EUR 850.00 For Business Accounts Only

Morningstar | Bullish Outlook on Auto MLCCs Is Mostly Priced In; TDK Shares Fairly Valued

TDK’s operating income for the June quarter of JPY 25.4 billion was above our forecast of JPY 22 billion. While robust auto demand continues to drive the growth of multilayer ceramic capacitors, or MLCCs, as expected, revenue growth on polymer rechargeable batteries was above our forecast. Although recovery in Chinese smartphone production contributed to the growth, we believe that orders from Chinese manufacturers are unsustainable because of the weaker end demand, and so June quarter numbers are mostly in line with our long-term forecasts. Management emphasized that strong demand for auto MLCCs will continue, as higher reliability on components and redundancy on circuit design are required for advanced driver-assistance systems, or ADAS, and autonomous driving, which also supports our view. We retain our fair value estimate of JPY 12,500, along with our no-moat rating. We believe that shares are fairly valued, as favorable conditions on auto MLCCs are mostly priced in.

Meanwhile, the sensor application products segment recorded an operating loss of JPY 4.9 billion on the first quarter, which was below our expectations, owing to increasing research and development costs. We think management seems more confident on revenue growth on motion sensors, magnetic sensors, and ultrasonic sensors on the second half of this year by capturing new customers, leveraging its alliance with Qualcomm. While we agree about the huge growth potential of the sensor market, we are somewhat skeptical whether the company can earn sufficient profits from the business, because of the tough competition and increasing fixed costs. TDK aims to achieve high-single-digit operating margin for the segment by fiscal 2021, and progress of the margin expansion may slightly lift our fair value estimate in the future.