Equity Analyst, LightStream Research

Aqila Ali

Equity Analyst

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

<a href="https://www.smartkarma.com/entities/nidec-corp" target="_blank" data-smartkarma-citation="entities:7245:1">Nidec Corp (6594 JP)</a> is currently trading at JPY13,375 per share which is almost 13% above its 12-month low of JPY11,800 per share. The company’s share price reached an all-time high of JPY17,260 in February 2018, however, it has declined slightly since then. This could be due to the low performance of the stock markets in general, along with the company’s lacklustre performance during the recent FY (FY03/19 slow growth in revenue at +2.0% YoY, OP down -17.1% YoY, OPM at 9.1% cf. 11.2% during FY03/18) due to structural changes in its business. Nidec is known to operate stable businesses and holds solid shares in the markets in which it operates. The company, however, recognising that the market for small precision motors for Hard Disk Drive (HDDs) is in decline,  has decided to reform its business structure to capitalise on the following growth drivers for each of their already steady business segments:
<ul>
<li>
Automotive Electrification and Autonomous driving trends to drive the Automotive business segment</li>
<li>
Expected introduction of 5G communication to streamline growth of big data driving the Small Precision Motors Segment via demand for data servers and in turn HDDs</li>
<li>
Growing trend of ‘Power saving’ while using electrical appliances (home and commercial purposes): Introduction and successful mass production of brushless motors to support growth in the Small Precision Motors segment and the Appliance, Commercial and Industrial Products business segment (is also called the Appliance Segment for short in this Insight). Hopes to introduce the technology for the Automotive Product segment as well</li>
<li>
Industry 4.0, automation and robotisation to drive Machinery segment</li>
</ul>
Nidec’s business reformation efforts during FY03/19 to capitalise on these drivers have resulted in an increase in expenses during the year hurting the overall profitability of the company. Apart from this, unfavourable currency movements also added to the negative impact on profits.  However, we believe the downside for Nidec is limited as the expenses for business restructuring are temporary and should not continue over the next financial year or beyond. Nidec’s business is now structured in a way that its three main segments, namely, the Small Precision, Automotive and Appliance businesses are each expected to bring in JPY600bn worth revenue or more by FY03/21. The Automotive segment is specifically targeted to bring at most JPY 1 trn in revenue backed by the growing trends toward autonomous driving and electrification alongside Nidec’s continuing spree of acquisitions. The JPY 1 trn target looks a bit challenging to achieve given the current Automotive segment revenue of about JPY300bn. However, Nidec is known for its inorganic growth and expects to hit this target mainly through M&amp;A, of which Omron Automotive Electronics has been the most recent acquisition. We believe the acquisition of Omron’s Automotive business followed by two or three similar deals alongside other key growth prospects in the Automotive Product space should help revenue reach close to 80% of the JPY 1 trn target. However, in our opinion the company’s midterm target revenue of JPY2 trn could be achieved supported by the strong contribution from the Appliance segment.
According to our analysis, Nidec operates solid businesses with relatively impressive ROE and attractive long-term growth prospects. However, we believe, the market has already factored most of this into its share price. Therefore, we believe Nidec is worth looking at on the long side if its management continues to find value-adding M&amp;A deals which complement its existing lines of business and new business opportunities.

Nidec Corp (6594 JP) is currently trading at JPY13,375 per share which is almost 13% above its 12-month low of JPY11,800 per share. The company’s share price reached an all-time high of JPY17,260 in February 2018, however, it has declined slightly since then. This could be due to the low performance of the stock markets in general, along with the company’s lacklustre performance during the recent FY (FY03/19 slow growth in revenue at +2.0% YoY, OP down -17.1% YoY, OPM at 9.1% cf. 11.2% during FY03/18) due to structural changes in its business. Nidec is known to operate stable businesses and holds solid shares in the markets in which it operates. The company, however, recognising that the market for small precision motors for Hard Disk Drive (HDDs) is in decline,  has decided to reform its business structure to capitalise on the following growth drivers for each of their already steady business segments:


Automotive Electrification and Autonomous driving trends to drive the Automotive business segment

Expected introduction of 5G communication to streamline growth of big data driving the Small Precision Motors Segment via demand for data servers and in turn HDDs

Growing trend of ‘Power saving’ while using electrical appliances (home and commercial purposes): Introduction and successful mass production of brushless motors to support growth in the Small Precision Motors segment and the Appliance, Commercial and Industrial Products business segment (is also called the Appliance Segment for short in this Insight). Hopes to introduce the technology for the Automotive Product segment as well

Industry 4.0, automation and robotisation to drive Machinery segment

Nidec’s business reformation efforts during FY03/19 to capitalise on these drivers have resulted in an increase in expenses during the year hurting the overall profitability of the company. Apart from this, unfavourable currency movements also added to the negative impact on profits.  However, we believe the downside for Nidec is limited as the expenses for business restructuring are temporary and should not continue over the next financial year or beyond. Nidec’s business is now structured in a way that its three main segments, namely, the Small Precision, Automotive and Appliance businesses are each expected to bring in JPY600bn worth revenue or more by FY03/21. The Automotive segment is specifically targeted to bring at most JPY 1 trn in revenue backed by the growing trends toward autonomous driving and electrification alongside Nidec’s continuing spree of acquisitions. The JPY 1 trn target looks a bit challenging to achieve given the current Automotive segment revenue of about JPY300bn. However, Nidec is known for its inorganic growth and expects to hit this target mainly through M&amp;A, of which Omron Automotive Electronics has been the most recent acquisition. We believe the acquisition of Omron’s Automotive business followed by two or three similar deals alongside other key growth prospects in the Automotive Product space should help revenue reach close to 80% of the JPY 1 trn target. However, in our opinion the company’s midterm target revenue of JPY2 trn could be achieved supported by the strong contribution from the Appliance segment.
According to our analysis, Nidec operates solid businesses with relatively impressive ROE and attractive long-term growth prospects. However, we believe, the market has already factored most of this into its share price. Therefore, we believe Nidec is worth looking at on the long side if its management continues to find value-adding M&amp;A deals which complement its existing lines of business and new business opportunities.

Our First Look at Nidec: Too Good To Short