Denso Earnings: Fair Value Estimated Cut 10% as Dark Clouds Gather Around Global Vehicle Production

We cut our fair value estimate for narrow-moat Denso to JPY 2,440 from JPY 2,700, based on near-term turmoil due to OEMs’ production halt, as well as a cut on midterm profit margin as dark clouds are gathering over the outlook of the overall vehicle market. The company reported that December-quarter revenue decreased by 1.5% year on year and fell short again of our estimate of a 3.7% increase, dragged by the sluggish European market. Quarterly sales in Europe (including intersegment) dropped by 13.4%, far below our estimate of a 4% increase. According to The European Steel Association, or EUROFER, the European auto sector experienced a 6.5% contraction in output in 2024 due to protracted weakness of the manufacturing sector and lackluster consumer confidence. We see automotive demand in the European market remaining weak until the macroeconomic picture and consumer disposable income substantially improve. As a result, we lower our fiscal 2024 estimate of revenue year-on-year growth in Europe to a 6% decrease from a 1% increase. Over the longer term, we maintain our views on ROIC to gradually improve to 11.2%, above our estimated weighted average cost of capital of 7.8%, supported by increased sales of highly profitable electrification/heat pump components for electric vehicles. We see that the market is overreacting to the near-term predicament, with the share price dropping by more than 6% on the next trading day after the announcement.