Company Reports

We upgrade Yageo’s Morningstar Uncertainty Rating to Medium from High, and with a lower discount rate, we revise our fair value estimate to TWD 800 per share from TWD 750. We believe that Yageo’s diversified product portfolio and customer mix have made the company much more resilient to economic fluctuations, but the market has not yet fully recognized this transformation.

Yageo is one of the leading suppliers of passive components in Taiwan. Passive components are widely used in all kinds of electronic applications; they are necessary to stabilize and control electric flow and to remove electromagnetic noise from circuits. Yageo’s main products are chip resistors and multilayer ceramic capacitors, or MLCCs, in which the firm is ranked first and third in global production volume, respectively.

No-moat-rated Yageo’s March-quarter results and June-quarter guidance support our view that the operating margin bottomed out in the March quarter. While the improvement in capacity utilization in the coming quarters is likely to be somewhat slower than we had expected, the company’s operating expense ratio is likely to improve faster due to cost-cutting initiatives. As a result, we maintain our forecast for Yageo’s operating margin to reach 23.0% in the December quarter, up from 17.4% in the March quarter, and maintain our fair value estimate for Yageo of TWD 750.

No-moat Yageo’s December-quarter revenue and gross margin of TWD 27.4 billion and 34.5%, respectively, exceeded our expectations of TWD 26.3 billion and 33.2%, due to the two months of contribution from the acquired Telemecanique Sensors business. For the same reason, Yageo’s operating margin of 18.5% was lower than our forecast of 19.4%, due to the heavy operating expenses of the acquired business. We estimate that Yageo’s numbers, excluding the acquisition, were largely in line with our expectations. We have incorporated the impact of the acquisition into our forecast, which will add about 6% to sales after 2024. On the other hand, we have largely maintained our operating income forecast, as lower capacity utilization assumptions due to the prolonged inventory digestion will almost offset Telemecanique’s contribution to earnings. As a result, we maintain our fair value estimate for Yageo of TWD 750 per share and believe the shares are undervalued. We believe that the March quarter will be the bottom of the cycle, and we expect Yageo’s profitability to improve toward the end of the year as capacity utilization improves in the second half, and as Yageo improves the efficiency of Telemecanique’s operating expenses.

Yageo is one of the leading suppliers of passive components in Taiwan. Passive components are widely used in all kinds of electronic applications; they are necessary to stabilize and control electric flow and to remove electromagnetic noise from circuits. Yageo’s main products are chip resistors and multilayer ceramic capacitors, or MLCCs, in which the firm is ranked first and third in global production volume, respectively.

After revising our earnings forecasts, we have lowered our fair value estimate for narrow-moat Samsung Electro-Mechanics to KRW 200,000 per share from KRW 210,000 and raised our fair value estimate for no-moat Yageo to TWD 750 per share from TWD 670. We are concerned that the price erosion of multilayer ceramic capacitors, or MLCCs, will intensify, which will affect Semco more. On the other hand, we believe that the impact of MLCC price erosion is limited for Yageo, and that the company will benefit more from the recovering demand for tantalum capacitors, driven by the pickup in PC replacement demand in late 2024. Longer term, we maintain our view that passive component suppliers, including Semco and Yageo, will continue to benefit from the secular growth in smartphones, autos, and servers. Although we will be cautious on Semco’s profitability over the next few quarters, we believe both stocks are undervalued.

Yageo is one of the leading suppliers of passive components in Taiwan. Passive components are widely used in all kinds of electronic applications; they are necessary to stabilize and control electric flow and to remove electromagnetic noise from circuits. Yageo’s main products are chip resistors and multilayer ceramic capacitors, or MLCCs, in which the firm is ranked first and third in global production volume, respectively.

Two multilayer ceramic capacitor, or MLCC, suppliers, Samsung Electro Mechanics and Yageo, reported their September-quarter results on Oct. 26. As the stock reaction after the results showed, the two companies' results were in stark contrast. While Samsung Electro Mechanics', or Semco's, stock price dropped more than 10% after the results because of the unexpected margin contraction, Yageo's stock price rose about 5% on the next day after the results because of the solid margin outlook. Although Semco's results imply intensifying competition in MLCC, we are still optimistic that the company will grow at a faster pace than the market, driven by the share gains in MLCC for automobiles. We will revise our earnings forecasts as well as our fair value estimates after meeting with the companies, so for now we maintain our fair value estimates of KRW 210,000 for Semco and TWD 670 for Yageo. We believe that both companies are undervalued.

We have revised our earnings forecasts for two suppliers of multilayer ceramic capacitors, maintaining our fair value estimate for Samsung Electro-Mechanics, or Semco, at KRW 210,000 and lowering our fair value for Yageo to TWD 670 from TWD 700 as a result of a slower-than-expected recovery from an inventory correction. While Semco’s June quarter revenue was up 9.8% from the previous quarter, Yageo’s was up 2.5%. For the September quarter, Yageo expects revenue to be flat sequentially, while Semco expects mid-single-digit growth. While different seasonality makes sales momentum difficult to compare, we believe the difference is due to Semco’s auto MLCC business gaining market share and Yageo’s prolonged inventory correction of tantalum capacitors. While we believe shares of each company are undervalued, we prefer Semco to Yageo as we believe Semco’s strong revenue growth momentum will continue for the time being.

Yageo is one of the leading passive components suppliers in Taiwan. Passive components are widely used in all kinds of electronic applications, and necessary to stabilize and control electric flow, and to remove electromagnetic noise from circuits. Yageo’s main products are chip resistors and multilayer ceramic capacitors, or MLCCs, in which it is ranked first and third in global production volume, respectively.

