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Morningstar | Robust Demand Will Enable Price Hike of MLCC, but Mostly Priced in; Taiyo Yuden Shares Fairly Valued

Taiyo Yuden's operating income for the June quarter is JPY 6 billion, which is 75% above the previous year's number, but in line with our forecast of JPY 5.8 billion. Driven by the robust demand from autos and industrial equipment, revenue for capacitors increased 22% from the previous year, which is the major reason of the margin expansion to 10.0% from 6.3%. The company revised its operating income guidance for fiscal 2019 (financial year ending March 2019) from JPY 21 billion to JPY 24.5 billion by updating the forecast of the September quarter, but not revising the assumptions on the second half. Therefore, we believe that its operating income for this fiscal year will eventually reach our forecast of JPY 28 billion.

As Taiyo Yuden's share price has almost doubled since its latest bottom in March, we view that its upbeat fundamentals are mostly priced in, and thus, retain our fair value estimate of JPY 3,000, as well as our no-moat rating.

At the conference call, the management mentioned that the company is asking its clients to accept a price hike of multilayer ceramic capacitors, or MLCC, because of the tight demand-supply balance. In fact, we estimate that orders for capacitors increased more than 30% from the previous year, pushing up its order backlog by 80% from the previous year, and exceeding its sales by 25%. We believe these numbers suggest that suppliers are not able to fulfill all the demand for MLCCs in the short run. While auto digitalization will continue to drive the growth of MLCCs, we forecast that the capacity expansion will be limited, because of the restriction on equipment, materials and engineers. Therefore, we maintain our view that the proposed MLCC price hike will succeed, pushing up Taiyo Yuden's operating income to JPY 38 billion in fiscal 2020 from JPY 28 billion in fiscal 2019.