Company Reports

Denso’s fiscal 2023 (ended March 2024) operating income of JPY 381 billion, down 11% year on year, was significantly below our estimate of JPY 432 billion and guidance of JPY 495 billion. This was largely due to temporary factors including quality costs related to past recalls of fuel pumps, delayed cost pass-throughs, and the impact of production cuts by Daihatsu and Toyota Industries (not to be confused with Toyota Motor), which had engaged in misconduct. We do not expect these issues to materially affect Denso going forward and therefore maintain our fiscal 2024 operating income estimate of JPY 712 billion, implying operating margin of 9.6%, in line with the company’s guidance. Denso's largest customer, Toyota Motor, plans to increase production by 3% year on year to 10.3 million vehicles for calendar 2024. In addition, we expect cost pass-throughs and further sales of Denso’s high-margin electrification components like inverters to contribute to margin expansion. Hence, we expect an operating income compound annual growth rate of 6.6% between 2024 and 2028. Despite the better outlook, we believe narrow-moat Denso’s shares are fairly valued now.

As one of the largest global automotive component suppliers, Denso has a diverse product portfolio that ranges from traditional powertrain/thermal components for internal combustion engine vehicles to relatively newer technologies such as electrification and advanced safety/sensing components. To adapt to a “once in a hundred years” transformation in the automotive industry, the company has been spending high amounts on research and development in recent years. In Japan, Denso has been engaging in various projects with its main original equipment manufacturer customer, Toyota Motor, as well as other components supplier companies in the Toyota Group, to jointly develop various technologies, including semiconductors, electrification, and advanced driver-assistance systems. We expect these initiatives will prevent commoditization of its key technologies, thus allowing the company to maintain its narrow moat.

We raise our fair value estimate for Denso to JPY 2,700 from JPY 2,375, after revising our margin assumptions based on a more favorable mix of electrification product sales and progress in restructuring. In the December quarter, sales of electrification systems and mobility electronics, which contain more high-end components, were stronger than expected, growing 23% and 19%, respectively, driven by the robust demand for its largest customer Toyota’s hybrid and high-end automobiles. We raise our fiscal 2024 (ending March 2025) and 2025 operating margin assumptions to 9.5% and 10.2%, respectively, from 9.1% and 9.8% previously, as we expect a better product mix to continue, driven by higher-margin electrification component sales outpacing other commoditized components. We believe Denso’s shares are fairly valued.

As one of the largest global automotive component suppliers, Denso has a diverse portfolio of products, ranging from traditional powertrain/thermal components for internal combustion engine vehicles to relatively newer technologies such as electrification/mobility-related components. To adapt to a “once in a hundred years” transformation in the automotive industry, the company has been spending high amounts on research and development in recent years. In Japan, Denso has been engaging in various projects with its main original equipment manufacturer customer, Toyota Motor, as well as other components supplier companies in the Toyota Group, to jointly develop various technologies (including semiconductors, electrification, and advanced driver-assistance systems). We expect these initiatives will prevent commoditization of its key technologies, thus allowing the company to maintain its narrow moat.

We leave our fair value estimate for Denso unchanged at JPY 2,375 with September-quarter operating margin disappointingly lower and dampening better-than-expected revenue growth. While we tweak our fiscal 2023 (ending March 2024) assumptions, our medium-term outlook remains intact. We believe Denso’s shares are fairly valued. Our fair value estimate prices Denso at 15.9 times fiscal 2023 price/earnings. We forecast five-year EPS to average 16.9% growth.

As one of the largest global automotive component suppliers, Denso has a diverse portfolio of products, ranging from traditional powertrain/thermal components for internal combustion engine vehicles to relatively newer technologies such as electrification/mobility-related components. To adapt to a “once in a hundred years” transformation in the automotive industry, the company has been spending high amounts on research and development in recent years. In Japan, Denso has been engaging in various projects with its main original equipment manufacturer customer, Toyota Motor, as well as other components supplier companies in the Toyota Group, to jointly develop various technologies (including semiconductors, electrification, and advanced driver-assistance systems). We expect these initiatives will prevent commoditization of its key technologies, thus allowing the company to maintain its narrow moat.

As one of the largest global automotive component suppliers, Denso has a diverse portfolio of products, ranging from traditional powertrain/thermal components for internal combustion engine vehicles to relatively newer technologies such as electrification/mobility-related components. To adapt to a “once in a hundred years” transformation in the automotive industry, the company has been spending high amounts on research and development in recent years. In Japan, Denso has been engaging in various projects with its main original equipment manufacturer customer, Toyota Motor, as well as other components supplier companies in the Toyota Group, to jointly develop various technologies (including semiconductors, electrification, and advanced driver-assistance systems). We expect these initiatives will prevent commoditization of its key technologies, thus allowing the company to maintain its narrow moat.

