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Morningstar | Contents Growth on Auto Mitigates Weak Smartphone Production; Murata's Shares Undervalued

Murata is a top supplier of passive components, such as the multilayer ceramic capacitor, or MLCC (35% global share), and surface acoustic wave, or SAW, filters (45% global share). While we acknowledge that shipments of digital devices--such as TVs, PCs, and handsets--are slowing down, we believe progress in telecommunications technology will be the driver to increase contents per device.Wireless carriers continue to introduce faster communication speeds, according to the roadmap legislated by the 3rd Generation Partnership Project, or 3GPP, a worldwide organization for telecom specification. The adoption rate of long-term evolution, or LTE, networks began to increase after the launch of the iPhone 5 in September 2012. As a result, we estimate the proportion of LTE phones among global shipments has increased from 7% in 2012 to 37% in 2015. In addition, LTE-advanced networks were commercialized in 2014, and we assume LTE-advanced phones comprised 7% of total handset shipments in 2015. The key technology used on LTE-advanced phones is termed Carrier Aggregation, or CA, which utilizes multiple frequency bandwidths at once to increase overall transmission. In order to achieve faster communication, therefore, smartphones need to capture multiple bandwidths. For instance, while the iPhone 5S captures 13 bands, the iPhone 6 captures 20, and the iPhone 6S captures 24. As each frequency band requires a different filter, the number of passive components per phone has grown significantly over the years.We believe this trend will continue over the next decade. According to the 3GPP release, we expect that CA utilizing 3 frequency bands at once will be commercialized later in 2016, and CA in China will flourish in 2017. Moreover, CA with additional bands is estimated to begin in 2018-19. Introduction of new technologies will contribute to increasing wireless content per phone, and therefore, we expect solid growth in demand for key components. For instance, while we expect global handset shipments to grow 2.0% per year from 2015 to 2020, we believe MLCC (10.9% CAGR) and SAW filters (14.2% CAGR) will achieve higher unit growth over the same period.