Japan Research Pack

We raise our FY17 EPS forecast (12-month adjusted basis, excluding goodwillamortization) and target price for THK by 15%, and reiterate our Buy rating. We think itremains highly attractive as a cyclical stock. First, the cyclical recovery in profits islikely to continue. Second, the stock’s valuation remains low in P/E and P/B termsrelative to previous recovery phases. Linear motion products, which we expect toaccount for 90% of overall operating profits in FY17 (12-month adjusted basis), arelikely to benefit from the recovery in global machinery demand. We think that FY17operating profits will exceed the pre-financial crisis peak in 07/3. We also expect theoperating margin on linear motion products to rise to 15% in FY17. While this is not ashigh as 30% at SMC [6273] and Fanuc [6954], it is nevertheless relatively high for amanufacturer of machinery parts.