We raise Denso’s fair value estimate to JPY 9,500 from 9,100, after increasing our near-term revenue assumptions based on a stronger outlook of automobile production by its OEM customers. The company’s June quarter revenue was better than expected across all regions, growing 21% year on year. This was mainly supported by the production volume recovery of its largest customer, Toyota, which grew 20% year on year in the same period, up from 4.6% in the March quarter. Although we expect weaker automobile production by Japanese OEMs in China in the near term, we expect continued recovery in other regions as well as further electric vehicle component sales, such as inverters and electronic control units. As such, we raise Denso’s fiscal 2023 (ending March) revenue growth assumption to 8.3% year on year, up from 3.8% previously. We believe Denso’s shares are fairly valued.

As one of the largest global automotive component suppliers, Denso has a diverse portfolio of products, ranging from traditional powertrain/thermal components for internal combustion engine vehicles to relatively newer technologies such as electrification/mobility-related components. To adapt to a “once in a hundred years” transformation in the automotive industry, the company has been spending high amounts on research and development in recent years. In Japan, Denso has been engaging in various projects with its main original equipment manufacturer customer, Toyota Motor, as well as other components supplier companies in the Toyota Group, to jointly develop various technologies (including semiconductors, electrification, and advanced driver-assistance systems). We expect these initiatives will prevent commoditization of its key technologies, thus allowing the company to maintain its narrow moat.

We believe Denso's fiscal 2023 (ending March 2024) revenue guidance of JPY 6.3 trillion, which implies a 1.6% year-on-year decline, is too conservative. While the stronger Japanese yen and declining sales of non-battery electric vehicles, or BEVs, in China will be negative factors, we believe that the recovery in global auto production and increasing sales of BEV components (such as inverters) will continue to drive Denso's sales growth. Further, Toyota's plan to produce 10.1 million vehicles this fiscal year, which is a 10.6% year-on-year increase and in line with our expectations, is another reason we believe Denso's guidance is conservative. As a result, we maintain our 2023 revenue forecast of JPY 6.6 trillion, up 3.8% year on year, and our fair value estimate of JPY 9,100. We believe Denso's shares are currently fairly valued.

We maintain our fair value estimate of JPY 9,100 per share for Denso, even though December-quarter operating income of JPY 108 billion, for an operating margin of 7.0%, fell short of our projection by about JPY 39 billion. We attribute this to capacity utilization hurt by Toyota Motor’s weak production and slow progress in passing through components/logistics costs in North America, where negotiations have been lagging. However, our longer-term outlook is intact. We think the market is underestimating Denso’s ability to meet its midterm operating margin target of 10.0% in fiscal 2025, ending March. We expect this target will be met by improved product mix from new-generation products and the restructuring of its low-margin North America business.

As one of the largest global automotive component suppliers, Denso has a diverse portfolio of products, ranging from traditional powertrain/thermal components for internal combustion engine vehicles to relatively newer technologies such as electrification/mobility-related components. To adapt to a “once in a hundred years” transformation in the automotive industry, the company has been spending high amounts on research and development in recent years. In Japan, Denso has been engaging in various projects with its main original equipment manufacturer customer, Toyota Motor, as well as other components supplier companies in the Toyota Group, to jointly develop various technologies (including semiconductors, electrification, and advanced driver-assistance systems) to adapt to increasing competition from this rapid shift in the environment. We expect these initiatives will prevent commoditization of its key technologies, thus allowing the company to maintain its narrow moat.

We lower our fair value estimate for Denso to JPY 9,100 from JPY 9,200, after revising our revenue/operating margin projections. Its largest customer, Toyota Motor, recently cut its production plan for its fiscal 2022 (ending March for Denso/Toyota) to 9.2 million units from 9.7 million, implying only about a 5% increase in the second half from last year and the first half. While this is due to supply-side risks like semiconductor procurement according to Toyota, we think the reduction was also due to lower demand expectations. Although we expect near-term headwinds, Denso’s shares trade below our fair value estimate and we maintain our outlook that that its midterm revenue target of JPY 7 trillion, or a 6.1% CAGR between 2021 and 2025, can be surpassed.

As one of the largest global automotive component suppliers, Denso has a diverse portfolio of products, ranging from traditional powertrain/thermal components for internal combustion engine, or ICE, vehicles to relatively newer technologies such as electrification/mobility-related components. To adapt to a “once in a hundred year” transformation in the automotive industry, the company has been spending high amounts of R&D over the recent years. In Japan, the company has been undergoing various joint development projects with its main original equipment manufacturer customer, Toyota Motor, as well as other components supplier companies in the Toyota Group, to jointly develop various technologies (including semiconductors, electrification, advanced driver-assistance systems) to adapt to increasing competition from this rapid shift in the environment. We expect these initiatives will prevent commoditization of its key technologies, thus allowing the company to maintain its narrow moat.

