Passive Components Suppliers Earnings: Smartphone Demand Rebound Is a Plus Amid Economic Slowdown

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 6981, 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.

Murata’s September-quarter operating income was JPY 88.9 billion, exceeding our expectation of JPY 80 billion. Although inventory adjustment weighed on profitability, operating margin for the quarter improved significantly to 20.1% from 13.6% in the June quarter. This was largely due to the recovery of the devices and modules segment from around breakeven to 13.6%, driven by the high seasonality of iPhone demand and improved product mix due to the recovery of RF filter sales from Chinese smartphone manufacturers. The company raised its full-year operating income guidance to JPY 270 billion from JPY 220 billion, which is in line with our forecast, based on upbeat first-half results and changes in currency exchange assumptions. Our new fair value estimate is set at JPY 3,300, reflecting the impact of the 1-to-3 stock split implemented in early October.