Harmonic Drive's Orders Down in June Quarter but Largely Within Expectations; Maintain FVE

Harmonic Drive Systems' June-quarter orders declined 29.2% year on year, but this was within expectations, and our projected medium-term sales trajectory is largely unchanged. Much of the decline came from lower orders related to industrial robot applications in Japan and significant up-front purchases by customers last year. Despite this, HDS’ share price has continued to recover, which we attribute to increased market confidence that orders will not drop to levels of the U.S.-China trade friction in 2018-19 and the upcoming downcycle will be shorter than the previous one. We believe the shares are still undervalued, as HDS’ medium-term top-line growth prospects are being underestimated. As the strain wave gear market leader, the wide-moat company is best positioned to capitalize on increased use of gears in robotic applications, like those for electric vehicle/battery production, collaborative robots for general manufacturing, and newer types like surgical/humanoid robots. With this outlook intact, we retain our fair value estimate at JPY 6,400 per share.