EUR 850.00 For Business Accounts Only

Morningstar | Solid Profitability of MLCC and HDD Heads Proves Resilience of TDK’s Product Portfolio

TDK’s December quarter operating income of JPY 32.7 billion is lower than our forecast of JPY 38.7 billion, but we think weak numbers are already embedded to the share price, as economic indicators and peers’ results have already been suggesting deceleration in China. From this point of view, we consider that TDK’s numbers were rather encouraging, as operating margin of the passive components segment improved to 13.8% from 12.4% of the previous year, despite the weakness of smartphone shipment. In addition, improved product mix of HDD heads also contributed to lift operating margin of the magnetic application products segment to 11.8% from 9.5%. TDK’s share has dropped approximately 40% from its recent peak last September, but we consider that TDK’s solid numbers show its diversified business portfolio is more resistant to the economic slowdown than the market had anticipated, which is the reason to believe TDK’s shares are currently undervalued. We plan to update our earnings forecasts and fair value estimate after meeting with the company in mid-February but do not expect to make material changes to our long-term view that further digitalization in various industries will continue to drive the growth of TDK’s multilayer ceramic capacitors, polymer rechargeable batteries, and sensors.

We believe that management’s business outlook for the next fiscal year is in line with our view: 1) demand for multilayer ceramic capacitors will remain relatively healthy as the increasing electronic contents growth of autos will mitigate the negative impact of weaker auto production; 2) management expects more orders for its magnetic sensors and motion sensors from new applications in 2019; and 3) revenue of polymer rechargeable batteries will increase in 2019, driven by new applications such as wearables, robots, and drones, despite the sluggish smartphone shipment.