Semco and Yageo Should See MLCC Utilization Improve in H2

We lower our 2023 revenue forecasts for two passive component suppliers, Samsung Electro-Mechanics 009150 and Yageo 2327, 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 stocks 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.

We lower Semco’s 2023 sales and operating income forecasts to KRW 9.25 trillion and KRW 950 billion, from KRW 10.4 trillion and KRW 1.5 trillion, respectively. We lower the 2023 operating margin assumption for the component division to 13.5% from 17.1%, due to the lower-than-expected capacity utilization in the first half, but we forecast its operating margin to return to the high teens in the second half. Similarly, we reduce our 2023 operating margin assumption for the package solution division to 14.2% from 24.3%, due to the lower utilization and pricing assumptions for substrates used in application processors and 5G antennas. Meanwhile, we expect profitability for high-end substrates to remain healthy, due to supply constraints.