Description

Hiwin Technologies was founded in 1989 in Taiwan and is a leading manufacturer of linear  motion control products (guideway, ball screw and industrial robotics). The company’s main production base is in Taiwan while it also has some back-end production lines in Kunshan, China. It is the world’s second largest linear motion control products in the world after THK from Japan.

Linear motion products

Linear motion (including linear guideway and ball screw) products are mainly used for processes which require linear movement and hence are widely adopted for applications such as automotive production lines, electronics (loading, logistics, inspection, welding, etc), machine tools and robotics.

Hiwin's primary revenue contribution comes from the tech sector, accounting for 40% of their revenue. The remaining revenue is mainly derived from the automobile, machine tools, and general manufacturing sectors, each contributing approximately 20%. In terms of geographical distribution, 50% of Hiwin's sales come from China, 27% from Europe, and the remainder is from the American and other Asia markets.

Linear guide (left) and ball screw (right)

Source: Company data

Demand is cyclical

Linear motion products are typically utilized in machinery applications, and therefore, their end demand is highly dependent on the capital expenditure of various industries, including electronics and automobiles, resulting in a cyclical pattern. Hiwin's operational profit has demonstrated a significant correlation with the Japan Machine Tool Orders from JMTBA, which serves as a representative indicator of global machinery demand.

Hiwin operating profit yoy and Japan Machine Tool Orders yoy

Source: Goldman Sachs and JMTBA

China to lead demand recovery

China’s manufacturing activities have been recovering in 2023 after the Covid lock down in the past two years. The manufacturing PMI has rebounded, albeit in a bumpy way, indicating a gradual increase in business activity. Additionally, corporates have demonstrated a robust demand for medium and long-term loans, which are often utilized for investment purposes.

When compared to other companies in the automation industry, Hiwin has a substantial presence in China. As a result, the company may also benefit earlier from any potential market upturns.

Revenue from China%

Source: Bloomberg

Airtac is a leading indicator

Airtac International is a producer of pneumatic components that are utilized in production lines, with 93% of its revenue derived from China. As pneumatic components have an order lead time of only days due to their low value, Airtac is highly sensitive to end demand. In comparison, linear motion products have a longer order lead time of 2-3 months. Therefore, Airtac can serve as a leading indicator for Hiwin. Historically, Airtac's revenue growth has preceded Hiwin's by 2-3 quarters since factories typically upgrade their current production lines before ordering new machinery. As Airtac has experienced a robust revenue rebound since 2023, it suggests that Hiwin's growth may recover in the second half of 2023.

Electronics CAPEX may recover

Approximately 40-50% of Hiwin's revenue is derived from the electronics sector, including semiconductors. Hiwin typically benefits when there is a significant upgrade in iPhone specifications, which then leads to an increase in Apple supply chain’s CAPEX. After the strong work-from-home demand over the previous two years, the overall IT industry sales and inventory have reached a high level, resulting in decreasing demand in 2022. It is anticipated that IT players will resume CAPEX in 2024 after a two-year period of adjustment. Additionally, the semiconductor CAPEX down cycle may also reach its bottom in 2023.

Machine tool cycle to bottom in 3Q23

Hiwin's product demand has been on a decline trend since the third quarter of 2022, which is in line with the trend of machine tool orders. Typically, a machine tool down-cycle lasts between 16-25 months. However, due to China's demand recovery and de-carbonization investment in Europe and the US, the current down-cycle is expected to bottom out earlier, likely in the third quarter of 2023.

Machine tool down-cycles

Source: Goldman Sachs

Auto OEM CAPEX keeps increasing

As the auto semiconductor shortage recedes, global passenger vehicle production is anticipated to increase in 2023 and 2024. Furthermore, with higher electric vehicle (EV) penetration, more new models are expected to be launched. Both will drive global auto OEMs CAPEX.

Long term demand to be support by labor shortage and capacity relocation

The long-term demand for motion control products, such as those manufactured by Hiwin, is expected to be supported by two factors. Firstly, both the US and China are facing more severe labor shortages, and this gap between labor supply and demand may continue to widen in the future. This labor shortage could drive an increased adoption of automation infrastructure to meet production needs. This, in turn, is likely to drive up the demand for linear motion control components.

Secondly, the demand for factory automation, including linear motion components, is expected to be supported by the increasing industrialization in Southeast Asia, the US, and Europe. Many manufacturing facilities have moved away from China due to geopolitical tensions and rising labor costs, creating opportunities for automation in other regions. As more companies seek to automate their production processes in these regions, the demand for motion control products is likely to increase.

Valuation:

As Hiwin may not enter an up-cycle until later in 2023, its PB-ROE valuation for 2024 is still at a relatively lower level, especially when compared to early cycle names like Airtac. From a PE perspective, although the stock price has rebounded, there should be more upside potential as its valuation is correlated to revenue growth pace. With the recovering fundamentals, Hiwin may be revalued further to around 3X PB or 25X PE, indicating a potential 40-50% upside from here.

Hiwin 2024 PB-ROE

Hiwin Revenue yoy% and 2024 PE X

Catalyst

China PMI improvement, albeit bumpy, continues toward 2H23 as comp gets increasingly easier due to last year's base effect due to Covid.