Report
Shanshan Wei, CFA
EUR 850.00 For Business Accounts Only

Morningstar | Hoshizaki Avoids Delisting From TSE by Submitting Earnings Report Within Deadline

On Dec. 27, Hoshizaki released its September-quarter results after a two-month delay as well as the result of its internal inspection regarding the misconduct in one of its subsidiaries. Its shares dropped more than 30% after the company said it was investigating the fraud, but we think this announcement will relieve the market as Hoshizaki avoided delisting from the Tokyo Stock Exchange by submitting quarterly earnings results within the extended deadline, and the direct impact from the fraud is limited. We believe it will take some time for Hoshizaki’s share price to recover, as the company needs to establish sufficient corporate governance to improve its culture, and the slowdown in domestic revenue growth suggests macro headwinds. However, we believe that Hoshizaki’s economic moat on the domestic business, which is based on its brand and the nationwide service network, is intact. We thus will maintain our wide-moat rating as well as our fair value estimate of JPY 11,100.

According to the investigation report, one of the company's 15 distribution subsidiaries, Hoshizaki Tokai, exaggerated revenue in order to meet challenging sales targets. While we believe the extent of the fraud is limited, we are concerned that these distribution subsidiaries did not appear to have sufficient financial monitoring by Hoshizaki’s management nor established processes to prevent fraud. As such, the company needs to enhance its corporate governance.

Hoshizaki’s operating income for the September quarter was JPY 10.6 billion, 3.6% below the previous year’s number. While revenue from overseas business grew 3.8%, domestic revenue growth was 1.0%, a slowdown from 2.8% in the previous quarter and 7.7% in the quarter before. We are concerned that domestic revenue will be weaker in 2019 because of the slowing economy, but we believe it is still in line with our midterm growth assumption of 2.4% for the domestic business.
Underlying
HOSHIZAKI Corp.

Hoshizaki and its subsidiaries are mainly engaged in the research, development, manufacture, sale and maintenance of kitchen equipment for industrial use. Co.'s principal products are ice makers including fully-automatic and large-scale ice makers, cooking electrolyzers, meal service carts, high humidity refrigerators, frozen refrigerators, cold salt water system, washing electrolyzers, dish washers, ice dispensers, tea servers, cooking appliances including electromagnetic cookers, electronic frying equipment and microwaves, among others. Co. provides its products in Japan as well as North and South America, Europe, Asia and other regions.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Shanshan Wei, CFA

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