for sales to remain steady for three more quarters. </p><p>At ¥2,884 (November 21 closing price), the shares are selling at 38x management's new EPS guidance for FY Dec-19. But that guidance implies near zero profit in 4Q. Looking ahead, the degree and timing of recovery in semiconductor capital spending should be the primary determinant of sales and profits. If management's previous guidance is achievable, the forward P/E would drop to 17x. If the record profit reached in FY Dec-18 can be regained, it would drop to 10x.</p><div><div>Japan Analytics estimates that THK is close to a no growth valuation. In such a cyclical business, this indicates significant potential upside, although patience may be required to realize it.  </div></div>

THK's share price has outperformed those of its domestic competitors in the market for linear motion guides - most likely because of THK's higher gearing to demand for semiconductor production equipment - but it is now dropping back even though new orders show signs of bottoming out. The year-on-year declines in domestic orders from each of the company's three main user industries - electronics, machine tools, general industry - have started to shrink. The same is true for orders received from Europe, America, Taiwan and China.In the September quarter, sales were 1.5x new orders while the order backlog dropped to 1.05x quarterly sales.  If orders do not pick up, there is enough backlog for sales to remain steady for three more quarters. At ¥2,884 (November 21 closing price), the shares are selling at 38x management's new EPS guidance for FY Dec-19. But that guidance implies near zero profit in 4Q. Looking ahead, the degree and timing of recovery in semiconductor capital spending should be the primary determinant of sales and profits. If management's previous guidance is achievable, the forward P/E would drop to 17x. If the record profit reached in FY Dec-18 can be regained, it would drop to 10x.Japan Analytics estimates that THK is close to a no growth valuation. In such a cyclical business, this indicates significant potential upside, although patience may be required to realize it.  

THK (6481 JP): Close to No-Growth Valuation at the Bottom of the Cycle.

Thk Co Ltd

THK (6481 JP): Close to No-Growth Valuation at the Bottom of the Cycle.