Report on

MW is Short Nidec Corp. (6594:JP)

Muddy Waters Capital LLC (“Muddy Waters”) is short Nidec, and we value its shares at JPY 4,764. We view Nidec as a gigantic stock promotion. The company’s management, led by Mr. Shigenobu Nagamori, repeatedly give uber-bullish predictions about Nidec’s business, and then massively misses them. Nidec missed a three-year forward sales projection by 29%. The company missed its 2015 sales target of JPY 2,000 billion by 41%, and now tells investors that number is its 2020 target. Nidec missed a two-year projected overall operating profit target by 27%. Nidec’s track record with short, medium, and long-term projections in its Automotive product group seems even worse.

On top of the arbitrariness of Nidec’s projections, we calculate the company showed effectively no organic growth over the past four years, despite having projected its organic growth CAGR during this time would be 11.4%. Instead, we calculate that Nidec’s actual organic growth (ex-currency effects and M&A) CAGR from FY 2011 through FY 2015 was only 0.05%. The quality of Nidec’s earnings growth seems poor. We estimate that effective tax rate reductions have boosted Nidec’s reported EPS by 11.4% since FY 2013. Given Nidec’s meager top line organic growth, it is probably fair to say that the vast majority of the remainder of Nidec’s reported EPS growth has been due to currency effects and M&A.

Analysts and investors appear to have gone blind from staring at The Man Hotter Than the Sun. (This is a reference to Mr. Nagamori’s self-published comic book about himself.) Sell-side analysts heap praise on the company, and write about their expectations for future organic growth as though Nidec were a completely different company. At the same time, they remain oblivious to the incessantly missed predictions. As a result, Nidec’s sky high valuation implies a valuation for its non-HDD businesses close to that of Facebook, Inc., which is one of the strongest consumer brands in the world, generates 35%+ organic growth, and generally converts a much higher percentage of its operating cash flow to free cash flow than Nidec does.

Nidec’s failures to meet targets are made even worse by the highly aggressive accounting the company employs to boost reported profitability, and make the trend in its automotive business look more favorable than it really is. Nidec’s JPY 36 billion in write-offs seem unjustified, and could have been improper. According to the company, the write-offs boosted reported profit by JPY 10 billion to JPY 15 billion per year. Nidec has transferred businesses into the Automotive group in ways that misleadingly flatter the Automotive group’s results. Furthermore, we have interviewed four former employees who have attested to Nidec Automotive group salespeople in China stuffing the channels (thereby improperly boosting reported sales). Nidec’s auditor probably offers little safeguard against misleading accounts – in our opinion, Nidec’s auditor is to audit failures what Michael Jordan was to basketball.

Part of the myth underpinning Nidec’s valuation is a notion that it is a superior acquirer of businesses. We think Nidec’s acquisition strategy is more effective at masking weak organic growth than at creating value, and we see the extent to which it generates synergies as greatly overestimated. While Mr. Nagamori speaks publicly about buying companies such as Renesas Electronics Corp. (6723 JP) and Calsonic Kansei Corp. (7248 JP), he makes some highly questionable purchases, such as a recent acquisition of a small Romanian company from a convicted felon. Former employees of some of Nidec’s acquisition targets question the thoroughness of Nidec’s due diligence, and the notion that there were synergies with Nidec’s existing businesses. At the time Nidec announced it was acquiring Ansaldo Sistemi Industriali S.p.A., Mr. Nagamori brushed aside the rare analyst question about whether Nidec would be able to achieve its goal of generating a 10% operating profit margin in the business. The most recent financials we have for that entity show that its OP margin halved since around the time of acquisition to 2.8%. Nidec’s reasons for acquiring minority stakes in six formerly listed subsidiaries are unclear, but we note that Mr. Nagamori received JPY 29.5 billion in Nidec shares (at today’s share price) for his ownership of these companies.

Nidec in our view unduly promotes business opportunities with sex appeal, such as haptics (which led to a write-off), robots, drones, and LIDAR. These exciting products account for a tiny sliver of Nidec’s overall business, and in our view, have received an inordinately large amount of attention from investors. Nidec’s margin on sales of drone motors to (AMZN US) is likely to be significantly compressed once any scale is achieved.

We have real corporate governance concerns about Nidec. There are indications that management is able to override internal controls. Mr. Nagamori’s receipt of Nidec shares worth today approximately JPY 29.5 billion for his stakes in subsidiaries raises questions, as does the JPY 14.5 billion loan he received from the company, which was repaid a few months later by mostly selling his Nidec shares to the company. It is disconcerting that Nidec was unable to hold onto Bunsei Kure, while the company’s Chief Technology Officer, Mikio Katayama, was instrumental in running Sharp into the ground.

