Yaskawa Electric (6506): New Products from FY17 to Boost Profitability

Of Yaskawa’s three main products, only the mainstay servomotors are doing well at present but next year – FY17 – sees new cost reduction products for inverters (new line of low-cost models) and robots (new controllers). Servomotors have long accounted for 30-40% of total OP at Yaskawa, but we think the figure currently approaches 60%, due to weak profitability for inverters plus lagging top-line for robots.  
The other major point for Yaskawa is its high currency sensitivity. Each 1% move in the currency impacts OP by just over 2%. Although inverters are largely produced in China, 45% of servomotors and over 85% of robots continue to be made in Japan, at Kita-Kyushu. Our last report on Sep 7th, Still Preparing for FY18, assumed a rate of ¥102, but here we adjust our assumption back to the ¥112 of our Apr 26th update, Rising Costs but Huge Potential. 
Surprisingly, the currency boost in FY17 may not be as large as the market is expecting. Hence our modest 13% YoY projected gain for FY17 OP. The impact of USD, EUR, KRW and CNY are approximately equal, and given the anticipated ¥108/USD and ¥119.5/EUR rates for Yaskawa in FY16, we project the positive FY17 currency contribution from our assumptions may be as little as ¥1bn (3% boost to OP).  

Key Points

• Servomotors approach 60% of total OP thanks to new Sigma 7 series 
• Servomotor OPM (high teens) well above Yaskawa’s 7.7% average  
• By mid-FY17, Sigma 7 could be the world’s lowest cost, high quality servomotor; Yaskawa has top global servomotor share of 17% 
• Struggling margins for inverters and robots to improve from H2 FY17, on new product 
• While valuations are stretched for FY16 (PER 26x, EV/OP 17.6x), FY17 (PER 20.9x, EV/OP 15.5x) looks 10-15% undervalued 
• FY18 sees OPM hit a record high of 9.2%