IR & Research Intelligence, Sessa Investment Research

Sessa Investment Research

IR & Research Intelligence

Sponsored research focusing on Japanese small cap.

Equity Bottom-Up

<ul><li>While delayed by roughly one year, likely due to the glut of inventory accumulation in the wake of the spike in special demand caused by the global pandemic, and subsequent extreme stress on global supply chains, resulting in double-booking orders, etc., earnings have started a full-fledged recovery against the backdrop of an unusual situation of low levels of distribution inventories across all end markets just as the silicon cycle enters an upturn.</li><li>This coincides with a full-fledged recovery in PC demand driven by the October Windows 10 end-of-service PC replacement, and rapid diffusion of AI PCs (equipped with dedicated AI accelerators designed to optimize and accelerate AI tasks on a device, providing improved performance and efficiency in handling AI and GenAI workloads without relying on external servers or cloud services).</li><li>Q1 2025 Gartner PC shipments were: worldwide +4.8% YoY, US +12.6% and Japan +15.6%.</li></ul>

While delayed by roughly one year, likely due to the glut of inventory accumulation in the wake of the spike in special demand caused by the global pandemic, and subsequent extreme stress on global supply chains, resulting in double-booking orders, etc., earnings have started a full-fledged recovery against the backdrop of an unusual situation of low levels of distribution inventories across all end markets just as the silicon cycle enters an upturn.This coincides with a full-fledged recovery in PC demand driven by the October Windows 10 end-of-service PC replacement, and rapid diffusion of AI PCs (equipped with dedicated AI accelerators designed to optimize and accelerate AI tasks on a device, providing improved performance and efficiency in handling AI and GenAI workloads without relying on external servers or cloud services).Q1 2025 Gartner PC shipments were: worldwide +4.8% YoY, US +12.6% and Japan +15.6%.

Torex Semiconductor (6616 JP) - Start of a Full-Fledged Recovery from FY26/3

<ul><li>FY24/3 results were consolidated net sales -19.4% YoY, OP dropping from JPY 3,976mn in FY23/3 to an operating loss of JPY 1,778mn, and profit attributable to owners of parent dropping from JPY 2,179mn in FY23/3 to a net loss of JPY 4,297mn. Nevertheless, the Company maintained the dividend of 56 yen.</li><li>The two main losses incurred in FY24/3 were 1) inventory write-down in mfg. cost of sales and 2) extraordinary impairment loss. Following weak 1H FY25/3 results, partly reflecting the Q2 foreign exchange loss of JPY 298mn due to the sharp yen appreciation in Q2, TOREX revised down its full-term forecasts for FY25/3, noting that the original budget had anticipated a completion of the adjustment of distribution inventories during the 1H, and a clear recovery in demand from the 2H.</li><li>TOREX again revised down full-term profits, to net loss on Q3 results, with Phenitec citing weakness in industrial equipment, etc., particularly in North America (see our 2/17 Q3 Flash for details). Since depreciation peaks in FY25/3, it will become easier to record profits going forward.</li></ul>

FY24/3 results were consolidated net sales -19.4% YoY, OP dropping from JPY 3,976mn in FY23/3 to an operating loss of JPY 1,778mn, and profit attributable to owners of parent dropping from JPY 2,179mn in FY23/3 to a net loss of JPY 4,297mn. Nevertheless, the Company maintained the dividend of 56 yen.The two main losses incurred in FY24/3 were 1) inventory write-down in mfg. cost of sales and 2) extraordinary impairment loss. Following weak 1H FY25/3 results, partly reflecting the Q2 foreign exchange loss of JPY 298mn due to the sharp yen appreciation in Q2, TOREX revised down its full-term forecasts for FY25/3, noting that the original budget had anticipated a completion of the adjustment of distribution inventories during the 1H, and a clear recovery in demand from the 2H.TOREX again revised down full-term profits, to net loss on Q3 results, with Phenitec citing weakness in industrial equipment, etc., particularly in North America (see our 2/17 Q3 Flash for details). Since depreciation peaks in FY25/3, it will become easier to record profits going forward.

