Company Reports

Narrow-moat Taiyo Yuden’s revenue growth guidance of 8.5% for fiscal 2024 (ending March 2025) is largely in line with our expectations, suggesting that demand for its mainstay multilayer ceramic capacitors, or MLCCs, will pick up following the completion of the inventory correction, driving Taiyo Yuden’s sales recovery. On the other hand, the operating income guidance of JPY 20 billion is much lower than we had expected. Based on the guidance, the company’s operating margin would recover from 2.8% in fiscal 2023 to 5.7% this year, but given that the company had double-digit margins from fiscal 2018-22, the margin expansion Taiyo Yuden expects for this year is not satisfactory. Given the sales recovery of profitable MLCCs, we believe the company is being quite conservative in expecting costs to rise with the production expansion.

Taiyo Yuden is one of the top suppliers of passive components, with the third-largest market share in multilayer ceramic capacitor, or MLCCs, and bandpass filters. Passive components are necessary for all electronic circuits. They are used to store electricity, to control electric flow, to enable wireless communication, and to remove electromagnetic noise. While we acknowledge that shipments of digital appliances are slowing down, we think progress in telecommunication standards—such as 3G, LTE, LTE advanced, and 5G—and increased electronic devices in automobiles will drive the continued expansion of the component market.

The earnings results of four passive component suppliers indicate that the recovery of demand for multilayer ceramic capacitors is underway as expected. In the December quarter, Murata Manufacturing’s book/bill ratio for MLCC exceeded 1 for the first time in seven quarters, while Taiyo Yuden’s BB ratio improved to 1.07 from 1.01 in the previous quarter, when it exceeded 1 for the first time in nine quarters.

Taiyo Yuden is one of the top suppliers of passive components, with the third-largest market share in multilayer ceramic capacitor, or MLCCs, and bandpass filters. Passive components are necessary for all electronic circuits. They are used to store electricity, to control electric flow, to enable wireless communication, and to remove electromagnetic noise. While we acknowledge that shipments of digital appliances are slowing down, we think progress in telecommunication standards—such as 3G, LTE, LTE advanced, and 5G—and increased electronic devices in automobiles will drive the continued expansion of the component market.

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.

Taiyo Yuden is one of the top suppliers of passive components, with the third-largest market share in multilayer ceramic capacitor, or MLCCs, and bandpass filters. Passive components are necessary for all electronic circuits. They are used to store electricity, to control electric flow, to enable wireless communication, and to remove electromagnetic noise. While we acknowledge that shipments of digital appliances are slowing down, we think progress in telecommunication standards—such as 3G, LTE, LTE advanced, and 5G—and increased electronic devices in automobiles will drive the continued expansion of the component market.

We have a mixed impression of Taiyo Yuden’s June-quarter results. As expected, the inventory correction for smartphones has largely been completed, evidenced by the recovery in sales of telecom devices. Meanwhile, sales for servers dropped more than expected because of the slowdown in server investment. As a result, while sales of JPY 72.6 billion were in line with our forecast, the company posted an operating loss of JPY 577 million due to the worse-than-expected product mix, which was lower than our expectation of a JPY 1 billion profit. As we expect sluggish server investment to continue for at least the rest of this year, utilization of multilayer ceramic capacitors, or MLCCs, may not improve as quickly as we had expected. Therefore, we are lowering our operating income forecast for fiscal 2023 (financial year ending March 2024) to JPY 20 billion, down 37.5% year on year, and our fair value estimate to JPY 5,700 from JPY 6,000. Despite the slower-than-expected recovery, we reiterate our midterm view that the company will benefit from growing demand for large, high-capacitance MLCCs for automobiles and information infrastructure, and believe that Taiyo Yuden’s shares are undervalued.

Taiyo Yuden is one of the top suppliers of passive components, with the third-largest market share in multilayer ceramic capacitor, or MLCCs, and bandpass filters. Passive components are necessary for all electronic circuits. They are used to store electricity, to control electric flow, to enable wireless communication, and to remove electromagnetic noise. While we acknowledge that shipments of digital appliances are slowing down, we think progress in telecommunication standards—such as 3G, LTE, LTE advanced, and 5G—and increased electronic devices in automobiles will drive the continued expansion of the component market.

Although narrow-moat Taiyo Yuden guides flat sales growth for the new fiscal year (ending March 2024), it expects operating income to decline 53.1% year over year to JPY 15 billion, which is much lower than our expectation and the market consensus. While we believe it is inevitable that the stock price will react negatively in the short term, we believe this year's guidance is too conservative. In addition, we are encouraged that the company has maintained its midterm plan to allocate JPY 300 billion for capital expenditures over five years, which we believe is a sign of the company's confidence in future demand. While demand for small multilayer ceramic capacitors, or MLCCs, used in consumer electronics products is much lower than originally expected, most of the additional production capacity will be allocated to large-size, high-specification MLCCs to meet the robust demand from autos, making its capital expenditure plan largely unchanged. We will revise our earnings forecasts after meeting with the company later this month, but we continue to believe that Taiyo Yuden's shares are undervalued.

We lower our fair value estimates for Murata Manufacturing and Taiyo Yuden to JPY 9,700 and JPY 6,000, from JPY 10,000 and JPY 6,500, respectively, as their profitability recovery will be slower than previously anticipated due to prolonged inventory correction. In addition to the further reduction in procurement of components used for Android devices and PCs, iPhone production during the holiday season was lower than expected due to factory shutdowns caused by the pandemic; and capital spending on base stations and data centers is stagnating due to the economic slowdown. Because of this weaker demand, we expect multilayer ceramic capacitor, or MLCC, suppliers to further reduce their utilization rates in the first half of 2023, as their inventory levels have not been reduced as expected. As a result, we lower Murata’s fiscal 2023 (ending March 2024) revenue by 7% and operating margin assumption to 19.7% from 21.8%, and Taiyo Yuden’s fiscal 2023 revenue by 8% and operating margin assumption to 13.3% from 16.8%, which is the reason for lowering their fair value estimates. Meanwhile, we remain optimistic about the long-term growth opportunity for MLCCs, driven by increasing data traffic and auto digitalization. We expect the March quarter to be the bottom of the utilization rate, which should improve toward the end of 2023.

