Airtac Earnings: Linear Guide Sales Below Expectation; Shares Fairly Valued

Narrow-moat Airtac’s 1590 first-half 2023 net profit was up 1% year on year to TWD 3.3 billion. Stripping out foreign exchange losses of TWD 236.9 million due to the depreciation of the Chinese yuan, we view the result as broadly in line with our expectation. Nonetheless, operating margin of 30% was below forecast due to lower utilization rate for its linear guide products. We cut our 2023 earnings by 6% to factor in the latest numbers, but our longer-term forecasts are largely unchanged. We maintain our fair value estimate at TWD 870, and we think the shares are fairly valued currently. Our valuation for Airtac implies a 2023 P/E ratio of about 25 times, versus its five-year historical trading range of around 14 times to 40 times.

Although Airtac maintained 2023 revenue growth guidance at teens year on year with operating margin greater than 30%, we think the market could be disappointed with the revised sales guidance for its linear guide products due to China’s slower-than-expected economic recovery. Revenue guidance for linear guide products is lowered to between CNY 500 million and CNY 600 million, from CNY 600 million previously. Airtac achieved CNY 150 million linear guide sales in the first half, with stronger growth expected sequentially. Management is more cautious now and only expects overall market demand for pneumatic components to recover gradually, with China’s government introducing more policies to support the domestic economy in second half of 2023. While demand from electronic equipment segment remains weak, Airtac thinks demand from automotive and battery industries will continue to see double-digit growth despite the high bases.

Management believes the firm can still enjoy double-digit revenue growth for the next 10 years, to be supported by the introduction of electric cylinders and two new automation components in the coming years. Overall, this is in line with our revenue CAGR forecast of 14% for 2022-27.