We Expect MLCC Suppliers’ Margins to Recover in H2

We lower our fair value estimates for Murata Manufacturing 6981 and Taiyo Yuden 6976 to JPY 9,700 and JPY 6,000, from JPY 10,000 and JPY 6,500, respectively, as their profitability recovery will be slower than previously anticipated due to prolonged inventory correction. In addition to the further reduction in procurement of components used for Android devices and PCs, iPhone production during the holiday season was lower than expected due to factory shutdowns caused by the pandemic, and capital spending on base stations and data centers is stagnating due to the economic slowdown. Because of this weaker demand, we expect multilayer ceramic capacitor, or MLCC, suppliers to further reduce their utilization rates in the first half of 2023, as their inventory levels have not been reduced as expected. As a result, we lower Murata’s fiscal 2023 (ending March 2024) revenue by 7% and operating margin assumption to 19.7% from 21.8%, and Taiyo Yuden’s fiscal 2023 revenue by 8% and operating margin assumption to 13.3% from 16.8%, which is the reason for lowering their fair value estimates. Meanwhile, we remain optimistic about the long-term growth opportunity for MLCCs, driven by increasing data traffic and auto digitalization. We expect the March quarter to be the bottom of the utilization rate, which should improve toward the end of 2023.

We are impressed that the MLCC price declines have been modest compared with previous downturns. Supported by the relatively resilient demand for large-size MLCCs that are used in automobiles and information infrastructure, major MLCC suppliers did not implement an aggressive pricing strategy to protect market share for small-size MLCCs used mainly in IT equipment. Instead, MLCC suppliers responded to the slowdown in demand by flexibly adjusting their utilization rates. Overall, we retain our view that the MLCC industry has become much more disciplined than in the past.