MW is Short Nidec Corp. (6594:JP)
Muddy Waters Capital LLC (“Muddy Waters”) is short Nidec, and we value its shares at JPY 4,764. We view Nidec as a gigantic stock promotion. The company’s management, led by Mr. Shigenobu Nagamori, repeatedly give uber-bullish predictions about Nidec’s business, and then massively misses them. Nidec missed a three-year forward sales projection by 29%. The company missed its 2015 sales target of JPY 2,000 billion by 41%, and now tells investors that number is its 2020 target. Nidec missed a two-year projected overall operating profit target by 27%. Nidec’s track record with short, medium, and long-term projections in its Automotive product group seems even worse.
On top of the arbitrariness of Nidec’s projections, we calculate the company showed effectively no organic growth over the past four years, despite having projected its organic growth CAGR during this time would be 11.4%. Instead, we calculate that Nidec’s actual organic growth (ex-currency effects and M&A) CAGR from FY 2011 through FY 2015 was only 0.05%. The quality of Nidec’s earnings growth seems poor. We estimate that effective tax rate reductions have boosted Nidec’s reported EPS by 11.4% since FY 2013. Given Nidec’s meager top line organic growth, it is probably fair to say that the vast majority of the remainder of Nidec’s reported EPS growth has been due to currency effects and M&A.
Analysts and investors appear to have gone blind from staring at The Man Hotter Than the Sun. (This is a reference to Mr. Nagamori’s self-published comic book about himself.) Sell-side analysts heap praise on the company, and write about their expectations for future organic growth as though Nidec were a completely different company. At the same time, they remain oblivious to the incessantly missed predictions. As a result, Nidec’s sky high valuation implies a valuation for its non-HDD businesses close to that of Facebook, Inc., which is one of the strongest consumer brands in the world, generates 35%+ organic growth, and generally converts a much higher percentage of its operating cash flow to free cash flow than Nidec does.
Nidec’s failures to meet targets are made even worse by the highly aggressive accounting the company employs to boost reported profitability, and make the trend in its automotive business look more favorable than it really is. Nidec’s JPY 36 billion in write-offs seem unjustified, and could have been improper. According to the company, the write-offs boosted reported profit by JPY 10 billion to JPY 15 billion per year. Nidec has transferred businesses into the Automotive group in ways that misleadingly flatter the Automotive group’s results. Furthermore, we have interviewed four former employees who have attested to Nidec Automotive group salespeople in China stuffing the channels (thereby improperly boosting reported sales). Nidec’s auditor probably offers little safeguard against misleading accounts – in our opinion, Nidec’s auditor is to audit failures what Michael Jordan was to basketball.
Part of the myth underpinning Nidec’s valuation is a notion that it is a superior acquirer of businesses. We think Nidec’s acquisition strategy is more effective at masking weak organic growth than at creating value, and we see the extent to which it generates synergies as greatly overestimated. While Mr. Nagamori speaks publicly about buying companies such as Renesas Electronics Corp. (6723 JP) and Calsonic Kansei Corp. (7248 JP), he makes some highly questionable purchases, such as a recent acquisition of a small Romanian company from a convicted felon. Former employees of some of Nidec’s acquisition targets question the thoroughness of Nidec’s due diligence, and the notion that there were synergies with Nidec’s existing businesses. At the time Nidec announced it was acquiring Ansaldo Sistemi Industriali S.p.A., Mr. Nagamori brushed aside the rare analyst question about whether Nidec would be able to achieve its goal of generating a 10% operating profit margin in the business. The most recent financials we have for that entity show that its OP margin halved since around the time of acquisition to 2.8%. Nidec’s reasons for acquiring minority stakes in six formerly listed subsidiaries are unclear, but we note that Mr. Nagamori received JPY 29.5 billion in Nidec shares (at today’s share price) for his ownership of these companies.
Nidec in our view unduly promotes business opportunities with sex appeal, such as haptics (which led to a write-off), robots, drones, and LIDAR. These exciting products account for a tiny sliver of Nidec’s overall business, and in our view, have received an inordinately large amount of attention from investors. Nidec’s margin on sales of drone motors to Amazon.com (AMZN US) is likely to be significantly compressed once any scale is achieved.
