EUR 850.00 For Business Accounts Only

Morningstar | Daikin’s Nine-Month Fiscal 2019 Earnings Aided by Chemicals and Others Segments; Shares Overvalued. See Updated Analyst Note from 13 Feb 2019

There are no major surprises in no-moat Daikin’s nine-month fiscal 2019 (year ending March 2019) results, with net profit down 3% year over year to JPY 149.9 billion. We leave our forecasts largely unchanged, but we raise our fair value estimate to JPY 9,900 from JPY 9,600 to take into account the time value of money. In our view, Daikin’s shares remain overvalued, given the firm’s slower earnings growth going forward. We expect Daikin’s earnings CAGR to decelerate to 3% in our explicit five-year forecast, compared with the historical three-year CAGR of 16%, due to headwinds such as slower global economic growth, appreciation of the Japanese yen and slowdown in the China market.

The air-conditioning business registered a muted operating profit growth of 3% year over year due to cost pressures. Nonetheless, this was partly mitigated by strong growth of 39% and 38% from the chemicals and others (such as sales of oil hydraulic equipment and specialized machinery) segments, respectively. In particular, the chemicals division benefited from robust sales in the semiconductor and automotive markets, as well as higher selling prices. We think Daikin’s results are commendable given the rising costs environment amid global economic slowdown and trade war between U.S. and China. The firm is managing the challenges through raising selling prices, expanding sales of high-value-added product, strengthening sales and after-sales service networks and prioritizing cost reduction efforts (such as in-house production and automation).

Daikin’s air-conditioning sales in Japan (up 7% year over year) continued to be underpinned by personal spending and capital investments from the commercial sector. In addition, key overseas markets such as the Americas, Europe, and Asia were reporting sales growth of 10%-12% year over year. However, the firm’s third-largest market, China, saw slow sales growth of 2% year over year, largely attributable to weaker housing sales and economic slowdown.

We do not expect a quick turnaround in China’s business, and we believe competition will remain intense in China going forward.