Company Reports

Narrow-moat Daikin reported mixed results for first-quarter fiscal 2024 (ended June 2024). While the top line beat our estimate of robust sales of applied air conditioning products for industrial use and the yen’s depreciation, operating profit lagged because of increases in raw material and fixed costs. Management was confident in achieving the JPY 425 billion operating profit target for fiscal 2024, but flagged that residential product demand will see high uncertainties amid inflationary pressure and slowing economic growth globally. We also expect heightened copper prices and headwinds from Japan’s interest-rate hike to weigh on Daikin’s near-term profitability. Consequently, we lowered our fiscal 2024 operating profit and earnings per share assumptions by 3% and 9%, respectively. That said, we still foresee gradual pickups in Daikin’s margins through fiscal 2028 given product mix upgrades and cost reductions in main regions, which, we believe, have been underappreciated by the market. We maintain our fair value estimate of JPY 25,000 for Daikin and view its shares as underpriced given the recent rout.

Daikin is one of the world’s largest heating, ventilation, and air conditioning companies. The air conditioning segment constantly contributes to over 90% of the company's revenue, and the division’s revenue mix is well-diversified geographically, with the Americas—mostly the United States, China, Japan, and Europe each contributing to over 10% of revenue. Over the years, Daikin has seen decent earnings growth mainly thanks to sales channel expansion in the US and Southeast Asia, robust global demand for high-end products, and the Japanese yen’s depreciation. Meanwhile, the company maintained healthy operating margins thanks to cost rationalization and efficiency improvements.

We resume our coverage of Daikin Industries, Japan's largest heating, ventilating, and air conditioning company, with a fair value estimate of JPY 25,000 per share and a fiscal 2024 (ending March 2025) price/earnings of 26.3 times. We also assign the company narrow moat, Medium Uncertainty, and Standard Capital Allocation ratings. As Daikin actively expands overseas through acquisitions, the North America region is its largest earnings contributor, followed by China and Japan. Despite sluggish global demand, Daikin delivered robust 10.4% revenue growth for fiscal 2023. That said, the 8.9% operating margin missed its prior guidance of 9.4%, which the company ascribed to sales volume contraction and fixed costs expansion, partly offset by selling price hikes and the Japanese yen’s depreciation.

Daikin is one of the world’s largest heating, ventilation, and air conditioning companies. The air conditioning segment constantly contributes to over 90% of the company's revenue, and the division’s revenue mix is well-diversified geographically, with the Americas—mostly the United States, China, Japan, and Europe each contributing to over 10% of revenue. Over the years, Daikin has seen decent earnings growth mainly thanks to sales channel expansion in the US and Southeast Asia, robust global demand for high-end products, and the Japanese yen’s depreciation. Meanwhile, the company maintained healthy operating margins thanks to cost rationalization and efficiency improvements.

We are no longer providing equity research on Daikin Industries. We provide broad coverage of more than 1,500 companies across more than 90 industry groups and adjust our coverage as necessary based on client demand and investor interest.

Daikin is one of the world’s largest heating, ventilating, and air conditioning, or HVAC, companies. The air conditioning segment contributed 90% of the firm's total revenue in fiscal 2019 (ending March 2019), while the division’s revenue mix is well diversified geographically, with the Americas, Japan, China, and Europe contributing 29%, 22%, 15%, and 15% of revenue, respectively. Over the past few years, Daikin saw strong earnings growth, mainly thanks to robust revenue growth in China, its acquisition of U.S. HVAC company Goodman, and the depreciation of the yen. Meanwhile, Japanese operation grew slowly with low profitability, owing to stagnant HVAC demand.

While no-moat Daikin’s first-quarter fiscal 2021 (year ending March 2021) operating profit of JPY 54.5 billion was down 39% year over year, largely attributable to negative impact from the coronavirus outbreak, this was better than our expectation on the back of the firm’s efforts to capture recovery sales swiftly and continue focus on reducing fixed costs. As a result, first-quarter operating profit was 17% higher quarter over quarter with operating margin improving to 9.4% from 7.7%.

