AI server business is expanding rapidly, but overall profitability remains low

Overview

This report is a briefing from Goldman Sachs following Nichicon's earnings presentation. The core conclusion is that the AI server capacitor business is growing faster than previously expected, the probability of improvement in xEV film capacitors is rising, but overall company profitability remains relatively low, so the investment rating is maintained at Neutral.

Core views

Positive factors include a strengthened product line of aluminum electrolytic capacitors for AI servers, higher sales targets, and film capacitors for xEVs moving closer to a return to profitability. Cautionary factors are that the company did not provide a clear explanation of medium- to long-term company-wide profit levels or the marginal profit contribution from the AI server business, while FY3/27 company-wide operating margin guidance is only 4.7%. Therefore, Nichicon still needs to deliver profit expansion above market expectations to support a more positive rating.

Analysis framework

The report combines management comments from the earnings presentation, sales targets by business segment, cost pressure, company-wide operating margin guidance, and Goldman Sachs' valuation framework. On valuation, the 12-month target price is based on FY3/28E EV/GCI relative to CROCI/WACC, and implies FY3/27E P/B of 1.3x.

Methodology notes

• Valuation methodsEV/GCI vs CROCI/WACC

  Target price valuation framework

  Goldman Sachs said Nichicon's 12-month target price of ¥2,200 is based on FY3/28E EV/GCI relative to CROCI/WACC and implies FY3/27E P/B of 1.3x.

• factor_profileGS Factor Profile

  Comparison across growth, financial returns, valuation multiples, and overall percentile ranks

  GS Factor Profile compares individual stocks with the coverage universe and industry peers across growth, financial returns, valuation multiples, and composite metrics.

• scenario_riskM&A Rank

  M&A probability score

  Goldman Sachs uses an M&A Rank from 1 to 3 to assess acquisition probability; the chart in this report shows Nichicon's M&A Rank at 3, indicating a low probability and usually not included in target price.

Asset mapping & comparison

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

• Nichicon (6996.T) equity

  Covered name

  Strengths

  Demand for aluminum electrolytic capacitors for AI servers and sales targets have been clearly raised, the probability of improved profitability in xEV film capacitors has increased, and revenue, operating profit, EPS, and CROCI forecasts continue to rise through 3/29E.

  Weaknesses

  The company's overall operating margin remains low, with FY3/27 guidance at only 4.7%; the company has not clearly stated medium- to long-term overall profitability or the marginal profit contribution from the AI server business.

  Comparison

  Nichicon's rating is relative to Goldman Sachs' coverage universe of electronic components and semiconductor-related companies, including Murata Mfg., TDK, Taiyo Yuden, Rohm, Renesas Electronics, and others.

  Risks

  Exchange-rate fluctuations, changes in demand, material costs, power costs, EV market sales volatility, and subsidy impacts.

Key data

• RatingNeutralGoldman Sachs maintains a Neutral rating on Nichicon.
• 12-month target price¥2,200Against the current price of ¥2,736, this implies 19.6% downside.
• FY3/27 operating margin guidance4.7%The report believes the company's overall margins remain low.
• FY3/27 cost increase headwind¥4.3bnThis includes about ¥1.0bn from Middle East and crude-oil-related costs and about ¥2.5bn from higher aluminum and other material costs.
• AI server aluminum electrolytic capacitor sales targetFY3/27 ¥13.0bn; FY3/28 ¥18.0bn; FY3/29 ¥30.0bnThe FY3/27 and FY3/28 targets were raised from the previous ¥10.0bn and ¥15.0bn.
• Large aluminum electrolytic capacitor sales targetFY3/27 ¥9.0bn; FY3/28 ¥13.0bn; FY3/29 ¥23.5bnLarge long-can products account for most AI server-related sales.
• Target share of related productsFY3/27 30%FY3/26 was slightly below 20%.
• xEV film capacitor sales targetFY3/27 ¥13.0bn; FY3/28 above ¥20.0bn; FY3/29 above ¥25.0bn; FY3/30 ¥27.5bnFY3/26 sales were about ¥9.0bn, and the business is expected to become profitable once monthly sales exceed ¥1bn.
• FY3/29E revenue forecast¥225.2bnThe chart shows revenue rising from ¥169.7bn in 3/26 to ¥225.2bn in 3/29E.
• FY3/29E operating profit forecast¥14.8bnThe chart shows operating profit rising from ¥6.5bn in 3/26 to ¥14.8bn in 3/29E.

Impact & implications

The investment implication of this report for Nichicon is neutral. AI server and xEV-related products offer growth and profitability improvement drivers, but valuation and earnings delivery requirements are high, and the target price is below the current share price, indicating that the report is more focused on whether margin improvement can truly beat expectations rather than turning positive purely on higher revenue targets.

Risks

• FX fluctuations may affect earnings and valuation.
• Changes in demand for aluminum electrolytic capacitors, material costs, and power costs may affect profitability.
• EV market sales volatility may affect the growth path of xEV film capacitors.
• Changes in subsidies may affect end demand and customer orders.
• If growth in the AI server business does not translate into higher company-level margins, the market may lower expectations.

What to watch

• Whether the FY3/27 to FY3/29 sales targets for aluminum electrolytic capacitors for AI servers can be achieved.
• The share and margin of large long-can aluminum electrolytic capacitors within the AI server product mix.
• Whether monthly sales of xEV film capacitors exceed ¥1bn and at least break even.
• Whether costs for aluminum and other materials, as well as crude-oil-related costs, continue to exceed the company's already incorporated worst-case assumptions.
• Whether the company discloses medium- to long-term overall operating margin targets and the marginal profit contribution of the AI server business.