Is visibility really increasing? KEY STOCK DATA€¦ · 1) Murata is highly competitive in radio-frequency (RF) components and modules. Growing demand for these products is being

Murata M anufac turing 6981 JP BNP PARIBAS Masahiro Wakasugi

9 FEBRUARY 2016 JAPAN / TECHNOLOGY HARDWARE & EQUIPMENT

MURATA MANUFACTURING 6981 JP

Is visibility really increasing? KEY STOCK DATA

Sources: Bloomberg estimates, BNP Paribas estimates

Wireless technology innovation to continue through 2018–20E Wireless communication speeds are set to increase to 1Gbps in 2018–2020 from the current 300Mbps. The 3GPP roadmap has already been decided and later we will see the roll-out of 5G. Murata’s RF components/modules will be essential for achieving 1Gbps. There may be some near-term fluctuations in demand, but the medium/long-term growth potential is high. We reiterate our view that advances in wireless communication technology are becoming more visible.

New SAW technology to provide advantage in all bands Murata announced that, as of 2015, new SAW technology had given SAW devices an edge in all bands except Band 25. It also said that a new product due out in spring 2016 would be able to handle Band 25. For 3.5GHz (Band 42), ceramic filters, one of Murata’s strengths, have an advantage. Murata’s filters are gaining an advantage in all bands, and in our view are likely to help drive rapid growth in PA-related modules with integrated filters.

OP forecasts: FY3/16 JPY281.5b, FY3/17 JPY295.0b We estimate FY3/16 OP at JPY281.5b, higher than Murata’s JPY272.0b guidance. Our 4Q FY3/16 OP estimate is JPY46.1b (down 14% y-y, down 45% q-q). We forecast 5% y-y sales growth in FY3/17, with OP up 5% y-y to JPY295.0b. Assuming JPY120/USD and higher depreciation costs, we expect OP to grow JPY13.5b in FY3/17. Earnings may decline y-y in 1H FY3/17E, but that is because of the high bar set last year, which we believe is already priced in at the current share price.

Cut target price to JPY21,600 We reduce our target price to JPY21,600 from JPY23,000 following our estimate changes. We still base our target price on a FY3/17E P/E of 21x. This multiple is the five-year historical average P/E. Slowing smartphone sales may fuel concerns about Murata’s earnings, but we believe demand for the company’s RF products/modules is set to grow sharply as wireless-communication speeds climb to 1Gbps. We maintain our BUY rating.

Masahiro Wakasugi [email protected] +813 6377 2240

Our research is available on Thomson One, Bloomberg, TheMarkets.com, FactSet and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the back page.

PREPARED AND PUBLISHED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (JAPAN) LTD. THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. ANALYST

CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 22.

BUY UNCHANGED

TARGET PRICE JPY21,600

CLOSE JPY13,965

UP/DOWNSIDE +54.7%

PRIOR TP JPY23,000

CHANGE IN TP -6.09%

HOW WE DIFFER FROM CONSENSUS MARKET RECS

TARGET PRICE (%) 7.3 POSITIVE 18

EPS 2017 (%) (0.8) NEUTRAL 3

EPS 2018 (%) (2.8) NEGATIVE 2

2016E 2016C 2017E 2018E

Revenue 1,217.0 1,200.0 1,277.4 1,354.1

Op profit 281.5 272.0 295.0 315.7

Prior op profit 290.0 272.0 315.0 342.6

Pre-tax profit 284.2 276.0 298.6 320.6

Net profit 207.1 202.0 216.5 234.0

EPS (JPY) 981.7 954.2 1,026.2 1,109.2

P/E (x) 14.2 14.6 13.6 12.6

Dividend yield (%) 1.6 1.4 1.9 2.1

EV/EBITDA (x) 6.8 - 6.2 5.5

Price/book (x) 2.3 - 2.0 1.8

Net debt/equity (%) (28.0) - (34.0) (38.9)

ROE (%) 17.2 - 15.9 15.3

Share price performance 1 Month 3 Month 12 Month

Absolute (%) (10.3) (26.8) 9.1

Relative to country (%) (5.2) (15.4) 15.6

Next Results

Mkt cap (USD m) 52,274

3m avg daily turnover (USD m) 195.1

Free float (%) 65

Major shareholder Capital Group Companies Inc (17%)

12m high/low (JPY) 21,840/12,640

3m historic vol. (%) 49.1

ADR ticker MRAAF US

ADR closing price (USD; 08 Feb 2016) 118.50

Issued shares (m) 212

YE Mar (JPY b)

April 2016

(10)

15

40

65

90

12,000

14,500

17,000

19,500

22,000Feb-15 May-15 Aug-15 Nov-15 Jan-16

Murata Manufacturing Rel to TOPIX Index(JPY) (%)

Murata Manufacturing 6981 JP Masahiro Wakasugi

Investment thesis Our investment thesis can broadly be divided into three parts:

1) Murata is highly competitive in radio-frequency (RF) components and modules. Growing demand for these products is being fuelled by the perennial problem of wireless spectrum shortage, exacerbated by the surge in mobile data traffic due to smartphone and tablet use.

2) Murata’s profit is being driven by demand for ultra-small components (MLCC, inductors, piezoelectric devices, connectors, etc) and modules (low temperature co-fired ceramic, etc), fuelled by demand for lighter and thinner final products that are less power hungry.

3) New wireless-related markets such as the Internet of Things (IoT) and Machine to Machine (M2M) are emerging, and should generate longer-term profit growth in fields such as autos, healthcare and public infrastructure. Based on its M&A history, we believe Murata, with one eye on the future, may make acquisitions in such promising fields, which would make it relatively easy to assume longer-term growth.

Catalyst Catalysts include emerging countries migrating from 2G to 3G wireless communications and China shifting to LTE.

Industrialised countries are shifting from 3G to LTE. Moreover, migration to the next-generation wireless communications technology, LTE-Advanced, is also positive.

Other positives are technologies such as IoT and M2M gradually percolating through, an expanding market for car electronics, and progress in wireless healthcare.

Risk to our call Downside risks include delays by emerging countries in migrating to 3G, China in shifting to LTE, and industrialised countries in introducing LTE and LTE-Advanced. Delays such as these would weaken supply/demand for components and create the risk of price pressure.

Sharp JPY appreciation is also a risk. We estimate each JPY1 increase vs the USD would lower annual OP by about JPY3.5b, all else being equal.

Company background Key assumptions (FY3/16E sales, OP)

Murata Manufacturing manufactures and sells ceramic applied electronic components. The company's products include filters, capacitors, thermistors, resistors, noise suppression components, coils, piezoelectric sound components, power supplies, sensors, hybrid integrated circuit (IC) and microwave components.

Key executives Age Joined Title

Tsuneo Murata 64 1974 President

Yoshitaka Fujita 64 1975 Executive Deputy President

http://www.murata.com Sources: BNP Paribas estimates

Principal activities (sales, FY3/15A) Earnings sensitivity

----------------------------- FY3/16E -----------------------------

Bull case Base case Bear case

Sales (JPY b) 1,253.0 1,217.0 1,180.0

Diff (%) 3 0 (3)

OP (JPY b) 300.0 281.5 263.0

Diff (%) 7 0 (7)

EPS (JPY) 1,046.9 981.7 918.8

Diff (%) 7 0 (6)

Source: Murata Manufacturing Sources: Murata Manufacturing; BNP Paribas estimates

Event calendar

Date Events

22–25 February, 2016

Mobile World Congress 2016, the world’ largest mobile phone trade show (Barcelona)

Around February –March

Samsung: launch of new model

3 March 2016 AVAGO 1Q results

When ready Apple: launch of new model

We estimate demand for SAW devices and front-end modules rising an annualised 10% in the next two-to-three years, as emerging countries migrate to 3G, China to LTE and industrialised countries to LTE and LTE-Advanced.