We have real corporate governance concerns about Nidec. There are indications that management is able to override internal controls. Mr. Nagamori’s receipt of Nidec shares worth today approximately JPY 29.5 billion for his stakes in subsidiaries raises questions, as does the JPY 14.5 billion loan he received from the company, which was repaid a few months later by mostly selling his Nidec shares to the company. It is disconcerting that Nidec was unable to hold onto Bunsei Kure, while the company’s Chief Technology Officer, Mikio Katayama, was instrumental in running Sharp into the ground.
We value Nidec’s shares at less than half of the price – JPY 4,764. At the current price, the implied valuation ascribed to its non-HDD businesses is approximately 21.5x EV / EBITDA. (Facebook trades at 24.9x.) Given Nidec’s anemic organic growth, the seeming commoditization of many of its products, and the capital intensity of manufacturing, we can see no reason to justify a share price anywhere close to Nidec’s current valuation. Unfortunately, Nidec’s transparency has been decreasing over the years, and is poised to take a large step backward as the company plans to no longer file financial statements in the U.S. Unless Nidec resolves the U.S. filing and other transparency issues, we believe investors should exercise extreme caution when considering purchasing Nidec’s shares.
To download the full report (file size: 5 MB), click the “Download Report” button and agree to the Terms of Service to download the report.
Use of Muddy Waters Research reports is limited by the Terms of Use on its website, which are as follows. These Terms of Use govern current reports published by Muddy Waters Research and supersede any prior Terms of Use for older reports of Muddy Waters Research, which you may download from the Muddy Waters Research’s website.
Terms of Use
The reports on this website have been prepared by Muddy Waters, LLC (“Muddy Waters Research” or “we” or “us”). Muddy Waters Research is under common control and affiliated with Muddy Waters Capital LLC (“Muddy Waters Capital”). Muddy Waters Research is an online research publication that produces due diligence-based reports on publicly traded securities, and Muddy Waters Capital LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. The reports on this website are the property of Muddy Waters Research. Muddy Waters Research and Muddy Waters Capital, collectively their respective affiliates and related parties, including, but not limited to any principals, officers, directors, employees, members, clients, investors, consultants and agents, are referred herein to as “Muddy Waters”.
As of the time and date of each report, Muddy Waters (defined below) is short the securities of, or derivatives linked to, the securities of the subject issuer (each, a “Covered Issuer”), unless otherwise stated in the report. Upon the publication of each report, we intend to begin covering a substantial majority of our short positions. Our risk reduction is not a reflection of a lack of conviction in our opinions or the facts presented; rather, it has to do with managing risk in a manner that is prudent for a fiduciary of our investors’ money.
Muddy Waters will continue transacting in the securities of Covered Issuer for an indefinite period after a report on a Covered Issuer, and we may be net short, net long or flat positions in the Covered Issuer’s securities after the initial publication of a report, regardless of our initial position and views herein.
We are a “for profit” journalistic organization with a non-traditional revenue model – rather than accepting advertising money or subscriptions, we finance our journalism through taking positions in the securities of companies on which we report. This revenue model enables us to report in great depth on a limited number of investigations, and also entails our taking significant financial risk on behalf of ourselves and our clients. In order to manage risk, we must close open positions as we deem prudent. We do not provide “price targets”, although we may express our opinion of what the security is worth. An opinion of the value of a security differs from a price target in that we do not purport to have any insight as to how the market as a whole might value a security – we can only speak for how we, ourselves, view its value. We therefore do not hold a position until it reaches a certain price target, nor do we hold positions until they reach the price at which we have expressed a valuation opinion. There are numerous factors that enter into investment decisions aside from opinions of the value of the security, including without limitation, the borrow cost of a shorted security, the potential for a “short squeeze”, prudent risk sizing relative to capital and volatility, reduced information asymmetry, the opportunity cost of capital, client expectations, the ability to hedge market risk, our perception of the efficacy of market regulators and gatekeepers, our perception of the resource imbalance between us and Covered Issuers, and our moods and gut feelings. Therefore, you should assume that upon publication of a report, we will, or have begun to, close a substantial portion – possibly the entirety – of our positions in the Covered Issuer’s securities.
We are not providing you with a recommendation to buy or sell securities of a Covered Issuer. We are articulating our reasons at the time of publication we have positions in the securities of a Covered Issuer.