No-moat Daikin’s fiscal 2020 (year ending March 2020) results were below expectations, with operating profit decreasing by 3.9% year over year to JPY 265.5 billion, largely attributable to appreciation of the Japanese yen and negative impact from COVID-19. After rolling forward our model and updating our foreign exchange assumptions, we raise Daikin’s fair value estimate to JPY 11,400 from JPY 10,800. While we expect the pandemic to continue to pressure fiscal 2021 results, we expect a sharp turnaround in Daikin’s business once COVID-19 is contained. That said, Daikin’s shares remain overvalued at the current price in our view, given the firm’s slower earnings growth going forward. We anticipate Daikin’s earnings CAGR to decelerate to 4.8% for fiscal 2019-25, compared with the three-year CAGR of 10.8% for fiscal 2016-19.

Daikin is one of the world’s largest heating, ventilating, and air conditioning, or HVAC, companies. The air conditioning segment contributed 90% of the firm's total revenue in fiscal 2019 (ending March 2019), while the division’s revenue mix is well diversified geographically, with the Americas, Japan, China, and Europe contributing 29%, 22%, 15%, and 15% of revenue, respectively. Over the past few years, Daikin saw strong earnings growth, mainly thanks to robust revenue growth in China, its acquisition of U.S. HVAC company Goodman, and the depreciation of the yen. Meanwhile, Japanese operation grew slowly with low profitability, owing to stagnant HVAC demand.

There are no major surprises in no-moat Daikin’s nine-month fiscal 2020 (year ending March 2020) results, with operating profit increasing by 2% year over year to JPY 219.1 billion. After fine-tuning our earnings model and updating our foreign exchange assumptions, we raise Daikin’s fair value estimate to JPY 10,800 from JPY 10,400. That said, Daikin’s shares remain overvalued in our view, given the firm’s slower earnings growth going forward. We expect Daikin’s earnings CAGR to decelerate to 4% in our explicit five-year forecast, compared with the historical three-year CAGR of 11%. The firm guided for net profit growth of 3% year over year in fiscal 2020, as higher sales are partly offset by the appreciation of Japanese yen.

Daikin is one of the world’s largest heating, ventilating, and air conditioning, or HVAC, companies. The air conditioning segment contributed 90% of the firm's total revenue in fiscal 2019 (ending March 2019), while the division’s revenue mix is well diversified geographically, with the Americas, Japan, China, and Europe contributing 29%, 22%, 15%, and 15% of revenue, respectively. Over the past few years, Daikin saw strong earnings growth, mainly thanks to robust revenue growth in China, its acquisition of U.S. HVAC company Goodman, and the depreciation of the yen. Meanwhile, Japanese operation grew slowly with low profitability, owing to stagnant HVAC demand.

No-moat Daikin reported second-quarter fiscal 2020 (year ending March 2020) earnings, with operating profit rising 2% year over year to JPY 78.7 billion. The results were in line with our expectation with first-half net profit increasing 5% year over year to JPY 118.5 billion. We keep our estimates largely unchanged, but we increase our fair value estimate to JPY 10,400 per share from JPY 10,200 as we roll our DCF-based valuation by one quarter. In our view, Daikin’s shares remain overvalued, as we believe the firm’s earnings growth is losing momentum. We project earnings CAGR of 4% in our explicit five-year forecast, compared with the historical three-year CAGR of 11%. The firm guided that net profit will grow 3% year over year in fiscal 2020.

Daikin is one of the world’s largest heating, ventilating, and air conditioning, or HVAC, companies. The air conditioning segment contributed 90% of the firm's total revenue in fiscal 2019 (ending March 2019), while the division’s revenue mix is well diversified geographically, with the Americas, Japan, China, and Europe contributing 29%, 22%, 15%, and 15% of revenue, respectively. Over the past few years, Daikin saw strong earnings growth, mainly thanks to robust revenue growth in China, its acquisition of U.S. HVAC company Goodman, and the depreciation of the yen. Meanwhile, Japanese operation grew slowly with low profitability, owing to stagnant HVAC demand.