We forecast rising demand for passive components, particularly MLCC, due to demand for smaller and low-energy final products.

Our USD/JPY rate assumption is JPY120. A single JPY change in the USD/JPY rate impacts annual OP by about JPY3.5b. Murata assumes JPY115/USD in FY3/16.

61.981.1

37.817.5

0.3 1.4

020406080

100

Sales OP

(%) Components Modules Others

Capacitors34%

Piezoelectric12%

Other components

20%

Comm. Modules

27%

Power Sources &

Other Modules

7%

Others0.3%

2 BNP PARIBAS 9 FEBRUARY 2016


Re-focus on the evolution of new wireless communication tech

Electronic component stocks, especially those related to the Apple supply chain, have faced a tough start to 2016. There are developments in wireless communication technology every year, and we look for further breakthroughs from here. At the same time, we think the negative impact of a slowdown in demand for smartphones has tended to overshadow advances in wireless communication technology and the growth potential of the relevant components market.

Targeting 1Gbps

The basic direction of wireless communication technology advances is towards a marked improvement in communication speed from the current best speed of some 250Mbps to 1Gbps (1000Mbps), at the earliest in 2018 and at the latest by 2020. Some people think that current speeds are sufficient but in highly densely populated areas (railway terminals etc) and at busy times (when people are commuting to work or school) the telecom environment is not satisfactory. Also, from here, there will be demand for stress-free sending and receiving of 4K and 8K content.

Three arrows: CA, high-frequency bands, MIMO

Advances in wireless communication technology are focused on three areas (1) carrier aggregation (CA), (2) use of high-frequency bands (ultra-high bands) and (3) Multiple Input Multiple Output (MIMO). (1) and (2), and particularly ultra-high band usage, will be introduced through small cells; small cells can be interpreted as a new technology. To ensure that electromagnetic waves use high-frequency bands, several small base stations are installed, and high frequency bands are used within the small cells.

All these technologies are vital to make it possible to achieve 4K and 8K data and in future 1Gbps. Sometimes the general term “LTE-Advanced” is used for these three technologies (that said, LTE-Advanced does not consist of these three technologies only).

Exhibit 1: Changes in wireless technology: CA + high-frequency bands +MIMO = achieving 1Gbps

Sources: Anritsu; Nikkei BP; BNP Paribas estimates

Wireless roadmap already established

Introduction of new wireless technologies is relatively likely as the Third Generation Partnership Project (3GPP), the standards body for mobile telecoms systems standards, has already decided technology specifications three to four years out. Final users require wireless communication to be able to handle larger amounts of data, more quickly and in a stress-free manner, an almost endless task. In a bid to satisfy these needs we think the state, telecoms carriers, handset makers, and component suppliers will introduce a raft of new technologies, conforming to standards decided by 3GPP.

2014 2015 2016 2017 2018 2019 2020-

3GPP

Data Speeds

①Carrier

Aggregation

②Frequency

③MIMO

Release 12 Release 13 Release 14 Release 15 Release 16 Release 17

～300Mbps ～450Mbps ～600Mbps ～1Gbps

DL2CA DL3CA DL4CA DL5CA

UL2CA UL3CA

- CA by both FDD and TDD- 3.5GHz- Small cell

DL4 x 2 DL4 x 4

DL8 x 2 UL 2 x 2

3-4GHz Band

4-6GHz Band

5G- Small cell

- Licensed Assisted Access



1. Carrier aggregation

To increase the speed of wireless communication it is necessary to increase frequency bandwidth. Basically, if the bandwidth of the frequency used is doubled, communication speed can be doubled. However, a major problem is that wireless frequency bands are like natural resources, they are basically in short supply. (For details see our 9 October 2013 report, Wireless still very attractive). For example, in Japan, NTT DoCoMo, KDDI and SoftBank are scrambling for frequency bands, and none of them has been assigned frequencies with broad bandwidth.

Theoretically, under the current LTE using 20MHz frequency bandwidth, communication speed is 150Mbps at best. However, the effective speed, depending on congestion, is 14.1-37.6Mbps (Ministry of Internal Affairs and Communications (MIC) research). Therefore, 20MHz bandwidth is totally inadequate to generate speeds of 1Gbps and broader bandwidths will have to be used.

The frequency bands owned by the telecoms carriers mainly have 15-20MHz bandwidth (small, discontinuous) and it is impossible to boost communication speed with such bandwidth. However, if the small frequency bands (component carriers) of each carrier are combined, they have about 200MHz of bandwidth.

For example, by combining NTT DoCoMo’s Band3’s (1.7GHz) 20MHz bandwidth with Band19’s (800MHz) 10MHz bandwidth NTT Docomo can use a total 30MHz bandwidth and offer a 225Mbps (best case) CA service. Also, coinciding with the iPhone 6s launch from September 2015, Band1’s (2GHz) 15MHz bandwidth was combined with Band3’s (1.7GHz) 20MHz making it possible to use 35GHz bandwidth and starting to offer 262.5Mps (best case) communication speed. Services are finally starting to get provided using CA and from here we look for global penetration.

Exhibit 2: Frequency bands owned by the three major mobile groups

Sources: NTT Docomo; KDDI; Softbank; Nikkei BP; BNP Paribas

Changes to RF circuits due to CA: shift to high quality and modularisation

The main changes likely due to the introduction of CA include (a) demand for higher quality individual components, (b) progress on modularisation of main circuits, and (c) increased complexity of diversity modules. Use of more than two bands at once causes problems with radio wave interference and noise, technological difficulties associated with stability of communication increase, boosting demand for higher quality radio frequency (RF) components. It becomes clear that progress is being made on modularisation when we look at changes in RF circuits; this should be positive for companies with high quality RF component technology and strength in module design and manufacture.

For example, if we look at the iPhone 6s RF block diagram, in the shift from the iPhone 6 to the iPhone 6s the distinction between high band (2.3-2.6GHz), middle band (1.7-2.3GHz) and low band (700-900MHz) was made clearer in the main circuits, evidence that progress has been made on modularisation. The iPhone 6 has only one antenna switch module (ASM) but the iPhone 6s has two for high/middle

0 50 100 150 200 250 300

Softbank

KDDI

NTTDocomo

700MHz 800MHz 900MHz 1.5GHz 1.7GHz1.9GHz 2GHz 2.5GHz 3.5GHz

200MHz

200MHz

241.2MHz

(MHz)

700MHz (W:10MHz×2)

800MHz (W:15MHz×2)

1.5GHz (W:15MHz×2)

1.7GHz (W:20MHz×2)

2GHz (W:20MHz×2)

3.5GHz (W:40MHz)


http://www.bnppresearch.com/?E=chjjhkbcefc


band and low band use. There are two separate ASMs for low band and high/middle band CA compatibility.

Also, for the iPhone 6 the high band circuit was made of discrete components, including filters and power amplifiers (PA), but in the iPhone 6s the PA, and filter/duplexer are all integrated into one PAiD module. We view this as a positive trend for Murata Mfg., which is highly competitive in key components used in modules and module miniaturisation.

Exhibit 3: Changes in RF due to CA: resolving increased complexity of main circuits through modularisation

Sources: Navian; BNP Paribas

If we compare the diversity circuits used in the iPhone 6 and the iPhone 6s, the iPhone 6 had one diversity module (DM) while the iPhone 6s has two DMs, a front part and back part DM. However, it is not simply a question of separating the DM into two parts, the front DM is compatible with high/middle band use and the back part DM is compatible with high, middle and low band use.

We think the use of multiple DM components is the result of CA but some characteristics of high and middle band electro-magnetic waves for wireless communication are inferior to low band waves so we think high and middle band compatible circuits have been installed in the front and back parts to improve communication performance (the higher the frequency the more closely the characteristics of electromagnetic waves resemble those of light so they reverberate more easily and will not reach far, making them unsuitable for wireless communication).