We have no duty or obligation to update reports on this website or update you on the size or direction of any position we hold in a Covered Issuer. We do not provide investment advice to any person, unless our affiliate has entered into an investment adviser-client relationship with that person in writing.
All information and opinions set forth herein are for informational purposes only. Under no circumstances should any information or opinions herein be construed as investment advice, as an offer to sell, or the solicitation of an offer to buy any securities or other financial instruments.
The reports on this website are opinion journalism. We are providing our journalistic opinions about issues of concern to the general public. The opinions, information, and reports set forth herein are solely attributable to Muddy Waters Research. Before making any investment decision, you should do your own research and due diligence before making any investment decision with respect to securities of or derivatives linked to the Covered Issuer.
The reports on this website represent the views of Muddy Waters Research only and is based on publicly available information. To the best of our knowledge, all information contained herein is accurate and reliable and has been obtained from publicly available sources that we believe to be accurate and reliable. The information presented herein is “as is,” without warranty of any kind, whether express or implied. The reports on this website contain a large measure of analysis and opinion. All expressions of opinion are subject to change without notice.
If you are in the United Kingdom, you confirm that you are accessing research and materials as or on behalf of: (a) an investment professional falling within Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “FPO”); or (b) high net worth entity falling within Article 49 of the FPO (each a “Permitted Recipient”). In relation to the United Kingdom, the research and materials on this website are being issued only to, and are directed only at, persons who are Permitted Recipients and, without prejudice to any other restrictions or warnings set out in these Terms of Use, persons who are not Permitted Recipients must not act or rely on the information contained in any of the research or materials on this website.
By downloading from, or viewing material on this website, you agree to the following Terms of Use:
-You agree that your use of the research on this website is at your own risk.
-Muddy Waters shall not be liable for any claims, losses, costs, or damages of any kind, including direct, indirect, punitive, exemplary, incidental, special or consequential damages, arising out of or in any way connected with the reports on this website. This limitation of liability applies regardless of any negligence or gross negligence of Muddy Waters. You accept all risks in relying on the information and opinions in a report on this website.
-You agree that any dispute between you and Muddy Waters arising from or related to this presentation shall be governed by the laws of the State of Texas, without regard to any conflict of law provisions. You knowingly and independently agree to submit to the personal and exclusive jurisdiction of the state and federal courts located in Austin, Texas and waive your right to any other jurisdiction or applicable law, given that Muddy Waters are based in Austin, Texas.
-The failure of Muddy Waters to exercise or enforce any right or provision herein shall not constitute a waiver of such right or provision. If any provision of these terms of use is found by a court of competent jurisdiction to be invalid, the parties nevertheless agree that the court should endeavor to give effect to the parties’ intentions as reflected in the other provisions set forth herein, in particular as to this governing law and jurisdiction provision.
-You agree and understand that, by the time you read a report on this website, we may be covering or have already covered (i.e., bought back) our short position, and we are unlikely to increase our short positions unless it is in our financial interest to do so. You should not make any investment decision based your interpreted view of our positioning in the Covered Issuer’s securities.
-You further agree that you will not communicate the contents of reports and other materials on this site to any other person unless that person has agreed to be bound by these Terms of Use. If you access this website, download or receive the contents of reports or other materials on this website on your own behalf, you agree to and shall be bound by these Terms of Use. If you access this website, download or receive the contents of reports or other materials on this website as an agent for any other person, you are binding your principal to these same Terms of Use.
-You agree that the information on this website is copyrighted, and you therefore agree not to distribute this information (whether the downloaded file, copies / images / reproductions, or the link to these files) in any manner other than by providing the following link: https://www.muddywatersresearch.com/research/. If you have obtained research published by Muddy Waters in any manner other than by download from that link, you may not use that research without agreeing to the Terms of Use.
-If any provision of these Terms of Use is found by a court of competent jurisdiction to be invalid, the parties nevertheless agree that the court should endeavor to give effect to the parties’ intentions as reflected in the other provisions set forth herein, in particular as to this governing law and jurisdiction provision. You agree that regardless of any statute or law to the contrary, any claim or cause of action arising out of or related to this presentation must be filed within one (1) year after the occurrence of the alleged harm that gave rise to such claim or cause of action, or such claim or cause of action be forever barred.