Harmonic Drive Systems Earnings: Business Development in China Suggesting Midterm Growth Potential

Wide-moat Harmonic Drive Systems marked a year-on-year revenue decline of negative 1.4% in the September quarter, largely in line with our forecast. However, the operating margin for the quarter dipped further to negative 3%, way below our positive 3% forecast. The Europe business dragged profitability as the top line is weaker than expected, with the ordinary income margin decreasing to negative 5.3% from positive 2.1% in the previous quarter. On the other hand, we see a gradual demand recovery in Asia (including China) and North America, with orders received on a consolidated basis growing by 15.5% and 69.4% sequentially, suggesting the worst has passed. We will review our forecast for fiscal 2024 and fair value estimate for HDS after getting more details from the result meeting on Tuesday.