MLCC Supplier Earnings: Unexpected Price Erosion Will Moderate Going Forward; Shares Undervalued

Two multilayer ceramic capacitor, or MLCC, suppliers, Samsung Electro Mechanics and Yageo 2327, reported their September-quarter results on Oct. 26. As the stock reaction after the results showed, the two companies’ results were in stark contrast. While Samsung Electro Mechanics’, or Semco’s, stock price dropped more than 10% after the results because of the unexpected margin contraction, Yageo’s stock price rose about 5% on the next day after the results because of the solid margin outlook. Although Semco’s results imply intensifying competition in MLCC, we are still optimistic that the company will grow at a faster pace than the market, driven by the share gains in MLCC for automobiles. We will revise our earnings forecasts as well as our fair value estimates after meeting with the companies, so for now we maintain our fair value estimates of KRW 210,000 for Semco and TWD 670 for Yageo. We believe that both companies are undervalued.

In contrast to Semco, Yageo’s September-quarter results were solid. Revenues were up 2.4% sequentially, gross margin was flat at 33.2%, and operating margin improved to 19.7% from 19.0% in the June quarter due to lower operating expenses. For the December quarter, the company guided for a mid-single-digit sequential revenue decline because of the seasonality with a flat gross and operating margins, suggesting that Yageo’s business is not affected by the price competition mentioned on Semco’s earnings call. We believe that the difference between Yageo and Semco in terms of MLCC price competition is caused by Semco’s product mix, which has more overlap with Japanese competitors, while Yageo has less direct competition. We expect solid margin expansion for Yageo next year as the utilization rate for high-margin products such as MLCCs and tantalum capacitors will start to increase after the completion of the inventory adjustment is completed.