Koito Manufacturing (7276.T): Upgrading to Neutral mostly on price action, but opportunities also present

Citi upgrades Koito Manufacturing (7276.T) to Neutral from Sell and raises the target price to ¥2,500 from ¥2,400, implying 12x FY3/28E EPS of ¥208. The upgrade is driven mainly by price action: following the recent share price decline, the total return yield now exceeds 10%. The surge in electronic substrate prices is a new negative factor, but we believe Koito can offset the related cost increase through streamlining in North America and China and a reduction in LiDAR losses, securing consensus-line operating profit in FY3/28. We maintain our FY3/27 operating profit forecast of ¥62bn, as higher raw material costs should be covered by lower tariff hits and solid domestic revenue growth, and we lift FY3/28 operating profit to ¥70bn from ¥68bn, implying double-digit profit growth on gradual price pass-throughs and narrowing LiDAR losses. We also note that the US NHTSA announced in October that it would begin revising FMVSS No.108; if North America-specific headlamp regulations are revis