Harmonic Drive Systems Earnings: Growth in China Offset by Sluggish Sales in North America, Europe

We raise our fair value estimate for wide-moat Harmonic Drive Systems, or HDS, to JPY 2,900 per share from JPY 2,800, reflecting gains of JPY 5.8 billion from the sale of Nabtesco shares announced in January. HDS' revenue in the December quarter grew 5% year over year to JPY 13.8 billion, in line with our estimate of JPY 13.5 billion, as growth in China was largely offset by sluggish sales in North America and Europe. As a result, we keep our revenue estimate for fiscal 2024 (ending March 2025) at JPY 55.0 billion, or a year-on-year decrease of 1%, but raise net income attributable to shareholders to JPY 4.0 billion from a loss of JPY 0.5 billion as previously estimated, simply reflecting the gains from the sale of all of its Nabtesco shares. Although we appreciate the company’s recent actions to enhance capital efficiency through the execution of the dissolving of cross-shareholdings and the share buyback plan, we think the shares are currently overvalued as the market is overreacting. The company plans to buy back up to JPY 1.2 billion, or up to 400,000 shares, which only accounts for 0.4% of total outstanding shares from today (Feb. 10, 2025) through June 30, 2025.