Nabtesco Earnings: Weak Reduction Gear Orders From Inventory Adjustments by Robot Makers

Nabtesco’s 6268 reduction gear orders were worse than expected with a year-on-year decline of 46% in the September quarter, compared with a 22% decline in the June quarter, as the robotics makers like Fanuc adjust their inventories. Although our revised 2023 and 2024 revenue growth projections now assume 6.8% and 4.1% year-on-year, respectively (6.0% and 4.6% before), after reflecting lower reduction gear and higher transportation equipment/automatic door sales, we maintain our fair value estimate at JPY 4,000, as our long-term outlook remains unchanged. Nabtesco’s shares have been underperforming year to date due to concerns of weakening component solutions, or CMP, sales, which are driven by reduction gear/construction machinery component demand; however, we believe most of the downside risks are priced in. We expect near-term headwinds to continue, but we forecast CMP will realize top-line growth from the second half of 2024, as the robotics makers digest inventories and construction activity in China picks up.

We forecast 6.8% year-on-year revenue growth for 2023, as the 3% decline in the CMP segment is more than offset by the stable MRO (maintenance, repair, and overhaul) sales from the transport solutions and the accessibility solutions segments. For these two segments, which sell transportation equipment and automatic/platform doors, we forecast sales growth of 12% and 22% in 2023, respectively. While MRO activities were previously affected by the pandemic due to the travel restrictions and component shortages, many of these issues have been alleviated. We believe that the recovery in global aircraft production and domestic commercial building/platform door construction will support this trend in the interim. However, due to the negative product mix from weaker CMP sales, we lower our 2023 and 2024 operating margin assumptions to 5.7% and 7.5%, respectively (down from 5.9% and 8.0%).