Torex Semiconductor (6616 JP) - Bright Spots on the Horizon for FY26/3

<ul><li>TOREX SEMICONDUCTOR announced 1H FY25/3 consolidated financial results at 16:00 on Thursday 11/14, and it held a results briefing on Tuesday 11/19 at 16:00.</li><li>Headline numbers were consolidated net sales -5.5% YoY, operating profit +277.2% YoY, and profit attributable to owners of parent turning into the black.</li><li>However, in a pattern similar to the three months for Q2-only last term, profits dropped into losses, from an operating loss of JPY 133 million for FY24/3 Q2 (OPM -1.9%) → an operating loss of JPY 28 million for FY25/3 Q2 (OPM -0.4%), partly reflecting the high electricity rates for Phenitec, citing the prolonged adjustment of distribution inventories due to a slowdown in demand for industrial equipment as well as general consumer electronics, and a pause in the recovery of the China market. </li></ul>

TOREX SEMICONDUCTOR announced 1H FY25/3 consolidated financial results at 16:00 on Thursday 11/14, and it held a results briefing on Tuesday 11/19 at 16:00.Headline numbers were consolidated net sales -5.5% YoY, operating profit +277.2% YoY, and profit attributable to owners of parent turning into the black.However, in a pattern similar to the three months for Q2-only last term, profits dropped into losses, from an operating loss of JPY 133 million for FY24/3 Q2 (OPM -1.9%) → an operating loss of JPY 28 million for FY25/3 Q2 (OPM -0.4%), partly reflecting the high electricity rates for Phenitec, citing the prolonged adjustment of distribution inventories due to a slowdown in demand for industrial equipment as well as general consumer electronics, and a pause in the recovery of the China market. 

Torex Semiconductor (6616 JP) - Q2 Follow-Up

<ul><li>While TOREX Group 1Q FY25/3 consolidated net sales decreased -2.4% YoY, they increased sequentially QoQ +0.9% (see graph on P3), in part boosted by the weak yen, but also reflecting the beginning of a pick-up in China in applications such as general consumer electronics, suggesting the adjustment of distribution inventories has largely run its course.</li><li>For reference, revenue of the Analog segment of Texas Instruments (US) for the Apr-Jun 2Q of FY24/12 declined -10.7% YoY, but increased sequentially QoQ +3.2%.</li><li>According to the transcript of TI’s conference call, on a QoQ sequential basis, industrial was down low single digits and automotive was down mid single digits, while personal electronics grew mid teens with broad-based growth, and communication equipment was up mid-single digits. </li></ul>

While TOREX Group 1Q FY25/3 consolidated net sales decreased -2.4% YoY, they increased sequentially QoQ +0.9% (see graph on P3), in part boosted by the weak yen, but also reflecting the beginning of a pick-up in China in applications such as general consumer electronics, suggesting the adjustment of distribution inventories has largely run its course.For reference, revenue of the Analog segment of Texas Instruments (US) for the Apr-Jun 2Q of FY24/12 declined -10.7% YoY, but increased sequentially QoQ +3.2%.According to the transcript of TI’s conference call, on a QoQ sequential basis, industrial was down low single digits and automotive was down mid single digits, while personal electronics grew mid teens with broad-based growth, and communication equipment was up mid-single digits. 

Torex Semiconductor (6616 Jp) - 1Q Follow-Up

<ul><li>While current underlying demand has yet to show signs of a strong recovery, progress has been made in inventory adjustments in the distribution supply chain, and TOREX expects a recovery in sales from the 2H of 2024, and the top priority for this term is strengthening sales expansion initiatives.</li><li>Regarding the initial FY25/3 consolidated OP forecast, in addition to a contribution of ¥1,150mn from the +8.7% YoY increase in net sales, the decrease of ¥2,370mn in inventory write-downs in manufacturing cost of sales will drive a strong recovery in OP.</li><li>Although capex is set to decline -31.9% YoY to ¥3,600mn (mainly for equipment being installed in the new Phenitec Kagoshima Fab clean room), having peaked out last term, depreciation will increase +27.7% YoY to ¥3,000mn as the new clean room has started operations. </li></ul>

While current underlying demand has yet to show signs of a strong recovery, progress has been made in inventory adjustments in the distribution supply chain, and TOREX expects a recovery in sales from the 2H of 2024, and the top priority for this term is strengthening sales expansion initiatives.Regarding the initial FY25/3 consolidated OP forecast, in addition to a contribution of ¥1,150mn from the +8.7% YoY increase in net sales, the decrease of ¥2,370mn in inventory write-downs in manufacturing cost of sales will drive a strong recovery in OP.Although capex is set to decline -31.9% YoY to ¥3,600mn (mainly for equipment being installed in the new Phenitec Kagoshima Fab clean room), having peaked out last term, depreciation will increase +27.7% YoY to ¥3,000mn as the new clean room has started operations. 

4Q Follow-Up - Torex Semiconductor (6616 JP)

Japan

Torex Semiconductor Ltd. designs and develops analog power management ICs. The Company offers products including voltage detectors, regulators, and DC/DC converters used in small electronic devices.

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Torex Semiconductor (6616 JP)