Harmonic Drive Earnings: Headwinds to Continue in 2023, but Long-Term Outlook Is Intact

Harmonic Drive System’s 6324, or HDS’s, March quarter orders declined 43.5% year over year due to weaker-than-expected demand for semiconductor production equipment, or SPE, and small-sized robots used in electronics manufacturing. As a result, we now expect HDS’ fiscal 2023 (ending March 2023) revenue to decline 18% year on year, down from our previous forecast of a 5% decline. However, we maintain its fair value estimate at JPY at 6,100, as we continue to forecast midteens sales growth in the midterm, driven by growing demand of industrial robots/cobots in factories, surgical robots, and SPE, which is underestimated by the market. As the inventory correction in IT equipment is nearing an end, we believe that orders have already bottomed out and that further order recovery will be the catalyst for HDS’ shares.

We think HDS’ ambitious medium-term capacity expansion plan reiterates our view that it can maintain strong revenue growth, which we forecast at a 15% CAGR between fiscal 2023 and 2027. The company plans to further increase its reduction gear capacity in Japan by 70,000 units to 200,000 units per month, excluding automotive engine gears. Although details have not yet been disclosed, we forecast the investments to start from 2024, with the expectation that revenue for the year will recover to the 2022 level of around JPY 71 billion. Compared with the previous capacity expansion, we expect a more gradual increase in investments, with the annual capital expenditure to be between JPY 8.5 billion to JPY 10 billion from 2024 to 2027, averaging about 11% of sales (lower than JPY 21 billion, or 31% of sales, in 2018).