Decreasing MLCC Suppliers’ FVE Due to Weaker Smartphone Demand; Long-Term Growth Outlook Is Intact

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.