Denso’s June-quarter operating margin fell 3.4 percentage points from last year to 4.5% as a result of lower sales in Japan and high labor and logistics costs in North America, which were worse than we expected. We reflect this by lowering our operating margin projection for fiscal 2022 (ending March 2023) to 7.3% (IFRS) from 8.6%. However, this does not affect our fair value estimate of JPY 9,200 per share, as we maintain our outlook that a higher portion of rising component costs will be passed on to prices from the second half of fiscal 2022, and we continue to believe the company can surpass its midterm operating margin target of 10.0% in fiscal 2025. We expect improved product mix from higher sales of electrification systems, third-generation advanced driver-assistance systems, and heat pump components for electric vehicles, as well as a gradual improvement in the supply/demand imbalance of components, will lead to an operating margin of 10.8% in fiscal 2025. With the market discounting Denso’s medium-term prospects, we think the shares are undervalued.

As one of the largest global automotive component suppliers, Denso has a diverse portfolio of products, ranging from traditional powertrain/thermal components for internal combustion engine vehicles to relatively newer technologies such as electrification/mobility-related components. To adapt to a “once in a hundred year” transformation in the automotive industry, the company has been spending high amounts of R&D over the recent years. In Japan, the company has been undergoing various joint development projects with its main original equipment manufacturer customer, Toyota Motor, as well as other components supplier companies in the Toyota Group, to jointly develop various technologies (including semiconductors, electrification, advanced driver-assistance systems) to adapt to increasing competition from this rapid shift in the environment. We expect these initiatives will prevent commoditization of its key technologies, thus allowing the company to maintain its narrow moat.

We raise Denso’s fair value estimate to JPY 9,200 from JPY 8,800, after raising our midcycle operating margin assumption. Denso’s progress on its continued structural improvements over the past year has exceeded our expectations. While margins have been impacted due to rising components/logistics costs (along with the automotive industry), excluding these costs, the company estimates it should have reached 10% operating margin in fiscal 2021, which is ahead of our forecasts. Further, sales of its higher-margin electrification products remain strong, as the company continues to expand its track record of OEMs outside Toyota Motor, and over the medium term, we expect higher value-added products like its heat pump and third generation ADAS components will replace its lower-margin counterparts like air conditioner products for ICE automobiles and first generation ADAS components. As such, we now project midcycle operating margin in fiscal 2025 to be at 11.0% from 10.6% previously. Going forward, progress on its restructuring initiatives in Europe/North America can potentially change our outlook on midcycle margins.

As one of the largest global automotive component suppliers, Denso has a diverse portfolio of products, ranging from traditional powertrain/thermal components for internal combustion engine, or ICE, vehicles to relatively newer technologies such as electrification/mobility-related components. To adapt to a “once in a hundred year” transformation in the automotive industry, the company has been spending high amounts of R&D over the recent years. In Japan, the company has been undergoing various joint development projects with its main original equipment manufacturer customer, Toyota Motor, as well as other components supplier companies in the Toyota Group, to jointly develop various technologies (including semiconductors, electrification, advanced driver-assistance systems, or ADAS) to adapt to increasing competition from this rapid shift in the environment. We expect these initiatives will prevent commoditization of its key technologies, thus allowing the company to maintain its narrow moat.

Denso’s fiscal 2021 third-quarter sales, ending in December 2021, declined 0.5% year on year, which was slightly better than our expectations as strong electrification, ADAS, and semiconductor/sensing product growth lessened the impact of sales for “traditional” components, like powertrain and thermal systems used for gasoline cars. We raise our fair value estimate to JPY 8,800 from JPY 8,000, as we are increasingly convinced that Denso is well-positioned to capitalize on CASE-related trends in the automotive industry. We think shares are fairly valued and with shares recovering after falling throughout most of January (likely from OEMs slowing down production amid the components crunch), we think the market also had a similar impression on Denso’s progress in building a track record with its newer value-added products.

As one of the largest automotive component suppliers, Denso has a diverse portfolio of products, ranging from traditional powertrain/thermal components for internal combustion engine, or ICE, vehicles to relatively newer technologies such as electrification/mobility-related components. To adapt to a “once in a hundred year” transformation in the automotive industry, the company has been spending high amounts of R&D over the recent years. In Japan, the company has been undergoing various joint development projects with its main original equipment manufacturer customer, Toyota Motor, as well as other components supplier companies in the Toyota Group, to jointly develop various technologies (including semiconductors, electrification, advanced driver-assistance systems, or ADAS) to adapt to increasing competition from this rapid shift in the environment. We expect these initiatives will prevent commoditization of its key technologies, thus allowing the company to maintain its narrow moat.