Keyence's Sales in China Affected by Lockdown, but Demand Prospects Remain Intact; Maintain FVE

We maintain Keyence’s fair value estimate at JPY 54,000, as our medium-term outlook is unchanged, and we think shares are fairly valued. Despite this, we think the negative reaction from Keyence's June-quarter results announcement suggests increased concerns over demand in China as well as quarterly operating margin falling short of expectations. While customer industries that are directly affected by declining consumer confidence, like electronics, will likely hold back on investments, we also expect continued near- and medium-term demand in other areas. We think ongoing issues in factories, like labor shortages and higher wages, will serve as a tailwind for Keyence, as its machine vision equipment/sensors would provide low-cost alternatives to deal with this, while saving energy and equipment running costs. Further, with medium-term expectations that the company will continue to find/meet automation needs during various types of headwinds and a balanced customer industry-base, we lower our Morningstar Uncertainty Rating to Medium from High to reflect this.