Precision Tsugami China (1651 HK)

9M FY3/22E Results/Profit Alert – Solid Performance in-line with HTI 

Expectations, Unchanged Guidance Looks Conservative  

What's happened/new

Parent company Tsugami Corporation (6101 JP) released Q3 FY3/22 results and Precision Tsugami China (1651 HK) released a positive profit alert on noon of Jan. 28 th .  Tsugami  Corporation  delivered  a  167%  attr.  NI  increase  for  9M  FY3/22  to  JPY7.7bn,  83%/91%  of  our  full  year estimates and the company’s unchanged guidance.  Precision Tsugami China guided for attr. net profit to reach RMB533mn (+115% YoY) in 9M FY3/22, 73% of our full year forecast, in-line with our expectations. 

We maintain OUTPERFORM rating on both names and our TP are unchanged. We apply 11x FY3/23E forward P/E on Tsugami Corporation to arrive at JPY2,000 (54% upside) and 8x FY3/23E P/E on Precision Tsugami China to arrive at HKD19 (87% upside). We believe the company’s high-end product positioning in China provides longer-term resilience and benefits from broader manufacturing upgrade trend within the overall machine tool cycle.

Tsugami Corporation 9M FY3/22 NI up by 167%, and reaches 83% of our full year forecast

For Apr-Dec 2021, revenue increased by 70% YoY to JPY72.3bn and gross margins expanded over +4ppt to 31.4%, while opex also  improved by 3ppt,  leading to 167% increase in attr. NI  to reach PY7.7bn. For Q3, sales increased  44% YoY, though declined -8% QoQ. Gross margin and net margin both declined by 1.6ppt QoQ partly due to lower scale effects. The company has not revised up its full year guidance of JPY90bn revenue and JPY8.5bn attr. net earnings, which looks conservative as 

they typically do not update guidance in Q1/Q3. We maintain our current estimates and wait for management to provide more clarity on near-term trends in discussions post-results.  

Q3 China rev maintained at high levels, though slowed to 44% on high base 

By manufacturing area, China makes up 72%/88% of total revenue/OP for 9M FY3/22 and has maintained a high level, but slowed  off  a  high  base.  In Q3, revenue from  products manufactured in China increased by 44% YoY,  though decreased sequentially 11% QoQ. Operating margin remained resilient at 25.1% vs 25.7% in Q2. By region, other Asia areas (ex-Japan) 

that contribute 14% sales kept up strong growth of 43%, suggesting solid broader economy recovery trend in Q3

PTC 9M FY3/22E profit alert reaches 73% of our full year forecast, in line with expectation. 

For Tsugami China, the 9M attr. profit of RMB533mn accounts for 73% of our FY3/22E full year forecast, and is hence in-line with our expectations. This suggests a 56% NI increase YoY in Q3 FY3/22, vs 155% in 1H FY3/22. We believe given its high order backlog, shipments may be able to sustain at high levels in Q4. We estimate Q4 net earnings to further improve 35% YoY given stable margins with a similar operating leverage and minimal raw material impact (CNC, linear guides and bearings take up the majority costs and have seen stable pricing recently). headwinds. We still see PTC shares trading at an attractive valuation with a high dividend yield of 6-7% and maintain an OUTPERFORM rating. 

Risks: Further slowdown in autos end-markets, more severe power outage in China, shortage of key CNC components