Weak China demand short-circuits rally in Japan robot stocks

By Ayai Tomisawa

TOKYO (Reuters) - Shares of Japanese industrial equipment makers have slumped sharply this year, defying a rally in the country's benchmark indexes, as investors grow increasingly worried about slowing demand in China as the U.S. piles on more tariffs.

The Nikkei share average is at 27-year highs and up 6 percent this year ,while the broader Japanese Topix index is trading at eight-month highs.

But shares of Fanuc Corp, a manufacturer of industrial robots counts on China for a big chunk of its sales, have plunged 20 percent so far this year, after gaining 37 percent in 2017.

Equipment makers Yaskawa Electric Corp and Nabtesco Corp are both down 28 percent so far in 2018.

"These companies' clients, especially those in China, have become cautious and reduced orders since June," said Sho Fukuhara, the senior vice president at Jefferies Japan.

Fukuhara said these manufacturers will likely remain hesitant about investment as the Sino-U.S. trade dispute drags on.

Demand for factory automation equipment grew sharply in China in 2017, helping Japanese machinery suppliers post strong earnings. But faltering demand this year is likely to hurt their profits.

U.S. President Donald Trump's administration slapped tariffs on $200 billion worth of Chinese goods last month and is threatening to impose duties on virtually all of the goods China exports to the United States. Beijing has retaliated with tariffs of its own on American imports.

According to Nomura Securities, orders from the general machinery sector in China in August dropped 16 percent from a year earlier to 5.1 billion yen in August, after a 14 percent drop in July.

Hit by weaker smartphone investment, orders from Chinese electronics and precision machinery makers fell 79 percent in August to 3.0 billion yen, after a 30 percent falloff in July, Nomura said.

"Smartphone investment was strong in 2017, so companies suffered from a drop in demand for the first half of this year in the electronics and precision machinery sector," said You Zhou, an analyst at Nomura Securities.

"For the second half of the year, we are seeing that companies are becoming cautious in investment in the general machinery sector due to U.S.-China tariff war."

But machinery stocks are still expensive. Fanuc, Yaskawa and Nabtesco are trading at price-earnings (PE) ratios of 24.84, 18.07 and 15.55, respectively, compared with the Topix's 14.

"I am heavily shorting these stocks," said Makoto Kikuchi, chief executive of Myojo Asset Management.

Share prices of these firms have roughly given up half of their rapid gains made between mid-2016 and early 2018, analysts said.

"Once more traders become aware that their orders and earnings actually start showing a slowdown in the next few months, the share prices will likely fall further."

($1 = 113.8700 yen)

(Editing by Vidya Ranganathan and Kim Coghill)