We value Nidec’s shares at less than half of the price – JPY 4,764. At the current price, the implied valuation ascribed to its non-HDD businesses is approximately 21.5x EV / EBITDA. (Facebook trades at 24.9x.) Given Nidec’s anemic organic growth, the seeming commoditization of many of its products, and the capital intensity of manufacturing, we can see no reason to justify a share price anywhere close to Nidec’s current valuation. Unfortunately, Nidec’s transparency has been decreasing over the years, and is poised to take a large step backward as the company plans to no longer file financial statements in the U.S. Unless Nidec resolves the U.S. filing and other transparency issues, we believe investors should exercise extreme caution when considering purchasing Nidec’s shares.

To download the full report (file size: 5 MB), click the “Download Report” button and agree to the Terms of Service to download the report.

Download Report

Use of Muddy Waters reports is limited by the Terms of Service on its website, which are as follows. To be authorized to access such reports, you must agree to these terms, regardless of whether you have downloaded its reports directly from the Muddy Waters Research website or someone else has supplied the report to you without authorization from Muddy Waters Capital.

Terms of Service

By downloading from, or viewing material on this website, you agree to the following Terms of Service. You agree that use of the research on this website is at your own risk. In no event will you hold Muddy Waters Capital LLC, Muddy Waters LLC, or any affiliated party liable for any direct or indirect trading losses caused by any information on this site. You further agree to do your own research and due diligence before making any investment decision with respect to securities covered herein. You represent that you have sufficient investment sophistication to critically assess the information, analysis and opinion on this site. You further agree that you will not communicate the contents of reports and other materials on this site to any other person unless that person has agreed to be bound by these same terms of service. If you download or receive the contents of reports or other materials on this site as an agent for any other person, you are binding your principal to these same Terms of Service.

You should assume that as of the publication date of our reports and research, Muddy Waters Capital LLC (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our clients and/or investors and/or their clients and/or investors has a short position in all stocks (and/or options, swaps, and other derivatives related to the stock) and bonds covered herein, and therefore stands to realize significant gains in the event that the price of either declines. We intend to continue transacting in the securities of issuers covered on this site for an indefinite period after our first report, and we may be long, short, or neutral at any time hereafter regardless of our initial position and views as stated in our research.

This is not an offer to sell or a solicitation of an offer to buy any security, nor shall Muddy Waters offer, sell or buy any security to or from any person through this site or reports on this site. Muddy Waters Capital LLC is an investment advisor only in the United States, but it does not render investment advice to anyone unless it has an investment adviser-client relationship evidenced in writing.

If you are in the United Kingdom, you confirm that you are accessing research and materials as or on behalf of: (a) an investment professional falling within Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “FPO”); or (b) high net worth entity falling within Article 49 of the FPO.

Our research and reports express our opinions, which we have based upon generally available information, field research, inferences and deductions through our due diligence and analytical process. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer. However, such information is presented “as is,” without warranty of any kind, whether express or implied. Muddy Waters Capital LLC makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. Further, any report on this site contains a very large measure of analysis and opinion. All expressions of opinion are subject to change without notice, and Muddy Waters Capital LLC does not undertake to update or supplement any reports or any of the information, analysis and opinion contained in them.

You agree that the information on this website is copyrighted, and you therefore agree not to distribute this information (whether the downloaded file, copies / images / reproductions, or the link to these files) in any manner other than by providing the following link: If you have obtained Muddy Waters Capital LLC research in any manner other than by download from that link, you may not read such research without going to that link and agreeing to the Terms of Service. You further agree that any dispute arising from your use of this report and / or the Muddy Waters Research website or viewing the material hereon shall be governed by the laws of the State of California, without regard to any conflict of law provisions. You knowingly and independently agree to submit to the personal and exclusive jurisdiction of the superior courts located within the State of California and waive your right to any other jurisdiction or applicable law, given that Muddy Waters Capital LLC has offices in California. The failure of Muddy Waters Capital LLC to exercise or enforce any right or provision of these Terms of Service shall not constitute a waiver of this right or provision. If any provision of these Terms of Service is found by a court of competent jurisdiction to be invalid, the parties nevertheless agree that the court should endeavor to give effect to the parties’ intentions as reflected in the provision and rule that the other provisions of these Terms of Service remain in full force and effect, in particular as to this governing law and jurisdiction provision. You agree that regardless of any statute or law to the contrary, any claim or cause of action arising out of or related to use of this website or the material herein must be filed within one (1) year after such claim or cause of action arose or be forever barred.