Tran

scei

ver I

C

One ASM Two ASMs

BAW

BAW

BAW

SAW

BAW

BAW

BAW

BAW

BAW

BAW

BAW

BAW

BAW

BAW

BAW

BAWBAW

BAW

BAW

BAW

Tran

scei

ver I

C

Discrete parts integrated into modules

BAWBAW

BAW

BAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

iPhone 6 iPhone 6s

Many discrete parts



Exhibit 4: Changes in RF due to CA: diversity circuits become increasingly complex

Sources: Navian; BNP Paribas

CA move to three bands and five bands starts in earnest from 2016

Currently CA mostly uses two bands (component carriers) at the same time but we are rapidly approaching the advent of three-band CA, which uses three component carriers at the same time. NTT DoCoMo has announced introduction of a three-band CA service with a maximum speed of 300Mbps from November 2015. In Japan, Sharp looks likely to be the first to launch three-band CA compatible models. We are likely to see successive three-band compatible models launches in 2016. Subsequently, in 2017 we expect to see five-band CA at maximum using up to five component carriers.

To date we have seen the launch of only receiver-side downlink (DL) CA but sender-side uplink (UL) CA is likely to be introduced from here. Advances in CA should lead to progress on increasing the sophistication and complexity of RF circuits and we expect growing demand for quality improvements on RF components. We believe that Murata Mfg., already highly competitive in RF components, will be one of the major beneficiaries of this trend. Also, TDK and Taiyo Yuden have highly competitive bulk acoustic wave (BAW) filters and film bulk acoustic resonator (FBAR) filters and should have increasing opportunity to grow their businesses.

Move from five to a maximum 32 component carriers for CA

In 3GPP’s “Release 13”, due in March 2016, CA expansion is one of the important topics. At present standardisation of CA using five component carriers has been completed. Next, technology enabling 32 component carriers to be used at the same time is likely to come under consideration. RF-related companies are likely to continue to be busy for some time.

2. High frequency band = ultra-high band use

The main frequencies currently used for wireless communication are 700MHz and 2.6GHz. However, the frequencies currently used are insufficient to cope with the exponential increase in mobile data traffic. Frequencies for wireless communication are like natural resources, it is not possible to forcibly create two or three 2.1GHz frequencies. (Strictly speaking, it would be a different story if a new invention were made, able to sharply improve efficiency relative to the LTE OFDMA method).

1st Diversity FEMMURATA

2nd Diversity FEMMURATA

SAWSAWSAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

SAW

Diversity FEMMURATA

Increase in diversity FEMs is positive for Murata. Total number of filters rises to 29.

Total number of filters: 16

iPhone 6 iPhone 6s



As a result it has been decided to use 3.5GHz and 3.7GHz, frequencies higher than 2.6GHz. For example in Japan, MIC allocated 40MHz bandwidth on Band42 (3.5GHz) to NTT DoCoMo, KDDI Group and SoftBank Group in December 2014. It was also decided that the communication method on 3.5GHz frequency would be the TDD method and not the FDD method.

As a condition when it was allocated, it was stipulated that Band42 should not be used as a single band but that new technology, including CA, should be introduced to sharply boost communication speeds. For example CA based on a mixture of frequency division duplex (FDD) and time division duplex (TDD) is likely to be introduced. NTT DoCoMo has announced the launch of a “mixed CA service” from October 2016 with Band42 (3.5GHz, TDD) and Band3 (1.7GHz, FDD) in order to achieve maximum speed of 370Mbps.

Changes to RF circuits from introduction of high frequency bands: growth of ultra -high band compatible components

When high frequency bands such as 3.5GHz are introduced we are likely to see changes including, (a) addition of ultra-high band compatible circuits in main circuits, (b) development of modularisation, and (c) greater complexity for diversity circuits.

For (a) new Band42 (3.5GHz) and Band43 (3.7GHz) compatible circuits will be required for the main circuit, and RF components, including antenna switches, filters and PA, will also be needed. As it uses TDD method, TDD filters rather than FDD duplexers will be required.

Exhibit 5: Introduction of high frequencies, including 3.5GHz: addition of ultra-high band circuits

Sources: Navian; BNP Paribas estimates

Regarding development of modularisation (b) it is necessary to understand that there were reasons why the 3.5GHz frequency had not been used to date. The higher the frequency the closer the characteristics of electromagnetic waves resemble those of light so they tend to reverberate off obstacles such as windows and walls, making it difficult for them to reach mobile handsets.

Low frequencies have narrow bandwidth so they are not suitable for transmitting large volumes of data. The 900MHz frequency, a topic in Japan, is called the platinum band as it can send and receive large data volumes to some extent and can send waves long distances, while avoiding obstacles. However, the platinum band has been exhausted.

As a result, wireless communication using ultra high band is likely to encounter greater technological difficulties than was previously the case. Therefore, we expect greater technological sophistication to be required of individual RF components (antenna switches, filters, PA etc). Also, ultra-high band uses the TDD method rather than FDD. Thus, RF circuits able to use a combination of FDD and TDD are needed for CA.

Use of 3.5GHz band requires addition of RF module for UH circuitry

Ultra High Band

Main Antenna HB

MB

LB

Current situation

Use of 3.5GHz band



If circuits are made up of discrete components, it becomes complicated to match the separate parts and to match ultra-high band and other bands. It is, therefore, likely to be advantageous from a performance and cost perspective to configure circuits as modules.

It is easy to imagine (c): greater complexity of diversity modules. Introduction of ultra- high bands (Band42 and Band43) requires diversity circuits that are compatible with these bands. Accordingly, parts including antenna switches, filters, and low noise amps (LNA) will need to be added to the DM.

This is pure conjecture, but as ultra-high bands are difficult to deal with compared to existing bands if we assume joint use with CA, the number of DMs could also increase. The increase from one existing DM to two, and from two existing DMs to three could also increase the complexity of diversity circuits.

Exhibit 6: Introduction of high frequency bands including 3.5GHz: increased complexity of diversity circuits


Use of a high frequency band such as 3.5GHz would also require a large number of base stations and installation of a large number of small base stations or so-called small cells. LTE-Advanced does not always use the expression ultra-high band but instead refers to “small cell”. With the increase in small cell usage electronic component companies, starting with Murata, should benefit from higher demand for various kinds of passive components and power sources.

Ceramic filters have stronger prospects than BAW, FBAR, in our view

To a great extent no decision has been made on the type of filter to be used for ultra-high band. Generally, the prevailing view is that BAW filters and FBAR filters are suitable for high frequencies. However, we think mainly using ceramic filters for ultra-high band is also an option. According to data from major baseband chipmaker Qualcomm, one of the advantages of the TDD method is that ceramic filters can be used.

It seems that adoption of highly cost competitive ceramic filters, rather than high-priced BAW and FBAR filters, is increasingly likely. At their results briefings, Murata and TDK mentioned that ceramic filters are better suited than alternatives for use in 3.5GHz and other high frequency bands, and we think it would be fair to assume that ceramic filters will be the top candidate for ultra-high bands.

Band 25, which is not readily compatible with SAW technology, uses FDD and there is only a very narrow difference of 15MHz between the uplink and downlink bands, which gives BAW and FBAR an advantage. However, ultra-high bands work with TDD, so there is no need for filtering to clearly segregate the uplink and downlink (as there is with FDD). Moreover, unlike the 2.4GHz band, the 3.5GHz band is not close to the frequencies used for WiFi and similar communications, so we think there is unlikely to be any need for high-performance (and high-cost) filters, such as FBAR and BAW.

