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On Friday, Morgan Stanley revised its stance on Nippon Chemi-Con (6997:JP), shifting its rating from Equalweight to Underweight and reducing the price target to JPY850.00 from the previous JPY1,350.00. The adjustment follows an analysis of the company's financial projections and the potential impact of share conversions by shareholder JIS.
The financial institution projects that Nippon Chemi-Con will achieve an operating profit (OP) of JPY6.0 billion for the fiscal year ending in March 2025 (F3/25). It was noted that if the company's operating profit does not reach JPY8.8 billion, JIS, which holds JPY10 billion of Class A shares and JPY5 billion of Class B shares, has the right to convert these to common shares at a premium before March 31, 2026.
In Morgan Stanley's base scenario, it is assumed that JIS will convert its Class A and Class B shares into common shares at a rate of JPY955 per share. Additionally, JIS would receive a further 6% of the converted Class A shares and 25.5% of Class B shares. This potential dilution of equity is a factor in the revised outlook.
Furthermore, the report anticipates that Ibiden, another firm within the sector, will see its operating profit decline for the second consecutive year in F3/25. The forecast also suggests only limited growth in the following fiscal year (F3/26) due to increased depreciation expenses associated with the commencement of mass production at the Ono Plant among other factors.
Morgan Stanley expects that the company's mid-term outlook for F3/26, which is to be presented at the F3/25 second quarter results briefing, will be revised downwards. This anticipated revision is likely to lead to a reduction in the market consensus regarding the company's financial performance.
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