No-moat Daikin reported record high first-quarter fiscal 2020 (year ending March 2020) earnings, with operating profit rising 8% year over year to JPY 89.6 billion. Although net profit accounted for 32% of our original full-year forecast, we keep our estimates largely unchanged, given that first-half earnings are seasonally stronger. We increase our fair value estimate to JPY 10,200 per share from JPY 10,100 to take into account the time value of money. In our view, Daikin’s shares remain overvalued, as we believe earnings growth is losing momentum. We project earnings CAGR of 3% in our explicit five-year forecast, compared with the historical three-year GAGR of 11%. Company management itself expects flat profit this year.

Daikin is one of the world’s largest heating, ventilating, and air conditioning, or HVAC, companies. The air conditioning segment contributed 90% of the firm's total revenue in fiscal 2019 (ending March 2019), while the division’s revenue mix is well diversified geographically, with the Americas, Japan, China, and Europe contributing 29%, 22%, 15%, and 15% of revenue, respectively. Over the past few years, Daikin saw strong earnings growth, mainly thanks to robust revenue growth in China, its acquisition of U.S. HVAC company Goodman, and the depreciation of the yen. Meanwhile, Japanese operation grew slowly with low profitability, owing to stagnant HVAC demand.

No-moat Daikin’s net profit of JPY 189 billion for fiscal 2019 (year ending March 2019), flat year over year, was in line with our expectations. After rolling forward our valuation model, we raise our fair value estimate slightly to JPY 10,100 from JPY 9,900. While the company’s ability to control cost and achieve record high operating profit are impressive, this has been priced in and further outperformance is not sustainable, in our view. We think the company is overvalued at the current stock price given its slowing earnings momentum, as we forecast Daikin’s earnings per share to grow at a CAGR of 3.5% over the next five years (versus historical three-year CAGR of 11.3%) on the back of headwinds such as uncertain global economic growth due to geopolitical frictions, appreciation of the Japanese yen and slowdown in the China market.

Daikin is one of the world’s largest heating, ventilating, and air conditioning, or HVAC, companies. The air conditioning segment contributed 90% of the firm's total revenue in fiscal 2018 (ending March 2018), while the division’s revenue mix is well diversified geographically, with the Americas, Japan, China, and Europe contributing 28%, 22%, 17%, and 15% of revenue, respectively. Over the past few years, Daikin saw strong earnings growth, mainly thanks to robust revenue growth in China, its acquisition of U.S. HVAC company Goodman, and the depreciation of the yen. Meanwhile, Japanese operation grew slowly with low profitability, owing to stagnant HVAC demand.

There are no major surprises in no-moat Daikin’s nine-month fiscal 2019 (year ending March 2019) results, with net profit down 3% year over year to JPY 149.9 billion. We leave our forecasts largely unchanged, but we raise our fair value estimate to JPY 9,900 from JPY 9,600 to take into account the time value of money. In our view, Daikin’s shares remain overvalued, given the firm’s slower earnings growth going forward. We expect Daikin’s earnings CAGR to decelerate to 3% in our explicit five-year forecast, compared with the historical three-year CAGR of 16%, due to headwinds such as slower global economic growth, appreciation of the Japanese yen and slowdown in the China market.

Daikin is one of the world’s largest heating, ventilating, and air conditioning, or HVAC, companies. The air conditioning segment contributed 90% of the firm's total revenue in fiscal 2018 (ending March 2018), while the division’s revenue mix is well diversified geographically, with the Americas, Japan, China, and Europe contributing 28%, 22%, 17%, and 15% of revenue, respectively. Over the past few years, Daikin saw strong earnings growth, mainly thanks to robust revenue growth in China, its acquisition of U.S. HVAC company Goodman, and the depreciation of the yen. Meanwhile, Japanese operation grew slowly with low profitability, owing to stagnant HVAC demand.

No-moat Daikin’s first-half fiscal 2019 (year ending March 2019) net profit of JPY 112.8 billion, up 11% year over year, was within our expectations. Although first-half earnings accounted for 60% of our full-year estimate, we leave our forecasts largely unchanged, given that this was in line with historical trend. We maintain our fair value estimate of JPY 9,600 per share, and we think Daikin’s shares remain overvalued, as we expect the firm’s earnings momentum to subside going forward. We project earnings CAGR of 3% in our explicit five-year forecast, compared with the historical three-year CAGR of 16%.