Company Reports

Mitsubishi Electric’s, or MEC’s, results for fiscal 2023 (ending March 2024), were met with a very strong market reaction, as its record high operating income of JPY 329 billion and full-year guidance of JPY 400 billion for fiscal 2024 exceeded market expectations. However, the company plans to improve its operating margin to 7.5% from 6.2% through restructuring initiatives, price hikes, and properties/assets sales, with flat sales growth for the current fiscal year, which seems overly bullish. While we expect further details on the restructuring to be disclosed in the investor relations day at the end of May, we think the market has overreacted to the aggressive guidance and market expectations for MEC’s margin expansion are too high.

Mitsubishi Electric utilizes its technology related to the control of electricity to cover a broad spectrum of business fields, including factory automation, or FA, elevators/escalators, social infrastructure equipment, satellite and communication equipment, and air conditioners. Its key top-line drivers—FA systems, automobile equipment, and air conditioning systems/home appliances—together make up about 60% of revenue.

Mitsubishi Electric’s, or MEC’s, December quarter revenue grew 1.5% year on year, with stronger-than-expected automotive equipment sales growth offset by weaker air conditioner, or A/C, and factory automation, or FA, systems sales. December quarter automobile sales grew 20% year on year, due to a recovery in automobile production. On the other hand, A/C sales declined 8% year on year, compared with 4% growth in the September quarter, due to channel inventory adjustments and sluggish end-demand in Europe/Asia. We revise our fiscal 2023 and 2024 revenue assumptions (ending March 2024 and 2025) to 4% growth and 2% growth, respectively, from 1% growth and 4% growth, after reflecting stronger automobile equipment sales for 2023 and weaker recovery of A/C and FA sales in 2024. Nonetheless, our medium-term outlook is unchanged and we maintain our fair value estimate for MEC at JPY 2,200, implying its shares are fairly valued.

The main highlight of Mitsubishi Electric’s, or MEC’s, September-quarter results was the automotive segment’s turn to profitability, which had been struggling with losses since 2020. In April, the company announced structural reforms, which include discontinuing its car multimedia business and focusing its resources on electrification and advanced driver-assistance systems technologies. We were previously skeptical that the business would return to profitability in this fiscal year, as the company had guided. However, we are encouraged that the business posted an operating margin of 2.0% in the September quarter, an improvement from a loss of 3.3% in the June quarter, turning profitable earlier than we had expected. In addition, the announcement of the spinoff of its automotive business enables the company to accelerate business decisions, demonstrating solid progress in its restructuring.

Mitsubishi Electric utilizes its technology related to the control of electricity to cover a broad spectrum of business fields, including factory automation, or FA, elevators/escalators, social infrastructure equipment, satellite and communication equipment, and air conditioners. The company has the leading domestic share and/or top 5 global share in various products, including program logic controllers, or PLCs, for factory automation, electric systems equipment for trains, elevators/escalators, turbine generators, and power semiconductors. Its key growth drivers—FA systems, automobile equipment, and air conditioning systems/home appliances—together make up about 60% of revenue in fiscal 2022.

Mitsubishi Electric’s June-quarter factory automation systems orders fell 43% year on year, worsening from the 25% decline year on year in the March quarter, which we think caused the negative market reaction. While guidance suggests 4% segment sales growth for fiscal 2024 (ending March 2024), assuming an order recovery in the second fiscal half, we are not convinced this will be realized. With the weak investments in the semiconductor/digital and machine tool industries, we expect the inventory adjustment in the industry will continue for the rest of fiscal 2024. As such, we now project full-year FA systems sales to decline 13.5% year on year, down from a 7% decline previously; given the downward revision, we forecast this year’s operating income to be 26% below guidance. Nevertheless, our medium-term outlook is intact, as we expect a recovery in semiconductor/digital investments will improve operating income from next year onward; therefore, we maintain our fair value estimate at JPY 2,000. We believe the shares are fairly valued.

Mitsubishi Electric utilizes its technology related to the control of electricity to cover a broad spectrum of business fields, including factory automation, or FA, elevators/escalators, social infrastructure equipment, satellite and communication equipment, and air conditioners. The company has the leading domestic share and/or top 5 global share in various products, including program logic controllers, or PLCs, for factory automation, electric systems equipment for trains, elevators/escalators, turbine generators, and power semiconductors. Its key growth drivers—FA systems, automobile equipment, and air conditioning systems/home appliances—together make up about 60% of revenue in fiscal 2022.