H HM・L

UH UHor

UH UHH H

M・L

UH

Possibility ofthree-stage diversity module

Addition of SAW filters, AS, LNA for UH in diversity module

Diversity Antenna

H HM・L

Current situation

Use of 3.5GHz band



Japanese companies specialise in ceramic filters

This is a very important point: if ceramic filters are used for ultra-high band, Japanese electronic component makers such as Murata, TDK and Taiyo Yuden would have a marked advantage over US RF companies as they do not manufacture ‘ceramic’ filters in house. Please note one of the investors’ concerns is that Murata will be at a disadvantage in high frequency-use filters because it does not make BAW and FBAR filters.

Prediction for Murata’s valuation

Murata is the only company able to make antenna switches, filters and PA in-house and will have an advantage if ceramic filters are used for ultra-high band, in our view. Ceramic filters tend to be made using the low temperature co-firing ceramic (LTCC) method, Murata’s specialty. We would expect Murata’s competitive edge to be reflected in a superior valuation.

Introduction of ultra-high band with iPhone 7

As outlined above, NTT DoCoMo will launch combined FDD and TDD CA services from October 2016 and plans to achieve maximum speeds of 370Mbps. The iPhone 7 is also likely to launch around October 2016. There is no way of knowing whether all iPhone 7 models will use ultra-high band but carriers could use maximum speeds of 370MHz as a sales slogan to differentiate the iPhone 7 from other models.

If the iPhone 7 is equipped with ultra-high band for high-speed communication, Japanese component makers, including Murata, TDK and Taiyo Yuden, are likely to be parts suppliers as US makers do not manufacture “ceramic” filters and, in our view, Murata would be one step ahead of its peers if supply is via modules as it has PAs and antenna switches in-house to make a module.

5GHz after 3.5GHz

Licensed Assisted Access with LTE (LAA) is likely to be one of the important topics in “Release 13”, to be announced by 3GPP in March 2016. LAA uses bands such as 5GHz, which do not require a permit, with existing LTE bands and CA technology. Against a backdrop of constant frequency shortages we look for successive introduction of new technologies to increase communication speeds to 1Gbps.

Low-TCF technology enables Murata’s products to work with all bands

In December 2014, Murata noted that Band 25 (FDD 1.9GHz) was the only band that its SAW devices could not handle and that they competed with BAW and FBAR in Bands 2, 3, 7 and 41 (meaning SAW technology did not offer advantage). For nearly all other bands, Murata claimed that SAW technology had the edge.

At its results briefing in 2 December 2015, Murata commented that low temperature compensated frequency (low-TCF) technology had now given the advantage to SAW devices for Bands 2, 3, 7 and 41, and that it planned to launch a new product in the spring of 2016 for use with Band 25, the sole band not covered to date. Murata’s high-performance and low-cost filters/duplexers using low-TCF SAW technology should thus enjoy an advantage in all bands, and we think its ceramic filters are likely to have an advantage in ultra-high bands of 3.5GHz and above.

Murata is also active in the field of PA-related products and we think that the ability to demonstrate the superiority of SAW filters and ceramic filters for all bands could spark rapid growth in modules integrating PA and filters. As indicated in our earlier analysis on 6 October 2015, Reconsider RF components' appeal, the PA-related market is large. If Murata is able to leverage the synergy between filters and PA, we think it could be set for significant earnings growth.


https://eqresearch.bnpparibas.com/researchfs/CR__7bb2d6a64aca441a8e5bf08818d9176b.pdf


3. MIMO

Introduction of LTE will make MIMO a necessity, in our view. MIMO is an abbreviation of Multiple Input Multiple Output and is a technology that enables use of multiple antennas (or circuits) for sending and receiving data (Input/Output) to achieve high communication speeds. It is often pronounced as MIMO.

Existing LTE handsets, including smartphones, become MIMO receivers through installation of a receive-only “diversity circuit” in addition to the “main circuit” that sends and receives. The major difference between the main circuit and the diversity circuit is that the main circuit has transmitter functions, including PA, to boost electromagnetic wave signals, while the diversity circuit has no transmitter functions.

In the prevailing format the base station uses two to four antennas/circuits while the handset uses two antennas/circuits for receiving only, and 2x2 DL (downlink) or 4x2. Since for the user handset data download requirements are greater than upload requirements only the downlink receiver uses a number of antennas or circuits.

At this point, uplink MIMO services have not been introduced (Cat-7 (see Exhibit 10) handsets to be introduced from here are likely to be UL MIMO compatible) as when MIMO is used as an uplink for uploading data at the handset-end a considerable burden is placed on handset circuits and algorithms.

RF circuit changes due to MIMO introduction: from 4x4 DL to 2x2 UL (moved from other section)

Introduction of 4x4 DL is in the pipeline for MIMO technology. The move from 2x2 to 4x4 will require the number of antennae in the receiving handset to increase from the current two to four and the number of circuits will also probably have to increase from two to four. In the 2x2 format the second circuit is a diversity circuit but we think that in 4x4 three of the four receiver circuits will have to be similar to the current diversity circuit.

Exhibit 8: MIMO：DL4x2 ⇒ DL4x4


DL4x2

Main Antenna

Diversity Antenna H H

M・L

Transmitting and receiving

Receiving only

H HM・L


Receiving only

H HM・L

H HM・L

Increase in number of diversity modules

DL4x4

Four antennas

Two antennas

Exhibit 7: Bands handled by Murata’s SAW devices: moving towards competitive advantage for all bands

Band B17 B13 B20 B5 B18 B8 B11 B21 B3 B9 B39 B25 B2 B4 B34 B1 B40 B41 B38 B7

Frequency 740 750 800 850 860 900 1500 1500 1800 1800 1900 1900 1900 2000 2000 2100 2400 2500 2500 2500

MHz MHz MHz MHz MHz MHz MHz MHz MHz MHz MHz MHz MHz MHz MHz MHz MHz MHz MHz MHz

FY2014 ○ ○ ○ ○ ○ ○ ○ ○ △ ○ ○ × △ ○ ○ ○ △ △ ○ △

↓ ↓ ↓ ↓ ↓ FY2015 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Preparing ○ ○ ○ ○ △ ○ ○ ○

Note: ○: Advantage for SAW, △: SAW competes with BAW/FBAR, ×: Advantage for BAW/FBAR Source: Murata HP



The introduction of 2x2 UL is likely to mean that the existing diversity circuit has the same structure as the main circuit. In other words transmitting components such as PA and transmitting filters will be added to the diversity circuit, which mainly fulfils receiving functions. In 3GPP’s “Release 10”, completed in June 2011, MIMO was expanded to 4x4 UL (expressed as four uplink layers). Also, in “Release 12”, published in March 2015, there was a further doubling of the uplink to “eight layers”. It should be possible to install eight circuits in the mobile handset with UL MIMO.

Exhibit 9: MIMO changes: DL4x2 ⇒ UL2x2 ⇒ UL4x4


MIMO problems and possibilities

The current question is whether final user demand for UL MIMO is strong enough to justify the circuitry complexity required of UL MIMO mobile handsets and higher costs. UL MIMO is likely to be adopted if it can be a powerful distinguishing feature for telecoms carriers and handset makers. As the mobile communication requirements of end users are not currently fully satisfied, telecoms carriers have a clear target of improving maximum speeds to 1Gbps. While the volume of data sent and received may increase it will certainly not decline. It is difficult to predict exactly when UL MIMO is likely to be introduced but we think it is not so far away.

Why is value-add increasing for RF analogue components?

Technological advances in wireless communication from 1G to 4G can be seen as the history of progress on Multiple Access. 1G used Frequency Division Multiple Access (FDMA). The first mobile phones launched in the second half of the 1990s used 2G (GSM, PDC etc) Time Division Multiple Access (TDMA), multiple access based on time division multiplexing. The early 2000s saw the penetration of 3G mobile phones that used Code Division Multiple Access (CDMA), multiple access via encoding.

