Lower Construction Machinery Demand in China Affected Nabtesco’s June Quarter Sales; Maintain FVE

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.