The Japanese factory automation, or FA, control equipment suppliers (Keyence, Omron, and Mitsubishi Electric, or MEC) posted lower year-on-year revenue growth in the March quarter than in the December quarter. According to the Nippon Electric Control Equipment Industries Association, shipments of FA electric control equipment, including switches and relays, grew about 12% year on year in the March quarter, slowing down from 19% in the December quarter. In addition, FA-related orders for Omron and MEC declined year on year in the past two quarters, due to weak capital investments in the semiconductor/electronics industries. Therefore, our expectation of a slowdown in shipments in 2023 remains unchanged, and we maintain our fair value estimates for Omron and Keyence at JPY 9,100 and JPY 58,000, respectively. Meanwhile, we slightly increase our fair value estimate for MEC to JPY 2,000 from JPY 1,900 after revising our margin assumptions.

Mitsubishi Electric utilizes its technology related to the control of electricity to cover a broad spectrum of business fields, including factory automation, or FA, elevators/escalators, social infrastructure equipment, satellite and communication equipment, and air conditioners. The company has the leading domestic share and/or top 5 global share in various products, including program logic controllers, or PLCs, for factory automation, electric systems equipment for trains, elevators/escalators, turbine generators, and power semiconductors. Its key growth drivers—FA systems, automobile equipment, and air conditioning systems/home appliances—together make up about 60% of revenue in fiscal 2022.

We maintain narrow-moat Mitsubishi Electric, or MEC's, fair value estimate at JPY 1,900, implying shares are undervalued; however, we think investors will need to be patient to realize upside potential. While the company’s third-quarter (ending December) revenue growth of 17.5% year on year was in line with expectations, we project revenue will decline in fiscal 2023 from lower demand for factory automation, or FA, systems and air conditioners/home products, or AC. Nevertheless, we expect FA orders to recover toward the end of this year as smartphone shipments pick up and digital/semiconductor-related investments increase. Over the longer term, we continue to believe secular trends like labor shortages and aging populations will serve as a tailwind for MEC, who is one of the leading players in the programmable logic controller market in Asia.

Mitsubishi Electric utilizes its technology related to the control of electricity to cover a broad spectrum of business fields, including factory automation, or FA, elevators/escalators, social infrastructure equipment, satellite and communication equipment, and air conditioners. The company has the leading domestic share and/or top 5 global share in various products, including program logic controllers, or PLCs, for factory automation, electric systems equipment for trains, elevators/escalators, turbine generators, and power semiconductors. Its key drivers—the industrial automation systems segment (which includes FA equipment as well as automobile equipment), energy and electric systems segment (includes heavy electrical equipment like elevators, train systems, and power generation equipment), and home appliances (includes home and commercial air conditioners)—together make up about three fourths of total operating income excluding eliminations as of fiscal 2021.

Mitsubishi Electric’s, or MEC’s, share price has continued to trade below its book value per share, and while its shares are undervalued, limited near-term catalysts suggests investors will need to be patient to realize upside potential. We expect the automotive business will continue to be unprofitable and that air conditioner/home product and FA systems sales will peak out in fiscal 2022 (ending March 2023). We factor in declining consumer confidence/inflation and slower margin improvement to our 2022 and 2023 revenue and operating margin assumptions. However, our fair value estimate of JPY 1,900 remains intact, with the continued expectation that companywide operating margin has bottomed out in the first half of fiscal 2022, as high components costs will be increasingly transferred to prices from the second half.

Mitsubishi Electric utilizes its technology related to the control of electricity to cover a broad spectrum of business fields, including factory automation, or FA, elevators/escalators, social infrastructure equipment, satellite and communication equipment, and air conditioners. The company has the leading domestic share and/or top 5 global share in various products, including program logic controllers, or PLCs, for factory automation, electric systems equipment for trains, elevators/escalators, turbine generators, and power semiconductors. Its key drivers—the industrial automation systems segment (which includes FA equipment as well as automobile equipment), energy and electric systems segment (includes heavy electrical equipment like elevators, train systems, and power generation equipment), and home appliances (includes home and commercial air conditioners)—together make up about three fourths of total operating income excluding eliminations as of fiscal 2021.

