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China's slowdown not so bad, Yaskawa's profits show

TOKYO -- Yaskawa Electric's stellar earnings despite its significant operations in China appear to hint that across-the-board pessimism about that market is unwarranted.

     The Japanese industrial technology manufacturer has not only logged record profits and sales for the April-September half, but also propped up predictions for the current half despite fears of a slowing Chinese economy.

Yaskawa industrial robots sold well.

     Since late June, even tenuous ties to China have sent Japanese stocks sliding without regard for strong corporate earnings. Yaskawa, which draws 23% of its sales from the country, was among those hit hard. Investors roundly expected Yaskawa to downgrade earnings estimates for the year ending March 2016 in its interim statement released Oct. 20. Yet profit at all levels hit records for the first half and looked strong for the second, revealing unexpected strengths in a supposedly bleak Chinese economy.

     Production robots used in factory automation and other fields, alongside servomotors and other motion control devices, form the core of Yaskawa's operations. Sales by those businesses tend to swing with changes in companies' capital investment, leading many investors to fear that China's deceleration would force Yaskawa to downgrade its second-half earnings predictions.

More boom than gloom

So the actual numbers came as a welcome surprise. First-half operating profit grew 27% on the year to 18.9 billion yen ($154 million). Though fiscal 2015 sales predictions took a hit, full-year profit forecasts were left intact in defiance of grim market expectations. Yaskawa shares surged 12% at one point Wednesday, the day after the earnings announcement, to a two-month high. They climbed through Friday, gaining a total of 16% and outstripping the Nikkei Stock Average's 3% rise over the three days.

     Yaskawa fared well for a number of reasons. Strong new-car demand lifted sales of industrial robots to U.S. automakers. American machine tool companies, chipmakers and others bought more servos, boosting sales of highly profitable new products. The weak yen also made exports more profitable, propping up revenue.

     But the U.S. is not solely responsible for Yaskawa's success abroad. Sales were also brisk to China, its largest overseas market. Yaskawa's robots were in high demand, with orders growing from logistics and other businesses. Automation technology sold well to automakers as usual. But orders of robot technology to general industry were the clear leader in growth.

     "Though people say China's doing poorly, it's really infrastructure-related demand -- orders for steel, cement, cranes -- that's flagging," said Noboru Usami, senior executive vice president. "Other sectors are going strong."

Better times ahead

Yaskawa sees sales growing 5% to 420 billion yen for fiscal 2015, down 15 billion yen from initial forecasts -- sales of inverters for infrastructure projects are expected to slip. But all profit forecasts have been left untouched, with operating profit growing 16% to 36.5 billion yen. The company expects to make up for lower sales by pushing new products and raising manufacturing efficiency, among other tactics.

     Yaskawa's leaner revenue structure is certainly a factor. But the company's success is partly because negative effects from China's economy are simply not as strong as commonly assumed. In fact, "given the current climate of brisk sales and orders, the company should be able to streamline operations to further raise profits," said Masayasu Noguchi of Nomura Securities.

     As October winds down, a number of companies tied to China in the electronics, machinery, auto and other manufacturing industries will announce interim earnings. Investors should still look out for shifts in earnings by infrastructure companies. But if Yaskawa's performance is any indicator, fears that China could send Japanese corporate earnings crumbling may be dissipating.

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