The current mainstay LTE (also known as 3.9G or 4G) uses Orthogonal Frequency Division Multiple Access (OFDMA). To date multiple access innovations have made it possible to send and receive large amounts of data via a limited number of frequencies.

In other words successive technological discoveries have made it possible for large volumes of traffic (data) to run on the same breadth of road (frequency bandwidth); without broadening the road or using a large number of roads a large volume of

UL2x2 UL4x4

Plus two additional main modules⇒Possibility of larger number of PAs

Possibility of transmitting and receiving with four antennas (may be difficult with smartphones)⇒Might be possible

with tablet PC or communication module

Four antennas

DL4x2

Main Antenna

Diversity Antenna H H

M・L


Receiving only

Two antennas

Diversity module becomes main module (able to transmit and receive)⇒Increase in PAs

Two antennas

Trans-mitting and receiving



traffic has been able to pass through. Qualcomm has been at the forefront of these technology advances.

That said, no new multiple access methods have been discovered since the development of OFDMA. In some ways advances in multiple access have reached an impasse. For 5G Non-Orthogonal Multiple Access (NOMA) technology and filtered-OFDMA seem promising but it is likely to take time for them to be implemented.

Up until now, baseband chip suppliers have expanded through the discovery of chips that made multiple access innovation possible. However, these manufacturers have recently been diversifying and disposing of parts of their businesses, acquiring PA makers or filter makers, or focusing their attention on analogue RF modules, which suggests to us the multiple access theme may be running out of steam, and it may be hard to achieve further innovative technological advances.

Under these circumstances, to increase wireless communication speeds it will be necessary to broaden bandwidth or increase the number of frequencies. In other words unless we can increase bandwidth through CA, increase frequencies used through ultra-high band, and boost the number of antennas and circuits used through MIMO, it will not be possible to raise communication speeds.

Thus, RF analogue components, including antenna switches, PA, duplexers, filters and LNA, rather than baseband chips, are the likely candidates to help boost communication speeds. This realisation by a number of baseband chip suppliers may explain their change of strategic direction. Nevertheless, the competitive environment has not deteriorated, and we are not yet seeing any slowdown in momentum for core RF analogue component players such as Murata and other US makers in this field.

Qualcomm acquiring TDK’s RF components business

On 12 January 2016, Qualcomm announced the establishment of a JV with TDK in RF components business, in which it will hold majority voting rights. TDK has the right to sell its entire 49% share of the JV to Qualcomm 30 months after the establishment of the new JV. Essentially, this amounts to Qualcomm’s acquisition of TDK’s RF business (carve out of the RF business by TDK).

The proposed deal would give Qualcomm baseband IC, PA, filters/duplexers (TDK’s SAW, BAW devices) and the new JV would compete against Murata as a supplier of RF components and modules.

Impact of Qualcomm’s entry into filter business likely to be limited

The impact on Murata, however, should be limited and conceivably might even be positive. There are three reasons for our view.

1. Apple and Samsung have the right to select components for their smartphones, so there will be no change in the competitive environment, and we see no reason why Murata would not continue to be selected.

2. For smartphones other than Apple and Samsung that use Qualcomm’s reference design, Murata may be at a disadvantage, but data from Qualcomm’s results suggests Qualcomm’s chip shipments are declining. If smartphone makers are uncomfortable with the prospect of Qualcomm dominating all products, the impact on Murata is likely to be small.

3. For phones that use the reference designs of non-Qualcomm suppliers like MediaTek or Intel, we do not think they are likely to use the duplexers and filters of Qualcomm (the new JV), their competitor. In fact, there might even be a shift from TDK products to Murata products, which could help boost Murata’s market share.

TDK has stated that it will continue to sell products for use with the reference designs of baseband chips (that compete with Qualcomm), so we may not see any dramatic



change in the competitive environment in the near term. Over the longer term, however, developments may be positive for Murata (and Taiyo Yuden).

One potential concern is that if Qualcomm improves PA performance, the new JV could pose a new competitive threat to suppliers of PAMiD and other PA modules. As discussed earlier, while it is unlikely that the new JV’s products would be used in reference designs other than Qualcomm’s, if Qualcomm boosts its market share with a particular smartphone client, it could become a threat.

According to TDK, however, it will take about a year to set up the new JV, and perhaps longer to develop PA-related modules. For that reason, we do not see the JV as posing a threat to Murata in the near term.

Why we favour Murata Mfg.

End users are looking for sustainable high-speed communication from mobile data communication. The impasse in multiple access means there is an urgent need for a technological solution to achieve high speeds through RF analogue components. The technological expertise of RF analogue component makers is a prerequisite for the satisfaction of consumer needs. As a result we strongly favour Murata Mfg. for medium and long-term investment, despite concerns about a slowdown in smartphone growth.



Reference: Bands for LTE specified by 3GPP

Exhibit 10: LTE bands specified by 3GPP

Sources: Nikkei BP; BNP Paribas

Band Common name Uplink（MHz）

Downlink （MHz） Mode LTE build-out by Japanese carriers LTE build-out by overseas carriers iPhone 6s

(A1633)iPhone 6s

(A1688)iPhone 6

(A1586/A1524)

1 IMT core band 1920-1980 2110-2170 FDDNTT Docomo (LTE/3G)、KDDI

(LTE/3G)、SoftBank (LTE/3G)

LG U+ (Korea), Southeast Asia (Thailand) ● ● ●

2 PCS 1900 1850-1910 1930-1990 FDD AT&T Mobility (US) ● ● ●

3 GSM 1800 1710-1785 1805-1880 FDD NTT Docomo (LTE), SoftBank (LTE/3G)

Africa, Europe, Middle East, Oceania, Southeast Asia, KT (Korea), SK Telecom (Korea)

● ● ●

4 AWS 1710-1755 2110-2155 FDD Latin America, North America, Canada, AT&T Mobility (US), T-Mobile (US), Verizon Wireless (US)

● ● ●

5 850 (US, ROK) 824-849 869-894 FDD LG U+ (Korea), SK Telecom (Korea) ● ● ●6 850 (Japan) 830-840 875-885 FDD

7 IMT extension band

2500-2570 2620-2690 FDD Latin America, Canada, Southeast Asia, Australia, Europe, Russia, Middle East

● ● ●

8 GSM 900 880-915 925-960 FDD SoftBank (LTE/3G) KT (Korea) ● ● ●9 1700 (Japan) 1749.9-1784.9 1844.9-1879.9 FDD10 Extended AWS 1710-1770 2110-2170 FDD11 1500 (Japan) 1427.9-1452.9 1475.9-1500.9 FDD KDDI(LTE), SoftBank (3G)12 US 700 698-716 728-746 FDD ● ●13 US 700 777-787 746-756 FDD Verizon Wireless (US) ● ● ●14 US 700 788-798 758-768 FDD15 Reserved - - FDD16 Reserved - - FDD17 US 700 704-716 734-746 FDD Latin America, North America, AT&T Mobility (US) ● ● ●18 850 (Japan) 815-830 860-875 FDD KDDI(LTE/3G) ● ● ●19 850 (Japan) 830-845 875-890 FDD NTT Docomo (LTE/3G) Africa, Europe, Russia ● ● ●20 800 DD 832-862 791-821 FDD ● ● ●21 1500 (Japan) 1447.9-1462.9 1495.9-1510.9 FDD NTT Docomo (LTE)22 3500 3410-3490 3510-3590 FDD23 US S-Band 2000-2020 2180-2200 FDD24 US L-Band 1626.5-1660.5 1525-1559 FDD25 PCS 1900G 1850-1915 1930-1995 FDD Sprint (US) ● ● ●26 E850 Upper 814-849 859-894 FDD Sprint (US) ● ● ●27 850 Lower 807-824 852-869 FDD ● ●

