Company Reports

Over the past two days, four passive component suppliers reported their June quarter results. Compared with our expectations, Murata Manufacturing’s numbers were slightly lower, Samsung Electro-Mechanics’ were mainly in line, and TDK’s and Yageo’s were higher. Such divergence in earnings performance is mainly due to differences in product portfolios, but demand by end-product generally showed a similar trend. While industrial products remained sluggish and automobiles and smartphones are stagnating, demand for applications related to high-performance computing, such as servers and PCs, seem to be improving. While we maintain our earnings forecasts and fair value estimate of JPY 4,000 for Murata Manufacturing, we plan to review our earnings forecasts for Semco, TDK, and Yageo after meeting with each company in early August. Overall, we expect that margin expansion for passive component suppliers will continue to improve in the coming quarters, driven by the better capacity utilization and an improved product mix. However, the strengthening of the Japanese yen could be a risk factor for Japanese suppliers.

Samsung Electro-Mechanics posted an operating income of KRW 180 billion for the March quarter, up 29% year on year and above our forecast of KRW 155 billion, driven by better-than-expected sales of multilayer ceramic capacitors and camera modules. While sales of the components division (mainly MLCC) were only 3% above our forecast, we estimate that the profitability was much better than we expected due to an improved product mix from solid sales to the industrial and automotive sectors. The optics & communication solutions division sales were up 47% year on year and 20% higher than our forecast due to better average selling prices and better shipments of Samsung’s flagship Galaxy S24.

Samsung Electro-Mechanics is the global second supplier of multilayer ceramic capacitors, which account for about 40% of Semco’s revenue and 70% of operating income. MLCCs are necessary to stabilize and control electric flow, and thus necessary for all electronic circuits. We believe the robust demand for MLCCs, mainly from smartphone and automotive manufacturers, will be the driver of Semco’s growth in the midterm.

We lower our fair value estimate for narrow-moat Samsung Electro-Mechanics, or Semco, to KRW 190,000 from KRW 200,000 due to the larger-than-expected price erosion for semiconductor packaging in the December quarter triggered by sluggish demand for PCs and servers. On the other hand, it is encouraging that the inventory adjustment of multilayer ceramic capacitors, or MLCCs, used in automobiles appears to have been largely completed in the second half of 2023, and did not last, as we had feared. As we expect PC and server shipments to pick up in the coming quarters, we believe that the December-quarter’s operating margin of 4.8% will be the low point and will recover each quarter as capacity utilization improves, reaching a near double-digit operating margin in the second half of this year. In the longer term, we continue to believe that Semco is better-positioned to capitalize on the growing demand for automotive MLCCs and, therefore, believe its shares are undervalued.

Samsung Electro-Mechanics is the global second supplier of multilayer ceramic capacitors, which account for 40%-45% of Semco’s revenue and 50%-60% of operating income. MLCCs are necessary to stabilize and control electric flow, and thus necessary for all electronic circuits. We believe the robust demand for MLCCs, mainly from smartphone and automotive manufacturers, will be the driver of Semco’s growth in the midterm.

After revising our earnings forecasts, we have lowered our fair value estimate for narrow-moat Samsung Electro-Mechanics to KRW 200,000 per share from KRW 210,000 and raised our fair value estimate for no-moat Yageo to TWD 750 per share from TWD 670. We are concerned that the price erosion of multilayer ceramic capacitors, or MLCCs, will intensify, which will affect Semco more. On the other hand, we believe that the impact of MLCC price erosion is limited for Yageo, and that the company will benefit more from the recovering demand for tantalum capacitors, driven by the pickup in PC replacement demand in late 2024. Longer term, we maintain our view that passive component suppliers, including Semco and Yageo, will continue to benefit from the secular growth in smartphones, autos, and servers. Although we will be cautious on Semco’s profitability over the next few quarters, we believe both stocks are undervalued.

Samsung Electro-Mechanics is the global second supplier of multilayer ceramic capacitors, which account for 40%-45% of Semco’s revenue and 50%-60% of operating income. MLCCs are necessary to stabilize and control electric flow, and thus necessary for all electronic circuits. We believe the robust demand for MLCCs, mainly from smartphone and automotive manufacturers, will be the driver of Semco’s growth in the midterm.

Two multilayer ceramic capacitor, or MLCC, suppliers, Samsung Electro Mechanics and Yageo, 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; 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.

