Capacitor Suppliers’ Earnings: Inventory Correction Bottoms Out; Auto Demand Drives Long-Term Growth

We have revised our earnings forecasts for two suppliers of multilayer ceramic capacitors, maintaining our fair value estimate for Samsung Electro-Mechanics, or Semco, at KRW 210,000 and lowering our fair value for Yageo 2327 to TWD 670 from TWD 700 as a result of a slower-than-expected recovery from an inventory correction. While Semco’s June quarter revenue was up 9.8% from the previous quarter, Yageo’s was up 2.5%. For the September quarter, Yageo expects revenue to be flat sequentially, while Semco expects mid-single-digit growth. While different seasonality makes sales momentum difficult to compare, we believe the difference is due to Semco’s auto MLCC business gaining market share and Yageo’s prolonged inventory correction of tantalum capacitors. While we believe shares of each company are undervalued, we prefer Semco to Yageo as we believe Semco’s strong revenue growth momentum will continue for the time being.

Yageo’s June quarter revenue of TWD 26.8 billion was down 14.6% from the previous year but up 2.5% sequentially, in line with our expectations. While revenue from MLCCs and chip resistors increased from the March quarter due to completion of the inventory correction, this was partially offset by the sluggish sales of tantalum capacitors and magnetic products. In particular, tantalum capacitors are expected to need about two more quarters for inventory digestion due to sluggish notebook PC sales and slower utilization adjustment than other passive components, so we lowered our 2023 revenue forecast by 5.8%. We maintain our view that Yageo’s acquisition of high-end passive components has made its business portfolio much more resilient to short-term economic fluctuations, and in the long run, Yageo’s growth will be driven by demand for premium components, especially from the automotive sector. Our fair value estimate for Yageo of TWD 670 corresponds to 13 times 2024 price/earnings.