Company Reports

Three passive component suppliers, Murata Manufacturing, Kyocera, and TDK announced their earnings results for fiscal 2023 (ending March 2024) Friday, April 26, and each company’s operating income guidance for the new fiscal year fell short of our expectations. We believe that they made conservative assumptions for sales and capacity utilization especially in the second half of the fiscal year, as they were less confident of a full recovery in end demand. Nevertheless, TDK’s guidance may disappoint the market as it is most divergent from our expectations and the market’s. While we maintain our fair value estimates for the three companies, we have lowered our fiscal 2024 operating income forecasts for Murata and Kyocera, reflecting price erosion for automotive passive components and a slower-than-expected recovery in capital spending for industrials and general servers. We plan to revise our TDK earnings forecasts after the company announces its new midterm plan at next month’s investor day. We believe Murata Manufacturing’s shares are undervalued, while Kyocera and TDK are fairly valued.

The earnings results of four passive component suppliers indicate that the recovery of demand for multilayer ceramic capacitors, or MLCCs, is underway as expected. In the December quarter, Murata Manufacturing’s book/bill ratio for MLCCs exceeded 1 for the first time in seven quarters, while Taiyo Yuden’s book/bill ratio improved to 1.07 from 1.01 in the previous quarter, when it exceeded 1 for the first time in nine quarters. While demand for PCs, servers, and industrials remains weak, demand for smartphones and automobiles—where inventory adjustment is largely complete—drove the order growth. In particular, we are relieved to hear from companies that inventory adjustment for automotive MLCCs does not seem to last, which we had feared. Although electric vehicle demand is uncertain in China, strong demand for hybrid vehicles is expected to drive content growth per car, supporting solid MLCC demand. In addition, demand for PCs and servers is likely to pick up soon, followed by a recovery in industrial demand in late 2024. With suppliers’ inventories already at appropriate levels, we expect margin expansion to continue in the following quarters as the utilization rate increases. We revise our earnings forecasts and fair value estimates for four passive component suppliers, and believe that Murata and Taiyo Yuden’s shares are undervalued, while TDK and Kyocera’s are fairly valued.

TDK is one of the top suppliers of passive components, especially focusing on the automobile industry. We estimate that TDK’s market shares in multilayer ceramic capacitors, or MLCCs, and inductors for automobiles are approximately 20% and 50%, respectively. While we expect electronic devices per automobile to continue increasing, owing to the progress of safety and environmental regulations, there are still a limited number of component manufacturers that could meet tough requirements of automakers. Therefore, we expect TDK to remain one of the beneficiaries of auto digitalization.

TDK is one of the top suppliers of passive components, especially focusing on the automobile industry. We estimate that TDK’s market shares in multilayer ceramic capacitors, or MLCCs, and inductors for automobiles are approximately 20% and 50%, respectively. While we expect electronic devices per automobile to continue increasing, owing to the progress of safety and environmental regulations, there are still a limited number of component manufacturers that could meet tough requirements of automakers. Therefore, we expect TDK to remain one of the beneficiaries of auto digitalization.

One of the few positive factors for the earnings of the three passive component suppliers was the solid demand for flagship smartphones such as the iPhone, and the recovery of component demand from Chinese smartphone manufacturers as they completed the inventory adjustments. On the other hand, demand for PCs and servers remained weak, and the stagnation in sales for industrials is expected to continue. As a result, the impact on each company’s business was slightly different due to their business portfolios. Murata Manufacturing, which is more exposed to the smartphone industry, has revised its operating income guidance to JPY 270 billion from JPY 220 billion, while TDK has maintained it at JPY 150 billion, and Kyocera has lowered it to JPY 120 billion from JPY 147 billion. While demand for electronic components has bottomed out and is expected to gradually improve, we are cautious that suppliers tend to offer aggressive component pricing during the recovery phase to attract more orders. We believe Murata’s shares are undervalued, while TDK’s and Kyocera’s shares are fairly valued.

TDK is one of the top suppliers of passive components, especially focusing on the automobile industry. We estimate that TDK’s market shares in multilayer ceramic capacitors, or MLCCs, and inductors for automobiles are approximately 20% and 50%, respectively. While we expect electronic devices per automobile to continue increasing, owing to the progress of safety and environmental regulations, there are still a limited number of component manufacturers that could meet tough requirements of automakers. Therefore, we expect TDK to remain one of the beneficiaries of auto digitalization.