We have revised the earnings forecasts for two multilayer ceramic capacitor, or MLCC, suppliers, maintaining Samsung Electro-Mechanics’, or Semco’s, fair value estimate at KRW 210,000 and lowering Yageo’s fair value estimate to TWD 670 from TWD 700 because of a slower-than-expected recovery from inventory correction. While Semco’s June quarter revenue was up 9.8% from the previous quarter, Yageo’s revenue was up 2.5%. For the September quarter, Yageo expects revenue to be flat sequentially, while Semco expects mid-single-digit growth. While the sales momentum cannot be easily compared because of different seasonality, we believe that the difference is due to Semco’s auto MLCC business is gaining market share, and Yageo’s prolonged inventory correction of tantalum capacitors. While we believe both shares are undervalued, we prefer Semco to Yageo as we believe Semco’s strong revenue growth momentum will continue for the time being.

Samsung Electro-Mechanics is the global second supplier of multilayer ceramic capacitors, which account for 40%-45% of Semco’s revenue and 50%-60% of operating income. MLCCs are necessary to stabilize and control electric flow, and thus necessary for all electronic circuits. We believe the robust demand for MLCCs, mainly from smartphone and automotive manufacturers, will be the driver of Semco’s growth in the midterm.

We continue to believe that multilayer ceramic capacitors, or MLCC, suppliers will gradually increase capacity utilization in the coming quarters. Although the timing of a full recovery in demand for smartphones and PCs remains difficult to predict, we believe that the inventory digestion for smartphones has made significant progress in recent quarters, and therefore orders for MLCCs will gradually approach previous levels. Meanwhile, due to the much lower-than-expected PC shipments, we view that the progress of inventory correction for other electronic components used in PCs has been slower than expected. As a result, we maintain our fair value estimate for Samsung Electro-Mechanics, or Semco, at KRW 210,000, while we lower our fair value estimate for Yageo to TWD 700 from TWD 750 after fine-tuning our earnings forecasts. We continue to believe that both shares are undervalued as MLCC’s midterm growth driven by auto demand is not fully priced in. We prefer Semco over Yageo as Semco’s auto MLCC sales growth is highly likely to outperform the market.

Samsung Electro-Mechanics is the global second supplier of multilayer ceramic capacitors, which account for 40%-45% of Semco’s revenue and 50%-60% of operating income. MLCCs are necessary to stabilize and control electric flow, and thus necessary for all electronic circuits. We believe the robust demand for MLCCs, mainly from smartphone and automotive manufacturers, will be the driver of Semco’s growth in the midterm.

We lower our 2023 revenue forecasts for two passive component suppliers, Samsung Electro-Mechanics and Yageo, due to the prolonged inventory correction. However, the downward revision for multilayer ceramic capacitors in this update was limited, while the revision for other products was larger. Therefore, we believe that the progress of the MLCC inventory correction is largely in line with our expectations. We expect MLCC utilization to bottom out in the March quarter and remain slightly below the actual demand in the June quarter, but to catch up with the end demand in the second half of the year. Although the share prices of MLCC suppliers have recovered significantly in recent months, we continue to be bullish, as we expect the destocking of MLCC inventories to end earlier than for other devices due to disciplined utilization control and the expected solid contribution from automotive demand. We remain optimistic about the long-term growth of MLCCs, driven by the robust demand from use in automobiles, servers, and smartphones. While we view both shares as undervalued, we prefer Yageo to Semco due to its lower valuation. We keep Semco’s fair value estimate at KRW 210,000 and revise Yageo’s to TWD 750 from TWD 720.

Samsung Electro-Mechanics is the global second supplier of multilayer ceramic capacitors, which account for 40%-45% of Semco’s revenue and 50%-60% of operating income. MLCCs are necessary to stabilize and control electric flow, and thus necessary for all electronic circuits. We believe the robust demand for MLCCs, mainly from smartphone and automotive manufacturers, will be the driver of Semco’s growth in the midterm.

Samsung Electro-Mechanics, or Semco, reported lower-than-expected earnings in the December quarter due to continued weakness in IT set demand. The component division’s sales were 5% below our forecasts due not only to weak smartphone shipments, but also slowing demand for networks and servers. The package solution division’s revenue was 8% below our numbers due to weak PC and smartphone demand. The companywide December quarter operating margin fell to 5.1% from 13.0% in the previous quarter, which we attribute to low multilayer ceramic capacitor, or MLCC, utilization and price declines in package substrates. In addition to the lower-than-expected numbers, we did not see substantial progress on inventory correction, which we think could negatively affect the share price in the very short term. However, we remain optimistic about the company’s long-term growth opportunities in MLCC and package substrates, driven by demand for high-end automotive and server components. We plan to update our earnings forecasts after speaking with the company later this month, but maintain our view that Semco’s shares are undervalued.

