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Morningstar | While Canon Cuts its Guidance Because of Competition on Cameras, its Dividends Are Attractive. See Updated Analyst Note from 28 Oct 2018

Canon cut its operating income guidance again for fiscal 2018 from JPY 378.5 billion to JPY 335.5 billion, as: 1) sales of interchangeable lens cameras, or ILCs, were below its expectation; and 2) some order of lithography equipment is postponed to the next year because of the delay on semiconductor investment. While we had mentioned in our previous note that Canon’s guidance on the imaging system segment is too optimistic, the reduction was larger than we had anticipated. Therefore, we cut our operating income forecast to JPY 330 billion from JPY 365 billion, and accordingly revised our five-year earnings forecasts to factor in the intensifying competition on ILC. As a result, our new fair value estimate is lowered to JPY 3,900 per share from JPY 4,200, and to USD 36 from USD 38 per U.S. ADR. While we understand that downward guidance revision for two consecutive quarters disappointed the market, current share price should be attractive for investors providing approximately 5% dividend yield.

Canon’s ILC unit sales has been flat over the past three years, but we view that Canon’s advantage on ILC is gradually diminishing as: 1) Sony’s improved image sensor enabled its mirrorless camera to catch up with single-lens reflex camera in functionality; and 2) Sony has established a decent ecosystem of interchangeable lenses over the past decade. We therefore consider that Canon’s ILC camera sales did not reach its expectation, especially on the low-end product segment. In addition, as both Canon and Nikon both announced launches of brand new full frame mirrorless cameras this autumn to compete with Sony, users withheld purchasing the existing mid-end products, which also was the reason for revising its unit shipment forecast to 5.1 million from 5.5 million this year. While we believe Canon can maintain its user base by leveraging the existing lens ecosystem, we cut down the operating margin assumption of the imaging system segment to factor in the competition.