Denso Earnings: Near-Term Revenue Growth To Be Driven by Production Recovery of Toyota

We raise Denso’s 6902 fair value estimate to JPY 9,500 from 9,100, after increasing our near-term revenue assumptions based on a stronger outlook of automobile production by its OEM customers. The company’s June quarter revenue was better than expected across all regions, growing 21% year on year. This was mainly supported by the production volume recovery of its largest customer, Toyota, which grew 20% year on year in the same period, up from 4.6% in the March quarter. Although we expect weaker automobile production by Japanese OEMs in China in the near term, we expect continued recovery in other regions as well as further electric vehicle component sales, such as inverters and electronic control units. As such, we raise Denso’s fiscal 2023 (ending March) revenue growth assumption to 8.3% year on year, up from 3.8% previously. We believe Denso’s shares are fairly valued.

While guidance revenue was revised to 4.7% growth year on year, up from a 1.6% decline, we continue to believe this is conservative, based on the company’s assumptions of exchange rates and OEM production plans. However, our sales growth estimate for Asia, excluding Japan, is below guidance. This is based on our expectation that the sluggish EV rollout in China by the Japanese OEMs (which account for the majority of sales by customers in the region) as well as near-term automobile inventory adjustments in the region will lead to weaker sales. Therefore, we project Asia ex-Japan sales to decline 4% year on year compared with guidance of a 1% decline. Nevertheless, we expect demand to be stronger in other regions in Asia outside China, as well as in North America/Europe, which will also be supported by the weak yen.