Progress of Inventory Correction Offers an Entry Point for MLCC Suppliers’ Shares

Although Murata Manufacturing and Taiyo Yuden have cut their full-year operating income guidance, we are encouraged that major multilayer ceramic capacitor, or MLCC, suppliers are lowering their utilization rate to digest inventories in the supply chain. As a result, we believe the end of the September quarter will be the peak of the inventory level, which is a positive sign, suggesting that we are at the bottom of the cycle. We note that the MLCC price erosion has been much smaller than in the past downturns as demand for premium MLCCs—which are used for autos, servers, and base stations—has been quite solid, supporting the blended average selling price to remain stable. Also, unlike in the past, Taiwanese suppliers including Yageo have not been implementing an aggressive pricing strategy so that they can protect their profitability. Therefore, we think that MLCC suppliers will maintain a relatively healthy margin and we remain confident about the long-term growth opportunities in 5G communication, increasing data traffic, and auto digitalization. We believe the market is overlooking these structural changes in the MLCC industry. Murata’s fair value estimate is revised to JPY 10,000 from JPY 10,800, and Taiyo Yuden’s fair value estimate is revised to JPY 6,500 from JPY 7,500 incorporating the impact of the lower utilization rate, but we continue to believe both shares are undervalued.