Harmonic Drive Earnings: Headwinds To Continue in 2023, but Shares Have Long-Term Upside Potential

Harmonic Drive Systems' June-quarter order decline of 32% year on year was in line with our expectations, as its industrial robotics and semiconductor production equipment, or SPE, maker customers undergo inventory adjustments. However, we see signs of demand having bottomed out, as June-quarter orders in the Japan/Asia segment (constituting the majority of orders) sequentially recovered 4%, which we think caused the positive market reaction. We attribute this to a recovery in small robot demand, as electronics makers look to increase production amid the final stages of inventory destocking, and to a lesser extent, new infrastructure demand in China. Although we have lowered our fair value estimate to JPY 5,900 per share from JPY 6,100 based on a slower near-term demand recovery, our longer-term outlook is intact. We think the market is underestimating the strain wave gear market leader’s midterm prospects, driven by demand for industrial robots, SPE, and new applications like surgical robots. We believe that as the inventory correction for robots/SPE nears its end in the first half of 2024, a stronger order recovery will be the catalyst for HDS shares.