[Overseas Stocks Spotlight] "SMC, Expected Increase in Factory Automation Equipment Demand Following Manufacturing Recovery"

[Asia Economy Reporter Eunmo Koo] An analysis suggests that SMC, a Japanese manufacturer of factory automation equipment, could benefit from increased demand for factory automation devices driven by the recovery of the manufacturing industry.

On the 26th, KB Securities researcher Asim Hussein stated in a report, "We expect benefits from the recovery of manufacturing in Asia, which accounts for a large portion of SMC's operating profit." He also forecasted, "There is anticipated reflexive gain due to U.S. export restrictions on Chinese companies, and the spread of factory automation accelerated by the COVID-19 pandemic will also provide benefits."

The recovery of Asian manufacturing is expected to drive growth in operating profit. Researcher Hussein explained, "If Asian manufacturing, which accounts for 90% of SMC's operating profit, recovers, capital goods orders will increase, leading to expected growth in operating profit," adding, "Industrial production in key Asian manufacturing countries including China and Japan is rebounding, and the manufacturing PMI index is recovering faster than the services PMI index."

Demand for SMC's capital goods from Chinese companies is also expected to increase. Hussein noted, "Due to U.S. trade sanctions, American companies cannot export components containing U.S. technology to Chinese companies like Huawei," and predicted, "As China is focusing on developing the electric vehicle and telecommunications industries, capital goods demand is rising, so Chinese companies' capital goods demand will shift to SMC." Chinese companies account for 18% of SMC's sales.

The acceleration of factory automation due to COVID-19 is also positive for SMC. Hussein said, "According to Fortune Business Insights in the U.S., the factory automation market is expanding at an annual rate of 8.4% and is expected to reach $296.7 billion by 2026," adding, "In preparation for the possibility of COVID-19 infections, companies will further increase investments in automation equipment."

However, risks include a downturn in Asia-centered manufacturing due to a resurgence of COVID-19, price declines from intensified market competition, and the possibility that U.S. government pressure could restrict exports of capital goods from Japanese companies to China following semiconductor product restrictions.