Taiyo Yuden Earnings: Disappointing 2023 Guidance, but Confidence in Long-Term Growth Unchanged

Although narrow-moat Taiyo Yuden 6976 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.

Taiyo Yuden expects MLCC capacity utilization to reach 60%-65% in the June quarter, up from 50% in the March quarter, as inventory correction by Chinese smartphone manufacturers is largely complete. Although demand for smartphone and PC shipments remains sluggish, we can expect orders to at least return to the demand levels, as we believe that orders have been lower than the actual demand for the past few quarters to digest inventories in the supply chain. In fact, management commented that the book/bill ratio has improved during the quarter, reaching 1 in March. Overall, the outlook for capacity utilization bottoming out in the March quarter is in line with peers and our view. We expect the company to return to profitability in the June quarter, after posting an operating loss in the March quarter caused by lower utilization.