Japan bearing orders: Machinery weak, autos firm, channel picks up

by SR on April 11, 2012

On 11 April 2012 the Cabinet Office of Japan released machinery order data for February 2012. Our interest is focused on the bearings orders that in effect form part of this release. Total bearing orders for February were Y57.83bn (+11% month-on-month, +7.1% year-on-year).

Conclusion: A slightly better month. The key point was that bearings for use in general machinery remained weak, in a continuation of recent trends. On the other hand, overseas orders – which have had a very poor few months – firmed up and auto-related bearing orders remained solid. Interestingly, orders from the distribution channel in Japan had a surprisingly good month. This category, though small in absolute terms, represents “grass-roots” demand and as such this should be seen as a positive development.

What to do? Be wary of bearing stocks in Japan. That price-fixing cartel for bearings investigation is still under way in addition to which I remain cautious on machinery demand. In relative terms, both auto parts (e.g. Denso) and tyres (Bridgestone) are looking pretty good compared to bearings. If you had to go for one of the bearing suppliers in Japan I would opt for JTEKT, which has the highest exposure to auto parts and the lowest exposure to ‘pure’ bearing demand. Note that bearings used in construction machinery are included in these orders, so continued weakness doesn’t bode well for construction machinery suppliers.

(Related stocks: JTEKT; NSK; NTN; Minebea Nachi-Fujikoshi; SKF; Timken; Komatsu; Hitachi Construction Machinery; Sany Heavy.)

Japan bearing orders % YoY

Autos good, machinery a bit suspect

Total orders for bearings in February 2012 reached Y57.83bn, rising 11% month-on-month and 7.1% year-on-year. Let’s bear in mind that February 2011 (last year) was the last month before the earthquake hit and thus it was not affected and nor were year-on-year comparisons in February 2012.

Japan bearing orders

Taking the seasonal aspect first, orders in February typically rise by a few percent relative to January, so the 11% MoM pickup was a good performance, the best for February since 2003. Driving that was a 12.4% increase in auto bearing orders, the best showing for February since the +18.9% posted twelve years ago in February 2000. This confirms our positive outlook on auto production in March, April and May 2012, assuming a 3-month lead time for many of these auto components. The chart below puts February 2012 orders in their seasonal context by comparing the month-on-month change in auto-related orders in February 2012 to all the other months of February since 1988. (Click for larger image.)

Japan auto bearings % MoM change in orders for each month of February from 1988

Auto orders make up 40.8% of total bearing orders, so this is a significant contributor to February performance. If autos was good, what disappointed? The under-achiever was general machinery bearing orders, which rose only 3.3% MoM when a more typical value for February would be a gain of 5-10% MoM. Still, machinery is only 14% of the total, so it did not upset the apple cart. Meanwhile overseas orders (32.8% of the total) posted a month-on-month increase of 13.1%, which was a decent, above-average rise. (Click for larger image.)

Japan machinery bearings % MoM change in orders for each month of February from 1988

I suspect that robust performance by overseas orders was caused not by surging demand for machinery but swelling output of autos at companies like Toyota. There is no breakdown for the overseas portion of bearing orders, but my interpretation is that machinery eked out only small gains or even fell month-on-month in February. I’m going to reuse a chart of Toyota’s global auto production here just to underline the strength of autos: the company has a good chance of posting its highest ever output in March 2012 and February 2012 was the second-highest output on record. (Click for larger image.)

Toyota global auto production (thousand units)

BB ratio not great but steady

In this post we went into some detail as to why we watch the book-to-bill ratio for Japan bearings. Briefly, bearings are used in most machinery, so bearing orders can offer a kind of early warning on machinery demand. Specifically, when the level of orders (bookings) to sales (billings) for bearings falls below a certain level, it’s time to start getting worried. In my experience, anything below 0.94x is bad. In a more general sense, if orders consistently under-perform sales, then sales (and profits) will fall in the future. The book-to-bill ratio in February 2012 was 0.98x, unchange from the previous month. Not great, but not terrible either. (Click for larger image.)

Japan bearing book-to-bill ratio (x)

Backlog still ticking down

No surprise here, but the backlog of bearing orders fell again in February, albeit only slightly, by 0.6% MoM to Y157.6bn (-3.1% YoY). The backlog, which is by nature fairly free of noise, now looks like this (click for larger image).

Japan bearing order backlog (billion yen)

Distribution (the channel) unexpectedly strong

Well, this is a surprise. Orders from distributors typically reflect demand from customers so small that they do not have accounts with the bearings suppliers and who have to be served by trading companies and small wholesalers. Precisely because of this it is difficult to say why distribution had a good month, but it did. Orders for February came in at Y3.6bn, up 29.3% MoM and 8.4% month-on-month. Take a look at this chart, which shows just how good a month February 2012 was – easily the best since 2000.

Japan bearing orders from distribution channel

My best guess is that the strength in the auto industry has trickled all the way down to the smallest suppliers and that this is giving distributor demand a push. Also I would expect some positive impact from bearings bound for equipment and facilities being used in rebuilding efforts in northern Japan following March 2011’s earthquake.

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