Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Securities analyst covering electronics, precision equipment & robotics, engineering, construction, transport and other sectors for more than 25 years in Japan and 3 years in Korea. Permanent resident of Japan.

Senior Technology Analyst, Japanese Equities

Alps (6770 JT) - Positive Outlook Post Merger

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Equity Bottom-Up

Long-term investors should have another look at Alps Alpine. On August 26, the company's share price hit a calendar year low of ¥1,686, down 31% from its ¥2,439 year-to-date high reached in April and down 45% from its (adjusted) 52-week high of ¥3,060. Since then, it has rebounded to ¥2,076 (Friday, October 4, closing price). The shares are now selling at 18.8x management's EPS guidance for FY Mar-20 and 1.2x book value at the end of June.Operating profit was down 38.9% year-on-year in the three months to June, but up more than 10 times from near zero in 4Q of FY Mar-19. At the end of September, management reduced sales and profit guidance for 1H of FY Mar-20, but not by much, and left 2H guidance unchanged. For FY Mar-20 as a whole, they are now guiding for a 2.3% decline in operating profit on a 0.9% increase in sales. With economic growth rates declining around the world, another downward revision might be unavoidable, but this should not be much of a surprise. 1H results are scheduled to be announced on October 30.On a medium-to-long-term view, management is targeting a 17.5% increase in sales to ¥1.0 trillion by Mar-25, accompanied by an increase in the operating margin from 5.8% in FY Mar-19 to 8.0% in FY Mar-22 and 10.0% in FY Mar-25, which implies a doubling of operating profit over the next six years. In the current environment, with sales weak and margins down, these targets look optimistic. But in FY Mar-18, the operating margin was 8.4%, indicating that they could be met if there is another strong up-cycle in demand.In management's plans, growth is led by sales of electronic components to consumer electronics makers, with sales to the auto industry rising at lower rates with lower margins. This implies that economic growth and cell phone demand, not in-vehicle software and connectivity, are likely to be the main drivers of sales and profits in the years ahead. As Google, Apple, Microsoft, Amazon and Baidu charge into the connected car market, this makes sense. Management is taking steps to participate in the evolution of relevant technology  (e.g., a software licensing agreement with Qualcomm to develop communication modules using the Snapdragon Automotive 5G Platforms), but is not raising excessive expectations for its automotive infotainment business.The main risks to sales, profits and the share price appear to be economic recession and the possibility that demand from the cell phone industry might not recover until 5G mobile telecom services are widely available.

Long-term investors should have another look at Alps Alpine. On August 26, the company's share price hit a calendar year low of ¥1,686, down 31% from its ¥2,439 year-to-date high reached in April and down 45% from its (adjusted) 52-week high of ¥3,060. Since then, it has rebounded to ¥2,076 (Friday, October 4, closing price). The shares are now selling at 18.8x management's EPS guidance for FY Mar-20 and 1.2x book value at the end of June.Operating profit was down 38.9% year-on-year in the three months to June, but up more than 10 times from near zero in 4Q of FY Mar-19. At the end of September, management reduced sales and profit guidance for 1H of FY Mar-20, but not by much, and left 2H guidance unchanged. For FY Mar-20 as a whole, they are now guiding for a 2.3% decline in operating profit on a 0.9% increase in sales. With economic growth rates declining around the world, another downward revision might be unavoidable, but this should not be much of a surprise. 1H results are scheduled to be announced on October 30.On a medium-to-long-term view, management is targeting a 17.5% increase in sales to ¥1.0 trillion by Mar-25, accompanied by an increase in the operating margin from 5.8% in FY Mar-19 to 8.0% in FY Mar-22 and 10.0% in FY Mar-25, which implies a doubling of operating profit over the next six years. In the current environment, with sales weak and margins down, these targets look optimistic. But in FY Mar-18, the operating margin was 8.4%, indicating that they could be met if there is another strong up-cycle in demand.In management's plans, growth is led by sales of electronic components to consumer electronics makers, with sales to the auto industry rising at lower rates with lower margins. This implies that economic growth and cell phone demand, not in-vehicle software and connectivity, are likely to be the main drivers of sales and profits in the years ahead. As Google, Apple, Microsoft, Amazon and Baidu charge into the connected car market, this makes sense. Management is taking steps to participate in the evolution of relevant technology  (e.g., a software licensing agreement with Qualcomm to develop communication modules using the Snapdragon Automotive 5G Platforms), but is not raising excessive expectations for its automotive infotainment business.The main risks to sales, profits and the share price appear to be economic recession and the possibility that demand from the cell phone industry might not recover until 5G mobile telecom services are widely available.

알프스 알파인(6770 JP): 장기적인 관점을 살펴보세요