The Market Underestimates Long-Term Growth of Auto Electrification, Which Will Provide a Long-Term Investment Opportunity

We believe the market is overlooking the long-term growth opportunity for auto electrification. TDK Corp (6762 JP)'s share price has dropped 8% this year, as the market is concerned that its transformation strategy to focus on auto electrification may take longer than expected to succeed. Meanwhile, Japanese tech stocks are performing well in 2017, with a 10%-15% surge for most stocks, even though foreign exchange movements have been a headwind. We think the market anticipates recovery for the smartphone market, and most good news is already embedded in current share prices. On the other hand, we believe the market still has not acknowledged the accelerating growth of contents per car, which will provide a long-term investment opportunity.

Key Takeaways

Shipments of most digital appliances, which used to be the growth driver for electronic devices, are slowing down. Therefore, the growth opportunity in the automotive industry is becoming the crucial factor for electronic component manufacturers for the next decade.
Environmental and safety regulations require automobiles to adopt new electronic devices, and as a result, electronic components per car will increase.
We forecast that passive components per car, which are necessary for all electronic circuits, will increase 10% per year for the next decade, twice as fast as the past decade. In our view, the accelerating growth momentum is not yet fully captured by the market.
Among the four passive component companies we cover, TDK is our top pick. TDK is the global top supplier of MLCCs and inductors, the global second-place supplier of DC-DC converters, and the global third-place supplier of magnetic sensors and temperature sensors for automobiles.

Coverage apart from TDK: Murata Manufacturing Co Ltd (6981 JP), Kyocera Corp (6971 JP) and Taiyo Yuden Co Ltd (6976 JP).

Analyst: Kazunori Ito

Auto Electrification 'Drives' Growth of Passive Components