Company Reports

As expected, Nabtesco’s component solutions segment, or CMP, continues to face headwinds, but the 16% year-on-year decline of its operating income in the June quarter was better than expected, as price increases and cost cuts mitigated the impact of weak reduction gear capacity utilization. As we expect this trend to continue, we raised our fiscal 2024 operating income projection by 8% to JPY 14.5 billion, assuming a 4% decline in sales and an operating margin of 4.5%. However, our overall outlook remains unchanged, and we maintain our fair value estimate at JPY 3,500. We continue to forecast operating income to increase to JPY 23 billion in 2025, as manufacturing activity picks up globally and industrial robot/machine tool manufacturers increase production. We believe Nabtesco’s shares are undervalued as the market underestimates CMP’s medium-term prospects, driven by demand for medium-/large-size industrial robots used for electric vehicle production.

Nabtesco’s component solutions segment’s, or CMP’s, March-quarter operating margin of 3.6% was a positive surprise, as cost pass-throughs mitigated the impact of weaker capacity utilization and higher fixed costs from the new factory for the reduction gear business. As CMP’s margins would not weaken as much as we had expected, we raise Nabtesco’s operating income estimate for fiscal 2024 by 14% to JPY 13.5 billion, implying a 5.5% revenue decline and 4.3% operating margin. Nonetheless, our outlook of a stronger recovery of reduction gear sales/capacity utilization from 2025 remains unchanged; therefore, we maintain our fair value estimate of JPY 3,500 per share. Although we expect CMP’s sales/utilization levels to remain low while its main customers, Fanuc and Yaskawa Electric, digest their high inventories, we expect the adjustments to be completed in the December quarter of 2024. As the market underestimates CMP’s prospects from 2025, we believe wide-moat Nabtesco’s shares are undervalued.

As a global leader in motion control technology, Nabtesco boasts the leading global and/or domestic market share with its main products in each of its segments. Nabtesco’s precision reduction gears are supplied to the big four industrial robotics companies, as well as major Chinese robotics players like Estun. The wide-moat company has a 60% global share in the RV reduction gear market for medium- to large-size industrial robots and we expect the business to continue to be the main top-line growth driver. The company is well positioned for a secular growth of industrial robot demand, driven by skilled labor shortage and need to increase production efficiency through automation.

Nabtesco’s 2024 operating income guidance of JPY 12.8 billion, or 4.0% operating margin, implies a 26% decline from last year and was a negative surprise, suggesting that the capacity utilization this year will be much lower than we had anticipated. Further, due to the weak December-quarter orders and higher inventory levels of the industrial robot manufacturers, we expect the inventory adjustment to take even longer than the company assumes and, accordingly, lower our 2024 operating income forecast to JPY 11.8 billion, or 3.7% operating margin, from JPY 18.2 billion previously. We also believe the company’s plan to return to a 10% operating margin in 2026 is optimistic, and we forecast an operating margin of 7.7%—which is lowered from 9.6% due to a lower capacity utilization assumption and higher-than-expected fixed costs from the recently constructed Hamamatsu plant. As a result, we lower our fair value estimate for Nabtesco to JPY 3,500 per share from JPY 4,000. While the firm's turnaround plan seems optimistic, we nevertheless believe that Nabtesco’s shares are undervalued as the market is overly pessimistic about the company’s medium-term margin recovery.

As a global leader in motion control technology, Nabtesco boasts the leading global and/or domestic market share with its main products in each of its segments. Nabtesco’s precision reduction gears are supplied to the big four industrial robotics companies, as well as major Chinese robotics players like Estun. The wide-moat company has a 60% global share in the RV reduction gear market for medium- to large-size industrial robots and we expect the business to continue to be the main top-line growth driver. The company is well positioned for a secular growth of industrial robot demand, driven by skilled labor shortage and need to increase production efficiency through automation.

