Yaskawa Earnings: Weak Orders in China Suggest Slower Recovery for 2023

While Yaskawa’s 6506 weak order recovery in the May quarter was met with a poor market reaction, we believe its shares are still slightly overvalued. The company’s shares have outperformed its Japanese factory automation peers like Fanuc, which we mainly attribute to the market’s expectations that Yaskawa is less susceptible to the weak macroeconomic conditions in China. However, orders in China are down 27% year on year in the May quarter, suggesting otherwise, and we believe the recovery in Chinese consumption is to be slower than what the market is expecting. Based on our lower outlook in China (though partially offset by the weaker Japanese yen assumptions), we lower our fiscal 2023, ending February 2024, revenue growth assumption from 2.9% to 2.0%. Despite this, we maintain our fair value estimate of Yaskawa at JPY 5,200.

Our medium-term revenue growth assumption of 6.5% CAGR between 2023 and 2027 remains unchanged, which implies Yaskawa will not outperform its peers over the medium-term. On one hand, as the only “top five” robotics player with a leading track record of supplying its servo controllers and motors to the semiconductor industry, the wide moat company is well positioned to utilize its strength in this space. Therefore, we expect stronger motion control/robotics sales from 2024 and onwards, as chip production picks up. On the other hand, we are not convinced the company can outcompete its FA peers in other target industries. While we like Yaskawa’s renewed focus to expand in the US by proposing new solutions comprising robots, servo motors, and inverters to non-traditional industries, the company will still have to compete for orders against wide moat regional leaders, like Fanuc for robotics and Rockwell Automation for FA components. As such, despite Yaskawa’s midterm operating margin target of 15.3% in fiscal 2025, we forecast 13.3% as we believe margins will not improve as much as management’s expectations due to the intensifying competition.