Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

Hamamatsu Photonics Kk / Equity Bottom-Up

<ul>
<li>Every so often, sudden shocks reduce Hamamatsu Photonics' usually high valuations. This is one of those times. </li>
<li>Valuations are starting to look attractive compared with their 5-year ranges. But not compared with their 10-year ranges.</li>
<li>Strong 1Q results support FY Sep-22 guidance. Management's 3-year sales and profit forecast would be reasonable in a normal operating environment. But the environment is not normal. </li>
</ul>


Every so often, sudden shocks reduce Hamamatsu Photonics' usually high valuations. This is one of those times. 
Valuations are starting to look attractive compared with their 5-year ranges. But not compared with their 10-year ranges.
Strong 1Q results support FY Sep-22 guidance. Management's 3-year sales and profit forecast would be reasonable in a normal operating environment. But the environment is not normal. 


Hamamatsu Photonics (6965 JP): Choose an Entry Point Carefully

Hamamatsu Photonics hit a new high of ¥7,050 last February, but hasn't regained the ¥7,000 level since then despite raising FY Sep-21 profit guidance by more than 20% after strong 1H results. In a positive scenario, profits could continue to rise at double-digit annual rates for another two years, but this, too, appears to be in the price.At 50x management's EPS guidance for FY Sep-21 and 39x our EPS estimate for FY Sep-23, the larger risk appears to be on the downside.Potential negatives include the diversion of record profits into higher than usual R&amp;D spending, a downturn in sales to the semiconductor industry when the current investment boom comes to an end, and a slowdown in demand for PCR testing equipment.

Hamamatsu Photonics hit a new high of ¥7,050 last February, but hasn't regained the ¥7,000 level since then despite raising FY Sep-21 profit guidance by more than 20% after strong 1H results. In a positive scenario, profits could continue to rise at double-digit annual rates for another two years, but this, too, appears to be in the price.At 50x management's EPS guidance for FY Sep-21 and 39x our EPS estimate for FY Sep-23, the larger risk appears to be on the downside.Potential negatives include the diversion of record profits into higher than usual R&amp;D spending, a downturn in sales to the semiconductor industry when the current investment boom comes to an end, and a slowdown in demand for PCR testing equipment.

Hamamatsu Photonics (6965 JP): Fully Valued, Take Profits

Hamamatsu Photonics has dropped back 11% from the ¥7,050 reached on February 15, but remains expensive at 52.5x our EPS estimate for FY Sep-21 and 39x our estimate for FY Sep-23, both of which are above management's guidance.Operating profit was up 3.4% year-on-year and net profit down slightly on a 5.6% increase in sales in the three months to December - much better than management's COVID-conservative forecast for 1H, but obviously not indicating an improvement in profitability.The expansion of valuation multiples over the past year has been excessive, in our estimation, removing incentive to buy the shares. Take profits or hold on a 5-year view.

Hamamatsu Photonics has dropped back 11% from the ¥7,050 reached on February 15, but remains expensive at 52.5x our EPS estimate for FY Sep-21 and 39x our estimate for FY Sep-23, both of which are above management's guidance.Operating profit was up 3.4% year-on-year and net profit down slightly on a 5.6% increase in sales in the three months to December - much better than management's COVID-conservative forecast for 1H, but obviously not indicating an improvement in profitability.The expansion of valuation multiples over the past year has been excessive, in our estimation, removing incentive to buy the shares. Take profits or hold on a 5-year view.

Hamamatsu Photonics (6965 JP): Likely to Consolidate Recent Gains

Hamamatsu Photonics is fully valued but not overvalued, in our estimation. If sales and earnings go to new highs over the next three years as expected, upside potential for the share price could be more than 20%.FY Sep-20 results were above guidance. FY Sep-21 guidance - which is based on conservative foreign exchange rate assumptions and includes a weak 1H - looks conservative. Medical and factory automation related sales should start to recover over the coming year, while semiconductor-related sales continue to grow. On a three-year view, sales and profits should set new highs.Sales in China and other Asian countries outside Japan grew by more than 10% in FY Sep-20 while total sales declined by 3.9%. They should continue to grow while other regions recover.Major investments are nearly complete. Depreciation should peak out and then decline as a percentage of sales over the next three years. So should R&amp;D.  Quarterly gross and operating profit margins appear to have bottomed out.With an operating margin of 12.8% in the three months to June (the COVID bottom) and a good chance of recovery to 20%, ROE headed back toward 10%, positive free cash flow and a sound balance sheet, Hamamatsu remains an attractive long-term investment. Traders should watch for infection points. 1H guidance looks like an easy target.

