May 11, 2017 6:00 am JST

TDK's growth strategy comes under scrutiny

Net profit forecast to drop 62% as acquired companies face stiff competition

TAKEHIKO HAMA, Nikkei staff writer

President Shigenao Ishiguro talks at a press conference during TDK's earnings announcement.

TOKYO -- Uncertainty looms over Japanese electronic parts maker TDK's growth strategy as recent acquisitions have yet to produce results in a market that has grown more competitive.

TDK's earnings guidance for fiscal 2017, released Wednesday, projects a 62% plunge in net profit to 55 billion yen ($482 million), based on U.S. accounting standards. Operating profit is also forecast to drop 62% to 80 billion yen.

The company pocketed a 144.4 billion yen profit in fiscal 2016 from the transfer of its majority stake in the radio frequency segment to U.S. chip maker Qualcomm. With that one-time windfall coming off the books, earnings were expected to dip. Factoring out the proceeds from the Qualcomm deal, the underlying operating profit came to about 64 billion yen last fiscal year. So the fiscal 2017 forecast translates to a 20% increase, short of the 93.4 billion yen profit in fiscal 2015 and 5 billion yen below the market estimate compiled by QUICK.

The reasons for the glum forecast are twofold. The first comes from the large hole left by the radio frequency business. RF components are used in products like smartphones, and the segment logged over 25 billion yen in operating profit for fiscal 2016. In fiscal 2017, that profit will all but disappear.

The second is increasing competition against companies TDK recently acquired. Over the last year TDK purchased five overseas companies, investing about 200 billion yen. The largest was its approximately 150 billion yen purchase of InvenSense, a sensor system maker that supplies to Apple. President Shigenao Ishiguro has previously emphasized the rising importance of and demand for sensors with the spread of the "internet of things." For fiscal 2017, however, TDK "is not predicting that [InvenSense] will contribute much to profit," said a cautious Ishiguro.

TDK purchased InvenSense because it predicted growth as an Apple supplier, but there are worrisome signs. Reports emerged earlier this month that German electronics company Robert Bosch won sensor orders from Apple. When asked about the developments, TDK's Ishiguro was restrained in saying, "I cannot comment [on Bosch], but I would like to increase our range of clients." A decline in orders from a major client would undercut InvenSense as an earnings source.

TDK's stock has remained unattractive compared with competitors like Nidec and Murata Manufacturing. Excluding TDK, Japan's six major electronic parts makers are all predicted to log profit growth in fiscal 2017 due to brisk sales of parts for smartphones and other products. Stock for each company has held firm since the end of last year with only TDK falling by about 10%. Concerns over TDK's acquisition strategy are starting to show.

"I want to make sound preparations for a jump during our next medium-term plan [starting in fiscal 2018]," said Ishiguro. The question is now whether the current lull produced by the move from radio frequency components to sensors is temporary. Ishiguro is already facing a critical moment in just his second year.

TDK Corp.

Japan

Market(Ticker): TKS(6762)
Sector:
Industry:
Electronic Technology
Electronic Components
Market cap(USD): 8,981.53M
Shares: 129.59M

NIDEC Corp.

Japan

Market(Ticker): TKS(6594)
Sector:
Industry:
Producer Manufacturing
Electrical Products
Market cap(USD): 31,652.45M
Shares: 298.14M

Murata Manufacturing Co. Ltd.

Japan

Market(Ticker): TKS(6981)
Sector:
Industry:
Electronic Technology
Electronic Components
Market cap(USD): 35,056.77M
Shares: 225.26M

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