At the June-quarter earnings results, TDK lowered its fiscal 2023 (financial year ending March 2024) full-year operating income guidance from JPY 190 billion to JPY 150 billion, due to the lower-than-expected demand. The company lowered demand forecasts for most applications, including those for autos and IT equipment, but the revision to hard disk drive shipment forecasts in particular was largely due to stagnant demand for servers. It is disappointing that the company revised its full-year guidance in the first quarter of this fiscal year, implying that the demand outlook was too optimistic. Based on the lower-than-expected June-quarter earnings and the revised full-year guidance, we lower TDK’s fair value estimate to JPY 6,500 from JPY 6,900. However, we maintain our view that TDK’s shares are undervalued as our growth outlook for auto multilayer ceramic capacitors and magnetic sensors remains intact. We expect TDK’s operating margin to rebound from the September quarter, which could be the near-term catalyst for the stock.

Although Murata Manufacturing and TDK, two major suppliers of multilayer ceramic capacitors, gave mixed guidance for the new fiscal year, we maintain our view that strong demand for auto MLCCs will continue, while orders for smartphones will gradually recover in the coming quarters. Although the timing of a full recovery in demand for smartphones and PCs remains difficult to predict, we believe that the inventory digestion for smartphones has made significant progress in recent quarters, and therefore MLCC orders will gradually approach previous levels. We will revise our earnings forecasts and fair value estimates after discussions with both companies in mid-May, but continue to believe that shares of both are undervalued, as MLCCs' midterm growth driven by auto demand is not fully priced in.

TDK’s December-quarter operating income of JPY 68.4 billion exceeded our forecast of JPY 56.7 billion, with the energy application products segment and the sensor application products segment beating our numbers and more than offsetting the worse-than-expected loss in the magnetic application products segment caused by the inventory correction of near-line hard disk drives, or HDDs. The passive components segment performed largely in line with our expectations, supported by the solid demand from autos. Although the company anticipates a slowdown in internal combustion engine, or ICE, auto demand, we maintain our view that TDK’s fundamentals will remain better than those of its peers, driven by the robust components demand for electric vehicles. We will update our earnings forecasts and our fair value estimate after meeting with the company, but continue to believe that TDK’s shares are undervalued.

After speaking with the company, we fine-tuned TDK’s earnings forecasts and lift our fair value estimate to JPY 6,900 from JPY 6,500. In the short term, we lift our operating margin assumptions for the energy application products segment as the company seems to succeed in passing over the increasing material costs, more than offsetting the negative impact of weak hard disk drive, or HDD, head shipment due to the inventory correction for servers. In the longer term, we believe solid demand for auto MLCC and margin expansion of sensors will drive TDK’s profit growth. TDK’s new fair value estimate of JPY 6,900 corresponds to 5.9 times 2023 EV/EBITDA. We reiterate our view that TDK’s business portfolio is more resilient than in the past as a result of focusing its resources on the growth area, which is underestimated by the market.

TDK is one of the top suppliers of passive components, especially focusing on the automobile industry. We estimate that TDK’s market shares in multilayer ceramic capacitors, or MLCCs, and inductors for automobiles are approximately 35% and 50%, respectively. While we expect electronic devices per automobile to continue increasing, owing to the progress of safety and environmental regulations, there are still a limited number of component manufacturers that could meet tough requirements of automakers. Therefore, we expect TDK to remain one of the beneficiaries of auto digitalization.

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.

We raise TDK’s fair value estimate to JPY 6,500 from JPY 6,000, although we have cut its multilayer ceramic capacitor, or MLCC, peers’ fair value estimates due to the weaker shipment outlook for smartphones and PCs. We believe that TDK is less affected by the recent macroeconomic headwinds due to its diversified product portfolio and thus can fully benefit from the weaker Japanese yen assumptions. While we lower our shipment forecasts for rechargeable batteries due to the inventory correction for Chinese smartphones, we expect revenue growth of the sensor application products segments will be higher than our previous forecasts, driven by TDK's new magnetic and MEMS sensor customers. Moreover, unlike its peers, TDK’s MLCC business is not affected by the weaker consumer electronics demand, as approximately 70% of its MLCC sales are from the auto industry. We believe TDK’s shares are undervalued, and its new fair value estimate corresponds to 15 times fiscal 2023 (financial year ending March 2024) price/earnings.

