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Morningstar | Nidec’s Profit Warning Implies Turbulence in Chinese Economy, but its Long-Term Growth Is Intact

Nidec lowered its earnings guidance for fiscal 2019 (financial year ending March 2019), owing to the economic slowdown in China. The management mentioned that orders from China had been gradually slowing down since last summer and dropped significantly in November and December, approximately 30% below the previous year because of the excess inventories in various industries, such as auto and home appliances. Assuming orders from China will not recover, Nidec has cut its revenue guidance for this fiscal year by 9%, which expects that Nidec’s second-half revenue will decline 13% from the previous year, while its first-half revenue had grown 9%. Although we acknowledge that the revision will disappoint the market as revised numbers are much below our expectation, we are encouraged on the other hand that Nidec is not changing its future capacity expansion plan, suggesting that Nidec’s long-term growth story on autos, appliances, and robots is intact. We will review our numbers after detailed December quarter results are disclosed next week, but as we consider Nidec’s profitability will recover in the second half of fiscal 2019, we do not expect to make substantial change to our fair value estimate, which means that the current share price is providing an attractive investment opportunity in the longer run.

Nidec’s operating income guidance is revised to JPY 145 billion from JPY 195 billion, with: 1) JPY 40 billion loss owing to the shortfall of revenue; and 2) JPY 10 billion loss is the net of impairment loss and cost savings. While the downward revision is disappointing, we are rather impressed that Nidec quickly switched gear to front-load the restructuring of production capacity within this fiscal year, as the company had done during the financial crisis. Historically, Nidec’s immediate action in downturn has been contributing to improve its cost structure and to enhance competitive position, which is the testament of the capable management, in our view.