22 May 2013 Asia Pacific/Japan Equity Research Electronic Equipment & Instruments (Machinery (Japan)) / MARKET WEIGHT Yaskawa Electric Corporation (6506 / 6506 JP) Rating OUTPERFORM* Price (21 May 13, ¥) 1,417 INCREASE TARGET PRICE Target price (¥) (from 1,000) 1,800¹ Chg to TP (%) 27.0 Expect upward revision to FY3/14 guidance, Market cap. (¥ bn) 356.56 (US$ 3.48) Enterprise value (¥ bn) 392.60 medium-term goals may be met a year early Number of shares (mn) 251.63 Free float (%) 70.0 ■ Action: We raise our forecasts for Yaskawa Electric and change the 52-week price range 1,430 - 482 reference year for our valuation model from FY3/14 to FY3/15, revising our *Stock ratings are relative to the coverage universe in each target price up from ¥1,000 to ¥1,800 (potential upside 27%). We reiterate analyst's or each team's respective sector. our OUTPERFORM rating. We also introduce our FY3/16 forecasts. ¹Target price is for 12 months. Research Analysts ■ Investment case: We look for brisk capex by the SPE and automotive industries to buoy Yaskawa’s monthly orders, for which we forecast Shinji Kuroda 81 3 4550 9994 sustained double-digit growth. With yen weakness also providing a boost, [email protected] we anticipate an upward revision to guidance around the time of the 2Q Yunchao Zhao results announcement 81 3 4550 9903 [email protected] ■ We adjust our forex assumptions to ¥100/$ and ¥130/€ and raise our FY3/14 OP forecast from ¥22.8bn to ¥29.6bn (23% above guidance for ¥24bn and 18% above the ¥25.1bn IFIS consensus). For FY3/15 we raise our OP estimate from ¥21.2bn to ¥32.0bn, 10% higher than the ¥29.1bn IFIS consensus. ■ Catalysts/risks: Catalysts would include a hike in full-year guidance when 2Q results are announced, spurred by upbeat capex by automakers and high-tech companies such as TSMC and a likely resulting acceleration of YoY growth in monthly orders into double digits. Risks include forex swings, scaled-back capex by the automotive and high-tech sectors, and a seasonal slowdown in Chinese demand. ■ Valuation: Our ¥1,800 is derived by applying our ROIC model to our FY3/15 estimates. Implied P/E is 23.8x, and implied P/B 3.4x. We expect FY3/15 to mark the second year of Yaskawa's earnings recovery and, accordingly, use valuations comparable to those in FY3/12 (P/E of 23.2x) and FY3/06 (30.3x). We now assume an RFR of 0.62% (previously 0.825%) and ERP of 5.5% (6.5%). Share price performance Financial and valuation metrics Year 3/13A 3/14E 3/15E 3/16E Price (LHS) Rebased Rel (RHS) Revenue (¥ bn) 310.4 358.0 359.0 385.0 120 1400 Operating profit (¥ bn) 13.1 29.6 32.0 38.9 100 Recurring profit (¥ bn) 14.1 30.8 33.2 40.1 900 80 400 60 Net income (¥ bn) 6.8 17.0 19.0 23.2 EPS (¥) 27.0 67.5 75.5 92.2 Change from previous EPS (%) n.a. 23.9 50.8 IBES Consensus EPS (¥) n.a. 56.5 67.5 79.3 The price relative chart measures performance against the EPS growth (%) -19.5 150.0 11.9 22.1 TOPIX which closed at 1270.39 on 21/05/13 P/E (x) 34.6 21.0 18.8 15.4 On 21/05/13 the spot exchange rate was ¥102.52/US$1 Dividend yield (%) 1.1 0.8 0.8 1.0 EV/EBITDA(x) 13.4 10.6 9.5 8.0 Performance Over 1M 3M 12M P/B (x) 2.2 3.0 2.6 2.3 Absolute (%) 28.0 70.5 127.4 ROE(%) 6.4 14.2 14.0 15.1 Relative (%) 17.1 38.6 54.2 Net debt/equity (%) 30.9 28.4 16.9 9.0 Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 22 May 2013 Figure 1: Yaskawa Electric (6506) – Financial summary In JPY bn, unless otherwise stated Profit & Loss 3/13A 3/14E 3/15E 3/16E Key Financials 3/13A 3/14E 3/15E 3/16E Sales revenue 310.4 358.0 359.0 385.0 Growth(%) COGS 228.3 251.4 250.0 267.1 Sales 1.1 15.3 0.3 7.2 SGA 60.0 68.0 68.0 70.0 EBIT -11.8 126.5 8.1 21.6 R&D 9.0 9.0 9.0 9.0 Net Income -19.4 150.0 11.8 22.1 Other op income(expense) -8.1 -9.5 -10.5 -10.5 EPS -19.5 150.0 11.9 22.1 EBITDA 21.2 39.1 42.5 49.4 Margins(%) Depr. & Amort. 