Despite Slower Recovery, the Market Underestimates Casio’s Rich Cash Flow Generation

We cut no-moat Casio Computer’s fair value estimate to JPY 2,000 from JPY 2,100, as the recovery from coronavirus seems to be slower than anticipated. In the December quarter, watch sales in China dropped 28% from the previous year due to limited promotional activities and implemented restrictions and lockdowns. In the domestic market, the revenue of the system equipment segment did not recover as much as we had expected, and the progress of new businesses was slower than the company’s guidance. Casio Computer’s share price has dropped approximately 40% over the past year, due to the market’s disappointment with the slower recovery. However, we believe the downside to the current share price is limited. Historically, Casio’s share price has been supported by its rich cash flow earned from watches, and the current dividend yield of 3.4% has reached the upper end of its historical range over the past two decades. Hence, we believe that Casio’s shares are undervalued.