Switch to income approach to assess EV amidst
growing expectations of economic recovery
■ Summary: We raise our forecasts for the five major components makers
due to early recovery in demand for electronic parts. Although we forecast a
2Q return to profitability in our results preview, prospects of even higher
earnings growth have strengthened with the upswing in July orders. At the
same time, we revise our TPs using the income approach as our valuation
method due to its capacity to reflect enterprise value (EV). This is because
with P/B valuation it is difficult to facilitate a fair assessment of changes in
EV associated with revised forecasts amid growing expectations of
economic recovery driven by relatively firm end markets for TVs, PCs and
mobile-phone handsets. We believe share prices have also finished
correcting low P/Bs and have started to factor in future earnings recovery
and growth. We upgrade our rating on Rohm from Neutral to
OUTPERFORM and make the following revisions to our TPs:
Mabuchi Motor (6592): OUTPERFORM, TP ¥5,500 (from ¥5,200)
Nidec (6594): OUTPERFORM, TP ¥8,000
TDK (6762): NEUTRAL, ¥5,000 (from TP ¥4,000)
Rohm (6963): OUTPERFORM (from Neutral), TP ¥7,400 (from ¥6,300)
Kyocera (6971): NEUTRAL, TP ¥7,800 (from ¥7,200)
Murata Mfg. (6981): UNDERPERFORM, TP ¥3,600
Nitto Denko (6988): OUTPERFORM, TP ¥3,800 (from ¥3,500) (see report
issued on 24 August)
■ Growth rate potential positive: The cyclical nature of the electronic parts
sector has become even more pronounced since the collapse of the IT
bubble. This is because of continuous price declines and a fall-off in the
added value of components with the emergence of Asian competitors and
the shift to emerging markets as the drivers of end markets. The abovementioned
early recovery in parts demand is largely due to correction of
excessively slimmed-down inventories and does not mean the above
structural problems have ended. With order momentum likely to decline as
we head into the seasonal adjustment period, there is probably only limited
upside price potential. However, the adjustment term may end in the short
term if the momentum of economic recovery particularly in the Asian region
gets stronger. With this in mind, we believe this is a good time to accumulate
the shares of companies that have been able to take advantage of the
downturn as a good opportunity to turn around their earnings structures and
those that are starting to cultivate new growth drivers, in view of their
currently low share prices and growth potential.
■ Stock calls: We revise our forecasts and TPs for the five major components
makers. In order of potential returns, they are Rohm ¥7,400 (+19%),
Mabuchi Motor ¥5,500 (+14%), Kyocera ¥7,800 (+7%), TDK ¥5,000 (-6%)
and Murata Mfg ¥3,600 (-18%). Based on these changes, we upgrade our
rating on Rohm from Neutral to OUTPERFORM.