Yaskawa Electric:FY18growth in China being priced in

Significant revaluation for AC servos due to automation capex in China

    For Yaskawa's AC servos in China, we undervalued expanding demand and risingmarket share as well as production capacity able to flexibly respond to demand.However, although automation demand will continue in China hereafter, the shareprice has advanced 82% year to date (average for the six major FA firms +35%) andhas started to also price in AC servo growth in China in FY18, in our view. We thinkfurther appreciation in the share price will be difficult unless double-digit overall realprofit growth can be maintained in FY18on growth for robots. We maintain a Neutralrating.

    We forecast AC servo order growth at +25% for FY17and +5% for FY18

    We forecast order growth for AC servos (local currency basis, UBS estimate) will gofrom +22% in FY16to +25% in FY17and +5% in FY18. In China, the range ofautomation demand is expanding based on the 'Made in China 2025' initiative, fromwhich AC servos, which are used for drive parts in machinery and equipment, arebenefitting greatly. In addition, the tie-ups with local major companies in the robotbusiness appear to also be fuelling sales growth for AC servos. The capex trend forautomation is likely to continue over the medium term, but short term we forecast thatgrowth will slow in FY18as smartphone-related capex runs its course.

    We forecast adjusted consolidated OP growth +86% in FY17, +7% in FY18

    We forecast consolidated OP of ￥53.5bn for FY17(+86% yoy before the accountingperiod change) and ￥60.5bn for FY18(+7% also before the change). Our forecast ishigher than the company's guidance by ￥8bn for FY17, or by segment ￥7.8bn higherfor the motion control segment. In FY18, we expect effects from robot productiongrowth and sales growth of AC servos in China to continue, but see no earningsgrowth drivers. Our forex assumption is ￥110/$ (the company assumes ￥110/$ for Q2and beyond; forex sensitivity is ￥170m). Our earnings forecast for FY18is in line withthe consensus forecast.

    Valuation: raising our PT by 59% to ￥3,250

    We maintain our Neutral rating. Our new PT is based on a FY18E PER of just over 20X(previously FY17E PER of 19.5X), mainly reflecting the revision to our earnings forecast.Our new PER target of 20X is the same as the upper end of the trading range in pastearnings expansion phases. We have a Key Call Buy rating on Fanuc, which we believeis strongly lagging among major FA related firms.