Taiyo Yuden Earnings: MLCC’s Margin Expansion in the Second Half Is Underestimated

Although Taiyo Yuden’s September-quarter operating margin of 3.3% was lower than our expectation of 5.7% due to lower capacity utilization and larger fixed costs, we are encouraged due to some positive signs: first, capacity utilization is expected to improve in the coming quarters as the inventory correction has finally been completed; second, the book-to-bill ratio for the mainstay multilayer ceramic capacitors, or MLCCs, has exceeded 1 for the first time in nine quarters, indicating that demand is recovering; and third, product mix is expected to improve as demand for high-value-added MLCCs used in servers and telecom base stations is expected to bottom out this quarter. As a result, we forecast Taiyo Yuden’s operating margin to improve from 1.4% in the first half to 7.7% in the second half. We continue to believe that Taiyo Yuden’s shares are undervalued as the market is underestimating this margin recovery, although we lower our fair value estimate to JPY 5,200 from JPY 5,700 due to the downward revision of our earnings forecasts and the inclusion of the dilution from the convertible bonds issued in October 2023.