PSA Daikin (6367) – Expansion Experts
Daikin (6367) – Expansion Experts
Daikin’s air conditioning (A/C) business is performing well across all major markets with the key N. America and China markets (they account for 45% of total A/C sales) looking promising for FY18. New A/C model introductions are scheduled to rise sharply in FY18, in line with the new model cycle upswing (FY17 was the cycle low-end). This should allow more aggressive pricing.
Management looks to ¥10bn in price increases for FY17. We think this figure could double to ¥20bn in FY18 on a combination of new model introductions and negotiations to pass on higher material costs. Raw material costs weigh on FY17 OP by ¥30bn under guidance, and we model for this being ¥40bn in FY18.
Fortunately, new model introductions also allow for more cost reduction, which we expect to reach at least ¥30~35bn in FY18, up from ¥28bn in FY17. In the absence of flooding and torrential rains, we see the Air Conditioner Division achieving at least 6-7% OP growth in FY18.
Meanwhile, the Chemicals Division (8% of sales and 10% of OP) benefits from a number of tailwinds, including semiconductor, OLED, smartphone and automotive demand. Record OPMs for FY18 look likely.
Key Points
- Sales momentum in all markets for FY17 and FY18 continues to rise
- New A/C products in FY18 to support momentum and price hikes
- We assume 20% higher material costs but less severe weather in FY18
- Favourable demand trends for the Chemical Division likely to continue into FY18 and FY19
- Daikin is expanding market share across the globe
- Debt burden is shrinking (over $5bn; $1bn net).
- Valuations are near fair value on PER (22.0x and 19.7x on our FY17 and FY18 numbers) but still 15-25% undervalued on our preferred metric of EV/OP (15.4x and 14.1x)
Daikin Industries is engaged in the manufacture and sale of air conditioning and refrigerating equipment. The Air Conditioning and Refrigeration Equipment segment offers housing equipment including split type air conditioners, air purifiers and air to water heat pump systems; commercial equipment including packaged air conditioners, multi-split type air conditioners, water cooled chillers, medium/low temperature refrigeration equipment, air handling units, rooftop systems and air filters; and marine air conditioning equipment. The Chemicals segment offers fluorocarbon gases, fluoroplastics, fluoroelastomers, fluoro coating agents, semiconductor-etching products and fluorinated oils.
Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods.
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