Gen-2 Traction Motor Drives Margin Expansion of the Automotive Business; Nidec’s Shares Undervalued

While we fine-tuned our earnings forecasts and trimmed narrow-moat Nidec’s fair value estimate to JPY 12,000 from JPY 12,500, there were two positives in the automotive segment. First, the segment’s financials improved significantly from the previous quarter. The revenue was 24.4% up from the June quarter as sales of traction motors doubled, and the segment’s operating margin improved to 3.9% from breakeven as the company was able to pass on increasing material costs. Second, the company reiterated its outlook that the shipment of traction motors will more than double, and the business will turn profitable in the next fiscal year, driven by the mass production of the brand-new second-generation, or Gen-2, motors. Management commented that Gen-2 motors can be manufactured at a cost 35% lower than Gen-1 motors, and approximately 70% of its traction motor shipments will be Gen-2 in the next fiscal year. Hence, we have higher visibility of the turnaround of traction motors and retain our view that the market is underestimating Nidec’s margin expansion.