TDK's Earnings Drivers Are Diversifying at an Accelerating Pace, with Batteries, AI Passive Components, and Magnetic Heads Jointly Supporting Growth

Overview

The report examines whether TDK can establish more stable and diversified earnings growth following its strong FY3/27 first-quarter results. BofA believes small batteries remain a stable foundation, while medium-sized batteries, AI server-related passive components, HDD magnetic heads, and sensors are becoming new growth drivers. It therefore raised its earnings forecasts and maintained its Buy rating and 4,100 yen price objective.

Core views

Strong first-quarter results prompted BofA to raise its forecasts for TDK across the board. The FY3/27 operating profit forecast was raised from 307.8 billion yen to 349.1 billion yen, and the FY3/28 forecast from 359.4 billion yen to 395.9 billion yen; FY3/27, FY3/28, and FY3/29 EPS forecasts were raised from 123.57, 145.75, and 166.14 yen to 141.88, 156.85, and 178.46 yen, respectively. Revenue forecasts for the same periods were raised from 2,649.0 billion, 2,856.493 billion, and 3,050.193 billion yen to 3,075.3 billion, 3,289.6 billion, and 3,556.869 billion yen, respectively. The report expects operating profit to increase 28.2% to 349.1 billion yen in FY3/27 and rise another 13.4% to 395.9 billion yen in FY3/28, with earnings growth no longer driven solely by smartphone batteries. Small batteries remain central to the current resilience of earnings. The market had previously been concerned that rising memory prices would increase customers' material costs and intensify pressure on battery suppliers to cut prices. However, first-quarter results showed that TDK absorbed the impact of raw-material price increases and the reduction in China's VAT rebate rate through price pass-through and cost reductions, demonstrating the competitiveness of its products. Beginning in the second quarter, metal-case products launched alongside new devices from a major customer are expected to increase market share and average selling prices, while higher battery content per foldable device should also support volumes. Metal-case products are expected to account for 14%—15% of small-battery sales in FY3/27, approximately double the prior year's proportion. Although the smartphone market continues to be affected by factors including memory shortages, TDK has relatively high exposure to flagship models from major customers and is continuing to gain share, leading the report to expect stable shipment volumes. Silicon-anode batteries are still expected to account for 15% of sales this fiscal year, but the company launched its fourth-generation product during April—June. High-value-added products such as metal-case and silicon-anode batteries, together with ongoing cost reductions, are expected to sustain high margins. Medium-sized batteries offer clearer medium- to long-term incremental growth. Medium-sized battery sales grew 45%—50% year over year in the first quarter of FY3/27, and BofA believes full-year growth of approximately 40% is achievable. Demand is currently driven by residential energy storage systems, electric motorcycles, and drones, while UPS and BBU batteries for AI data centers will become new sources of growth. UPS products have already been launched, and BBU mass production is expected to begin in the third quarter of FY3/27. The company targets medium-sized battery sales of 400.0 billion—500.0 billion yen in FY3/31, of which 200.0 billion—300.0 billion yen would come from AI-related businesses. Because products such as BBUs have not yet entered production, BofA currently forecasts FY3/31 sales of only approximately 300.0 billion yen, leaving upside potential if the AI business expands faster than expected. The acquisition of Malaysia-based Linergy Power helps diversify production locations, while its integrated manufacturing capabilities beginning with battery cells may also support relatively high profitability. Passive components have already shifted from a potential driver to a significant profit contributor. The segment generated FY3/27 first-quarter operating profit of 17.4 billion yen, up 172% year over year, with an operating margin of 9.8%; BofA forecasts FY3/27 and FY3/28 operating profit of 74.7 billion yen and 91.6 billion yen, respectively, representing year-over-year growth of 79% and 23%. Automotive demand remains stable, but weaker-than-previously-expected growth in battery electric vehicles means TDK's MLCC capacity utilization remains below that of peers. At the same time, demand for high-voltage MLCCs from AI servers and data centers is rising. TDK can adapt its automotive MLCC technology and products for direct use in AI servers and has already secured demand for accelerator boards, where supply is tight, creating conditions for a near-term improvement in utilization. AI data centers already account for approximately 20%—30% of aluminum electrolytic capacitor sales, and the company is doubling the relevant capacity. Beginning in the second half of FY3/27, inductors, which account for slightly more than 35% of passive-component sales, are also expected to benefit from vertical power-delivery applications. The improvement in magnetic application products is being driven by recovering shipments and higher capacity utilization. BofA forecasts FY3/27 segment operating profit of 45.5 billion yen, up 69% year over year, and FY3/28 operating profit of 53.8 billion yen, up 8% year over year. Although R&D spending on next-generation heat-assisted magnetic recording heads will increase, rising magnetic-head volumes are expected to lift the segment's operating margin from 10.3% in FY3/26 to 12.5% this fiscal year. The suspension business has been highly profitable since FY3/26, while magnetic-head profitability had previously been low because demand volumes were mismatched with capacity. In addition to resuming supply to an existing customer, the company has recently restarted shipments to two US HDD manufacturers, and FY3/27 magnetic-head shipments are expected to grow by more than 40% year over year. As HDD manufacturers increase capacity by adding more platters, the number of magnetic heads used per HDD is expected to rise from 6.7 five years ago to 12.0 in 2028, nearly doubling. With supply and demand tightening, the company also appears to be considering price increases. Sensors currently make only a small earnings contribution, but the first-quarter operating margin has already reached 12.7%. Recent improvement has come from temperature and pressure sensors for automobiles and industrial equipment, magnetic sensors for automobiles and smartphones, and MEMS sensors for smartphones and industrial equipment. In particular, increased shipments of digital microphones to a major smartphone manufacturer have significantly improved the profitability of the MEMS business. Over the medium to long term, MEMS motion sensors and TMR sensors, a core magnetic product, may see broader applications in the physical AI market, including humanoid robots, providing the long-term growth optionality highlighted in the report. On valuation, BofA maintained its 4,100 yen price objective but lowered the FY3/28 forecast P/E multiple used from 28x to 26x due to slowing share-price momentum among AI hardware-related companies. The 26x multiple is approximately at the upper end of TDK's average valuation range over the past decade. The report believes that steady expansion in batteries, rising passive-component profitability, improvement in magnetic application products, and the increasing visibility of the AI business are sufficient to support this valuation. FY3/27 is the final year of the current medium-term management plan, and the company has improved cash flow and its business portfolio by reviewing low-ROIC businesses; a new plan will begin in FY3/28. BofA also notes that TDK's shareholder return ratio is not particularly high relative to other major electronic-component manufacturers. If the company uses its improved cash flow for aggressive share repurchases in the future, this could provide an additional upside catalyst. Its model projects free cash flow to shift from negative 298.576 billion yen in FY3/27 to positive 112.088 billion yen in FY3/28.

