MLCC Supplier Earnings: Unexpected Price Erosion Will Moderate Going Forward; Shares Undervalued

Two multilayer ceramic capacitor, or MLCC, suppliers, Samsung Electro Mechanics 009150 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; 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.

While Semco’s September-quarter revenue increased 6.3% sequentially, driven by better MLCC utilization, its operating margin unexpectedly fell to 7.8% from 9.2% in the June quarter. The company explained that Japanese competitors have lowered MLCC prices to take advantage of the weak Japanese yen. For example, over the past three years, the Japanese yen has depreciated more than 30% against the U.S. dollar, while the Korean won has depreciated about 15%-16%, giving Japanese suppliers some room to lower prices to gain market share. While we believe the sharp postearnings decline in Semco’s stocks is caused by the growing concerns about intensifying price competition, we view that the price erosion for this quarter is mostly a one-time factor reflecting the current currency exchange rate and thus the price decline will moderate in subsequent quarters.