Harmonic Drive’s Order Decline in September Quarter as Expected; Shares Remain Undervalued

Harmonic Drive Systems', or HDS’, September-quarter orders declined 40.1% year on year, mainly due to lower orders of its reduction gears from industrial robot makers in Japan. However, this was not surprising, as there were massive upfront orders in the September quarter in 2021, which previously led to a 229.0% year-on-year increase in orders. Although we expect orders to fall below the previous year’s level for the next few quarters, we maintain our view that orders will not drop to 2018-19 levels during the U.S.-China trade friction. In fact, on a monthly level, management forecasts orders to gradually improve from around December-January, initially from inventories bottoming out by customers (like robot manufacturers and distributors), followed by an eventual pick-up in end-user demand. Over the longer term, we think the wide-moat company’s reduction gear demand will grow, along with the market for smaller robots/collaborative robots (or cobots) and surgical robots, where many of them use HDS’ gears. As such, we believe shares are undervalued, despite slightly lowering our fair value estimate to JPY 6,300 from JPY 6,400 after adjusting our near-term revenue/margin assumptions.