Nabtesco Earnings: Lowering Margin Estimates, but Reduction Gear Outlook Remains Firm

We lowered our fair value estimate for Nabtesco to JPY 4,200 from JPY 4,500 as we have a lower operating-margin outlook because of a worse-than-expected product mix. Reduction gears for mass-produced robots have lower margins as they are standardized products compared with those used in factory automation equipment like machine tools. As we expect revenue growth on reduction gears for robots to be higher than other products, we are increasingly concerned that margins for the component solutions business, or CMP, which includes reduction gears and hydraulic equipment for construction machinery, will not be as high as we had anticipated. However, we continue to believe that Nabtesco’s shares are undervalued as the market is underestimating the recovery of CMP.