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Morningstar | MEMS Sensor Growth Slower Than Anticipated; Cutting Our TDK FVE to JPY 12,000

After the earnings announcement and the meeting with TDK, we are trimming our fair value estimate to JPY 12,000 from JPY 12,500 despite the robust September quarter results. While we are confident in the growth of multilayer ceramic capacitors, or MLCCs, we lowered our revenue growth assumption for the sensor application products business, believing that the company’s original outlook is too optimistic. However, we retain our view that TDK will eventually benefit from increasing sensor demand, driven by the diffusion of Internet of Things, and will be able to leverage the alliance with Qualcomm to capture the growth opportunity. TDK’s share price has dropped sharply from its peak in September because of concerns about the trade war. Considering TDK’s leading position in auto MLCCs and rechargeable polymer batteries, we think the current share price is too pessimistic.

At the earnings briefing, TDK lowered its revenue growth guidance for the sensor application products segment for this fiscal year to 6% from 30%, and we estimate that the company failed to get an order on in-display fingerprint sensor for smartphones, as it has not established a sufficient supply chain with panel and module suppliers. While we believe that in-display sensors will be the standard for Android phones in the near future, we revised TDK’s midterm revenue and profit assumptions, as we are more concerned about the intense competition.

Meanwhile, even though the future economy is unpredictable, we forecast solid demand for auto MLCCs will continue in the longer run because of the increasing electronic content per auto. On the other hand, suppliers for auto MLCCs are limited; we estimate that TDK and Murata Manufacturing provides approximately 80% of auto MLCCs, as suppliers need to meet severe requirements to ensure the safety, which makes it difficult for Taiwanese suppliers to join the market.

We assume that the sharp drop in TDK’s share price is owing to concerns about the rechargeable battery business, which accounts for 64% of TDK’s operating profit this fiscal year. TDK’s polymer rechargeable battery is produced by its subsidiary in China, and more than 60% of the revenue is from Chinese handset makers, including Huawei. We thus acknowledge that TDK’s share price may be depressed for a while as the business will somewhat be affected by the trade war, but we believe that the increasing global demand for polymer batteries and TDK’s advantage in production capacity and energy density are intact.