Solid Auto and Flagship Smartphone Demand Supports TDK’s Growth; Shares Undervalued

TDK’s September quarter operating income of JPY 76 billion was 54% up from the previous year, exceeding our expectation. Although the technology industry struggles with weaker demand and inventory correction, we believe that TDK’s fundamentals are less affected by the ongoing headwinds as the company has larger exposure to automobiles and flagship smartphones. For instance, the firm disclosed that 73% of the passive components segment’s revenue comes from automobile and industrial demand, while only 14% is from information and communications industry, or ICT, demand. Meanwhile, about half of the sensor application products segment’s revenue is from ICT industry demand, but we estimate that most is for high-end sensors for flagship smartphones, whose shipments seem to be relatively resilient. Overall, TDK was able to offset the negative impact of weaker-than-expected shipments of HDD heads due to the weak PC demand, and therefore was able to fully benefit from the weaker Japanese yen. We plan to update TDK’s earnings forecasts after meeting with the company later this month, but retain our view that its shares are undervalued.