MLCC Price Erosion Limited on Solid Auto Demand; Yageo Shares Undervalued

We have mixed feelings about Yageo’s results for the quarter that ended in December. On the positive side, the reported results were largely in line with our expectations and the company’s guidance, except for operating and net income margins, which were below our forecasts due to one-time factors. On the negative side, the March quarter's guidance numbers and management’s outlook for the first half of the year were slightly weaker than expected. Meanwhile, based on management’s comments and industry data, multilayer ceramic capacitor price erosion is likely to be much lower than in the past downturns, which is supporting our view that the MLCC industry is much more disciplined than in the past. We will update our earnings forecasts as well as our fair value estimate after speaking with the company, but we maintain our view that Yageo’s shares are undervalued.