TDK is one of the top suppliers of passive components, especially focusing on the automobile industry. We estimate that TDK’s market shares in multilayer ceramic capacitors, or MLCCs, and inductors for automobiles are approximately 35% and 50%, respectively. While we expect electronic devices per automobile to continue increasing, owing to the progress of safety and environmental regulations, there are still a limited number of component manufacturers that could meet tough requirements of automakers. Therefore, we expect TDK to remain one of the beneficiaries of auto digitalization.

We have updated our earnings forecasts for four passive components suppliers--Murata Manufacturing, Taiyo Yuden, TDK, and Kyocera--and retain our view that supply-demand for multi-layer ceramic capacitors, or MLCCs, will remain tight throughout 2022, due to robust auto demand. Despite the weak orders in the December quarter because of the inventory correction for Chinese smartphones, MLCC pricing remained quite solid. In addition, MLCC suppliers decided to maintain a relatively high utilization rate to build up enough inventory to prepare for high auto demand. As the production of high-capacity, high-voltage MLCCs used for auto places a heavy load on capacity, robust auto demand underpinned by the content growth will contribute to tightening the supply-demand, which we believe is underestimated by the market. We retain our view that orders from Chinese smartphones will bottom out in the March quarter although the recovery may be somewhat weaker than expected, and auto production will recover quarter by quarter along with easing of the chip shortage. Hence, we expect that MLCC orders will continue to improve toward the end of this year and believe the recent dip in share price is offering good opportunities to accumulate.

TDK is one of the top suppliers of passive components, especially focusing on the automobile industry. We estimate that TDK’s market shares in multilayer ceramic capacitors, or MLCCs, and inductors for automobiles are approximately 35% and 50%, respectively. While we expect electronic devices per automobile to continue increasing, owing to the progress of safety and environmental regulations, there are still a limited number of component manufacturers that could meet tough requirements of automakers. Therefore, we expect TDK to remain one of the beneficiaries of auto digitalization.

We revise TDK’s fair value estimate to JPY 5,900 from JPY 5,833 (which was originally JPY 17,500 before the 1-to-3 stock split in September). While we slightly cut TDK’s operating income forecasts as its rechargeable battery business is likely to require more costs to pursue the growth in non-IT applications, we raised our operating margin assumptions for all the other three segments. In our old forecast, we had expected that profit from rechargeable batteries will be approximately twice as much as that of the non-battery businesses, but now we forecast that profit from batteries and non-batteries will be broadly balanced in fiscal 2025 (financial year ending March 2026). While TDK’s share price fell on concerns about the sustainability of profitability of rechargeable batteries, we are more confident about its solid profit growth, due to TDK’s more diversified and resilient product portfolio. Our new fair value estimate of JPY 5,900 corresponds to 16.3 times 2022 price to earnings, and we believe TDK’s shares are currently undervalued.

TDK is one of the top suppliers of passive components, especially focusing on the automobile industry. We estimate that TDK’s market shares in multilayer ceramic capacitors, or MLCCs, and inductors for automobiles are approximately 35% and 50%, respectively. While we expect electronic devices per automobile to continue increasing, owing to the progress of safety and environmental regulations, there are still a limited number of component manufacturers that could meet tough requirements of automakers. Therefore, we expect TDK to remain one of the beneficiaries of auto digitalization.

TDK is one of the top suppliers of passive components, especially focusing on the automobile industry. We estimate that TDK’s market shares in multilayer ceramic capacitors, or MLCCs, and inductors for automobiles are approximately 40% and 50%, respectively. While we expect electronic devices per automobile to continue increasing, owing to the progress of safety and environmental regulations, there are still a limited number of component manufacturers that could meet tough requirements of automakers. Therefore, we expect TDK to remain one of the beneficiaries of auto digitalization.

Our impression of TDK’s June quarter results is mixed. On the positive side, margin improvement in passive components and sensor application products segments was better than expected. Meanwhile, on the negative side, the operating margin contraction of the energy application products segment was worse than anticipated, owing to the weaker smartphone production and increasing cost of raw materials such as cobalt. As the negatives exceeded the positives, TDK’s June quarter operating income of JPY 30.8 billion was below our expectation of JPY 35 billion. Despite the somewhat disappointing result, we think the battery segment’s profitability would improve in the following quarters as production volume should recover and the higher material costs will be partly passed over to clients. We will review our numbers after meeting with the company in mid-August and maintain our fair value estimate of JPY 17,500 as well as our no-moat rating for now.