Mitsubishi Electric’s share price fell below its book value per share upon its June quarter announcement, likely from concerns over its air conditioning systems/home products and automotive businesses facing deteriorating margins from rising materials/logistics costs and weakening demand. In spite of near-term hurdles, we still expect margin recovery from the September quarter. Moreover, we think shares are undervalued, as the market is discounting its medium-term growth prospects of its factory automation, or FA, systems business. As one of the leading programmable logic controller market players in Asia, we think Mitsubishi Electric is well-positioned to capitalize on production automation trends in the region, including electric vehicle, or EV/battery-related applications and FA needs to deal with aging populations. With our outlook remaining unchanged, we maintain our fair value estimate at JPY 1,900. Further, we lower Mitsubishi Electric’s Morningstar Uncertainty Rating to Medium from High, as its diversified business portfolio and a postpandemic recovery of infrastructure investments should lead to a steady top-line growth over the next five years.

Mitsubishi Electric utilizes its technology related to the control of electricity to cover a broad spectrum of business fields, including factory automation, or FA, elevators/escalators, social infrastructure equipment, satellite and communication equipment, and air conditioners. The company has the leading domestic share and/or top 5 global share in various products, including program logic controllers, or PLCs, for factory automation, electric systems equipment for trains, elevators/escalators, turbine generators, and power semiconductors. Its key drivers—the industrial automation systems segment (which includes FA equipment as well as automobile equipment), energy and electric systems segment (includes heavy electrical equipment like elevators, train systems, and power generation equipment), and home appliances (includes home and commercial air conditioners)—together make up about three fourths of total operating income excluding eliminations as of fiscal 2021.

We retain our JPY 1,900 fair value estimate for Mitsubishi Electric Corp. The share price has declined to below book value levels recently, likely on concerns about reduced orders/sales from supply chain disruptions in the automotive industry (a major customer base), the impact of headwinds ranging from the China lockdown to rising materials and logistics costs, and the April 21 announcement regarding the latest discovery of more misconduct following a string of scandals over improper quality assurance tests. Despite the likelihood that the automobile production slowdown will especially affect sales of automobile equipment (and to a lesser extent, other products like power semiconductors), we expect electric vehicle/battery-related capital investments will continue to support demand for MEC’s factory automation systems. Further, we think investments and demand in the digital space, like semiconductors and 5G/smartphone, will serve as a tailwind for the FA systems and electronic device businesses. While investors will need to be patient as the company gradually undergoes governance reforms, we believe MEC is undervalued and there is medium- to long-term upside potential.

Mitsubishi Electric utilizes its technology related to the control of electricity to cover a broad spectrum of business fields, including factory automation, or FA, elevators/escalators, social infrastructure equipment, satellite and communication equipment, and air conditioners. The company has the leading domestic share and/or top 5 global share in various products, including program logic controllers, or PLCs, for factory automation, electric systems equipment for trains, elevators/escalators, turbine generators, and power semiconductors. Its key drivers—the industrial automation systems segment (which includes FA equipment as well as automobile equipment), energy and electric systems segment (includes heavy electrical equipment like elevators, train systems, and power generation equipment), and home appliances (includes home and commercial air conditioners)—together make up about three fourths of total operating income excluding eliminations as of fiscal 2021.

Mitsubishi Electric utilizes its technology related to the control of electricity to cover a broad spectrum of business fields, including factory automation, or FA, elevators/escalators, social infrastructure-related equipment, satellite and communication equipment, and air conditioners. The company has the leading domestic share and/or top 5 global share in various products, including program logic controllers, or PLCs, for factory automation, electric systems equipment for trains, elevators/escalators, turbine generators, and power semiconductors. Its key drivers--the industrial automation systems segment (which includes FA equipment as well as automobile equipment) and energy and electric systems segment (which includes heavy electrical equipment like elevators, train systems, and power generation equipment)--together average about 65% of total operating income excluding eliminations over the past three years.

Mitsubishi Electric, or MEC’s, results in the third quarter of fiscal 2021, ending in December, showed the company was affected by the ongoing components crunch, with only a 0.4% year-on-year increase in companywide revenue, but its factory automation, or FA, systems business outperformed our expectations.

Mitsubishi Electric utilizes its technology related to the control of electricity to cover a broad spectrum of business fields, including factory automation, or FA, elevators/escalators, social infrastructure-related equipment, satellite and communication equipment, and air conditioners. The company has the leading domestic share and/or top 5 global share in various products, including program logic controllers, or PLCs, for factory automation, electric systems equipment for trains, elevators/escalators, turbine generators, and power semiconductors. Its key drivers--the industrial automation systems segment (which includes FA equipment as well as automobile equipment) and energy and electric systems segment (which includes heavy electrical equipment like elevators, train systems, and power generation equipment)--together average about 65% of total operating income excluding eliminations over the past three years.