Analysis framework

The report first updates its revenue, operating profit, EPS, and segment forecasts based on FY3/27 first-quarter results. It then analyzes changes in volumes, pricing, product mix, capacity utilization, and margins across small and medium-sized batteries, passive components, magnetic products, and sensors. It subsequently aggregates segment growth into consolidated earnings and cash flow, determines the price objective using forecast FY3/28 EPS and the historical P/E range, and identifies downside risks to the price objective.

Methodology notes

• Valuation MethodP/E and PEG Valuation

  Target P/E valuation based on forecast FY3/28 EPS

  The report derives its 4,100 yen price objective by applying a 26x P/E multiple to forecast FY3/28 EPS. The 26x multiple is approximately at the upper end of the company's average valuation range over the past decade and was reduced from the previous 28x.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposing profit changes by shipment volume, average selling price, product mix, and costs

  The report separately evaluates battery volume and pricing changes resulting from metal-case products and foldable devices, the recovery in magnetic-head shipments, higher capacity utilization, and changes in the proportion of high-value-added products to explain margin trends across segments.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Assessing component profitability through downstream demand, supply tightness, and capacity utilization

  Starting with demand growth from AI servers, data centers, and HDDs, the report analyzes supply-demand changes for MLCCs, aluminum electrolytic capacitors, inductors, and magnetic heads, and uses these changes to assess the potential for improvements in utilization, pricing, and profitability.

• Corporate Fundamentals and Financial Framework

  BofA iQmethod standard metric system

  The report uses BofA Global Research's standardized operating performance, earnings quality, and valuation metrics, together with comparisons based on historical and forecast income statements, balance sheets, and cash flow statements from the analyst model.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• TDK (6762.T; TTDKF; TTDKY)

  The report believes TDK will benefit from stable profitability in its battery business and growing demand for AI data center-related BBUs, MLCCs, aluminum electrolytic capacitors, inductors, and HDD magnetic heads.