Nabtesco’s reduction gear orders were worse than expected with a year-on-year decline of 46% in the September quarter, compared with a 22% decline in the June quarter, as the robotics makers like Fanuc adjust their inventories. Although our revised 2023 and 2024 revenue growth projections now assume 6.8% and 4.1% year-on-year, respectively (6.0% and 4.6% before), after reflecting lower reduction gear and higher transportation equipment/automatic door sales, we maintain our fair value estimate at JPY 4,000, as our long-term outlook remains unchanged. Nabtesco’s shares have been underperforming year to date due to concerns of weakening component solutions, or CMP, sales, which are driven by reduction gear/construction machinery component demand; however, we believe most of the downside risks are priced in. We expect near-term headwinds to continue, but we forecast CMP will realize top-line growth from the second half of 2024, as the robotics makers digest inventories and construction activity in China picks up.

As a global leader in motion control technology, Nabtesco boasts the leading global and/or domestic market share with its main products in each of its segments. Nabtesco’s precision reduction gears are supplied to the big four industrial robotics companies, as well as major Chinese players like Estun. With a 60% global share in the reduction gear market, a focus on medium-size to large reduction gears and a wide moat backed by high switching costs and intangible assets, we expect the business will continue to be the main top-line growth driver. The company is well positioned for a secular growth of industrial robot demand, driven by skilled labor shortage and need to increase production efficiency through automation.

As a global leader in motion control technology, Nabtesco boasts the leading global and/or domestic market share with its main products in each of its segments. Nabtesco’s precision reduction gears are supplied to the big four industrial robotics companies, as well as major Chinese players like Estun. With a 60% global share in the reduction gear market, a focus on medium-size to large reduction gears and a wide moat backed by high switching costs and intangible assets, we expect the business will continue to be the main top-line growth driver. The company is well positioned for a secular growth of industrial robot demand, driven by skilled labor shortage and need to increase production efficiency through automation.

We lower our fair value estimate for Nabtesco 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.

As a global leader in motion control technology, Nabtesco boasts the leading global and/or domestic market share with its main products in each of its segments. Nabtesco’s precision reduction gears are supplied to the big four industrial robotics companies, as well as major Chinese players like Estun. With a 60% global share in the reduction gear market, a focus on medium-size to large reduction gears and a wide moat backed by high switching costs and intangible assets, we expect the business will continue to be the main top-line growth driver. The company is well positioned for a secular growth of industrial robot demand, driven by skilled labor shortage and need to increase production efficiency through automation.

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.

As a global leader in motion control technology, Nabtesco boasts the leading global and/or domestic market share with its main products in each of its segments. Nabtesco’s precision reduction gears are supplied to the big four industrial robotics companies, as well as major Chinese players like Estun. With a 60% global share in the reduction gear market, a focus on medium-size to large reduction gears and a wide moat backed by high switching costs and intangible assets, the business will continue to be a key driver and a core part of Nabtesco’s strategy. We expect Nabtesco is well positioned for a secular growth in the industrial robotics industry, driven by skilled labor shortage and need to increase production efficiency through automation.

As a global leader in motion control technology, Nabtesco boasts the leading global and/or domestic market share with its main products in each of its segments. Nabtesco’s precision reduction gears are supplied to the big four industrial robotics companies, as well as major Chinese players like Estun. With a 60% global share in the reduction gear market, a focus on medium-size to large reduction gears and a wide moat backed by high switching costs and intangible assets, the business will continue to be a key driver and a core part of Nabtesco’s strategy. We expect Nabtesco is well positioned for a secular growth in the industrial robotics industry, driven by skilled labor shortage and need to increase production efficiency through automation.

Nabtesco's December quarter revenue grew 4.8% year over year, which was below our expectation of 10.1% growth, due to weaker-than-expected revenue growth in its mainstay components solutions segment. In the December quarter, the segment posted 3.1% year-over-year revenue growth, well below the company's guidance of 9.4% growth and our projected 11.0% growth. However, we believe the disappointing sales were due to temporary production issues caused by labor shortages in Japan and lockdowns in China. Orders for reduction gears in the quarter were down 9% year over year, but in line with our expectations given the lower capital spending in the electronics industry. Overall, our long-term outlook for reduction gears remains intact. While we expect sluggish overseas orders to continue for most of 2023, demand from domestic customers will remain strong as robot makers like Fanuc and Yaskawa are inundated with orders/inquiries that more than offset the weak demand from the electronics industry. Therefore, we maintain our fair value estimate of JPY 4,500 and believe that Nabtesco's shares are undervalued.

