Nabtesco Earnings: Weak Near-Term Outlook for Component Solutions, but Shares Are Undervalued

We lower our fair value estimate for Nabtesco 6268 to JPY 4,000 from JPY 4,200 as we cut our fiscal 2023 and 2024 revenue assumptions by 3% and 5%, respectively, due to the weaker-than-expected outlook for reduction gears. In the June quarter, orders for reduction gears deteriorated, as they declined 22% year on year, worsening from a 14% decline in the March quarter, which we think caused the negative market reaction. As Nabtesco’s Japanese robotics maker customers, like Fanuc and Yaskawa, also face weaker orders and undergo inventory adjustments, we now expect reduction gear orders to remain weak until the end of the first half of 2024. Consequently, we now project component solutions segment, or CMP, sales to decline 0.5% year on year in 2023, followed by 5% growth in 2024, lowered from 8.4% and 8.6% growth, respectively. Despite the near-term headwinds for CMP, we think the market is overlooking Nabtesco’s longer-term prospects, as demand for the reduction gears will grow along with electric vehicle investments and new robot applications in nontraditional industries. Therefore, we believe the company’s shares are undervalued.

While investors will need to be patient in the meantime, we remain confident that CMP will realize top-line growth from the second half of 2024, after the robotics makers digest their inventory and construction activity in China picks up. The business segment, which comprises reduction gears and hydraulic equipment (mainly for excavators), has faced three consecutive order declines, due to a combination of weaker industrial robot demand as well as weak construction machine demand in China. While this has contributed to Nabtesco’s year-to-date underperformance relative to its peers, we believe much of the downside risks are now priced in. Although weaker capacity utilization in CMP will cause operating margin to remain flat in 2023 at 5.9%, we expect the margin to improve to 8.0% in 2024 as CMP’s sales recovery begins the following year.