8.1 9.5 10.5 10.5 EBITDA 6.8 10.9 11.8 12.8 Goodwill amort. 0.0 0.0 0.0 0.0 EBIT 4.2 8.3 8.9 10.1 EBIT 13.1 29.6 32.0 38.9 Pretax profit 4.5 8.6 9.2 10.4 Net interest expense 0.5 0.6 0.6 0.6 Net income 2.2 4.7 5.3 6.0 Associates 1.4 1.4 1.4 1.4 Valuation(x) Net other non-op income(exp.) -1.0 -0.8 -0.8 -0.8 EV/Sales 0.9 1.2 1.1 1.0 Recurring profit 14.1 30.8 33.2 40.1 EV/EBITDA 13.4 10.6 9.5 8.0 Extraordinary gain & loss 0.0 0.0 0.0 0.0 EV/EBIT 21.7 14.0 12.6 10.2 Profit before tax 14.1 30.8 33.2 40.1 PER 34.6 21.0 18.8 15.4 Income tax 4.7 11.6 12.8 15.5 PBR 2.2 3.0 2.6 2.3 Minorities 0.6 0.8 0.8 0.9 ROE analysis(%) Net Income 6.8 17.0 19.0 23.2 ROE 6.4 14.2 14.0 15.1 Balance Sheet 3/13A 3/14E 3/15E 3/16E ROIC 5.9 11.5 11.5 13.4 Cash & equivalents 19.5 18.1 29.9 39.4 Asset turnover 102.6 111.0 106.2 106.8 Receivables 99.7 105.0 107.0 115.0 Tax burden 33.5 37.7 38.5 38.5 Inventories 64.3 68.0 70.0 75.0 Financial leverage(x) 2.7 2.5 2.4 2.2 Other current assets 25.0 25.0 25.2 25.5 Credit ratio(%) Current assets 208.5 216.1 232.1 254.9 Net debt/Equity 0.3 0.3 0.2 0.1 Property, plant & equipments 40.9 53.4 52.9 52.4 Net debt/EBITDA 1.6 0.9 0.6 0.3 Intangibles 13.6 13.6 13.6 13.6 Interest converage ratio(x) 4.4 8.6 8.9 10.4 Other non-current assets 39.5 39.5 39.5 39.5 Per share data 3/13A 3/14E 3/15E 3/16E Non-current assets 94.0 106.5 106.0 105.5 No. of shares(millions) 252.0 252.0 251.6 251.6 Total assets 302.5 322.6 338.1 360.4 EPS(¥) 27.0 67.5 75.5 92.2 Payables 58.7 64.0 63.0 65.0 BPS(¥) 420.7 475.3 537.5 610.6 Short term debt 24.3 24.3 24.3 24.3 DPS(¥) 10.0 12.0 12.0 14.0 Other current liability 37.5 37.5 37.5 37.5 Dividend payout ratio(%) 37.1 17.8 15.9 15.2 Total current liability 120.5 125.8 124.8 126.8 Quarterly analysis Q1 Q2 Q3 Q4 Long term debt 29.9 29.9 29.9 29.9 3/13A Other non-current liability 34.7 34.7 34.7 34.7 Sales 72.6 77.9 68.6 91.3 Total liabilities 185.1 190.3 189.3 191.3 Operating Income 2.2 4.0 0.7 6.3 Shareholders equity 112.2 127.0 143.5 163.8 Recurring Profit 2.0 4.4 1.2 6.5 Minority interests 5.2 5.2 5.2 5.2 Net Income 0.9 2.6 0.4 2.9 Total shareholder funds 302.5 322.6 338.1 360.4 3/14E Cashflow 3/13A 3/14E 3/15E 3/16E Sales 80.2 89.0 87.8 101.0 EBIT 13.1 29.6 32.0 38.9 Operating Income 3.3 7.3 7.9 11.1 Depr & Amortisation 8.1 9.5 10.5 10.5 Recurring Profit 3.6 7.6 8.2 11.4 Chage in working capital 6.1 -3.7 -5.3 -11.3 Net Income 1.7 4.1 4.9 6.3 Other -4.1 -10.8 -12.0 -14.6 3/15E Operating cashflow 23.2 24.6 25.3 23.5 Sales 88.7 94.0 82.8 93.5 Capex -11.3 -22.0 -10.0 -10.0 Operating Income 6.5 9.4 7.2 8.9 Disposal of PPE 0.0 0.0 0.0 0.0 Recurring Profit 6.8 9.7 7.5 9.2 Acquisitions & Investments 0.0 0.0 0.0 0.0 Net Income 3.5 5.5 4.5 5.5 Asset sale proceeds 0.0 0.0 0.0 0.0 3/16E Other 0.0 0.0 0.0 0.0 Sales 86.2 96.0 95.8 107.0 Investing cashflow -11.3 -22.0 -10.0 -10.0 Operating Income 6.2 9.7 10.6 12.4 Equity raised 0.0 0.0 0.0 0.0 Recurring Profit 6.5 10.0 10.9 12.7 Dividends paid -2.5 -3.0 -3.0 -3.5 Net Income 3.4 5.6 6.6 7.7 Net borrowings 0.0 0.0 0.0 0.0 Other -3.1 0.0 0.0 0.0 Financing cashflow -5.6 -3.0 -3.0 -3.5 Effect of exchange rates 0.0 0.0 0.0 0.0 Net Change in Cash 6.4 -0.4 12.3 10.0 Free cash flow 12.0 2.6 15.3 13.5 Note : Reported year may include estimated data Source: Company data, Credit Suisse estimates Yaskawa Electric Corporation (6506 / 6506 JP) 2 22 May 2013 Investment opinion Raise TP to ¥1,800, reiterate OUTPERFORM Bullish stance seems warranted until 2Q results, when upward revision looks likely We revise up our forecasts for Yaskawa and change the reference year for our valuation Potential upside 27% model from FY3/14 to FY3/15, raising our TP from ¥1,000 to ¥1,800 (potential upside 27%).