Harmonic Drive Earnings: Expect Sequential Order Recovery Until Robotics Demand Picks Up in 2024

Our outlook for Harmonic Drive Systems is unchanged, as orders for the company's mainstay reduction gears for robotics applications are showing continued sequential recovery amid headwinds, as expected. Although September-quarter consolidated orders declined 29.5% year on year and 5% sequentially, orders for the parent entity increased sequentially by 17% for the industrial robot application, which we think caused the positive market reaction. HDS has been affected by sluggish electronics/semiconductor investments in Asia as well as inventory adjustments by the industrial robot original equipment manufacturer customers, which we expect to near their end in the first half of fiscal 2024 (ending March 2025). As a result, our revenue projection is largely intact, assuming a 23% year-on-year decline in 2023 followed by 17% growth in 2024. We have lowered our fair value estimate to JPY 5,700 per share from JPY 5,900 after cutting our operating margin assumptions.