28 APT 700 703-748 758-803 FDD NTT Docomo (LTE), KDDI(LTE),SoftBank (LTE)

● ● ●

29 Nil 717-728 FDD ● ● ●30 2305-2315 2350-2360 FDD ●31 452.5-457.5 462.5-467.5 FDD32 Nil 1452-1496 FDD33 TDD34 TDD35 TDD36 TDD37 TDD

38 TDD China Mobile, Russia, Saudi Arabia, Brazil, Philippines, Poland, Sweden

● ● ●

39 TDD China Mobile ● ● ●

40 TDD India, Sri Lanka, Australia, Hong Kong, Indonesia, Nigeria, Oman, Russia, Saudi Arabia, South Africa

● ● ●

41 TDD UQ Communications (WiMAX 2+), WCP(AXGP)

Sprint (US), China Mobile, China Telecom, China Unicom, Canada, Uganda

● ● ●

42 TDD NTT Docomo (LTE), KDDI(LTE), SoftBank (LTE)

UK, Spain, Canada

43 TDD UK44 TDD703-803

1900-19202010-20251850-19101930-19901910-1930

2570-2620

1880-1920

2300-2400

2496-2690

3400-3600

3600-3800

Band 3 is a superset of

Band 9

Band 26 defined as a superset of Bands 5,

6, 18, 19

Band 2 is a superset of

Band 25

Exhibit 11: Peak speed by terminal category

UE Category Cat-1 Cat-2 Cat-3 Cat-4 Cat-5 Cat-6 Cat-7 Cat-8 Cat-9 Cat-10 Cat-11 Cat-12

DL: Peak Speed (Mbps) 10 50 100 150 300 300 300 3000 450 450 600 600

UL: Peak Speed (Mbps) 5 25 50 50 75 50 100 1500 50 100 50 100

Band Width (Maximum MHz Width) 20 20 20 20 20 40 40 100 60 60 60 60

DL: Modulation Method 64 64 64 64 64 64 64 64 64 64 256 256

(Quadrant Amplitude Modulation)

UL: Modulation Method 16 16 16 16 16 16 16 64 16 16 16 16

(Quadrant Amplitude Modulation)

DL: Maximum MIMO 1 2 2 2 4 2 or 4 2 or 4 8 2 or 4 2 or 4 2 or 4 2 or 4

UL: Maximum MIMO No No No No No No 2 4 No 2 No 2

Release 3 GPP Release.8/9 3 GPP Release.10 3 GPP Release.12

Sources: Nikkei BP; BNP Paribas



Revised forecasts

We have cut our FY3/16, FY3/17 and FY3/18 EPS estimates following the 3Q FY3/16 results – for details of these results, see our report issued on 29 January 2016, Results: Strong Murata and encouraging TDK.

Estimate FY3/16 OP at JPY281.5b

We estimate Murata’s FY3/16 sales at JPY1.217t (up 17% y-y), with OP of JPY281.5b (up 31% y-y) and net income (NI) of JPY207.1b (up 23% y-y). Our forex assumption is JPY120/USD (unchanged). Murata made no change in its guidance for sales of JPY1.2t (up 15% y-y), OP of JPY272.0b (up 27% y-y) and NI of JPY202.0b (up 20% y-y). Its forex assumption is JPY115/USD. We expect OP to beat guidance by JPY9.5b.

Quarterly results: estimate JPY46.1b OP in 4Q FY3/16

Murata reported OP of JPY64.0b in 1Q FY3/16, JPY88.2b in 2Q and JPY83.3b in 3Q. Our estimate for 4Q is JPY46.1b (down 14% y-y, down 45% q-q). We estimate 4Q sales at JPY267.5b (up 1% y-y, down 21% q-q). The reason we expect sharp q-q declines in both sales and OP is because of the relatively significant seasonal adjustment in end-products, notably smartphones, by a major US supplier. However, the recent economic downturn, slump in demand and major adjustments in electronic components in January–March have been obvious from numerous company earnings reports and management comments, so we think they have already been priced into the share price.

There have also recently been substantial swings in forex, with the rate ranging between JPY116/USD and JPY121/USD in the space of a week. Because Murata’s earnings are susceptible to forex fluctuations, we highlight the importance of monitoring forex trends.

Exhibit 12: Murata Manufacturing annual earnings forecasts

FY3/15 -------------FY3/16E-------------- -------------FY3/17E-------------- -------------FY3/18E-------------- FY3/16E

(JPY m) A Old New Old New Old New CE

Sales 1,043,542 1,252,709 1,216,987 1,343,400 1,277,400 1,417,400 1,354,100 1,200,000

Change (y-y %) 23 20 17 7 5 6 6 15

OP 214,535 290,000 281,500 315,000 295,000 342,600 315,700 272,000

Change (y-y %) 70 35 31 9 5 9 7 27

OPM (%) 20.6 23.1 23.1 23.4 23.1 24.2 23.3 22.7

PBT 238,400 293,000 284,200 318,500 298,600 347,500 320,600 276,000

Change (y-y %) 80 23 19 9 5 9 7 16

NI 167,711 212,300 207,100 230,900 216,500 253,700 234,000 202,000

Change (y-y %) 80 27 23 9 5 10 8 20

Diluted EPS (JPY) 792.2 1,002.8 981.7 1,090.7 1,026.2 1,198.4 1,109.2 -

Change (y-y %) 80 27 24 9 5 10 8 -

Sources: Murata Manufacturing; BNP Paribas estimates

Forecast JPY295.0b OP in FY3/17

Our FY3/17 forecasts are sales JPY1.2774t (up 5% y-y), OP JPY295.0b (up 5% y-y), and NI JPY216.5b (up 5% y-y). Our forex assumption is JPY120/USD (unchanged). The average forex in FY3/16 was JPY121–122/USD, so we expect forex to erode earnings by around JPY4b–5b.

We also expect depreciation expenses to increase to JPY112.5b in FY3/17 from JPY100.0b in FY3/16. A roughly JPY60b increase in sales would boost marginal profit by around JPY30b, but we estimate y-y OP growth at JPY13.5b after allowing for forex effects and higher depreciation.

Y-y earnings decline in 1H FY3/17E would come as no surprise

We expect electronic-component makers in general, not just Murata, to face headwinds in 1H FY3/17. In 1H 2015, sales of the iPhone 6 and iPhone 6 Plus smartphones were strong in North America and purchases of components for the


https://eqresearch.bnpparibas.com/researchfs/FS__12e24a622ef54640b603ba71e857ec68.pdf


iPhone 6s/6s Plus were strong. Since sales of the iPhone 6s and iPhone 6s Plus have not been as brisk as the previous model, the bar is high for all electronic-component makers in 1H FY3/17. However, this is easy to deduce from the results announced by Apple and by many electronic-component makers, so we think the market has already priced it in share prices.

Assume essentially flat smartphone market

Murata has said a number of times that it hopes to achieve 5–10% y-y sales growth in FY3/17. We expect sales to grow 5% y-y. This assumes essentially no change in the size of the smartphone market and flat shipments of smartphones by major global suppliers. The drivers of Murata’s sales growth should be carrier aggregation (CA) in developed economies, an increase in the number of RF components per handset and shift to greater use of modules with the introduction of higher frequencies, and growing use of LTE in emerging markets.

We also expect automotive electrification to gather pace and forecast growth of 5–10% y-y in sales of electronic components for autos.

FY3/17 OP forecasts by segment

1) Components

In light of the current market environment, we assume that the smartphone market, including North America, will be essentially flat in FY3/17 y-y. We expect a modest increase in the market for major passive components due to improved product mix and increases in the number of components per handset, offsetting downward pressure on unit prices. Based on these assumptions, our segment forecasts for Murata are as follows.