We continue to believe that multilayer ceramic capacitors, or MLCC, suppliers will gradually increase capacity utilization in the coming quarters. Although the timing of a full recovery in demand for smartphones and PCs remains difficult to predict, we believe that the inventory digestion for smartphones has made significant progress in recent quarters, and therefore orders for MLCCs will gradually approach previous levels. Meanwhile, due to the much lower-than-expected PC shipments, we view that the progress of inventory correction for other electronic components used in PCs has been slower than expected. As a result, we maintain our fair value estimate for Samsung Electro-Mechanics, or Semco, at KRW 210,000, while we lower our fair value estimate for Yageo to TWD 700 from TWD 750 after fine-tuning our earnings forecasts. We continue to believe that both shares are undervalued as MLCC’s midterm growth driven by auto demand is not fully priced in. We prefer Semco over Yageo as Semco’s auto MLCC sales growth is highly likely to outperform the market.

Yageo is one of the leading passive components suppliers in Taiwan. Passive components are widely used in all kinds of electronic applications, and necessary to stabilize and control electric flow, and to remove electromagnetic noise from circuits. Yageo’s main products are chip resistors and multilayer ceramic capacitors, or MLCCs, in which it is ranked first and third in global production volume, respectively.

While Yageo’s March-quarter numbers were largely in line with our expectations, the company’s outlook for the June quarter was lower than we had anticipated. Despite the seasonality, the company expects little recovery in the June quarter. This suggests that demand is still weaker than we expected, due to heavy inventory in the supply chain. In particular, sluggish sales of tantalum capacitors may last longer, due to their greater exposure to the PC market. Meanwhile, we maintain our long-term view that the company will benefit from the growing auto demand, as evidenced by Yageo’s announcement in mid-April that it would invest EUR 205 million in North Macedonia, where Yageo already operates two plants that mainly produce multilayer ceramic capacitors for autos. We will review our earnings forecasts after speaking with the company later this month, but we maintain our view that Yageo’s shares are undervalued.

Yageo is one of the leading passive components suppliers in Taiwan. Passive components are widely used in all kinds of electronic applications, and necessary to stabilize and control electric flow, and to remove electromagnetic noise from circuits. Yageo’s main products are chip resistors and multilayer ceramic capacitors, or MLCCs, in which it is ranked first and third in global production volume, respectively.

We lower our 2023 revenue forecasts for two passive component suppliers, Samsung Electro-Mechanics and Yageo, due to the prolonged inventory correction. However, the downward revision for multilayer ceramic capacitors in this update was limited, while the revision for other products was larger. Therefore, we believe that the progress of the MLCC inventory correction is largely in line with our expectations. We expect MLCC utilization to bottom out in the March quarter and remain slightly below the actual demand in the June quarter, but to catch up with the end demand in the second half of the year. Although the share prices of MLCC suppliers have recovered significantly in recent months, we continue to be bullish, as we expect the destocking of MLCC inventories to end earlier than for other devices due to disciplined utilization control and the expected solid contribution from automotive demand. We remain optimistic about the long-term growth of MLCCs, driven by the robust demand from use in automobiles, servers, and smartphones. While we view both shares as undervalued, we prefer Yageo to Semco due to its lower valuation. We keep Semco’s fair value estimate at KRW 210,000 and revise Yageo’s to TWD 750 from TWD 720.

Yageo is one of the leading passive components suppliers in Taiwan. Passive components are widely used in all kinds of electronic applications, and necessary to stabilize and control electric flow, and to remove electromagnetic noise from circuits. Yageo’s main products are chip resistors and multilayer ceramic capacitors, or MLCCs, in which it is ranked first and third in global production volume, respectively.

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.

Although we cut Yageo’s earnings forecasts by incorporating the longer-than-expected inventory correction, we are encouraged that major multilayer ceramic capacitors, or MLCC, suppliers are lowering their utilization rate to digest inventories in the supply chain. As a result, we believe the end of the September quarter will be the peak of the inventory level, which is a positive sign, suggesting that we are at the bottom of the cycle. We note that the MLCC price erosion has been much smaller than in the past downturns as demand for premium MLCCs—which are used for autos, servers, and base stations—has been quite solid, supporting the blended average selling price to remain stable. In addition, Yageo did not follow the price competition this time as the company no longer depends on commoditized passive components. Therefore, we think that MLCC suppliers will maintain a relatively healthy margin and we remain confident about the long-term growth opportunities in 5G communication, increasing data traffic, and auto digitalization.

Yageo is one of the leading passive components suppliers in Taiwan. Passive components are widely used in all kinds of electronic applications, and necessary to stabilize and control electric flow, and to remove electromagnetic noise from circuits. Yageo’s main products are chip resistors and multilayer ceramic capacitors, or MLCCs, in which it is ranked first and third in global production volume, respectively.

Based on solid June-quarter earnings results, we reiterate our view that Yageo’s product portfolio is much more resilient than in the past. Due to the weaker demand outlook for both smartphones and PCs, we estimate that the utilization rate for commoditized components has dropped month by month to digest excess inventories in the supply chain. However, Yageo’s June-quarter gross margin came in at 38.8%, down from 41.0% in the previous year, but better than 38.1% in the previous quarter. Despite the lower utilization rate of commoditized passive components and lower sales of tantalum capacitors due to the lockdown, we estimate that Yageo has more than offset the shortfall by improving the productivity of the acquired Chilisin business. We also assume that the demand for specialized components remained solid throughout the quarter.