Equity ResearchFANUC Corporation TSE 6954Current Price 19,810 JPY

Junaid Farooq– Research+ (61) 405 154 351junaidfrq@hotmail.com

1 Price History Fundamental Appraisal October 2014

Stock Statistics:Current Price: 19,810 JPY52-Week High/Low ¥20,590 / ¥16,105Percent Off High: 4.54% Avg Volume/ Month: 868,923

Market Cap (billions) ¥4799.75EPS 2014: 567 JPYEPS 2015E: 718 JPYDividend Yield: 1.47%X-Dividend Date: 9/26/14

Company BETA: 1.01 Industry BETA: 1.00 Sector BETA: 0.92 ALPHA: 0.6645 ROE: 11.47%

2 Macro drivers

• Industry size of US$180bn. Factory & process automation represent ~ 56% (US$ 100bn) & 44% (US$80bn) of total industry respectively

• The industry has seen an average compounded annual growth rate of 8% (2007-2013). Projected industry growth of around 7.5% through 2014-2016.

• Global automation index increased considerably and leading as compared to MSCI world index• Sharp increase in robot demand post GFC• Motion control AC servomotors and drives represent ~US$18bn (19%) market with a YTD growth rate of 8%• Computer numerical control (CNC), sold with motion control represent 8% of the factory automation market. Sales about

US$10bn per annum with a YTD growth rate of 5%

Projected revenue growth of the robotics market

• Labour shortage a good indicator for investment opportunity in Automation industry• US manufacturing’s competitiveness improved due to weaker dollar, labour cost containment and automation• FANUC represent 50% market share in US.• Weaker Yen attracting domestic CAPEX. Bold tax cuts and lease support to small and medium sized businesses from Japanese PM Shinzo Abe• Demand in Europe is stabilizing but recovery is still illusive

3 Micro drivers

Macro drivers October 2014

HighlightFANUC announced upward revision to 15/3 guidance on 25 September increasing H1 sales to ¥345.5bn (from ¥302.4bn) and OP increased by 13.6% to ¥137.5bn (¥121bn).Full year sales projection also increased by 29.4% from ¥531.8bn to ¥688.2bn and OP by ¥63.8bn which equates to 41% of sales increase. Guidance was sharply increased due to the demand from IT related industries i.e. Robodrills using metal casings for smartphones and due to strong demand from Chinese phone manufacturers.

FA Division• Weak demand for CNC systems , servo motors and laser oscillators in domestic and overseas market. • FA market continue to recover in Japan with investments in Plant & Equipment supplied by a stable foreign exchange market with a low Yen.• However, FA division represent 40%+ portion in sales to the company’s total revenue.• CNC system “FANUC series 30i/31i32i/35i-Model B” was enhanced to support 5 axis machining for speed and high precision. Power saving upgrade to laser

oscillators and aforementioned enhancement can be a catalyst for future sale growth.• Strong sales expected in FA segment in H2 over H1 by a small margin (1-2%).

Robot Division• Strong business in North America and domestic markets within automobile industry. Increasing demand in Europe and Asia.• Robot division represent 20%-30% of total sales.• Learning robots are upgraded to achieve higher speeds and enabling to increase production capacity.• New product introduced “multi purpose mini robot LR Mate 200iD” with significantly improved motion performance.

Micro drivers October 2014

Robomachine Division• Robodrill expanding market in automotive and smartphone industry. Potential sale increase in future for robodrill in H2.• Roboshot product line new developments allow high quality moulding using high precision and speed injection specifications targeting IT devices. Primary reason for

increased guidance.• Robocut expansion in market with focus on medical equipment in America. New development include high precision cutting control.

4 Risks & Assumptions

Risks• Political risk in China if the Government does not support automation • Robomachine division derives an estimated 35% of its revenue from the automotive industry. The Automotive industry capex cycle is volatile and directly effects the

company’s revenue• Exposure in China, accounts for 30% of direct revenue• Adverse FX movement

Assumptions• 20% Y-Y FY3/15 sales growth• USD to Yen exchange rate of ¥109.67/$1

Year/Year change in Sales

5 Historical Valuation Perspective October 2014

VALUE: Fanuc corporation is currently undervalued.

• Primary valuation ratio, Price to book ratio shows a strong correlation with the share price• Secondary valuation ratio, Price to earnings ratio also shows a strong correlation with the share price with the exception in FY2010 where there was a YoY increase of 76.1% net sales with a operating profit change of YoY 244.9% and full year dividends per share at ¥184 as compared to ¥56 in 2009• Comparison between ROE and Price/Book ratio indicates that ROE will bounce back to around 14% in FY15

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ROE LHSPrice/Book Ratio RHS

710%Thematic drivers & Fundamental Health

62%Competitive Environment45%Size/Neglect/Asset Value810%Growth63%Value

Investment Theme Barometers710%Earnings Estimate Surprise Std

Dev’n

935%Earnings Cycle/Profitability825%Macro Catalysts

Fundamental Drivers 100% 78%

Confidence in decision process

Weight Score Points

78%Confidence Level

$18,200Stop Level

12Time Frame (months)

¥21,000Target

¥19,810Entry Point

Trade Parameters

The fundamental drivers scored well at 78% out of a possible 100%. The main catalyst to FANUC corporation is the combination of macro factors along with earnings cycle and demand from IT sector which will boost sales from Robomachine division.

Summation of confidence in decision process

6 Predictability & Confidence Gauge October 2014

SELL NEUTRAL BUY

Fundamental Catalysts scored 78%confidence in decision…out of 100%.

RESEARCH EVALUATION RISK RANKING: Medium

The more the red the less the

predictability

20%31.5%

7%

1.8%8%2%

1.2%7%