Declining Orders Suggest Headwinds for Harmonic Drive, but Long-Term Outlook Remains Intact

Harmonic Drive System’s 6324 orders declined 50.7% year on year in the December quarter, which we attribute to weaker demand for semiconductor production equipment and small robots, which are often used in electronics manufacturing. However, this was not surprising given the massive upfront orders in the September-quarter last year, which previously led to about 170% growth. While we lower our fair value estimate to JPY 6,100 from JPY 6,300 due to declining capital spending in the electronics/semiconductor industries in 2023, we expect a top-line recovery in 2024 as semiconductor investments pick up. Over the longer term, we see upside potential, as HDS grows along with demand for high-end industrial robots, collaborative robots, and surgical robots, given its dominant positioning in the strain-wave-reduction-gear market.

In contrast to electronics/semiconductors, demand for larger industrial robots used in other industries and healthcare equipment, including surgical robots, has been stronger. As a result, December-quarter segment orders in North America and Europe declined only 13% and 3% year on year respectively (compared with a 72% decline in Japan), as their exposure to semiconductors/electronics is lower. While we assume further order declines in electronics for at least two quarters, this will be mitigated by a high backlog as well as resilient demand in North America/Europe (which both have a book/bill ratio of 1.1 as of the December quarter). We now project a companywide revenue decline of 5.2% year on year in 2023, down from 8.6% growth in our previous projection, after growing 26.2% in 2022. Over the longer term, we project top-line growth of 14.3% CAGR between 2023 and 2026, as semiconductor investments pick up and robots become adopted in new areas.