Based on the worse-than-expected September quarter results and downward revision on the company’s full-year guidance, we lower Nabtesco’s fiscal 2022 and 2023 (ending December) earnings forecasts and cut our fair value estimate to JPY 4,500 from JPY 5,000. Its shares are trading below our fair value estimate, likely due to concerns about macroeconomic headwinds in China affecting sales. However, over the longer term, we remain positive on its outlook, as we think the wide-moat company’s reduction gear sales will grow along with industrial robot demand, such as for EV/battery assembly. Further, as the COVID-19 pandemic settles, transportation components sales will increase from the recovery of aircraft/railroad vehicles production as well as MRO demand.

As a global leader in motion control technology, Nabtesco boasts the leading global and/or domestic market share with its main products in each of its segments. Nabtesco’s precision reduction gears are supplied to the big four industrial robotics companies, as well as major Chinese players like Siasun and Estun. With a 60% global share in the reduction gear market, a focus on medium-size to large reduction gears, which are more difficult to replicate, and a wide moat backed by high switching costs and intangible assets, the business will continue to be a key driver and a core part of Nabtesco’s strategy. We expect factory automation investments to be put off in the near term as a result of uncertainties from the trade friction between the United States and China; however, Nabtesco will be well positioned as a recovery in capital expenditures and secular growth in the industrial robotics industry drive demand in the medium to long term.

Nabtesco’s June quarter results were worse than expected, but we maintain our fair value estimate at JPY 5,000, as our medium-term projection remains intact. Companywide revenue declined by 2.5% year on year for the quarter, with sales of hydraulic equipment (which are components for construction machinery) falling by 30.8%. This was after a 26.1% year-on-year drop in the previous quarter, mainly as a result of declining construction activity in China. Despite this steep decline in demand, we forecast a 3.4% growth in the second half as construction activity in China would start to recover from the government’s recent initiative to set up a state infrastructure fund. We believe Nabtesco’s shares are undervalued as the market is underestimating the recovery of hydraulic equipment sales.

As a global leader in motion control technology, Nabtesco boasts the leading global and/or domestic market share with its main products in each of its segments. Nabtesco’s precision reduction gears are supplied to the big four industrial robotics companies, as well as major Chinese players like Siasun and Estun. With a 60% global share in the reduction gear market, a focus on medium-size to large reduction gears, which are more difficult to replicate, and a wide moat backed by high switching costs and intangible assets, the business will continue to be a key driver and a core part of Nabtesco’s strategy. We expect factory automation investments to be put off in the near term as a result of uncertainties from the trade friction between the United States and China; however, Nabtesco will be well positioned as a recovery in capital expenditures and secular growth in the industrial robotics industry drive demand in the medium to long term.

Nabtesco’s fiscal 2022 first-quarter revenue and operating margin fell a bit short of our expectations, with companywide revenue declining 2.3% year on year and operating margin falling to 7.1% from 9.2%. We attribute this mainly to lower-than-expected sales in China, especially with hydraulic equipment (components for construction machinery) and railroad equipment. While we maintain our fair value estimate at JPY 5,000, we fine-tune our 2022 assumptions to reflect our expectations of high logistics/components costs and that lockdowns in China will especially impact sales of hydraulic equipment; therefore, we now assume 5.8% year-on-year revenue growth and operating margin at 10.0% (compared with 6.2% top-line growth and 10.8% previously) on an International Financial Reporting Standards basis. We expect headwinds such as rising materials costs will continue for the foreseeable future and we have yet to see any signs of a recovery in Nabtesco’s railroad vehicle equipment business (the largest business in its transport solutions segment), which we think has also contributed to the company’s share price remaining low throughout the year.

As a global leader in motion control technology, Nabtesco boasts the leading global and/or domestic market share with its main products in each of its segments. Nabtesco’s precision reduction gears are supplied to the big four industrial robotics companies, as well as major Chinese players like Siasun and Estun. With a 60% global share in the reduction gear market, a focus on medium-size to large reduction gears, which are more difficult to replicate, and a wide moat backed by high switching costs and intangible assets, the business will continue to be a key driver and a core part of Nabtesco’s strategy. We expect factory automation investments to be put off in the near term as a result of uncertainties from the trade friction between the United States and China; however, Nabtesco will be well positioned as a recovery in capital expenditures and secular growth in the industrial robotics industry drive demand in the medium to long term.