Hamamatsu Photonics is fully valued but not overvalued, in our estimation. If sales and earnings go to new highs over the next three years as expected, upside potential for the share price could be more than 20%.FY Sep-20 results were above guidance. FY Sep-21 guidance - which is based on conservative foreign exchange rate assumptions and includes a weak 1H - looks conservative. Medical and factory automation related sales should start to recover over the coming year, while semiconductor-related sales continue to grow. On a three-year view, sales and profits should set new highs.Sales in China and other Asian countries outside Japan grew by more than 10% in FY Sep-20 while total sales declined by 3.9%. They should continue to grow while other regions recover.Major investments are nearly complete. Depreciation should peak out and then decline as a percentage of sales over the next three years. So should R&amp;D.  Quarterly gross and operating profit margins appear to have bottomed out.With an operating margin of 12.8% in the three months to June (the COVID bottom) and a good chance of recovery to 20%, ROE headed back toward 10%, positive free cash flow and a sound balance sheet, Hamamatsu remains an attractive long-term investment. Traders should watch for infection points. 1H guidance looks like an easy target.

Hamamatsu Photonics (6965 JP): Fully Valued but Not Over-Valued

<ul>
<li>Guidance was cut after disappointing 1H results, but management's new forecast for FY Sep-20 does not include the impact of COVID-19.</li>
<li>Instead, management notes that the pandemic could reduce 2H sales by another 10% - 15%. In our estimation, this would lead to a 25% - 34% decline in FY Sep-20 net profit.</li>
<li>Management's plan for the following two years remains unchanged. It implies a sharp rebound taking operating profit well above its FY Sep-18 peak.</li>
<li>This plan is based on capacity expansion and demand forecasts made before the outbreak of COVID-19. But capital spending is now being postponed.</li>
<li>The share price has rebounded by 47% since March. The projected P/E ratios implied by management's plan are 33x for FY Sep-22 and 28x for FY Sep-23. The 5-year historical P/E range is 22x - 38x. </li>
<li>As infections continue to rise and lockdowns are reimposed, management's plan looks over-optimistic, at least for the coming syear.</li>
<li>3Q results should be announced in early August.</li>
</ul>


Guidance was cut after disappointing 1H results, but management's new forecast for FY Sep-20 does not include the impact of COVID-19.
Instead, management notes that the pandemic could reduce 2H sales by another 10% - 15%. In our estimation, this would lead to a 25% - 34% decline in FY Sep-20 net profit.
Management's plan for the following two years remains unchanged. It implies a sharp rebound taking operating profit well above its FY Sep-18 peak.
This plan is based on capacity expansion and demand forecasts made before the outbreak of COVID-19. But capital spending is now being postponed.
The share price has rebounded by 47% since March. The projected P/E ratios implied by management's plan are 33x for FY Sep-22 and 28x for FY Sep-23. The 5-year historical P/E range is 22x - 38x. 
As infections continue to rise and lockdowns are reimposed, management's plan looks over-optimistic, at least for the coming syear.
3Q results should be announced in early August.


Hamamatsu Photonics (6965 JP): Set Up for Disappointment

Japan

HAMAMATSU PHOTONICS K.K. manufactures electron tubes, semiconductors, and image processors.  The Company's products include photosensitive electronic tubes, optical/image sensors, X-ray related products, laser related products, photodiodes, light-emitting diodes (LED) and video camera used for measuring equipment.

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Hamamatsu Photonics Kk (6965 JP)

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Hamamatsu Photonics (6965 JP): Set Up for Disappointment

Guidance was cut after disappointing 1H results, but management's new forecast for FY Sep-20 does not include the impact of COVID-19. Instead,...

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