Our FY3/17 forecasts for the components business are sales of JPY775.9b (up 3% y-y) and OP of JPY273.0b (up 4% y-y). We expect this segment’s OP to grow roughly JPY10.9b y-y. By product category, we forecast sales growth of roughly 3% y-y for capacitors, roughly 9% for piezoelectric products, and flat for other components (including connectors and coils). We expect relatively strong growth of around 9% in sales of piezoelectric products. This is because we think growing use of CA is likely to boost demand for SAW devices in particular. RF circuits are likely to become increasingly complex in order to resolve chronic bandwidth shortages. We expect demand for Murata’s highly competitive piezoelectric products to grow even stronger, to meet the needs posed by complex circuit designs.

2) Modules

Our FY3/17 forecasts for the modules business are sales JPY497.6b (up 8% y-y) and OP JPY59.3b (up 5% y-y). We expect OP to grow JPY2.7b y-y. By product category, we forecast sales growth of roughly 3% y-y in power source modules and roughly 9% in communication modules. We think the further spread of LTE terminals and wider adoption of CA is likely to increase demand for communication modules such as antenna switch modules, MMMB PA, diversity modules and PAiD/PAMiD as solutions for increasingly complex circuits. In particular, we see potential for growth in demand for PA-related products and modules, which have recently been growing strongly.



Exhibit 13: Murata earnings forecasts by segment

FY3/15 -----------------------FY3/16----------------------- --------------------FY3/16-------------------- --------------------FY3/17--------------------

1Q 2Q 3Q 4Q E E E E

A A A A E Old New y-y y-y Old New y-y y-y

Sales (JPY b) (JPY b) (JPY b) (JPY b) (JPY b) (JPY b) (JPY b) (%) (JPY b) (JPY b) (JPY b) (%) (JPY b)

Component 679.1 184.0 201.2 202.8 165.0 772.8 753.0 11 73.9 799.0 775.9 3 22.9

Capacitor 334.3 89.1 95.5 97.2 77.8 368.0 359.6 8 25.4 379.2 368.8 3 9.1

Piezoelectric 121.9 38.2 41.9 43.5 37.0 160.5 160.6 32 38.7 168.5 175.2 9 14.6

Other component 222.9 56.6 63.8 62.1 50.3 244.3 232.8 4 9.9 251.4 231.9 0 (0.9)

Module product 360.9 96.0 126.7 136.0 101.5 476.2 460.1 27 99.2 540.6 497.6 8 37.5

Communication 308.0 83.0 113.0 123.0 89.8 423.3 408.7 33 100.8 487.6 445.0 9 36.2

Power source 53.0 13.0 13.7 13.0 11.7 52.9 51.4 (3) (1.6) 53.0 52.7 3 1.3

Others 3.6 0.9 1.1 0.9 1.0 4 3.9 9 0.3 3.7 3.9 2 0.1

Total 1,043.5 280.8 329.0 339.7 267.5 1,252.7 1,217.0 17 173.4 1,343.4 1,277.4 5 60.4

Change (y-y %) 23 29 27 13 1 20 17 7 5

Change (q-q %) 6 17 3 (21)

OP (JPY b) (JPY b) (JPY b) (JPY b) (JPY b) (JPY b) (JPY b) (%) (JPY b) (JPY b) (JPY b) (%) (JPY b)

Component 206.0 63.1 77.0 74.3 47.6 265.7 262.0 27 56.1 278.2 273.0 4 10.9

Module product 42.7 10.3 19.0 18.5 8.8 61.6 56.6 33 13.9 74.5 59.3 5 2.7

Others 4.8 1.4 1.5 1.0 0.7 5.3 4.5 (5) (0.2) 6.3 6.3 39 1.8

eliminations (38.9) (10.9) (9.2) (10.5) (11.0) (42.6) (41.6) 7 (2.7) (44.0) (43.5) 5 (1.9)

Total 214.5 64.0 88.2 83.3 46.1 290.0 281.5 31 67.0 315.0 295.0 5 13.5

Change (y-y %) 70 73 69 16 (14) 35 31 9 5

Change (q-q %) 20 38 (6) (45)

OPM (%) (%) (%) (%) (%) (%) (%) (%pt) (%) (%) (%pt)

Component 30.3 34.3 38.3 36.6 28.8 34.4 34.8 4.5 34.8 35.2 0.4

Module product 11.8 10.7 15.0 13.6 8.7 12.9 12.3 0.5 13.8 11.9 (0.4)

Others 134.6 165.6 132.3 104.7 70.0 144.3 117.2 (17.4) 168.5 159.5 42.3

Total 20.6 22.8 26.8 24.5 17.2 23.1 23.1 2.6 23.4 23.1 0.0


Exhibit 14: Murata consensus comparison

----------- BNPP ----------- -------- Consensus -------- ------------ Diff. (%) ------------

FY3/16E FY3/17E FY3/16E FY3/17E FY3/16E FY3/17E

OP (JPY b) 281.5 295.0 287.0 308.4 (1.9) (4.3)

EPS (JPY) 981.7 1,026.2 989.9 1,055.5 (0.8) (2.8)

Sources: Bloomberg consensus estimates; BNP Paribas estimates

Reduce target price to JPY21,600 from JPY23,000

We reduce our target price to JPY21,600 from JPY23,000. We still base our target price on a FY3/17E P/E of 21x. This multiple is the five-year historical average P/E. Because of the cuts in our forecasts, based on Murata’s recent results, we reduce our target price.

We think strong concerns about the macro environment and the smartphone market could potentially weigh on Murata’s P/E multiple, but the company’s recent results demonstrate its solid foundations, which could provide a tailwind for its share price.

Positive incentives abound for Murata, including 1) growth in RF components fuelled by higher wireless communication speeds, 2) growing opportunities for the PA and PA-related module business, 3) increasing demand for sensors, passive components and wireless modules driven by automotive megatrends, and 4) growing use of MLCCs and noise-reduction components—where Murata is highly competitive—in many applications. We expect the company’s shares to perform well and maintain our BUY rating.



Exhibit 15: Murata’s consensus P/E (FY1) average and standard deviation

Exhibit 16: Murata’s consensus P/E (FY2) average and standard deviation

Con. P/E (FY1) 1Y 2Y 3Y 4Y 5Y

Avg. 19.6 20.2 20.9 21.3 21.0

Std Dev. 2.2 2.2 3.7 3.9 3.8

Avg + 1 Std Dev. 21.8 22.4 24.5 25.2 24.7

Avg - 1 Std Dev. 17.4 18.0 17.2 17.3 17.2

Z scores (1.9) (2.2) (1.5) (1.5) (1.5)

Con. P/E (FY2) 1Y 2Y 3Y 4Y 5Y

Avg. 17.8 18.2 18.4 18.2 17.8

Std Dev. 2.0 1.8 1.8 2.2 2.3

Avg + 1 Std Dev. 19.8 20.0 20.3 20.4 20.1

Avg - 1 Std Dev. 15.8 16.4 16.6 16.0 15.6

Z scores (1.8) (2.1) (2.3) (1.8) (1.6)

Sources: Bloomberg consensus estimates; BNP Paribas Sources: Bloomberg consensus estimates; BNP Paribas

Exhibit 17: Murata’s consensus P/E (FY1): undervalued Exhibit 18: Murata’s consensus P/E (FY2): undervalued


Exhibit 19: Murata’s consensus EPS (FY1) and share price trends: Remarkable EPS improvement, look for good share price performance

Exhibit 20: Murata’s consensus EPS (FY2) and share price trends: Similar trends for FY2


13

15

17

19

21

23

25

27

Jan-

03 Jul

Jan-

04 Jul

Jan-

05 Jul

Jan-

06 Jul

Jan-

07 Jul

Jan-

08 Jul

Jan-

09 Jul

Jan-

10 Jul

Jan-

11 Jul

Jan-

12 Jul

Jan-

13 Jul

Jan-

14 Jul

Jan-

15 Jul

Jan-

16

(x)

