Daifuku Earnings: Margins Better Than Expected Due to Strong Profitability in Clean Room Segment

While Daifuku’s June-quarter revenue growth of 8% was in line, its operating margin of 11.3% was up from 6.1% in the year-ago quarter and exceeded our expectations. This was a positive surprise as the June quarter is typically a low season for the company. In addition to the price hike and cost-cutting initiatives for the clean room segment, we believe profitable deals in China for legacy chip investments helped improve the product mix. As a result, we raise our fiscal 2024 operating margin assumption to 10.5% from 9.5% as we expect this trend to continue for at least one more quarter. The strong June-quarter results support our view that the market is overly concerned about the slowdown in legacy chip investment in China, while high-end chip investment remains sluggish. We think that China will continue to invest in expanding domestic chip production capacity and demand for high-performance computing will pick up in 2025. We maintain our fair value estimate of JPY 3,500 for Daifuku and believe the stock is undervalued.