Taiyo Yuden is one of the top suppliers of passive components, with the third-largest market share in multilayer ceramic capacitor, or MLCCs, and bandpass filters. Passive components are necessary for all electronic circuits. They are used to store electricity, to control electric flow, to enable wireless communication, and to remove electromagnetic noise. While we acknowledge that shipments of digital appliances are slowing down, we think progress in telecommunication standards—such as 3G, LTE, LTE advanced, and 5G—and increased electronic devices in automobiles will drive the continued expansion of the component market.

Although Murata Manufacturing and Taiyo Yuden have cut their full-year operating income guidance, we are encouraged that major multilayer ceramic capacitor, or MLCC, suppliers are lowering their utilization rate to digest inventories in the supply chain. As a result, we believe the end of the September quarter will be the peak of the inventory level, which is a positive sign, suggesting that we are at the bottom of the cycle. We note that the MLCC price erosion has been much smaller than in the past downturns as demand for premium MLCCs—which are used for autos, servers, and base stations—has been quite solid, supporting the blended average selling price to remain stable. Also, unlike in the past, Taiwanese suppliers including Yageo have not been implementing an aggressive pricing strategy so that they can protect their profitability. Therefore, we think that MLCC suppliers will maintain a relatively healthy margin and we remain confident about the long-term growth opportunities in 5G communication, increasing data traffic, and auto digitalization. We believe the market is overlooking these structural changes in the MLCC industry. Murata’s fair value estimate is revised to JPY 10,000 from JPY 10,800, and Taiyo Yuden’s fair value estimate is revised to JPY 6,500 from JPY 7,500 incorporating the impact of the lower utilization rate, but we continue to believe both shares are undervalued.

Taiyo Yuden is one of the top suppliers of passive components, with the third-largest market share in multilayer ceramic capacitor, or MLCCs, and bandpass filters. Passive components are necessary for all electronic circuits. They are used to store electricity, to control electric flow, to enable wireless communication, and to remove electromagnetic noise. While we acknowledge that shipments of digital appliances are slowing down, we think progress in telecommunication standards--such as 3G, LTE, LTE advanced, and 5G--and increased electronic devices in automobiles will drive the continued expansion of the component market.

As a result of the weaker shipment outlook for Chinese smartphones and PCs, our fair value estimate for Murata Manufacturing is revised to JPY 10,800 from JPY 11,300, and our fair value estimate for Taiyo Yuden is revised to JPY 7,500 from JPY 8,500. Like other passive components suppliers, Murata and Taiyo Yuden have been prompted to cut utilization rates so as to digest excess inventories. We expect the inventory correction to continue for at least the next two quarters, which will be much longer than we had previously anticipated. This would materially drag down the profitability from our original forecasts, and as a result, our operating income assumptions for the two companies, which assume JPY 128 per U.S. dollar, will fall short of both companies’ guidance for this fiscal year. Nevertheless, we believe that the negative impact of the inventory correction is mostly priced in and that shares of both companies are undervalued. We also retain our long-term view that MLCC suppliers will benefit from the content growth driven by auto digitalization and 5G rollout.

Taiyo Yuden is one of the top suppliers of passive components, with the third-largest market share in multilayer ceramic capacitor, or MLCCs, and bandpass filters. Passive components are necessary for all electronic circuits. They are used to store electricity, to control electric flow, to enable wireless communication, and to remove electromagnetic noise. While we acknowledge that shipments of digital appliances are slowing down, we think progress in telecommunication standards--such as 3G, LTE, LTE advanced, and 5G--and increased electronic devices in automobiles will drive the continued expansion of the component market.

We add narrow-moat Taiyo Yuden to our Best Ideas List, given the recent weakness in its share price. We retain our view that multi-layer ceramic capacitors’, or MLCCs’, supply-demand will remain healthy and tightens toward the end of this year, driven by the recovery of smartphone production and content growth in the auto industry. While we see all passive components suppliers in our coverage as undervalued, we believe that Taiyo Yuden’s shares are offering the best opportunity to accumulate.

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.

Taiyo Yuden is one of the top suppliers of passive components, with the third-largest market share in multilayer ceramic capacitor, or MLCCs, and bandpass filters. Passive components are necessary for all electronic circuits. They are used to store electricity, to control electric flow, to enable wireless communication, and to remove electromagnetic noise. While we acknowledge that shipments of digital appliances are slowing down, we think progress in telecommunication standards--such as 3G, LTE, LTE advanced, and 5G--and increased electronic devices in automobiles will drive the continued expansion of the component market.

We raise Taiyo Yuden’s moat rating to narrow from no-moat and lift our fair value estimate to JPY 8,400 from JPY 6,900.

Taiyo Yuden is one of the top suppliers of passive components, with the third-largest market share in multilayer ceramic capacitor, or MLCCs, and bandpass filters. Passive components are necessary for all electronic circuits. They are used to store electricity, to control electric flow, to enable wireless communication, and to remove electromagnetic noise. While we acknowledge that shipments of digital appliances are slowing down, we think progress in telecommunication standards--such as 3G, LTE, LTE advanced, and 5G--and increased electronic devices in automobiles will drive the continued expansion of the component market.