CKD: Strong recovery in semiconductor-related demand drives earnings forecast and target price upgrades

Overview

This report is Morgan Stanley's earnings review of Japan's CKD (6407.T). The core view is that semiconductor-related capex and equipment demand are recovering strongly, which will drive substantial earnings improvement from F3/27 onward. The research institution therefore raised its F3/27 and F3/28 operating profit forecasts and increased the target price, while noting that the market already has high expectations for the improvement, and thus maintained the Equal-weight rating.

Core views

The report believes that the main driver of CKD's earnings recovery comes from the equipment business, especially the rapid rebound in semiconductor-related demand. F3/27 equipment business operating profit is expected to increase 44% YoY to ¥28.5bn, while the automation machinery business is expected to remain broadly flat. Under the assumption that semiconductor-related demand continues to expand in F3/28, operating profit is expected to rise to ¥30.0bn, with operating margin improving to 15.4%. However, the share price has already risen significantly and reflects expectations for earnings improvement over the next two years, so the rating was not upgraded.

Analysis framework

The analytical framework is based on Morgan Stanley ModelWare earnings forecasts, combined with segment operating profit, semiconductor-related capex, margin recovery, ROE-P/B correlation, and risk-reward scenarios for valuation. The target price is derived using F3/28e BPS and a P/B multiple, and the impact of stronger or weaker semiconductor capex on operating profit and valuation multiples is tested under bull and bear scenarios.

Methodology notes

• Earnings forecastMorgan Stanley ModelWare

  Forecast revision upward

  The report states that unless otherwise noted, metrics are based on the Morgan Stanley ModelWare framework; this time, CKD's F3/27 and F3/28 operating profit forecasts were raised to ¥28.0bn and ¥30.0bn, respectively.

• Valuation methodROE-P/B valuation

  Deriving the target price using F3/28e BPS and the P/B multiple

  The target price of ¥5,700 comes from F3/28e BPS of ¥2,734 multiplied by 2.1x P/B; this multiple incorporates strong earnings improvement, an upcycle premium, operating profit above the historical peak, and higher TOPIX valuation, based on the ROE-P/B correlation.

• Scenario analysisRisk Reward

  Bull, base, and bear scenarios

  The base-case scenario assumes F3/28 operating profit of ¥30.0bn; the bull-case scenario assumes a stronger recovery in semiconductor and general manufacturing capex, with F3/28 operating profit reaching ¥33bn; the bear-case scenario assumes capex, led by semiconductors, does not recover, with F3/28 operating profit falling to ¥16.5bn.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• CKD (6407.T)

  Research coverage target and beneficiary of the recovery in semiconductor-related equipment demand in Japan

  Strengths

  The equipment business is driven by the recovery in semiconductor-related demand, with F3/27 operating profit expected to rise sharply YoY; F3/28 operating profit and margin still have room for further improvement.

  Weaknesses

  The automation machinery business is expected to remain broadly flat, and 1Q is still affected by seasonal factors in the short term; the share price has already risen significantly, and valuation already incorporates substantial expectations for earnings recovery.

  Comparison

  Under the base-case scenario, F3/28 OP is ¥30.0bn, versus ¥33bn in the bull case and ¥16.5bn in the bear case; valuation is assigned a premium relative to historical upcycles.

  Risks

  A slowdown in semiconductor capex, a slowdown in capex in Japan and China, and rising component, material, and fixed costs could all weigh on earnings and valuation.

• Equipment segment

  The main business driver behind CKD's upward earnings revision

  Strengths

  Expansion in semiconductor-related demand is improving sales and utilization rates, with F3/27 OP expected to rise 44% YoY to ¥28.5bn.

  Weaknesses

  Sensitive to the semiconductor capex cycle; if customer capacity expansion or new customer development comes in below expectations, earnings leverage will decline.

  Comparison

  Compared with the broadly flat automation machinery business, the equipment business is the main source of earnings growth in F3/27.

  Risks

  Slower chip capex, weaker-than-expected recovery in general manufacturing capex, and rising costs.

Key data

• F3/27 operating profit forecast¥28.0bnRaised from the previous ¥25.5bn, an increase of ¥2.5bn.
• F3/28 operating profit forecast¥30.0bnRaised from the previous ¥27.5bn; expected to grow 7% YoY, with operating margin reaching 15.4%.
• F3/27 equipment business operating profit¥28.5bn，+44% YoYMainly driven by the strong recovery in semiconductor-related demand, while end markets such as autos and machine tools also gradually recover.
• 1Q operating profit forecast¥7.0bn，+86% YoY，-2% QoQThe slight QoQ decline mainly comes from seasonal factors in the automation machinery business; the core equipment business is expected to post QoQ profit growth.
• Target price¥5,700Raised from ¥5,300, reflecting the upward earnings forecast revision; the target multiple remains unchanged.
• Valuation parametersF3/28e BPS ¥2,734 × 2.1x P/BBased on the ROE-P/B correlation and an upcycle premium.
• F3/28 base-case scenarioOP ¥30.0bn，ROE 12.7%Reflects a strong recovery in earnings from a low base.
• F3/28 bull-case scenarioOP ¥33bnAssumes semiconductor capex expands more strongly than expected, while general manufacturing capex also recovers steadily.
• F3/28 bear-case scenarioOP ¥16.5bnAssumes capex, led by semiconductors, does not recover; bear-case P/B is 0.5x, close to historical trough levels.

Impact & implications

From an investment perspective, CKD's earnings leverage mainly depends on whether the recovery in semiconductor-related capex and equipment demand can be sustained. If F3/27 1Q and subsequent quarters confirm continued improvement in orders, sales, and utilization rates, earnings forecasts may still have upside; however, since the share price has already priced in two years of earnings improvement in advance, the risk-reward profile is more balanced, so the rating remains Equal-weight.

Risks

• A slowdown in semiconductor capex could cause the recovery in equipment demand to fall short of expectations.
• A slowdown in capex in Japan and China could weigh on sales growth of pneumatic equipment and semiconductor fluid control equipment.
• Rising component, material, and fixed costs could compress margins.
• The share price has already risen and reflects expectations for earnings improvement over the next two years; if the pace of earnings delivery falls short of market expectations, valuation may come under pressure.
• Under the bear-case scenario, capex led by semiconductors does not recover, and F3/28 operating profit could fall to ¥16.5bn.

What to watch

• Whether F3/27 1Q operating profit can reach or exceed the ¥7.0bn forecast.
• Whether semiconductor-related demand in the equipment business continues to expand from F3/26 4Q to F3/27 1Q.
• The strength of the recovery in semiconductor customer spending, rechargeable battery-related capex, and general manufacturing capex.
• Sales growth in pneumatic equipment and semiconductor fluid control equipment in Japan and overseas.
• Whether automation, productivity improvements, and expansion to new U.S. customers can support margin improvement.
• Whether F3/28 operating margin can improve to 15.4% and approach or exceed past peak levels.