Semco Earnings: Automotive MLCC Inventory Correction Completed, Utilization to Recover

We lower our fair value estimate for narrow-moat Samsung Electro-Mechanics, or Semco, to KRW 190,000 from KRW 200,000 due to the larger-than-expected price erosion for semiconductor packaging in the December quarter triggered by sluggish demand for PCs and servers. On the other hand, it is encouraging that the inventory adjustment of multilayer ceramic capacitors, or MLCCs, used in automobiles appears to have been largely completed in the second half of 2023, and did not last, as we had feared. As we expect PC and server shipments to pick up in the coming quarters, we believe that the December-quarter’s operating margin of 4.8% will be the low point and will recover each quarter as capacity utilization improves, reaching a near double-digit operating margin in the second half of this year. In the longer term, we continue to believe that Semco is better-positioned to capitalize on the growing demand for automotive MLCCs and, therefore, believe its shares are undervalued.