We trim Samsung Electro-Mechanics’, or Semco’s, fair value estimate to KRW 210,000 from KRW 230,000, based on the weaker-than-expected September-quarter numbers. Due to the uncertain macro environment, shipment for IT products such as smartphones and PCs has been much lower, and as a result, the ongoing inventory correction seems to be a few quarters longer than anticipated. As the correction is expected to last until the second quarter of 2023, we cut multilayer ceramic capacitor, or MLCC, revenue forecasts for 2022 and 2023 by 14% and 16%, respectively, and lowered our MLCC operating margin assumptions by around 3.5 percentage points for each year due to the lower utilization rate. Meanwhile, we remain optimistic about the long-term growth of high-end MLCC, which is underpinned by the content growth from auto digitalization and the solid growth of servers and networks. Hence, we believe Semco’s shares are undervalued. Our new fair value estimate of KRW 210,000 corresponds to 14 times price/earnings and 6 times EV/EBITDA on a 2023 basis.

Samsung Electro-Mechanics, or Semco, is the global second supplier of multilayer ceramic capacitors, or MLCCs, which account for 45%-50% of Semco’s revenue and 70%-80% of operating income. MLCCs are necessary to stabilize and control electric flow, and thus necessary for all electronic circuits. We believe the robust demand for MLCCs, mainly from smartphone and automotive manufacturers, will be the driver of Semco’s growth in the midterm.

We fine-tuned our earnings forecasts for Samsung Electro-Mechanics, or Semco, and maintain our fair value estimate of KRW 230,000, which corresponds to 14 times 2023 price/earnings and 6 times EV/EBITDA. We retain our view that Semco’s shares are undervalued. We believe Semco’s June quarter results were impressive, showing resilience despite the headwinds, just as we had anticipated in our latest report published in early July. We expect a moderate price decline for commoditized MLCCs, as demand for smartphones and PCs is more sensitive to the economic slowdown, and ongoing inventory correction seems to last at least until the second half of this year. However, solid sales for premium MLCCs underpinned by the demand for autos and industrials will contribute to improve the product mix and maintain the blended ASP for MLCCs. Similarly, in the package substrate business, the supply of package substrates will remain tight because of the wider adoption and the progress of multilayering, and the higher ASP due to the tight supply will more than offset the negative impact of weaker-than-expected set shipments. As such, we believe Semco can benefit from robust high-end demand thanks to its broad product portfolio.

Samsung Electro-Mechanics, or Semco, is the global second supplier of multilayer ceramic capacitors, or MLCCs, which account for 45%-50% of Semco’s revenue and 70%-80% of operating income. MLCCs are necessary to stabilize and control electric flow, and thus necessary for all electronic circuits. We believe the robust demand for MLCCs, mainly from smartphone and automotive manufacturers, will be the driver of Semco’s growth in the midterm.

We cut our earnings forecasts and fair value estimates for two multilayer ceramic capacitor, or MLCC, suppliers, Samsung Electro-Mechanics, or Semco, and Yageo, as we incorporate lower shipment assumptions for smartphones and PCs. Prolonged lockdowns in China, cost-push inflation, and the Ukraine-Russia war have substantially cooled down demand for consumer electronics products, and as a result, we expect the inventory correction of commoditized MLCC will continue longer than we had previously anticipated. While our new 2022 forecasts assume a mid- to high-single-digit percentage shipment decline for smartphones and a 10% shipment drop on PCs, we think the product portfolio of both Semco and Yageo is much more resilient than in the past. Driven by solid demand from autos, servers, and data centers, we expect that the utilization rate for premium MLCCs, tantalum capacitors, and package substrates will remain high throughout the year, supporting both firms’ profitability. Therefore, we believe shares of both firms are undervalued. Semco’s fair value estimate is cut to KRW 230,000 from KRW 257,000, which is 13 times 2023 price/earnings, and Yageo’s fair value estimate is revised to TWD 640 from TWD 700, which is 12 times 2023 price/earnings.