  Strengths

  Strong product competitiveness and high profitability in small batteries; diversified growth sources across medium-sized batteries, passive components, magnetic heads, and sensors; first-quarter results validated its capabilities in price pass-through, cost reductions, and technological iteration.

  Weaknesses

  Battery profitability remains relatively dependent on smartphones; automotive MLCC capacity utilization is below that of peers; sensors currently make only a small earnings contribution.

  Comparison

  The report notes that TDK's automotive MLCC capacity utilization is below that of peers and that its shareholder return ratio is not necessarily higher than those of other major electronic-component manufacturers; the target valuation is set at the upper end of its average P/E range over the past decade.

  Risks

  An accelerating slowdown in battery-business growth, rising HDD inventories and weakening component demand, and slower-than-expected sensor profit expansion, particularly in automotive applications.

Key data

• Rating and Price ObjectiveBuy; 4,100 yenRating and price objective maintained; current price is 3,041 yen
• FY3/27 Operating Profit Forecast349.1 billion yenPreviously 307.8 billion yen; expected to grow 28.2% year over year
• FY3/28 Operating Profit Forecast395.9 billion yenPreviously 359.4 billion yen; expected to grow 13.4% year over year
• FY3/27 EPS Forecast141.88 yenPreviously 123.57 yen; expected to grow 41.0% year over year
• Target Valuation Multiple26x forecast FY3/28 P/EReduced from 28x and approximately at the upper end of the average valuation range over the past decade
• First-Quarter Medium-Sized Battery Sales GrowthUp 45%—50% year over yearApproximately 40% growth for the full FY3/27 is considered achievable
• FY3/31 Medium-Sized Battery Sales Target400.0 billion—500.0 billion yenThe target for AI-related businesses is 200.0 billion—300.0 billion yen; BofA currently forecasts approximately 300.0 billion yen
• First-Quarter Passive-Component Operating Profit17.4 billion yenUp 172% year over year, with an operating margin of 9.8%
• AI Data Center Share of Aluminum Electrolytic Capacitor SalesApproximately 20%—30%The company is working to double the relevant capacity
• FY3/27 Magnetic-Head ShipmentsUp more than 40% year over yearSupply resumed to an existing customer and two US HDD manufacturers
• Number of Magnetic Heads per HDDExpected to reach 12.0 in 2028Up from 6.7 five years ago, nearly doubling over the period
• First-Quarter Sensor Operating Margin12.7%Automotive, industrial equipment, smartphone, and digital microphone businesses drove the improvement

Impact & implications

The report believes TDK's earnings structure is shifting from heavy dependence on small smartphone batteries toward joint contributions from medium-sized batteries, AI server passive components, HDD magnetic heads, and sensors. If these businesses expand their contributions as expected from the second half of FY3/27, the company should be able to sustain relatively stable double-digit profit growth and support a target multiple at the upper end of its historical valuation range through improvements in its business portfolio, cash flow, and shareholder returns.

Risks

• An accelerating slowdown in the battery business's growth rate would pose downside risk to the price objective.
• Rising inventories in the HDD market and slowing component demand could weaken the improvement in the magnetic-head and suspension businesses.
• Slower-than-expected profit expansion in the sensor business, particularly weaker-than-expected progress in automotive applications, could limit medium- to long-term growth.

What to watch

• Monitor whether the earnings contributions from AI-related businesses such as BBUs, MLCCs, aluminum electrolytic capacitors, inductors, and magnetic heads accelerate in the second half of FY3/27.
• Monitor whether BBU battery mass production begins as planned in the third quarter of FY3/27.
• Monitor whether metal-case small batteries reach 14%—15% of sales in FY3/27 and the resulting changes in average selling prices and market share.
• Monitor whether AI-related MLCC demand improves capacity utilization and the progress of aluminum electrolytic capacitor capacity expansion.
• Monitor whether FY3/27 magnetic-head shipments grow by more than 40% year over year and the progress of price adjustments for magnetic products.
• Monitor the new medium-term management plan beginning in FY3/28 and shareholder-return initiatives such as more aggressive share repurchases.