12

14

16

18

20

22

24

26

28

Jan-

03 Jul

Jan-

04 Jul

Jan-

05 Jul

Jan-

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Jan-

09 Jul

Jan-

10 Jul

Jan-

11 Jul

Jan-

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Jan-

13 Jul

Jan-

14 Jul

Jan-

15 Jul

Jan-

16

(x)

01002003004005006007008009001,000

2,0004,0006,0008,000

10,00012,00014,00016,00018,00020,00022,000

Jan-

01 Jul

Jan-

02 Jul

Jan-

03 Jul

Jan-

04 Jul

Jan-

05 Jul

Jan-

06 Jul

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Jan-

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13 Jul

Jan-

14 Jul

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15 Jul

Jan-

16

(JPY)(JPY)Share Price (LHS)Cons. EPS (FY1; RHS)

EPS growth is significant

0

200

400

600

800

1,000

1,200

3,0005,0007,0009,000

11,00013,00015,00017,00019,00021,00023,000

Jan-

01 Jul

Jan-

02 Jul

Jan-

03 Jul

Jan-

04 Jul

Jan-

05 Jul

Jan-

06 Jul

Jan-

07 Jul

Jan-

08 Jul

Jan-

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Jan-

10 Jul

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11 Jul

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12 Jul

Jan-

13 Jul

Jan-

14 Jul

Jan-

15 Jul

Jan-

16

(JPY)(JPY) Share Price (LHS)Cons. EPS (FY2; RHS)



Exhibit 21: Murata’s consensus ROE and P/B: both rising

Exhibit 22: Murata’s consensus EV/EBITDA (FY1) valuations trending up


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

(5)

0

5

10

15

20

25

Jan-

06 Jul

Jan-

07 Jul

Jan-

08 Jul

Jan-

09 Jul

Jan-

10 Jul

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11 Jul

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Jan-

13 Jul

Jan-

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Jan-

16

(x)(%) Cons. ROE (LHS) PBR (RHS)

23456789

101112

Jan-

06 Jul

Jan-

07 Jul

Jan-

08 Jul

Jan-

09 Jul

Jan-

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(x)



Financial statements Murata Manufacturing


Profit and Loss (JPY b) Year Ending Mar 2014A 2015A 2016E 2017E 2018E

Revenue 846.7 1,043.5 1,217.0 1,277.4 1,354.1

Cost of sales (incl depreciation) (554.3) (629.2) (723.8) (765.4) (808.3)

Gross profit 292.4 414.3 493.2 512.0 545.8

SG&A (166.5) (199.8) (211.6) (217.0) (230.1)

R&D 0.0 0.0 0.0 0.0 0.0

Operating profit 125.9 214.5 281.5 295.0 315.7

Interest and dividends received 4.1 3.4 2.9 3.8 5.1

Associates 0.0 0.0 0.0 0.0 0.0

Other non-operating income 2.7 20.9 0.0 0.0 0.0

Interest paid (0.4) (0.4) (0.2) (0.4) (0.4)

Other non-operating expenses 0.0 0.0 (0.0) 0.2 0.2

Extraordinary gains 0.0 0.0 0.0 0.0 0.0

Extraordinary losses 0.0 0.0 0.0 0.0 0.0

Pre-tax profit 132.3 238.4 284.2 298.6 320.6

Tax (39.1) (71.1) (76.6) (82.1) (86.6)

Minorities* 0.0 (0.4) 0.4 0.0 0.0

Net profit 93.2 167.7 207.1 216.5 234.0

EBITDA (operating profit + depreciation) 202.8 299.5 381.5 407.5 430.8

Per share (JPY)

Reported EPS 440.6 792.2 981.7 1,026.2 1,109.2

DPS 130.0 180.0 220.0 260.0 300.0

Growth

Revenue (%) 24.3 23.2 16.6 5.0 6.0

EBITDA (%) 54.8 47.7 27.4 6.8 5.7

Operating profit (%) 114.7 70.4 31.2 4.8 7.0

Recurring profit (%) - - - - -

EPS (%) 119.4 79.8 23.9 4.5 8.1

Operating performance

Gross margin inc depreciation (%) 25.5 31.6 32.3 31.3 31.8

EBITDA margin (%) 23.9 28.7 31.3 31.9 31.8

Operating profit margin (%) 14.9 20.6 23.1 23.1 23.3

Net margin (%) 11.0 16.1 17.0 16.9 17.3

Effective tax rate (%) 29.5 29.8 27.0 27.5 27.0

Dividend payout on net profit (%) 29.5 22.7 22.4 25.3 27.0

Interest cover (x) n/a n/a n/a n/a n/a

Inventory days 109.2 103.5 101.8 106.2 106.1

Debtor days 76.2 73.9 75.9 79.8 79.4

Creditor days 27.1 28.4 22.7 17.4 17.4

Operating ROIC (%) (612.4) (983.5) - (965.2) (975.2)

ROIC (%) (447.1) (736.4) - (764.1) (778.1)

ROE (%) 10.3 16.1 17.2 15.9 15.3

ROA (%) 23.8 64.0 18.4 18.8 19.8

*Pre exceptional pre-goodwill and fully diluted



Financial statements Murata Manufacturing


Cash Flow (JPY b) Year Ending Mar 2014A 2015A 2016E 2017E 2018EPre-tax profit* 132.3 238.4 284.2 298.6 320.6Tax paid 20.4 20.4 20.4 20.4 20.4Depreciation 76.9 84.9 100.0 112.5 115.1Working capital 0.0 0.0 0.0 0.0 0.0Other (14.7) (34.4) (97.1) (102.5) (107.0)Operating cash flow 185.8 259.9 218.8 306.5 320.5Capital expenditure (68.2) (101.2) (150.0) (120.0) (120.0)Other (49.0) 9.8 0.0 0.0 0.0Investing cash flow (117.2) (91.4) (150.0) (120.0) (120.0)Free cash flow 68.6 168.6 68.8 186.5 200.5Change in debt 0.0 0.0 0.0 0.0 0.0Dividends paid (23.3) (31.8) (46.4) (54.9) (63.3)Net buybacks 0.0 0.0 0.0 0.0 0.0Equity issued 0.0 0.0 0.0 0.0 0.0Other (17.6) (35.2) 0.0 0.0 0.0Financing cash flow (40.9) (67.0) (46.4) (54.9) (63.3)Gross change in cash 28.8 94.1 22.4 131.6 137.2Other adjustments 68.9 (18.2) 0.0 0.0 0.0Change in cash 97.7 75.9 22.4 131.6 137.2

Per share (JPY)Operating cash flow per share 877.4 1,227.8 1,037.1 1,452.6 1,519.2FCF per share 324.4 796.2 326.1 883.8 950.4

Balance Sheet (JPY b) 2014A 2015A 2016E 2017E 2018ECash & equivalents 282.4 358.3 380.7 512.3 649.5A/c receivable 188.8 233.7 272.5 286.0 303.2Inventories 170.6 186.3 217.3 228.0 241.7Other 31.2 37.6 37.6 37.6 37.6Current assets 673.0 815.8 908.0 1,064.0 1,232.0Tangible fixed assets 346.5 386.0 436.0 443.5 448.4Intangible fixed assets 0.0 0.0 0.0 0.0 0.0Investments and other assets 224.2 229.5 229.5 229.5 229.5Total assets 1,243.7 1,431.3 1,573.5 1,736.9 1,909.9A/c payable 43.4 54.5 35.6 37.4 39.6Short term debt 37.9 11.2 11.2 11.2 11.2Other (92.4) (132.8) (132.8) (132.8) (132.8)Current liabilities 173.7 198.5 179.6 181.4 183.6Long term debt 16.3 9.7 9.7 9.7 9.7Other 82.0 84.2 84.2 84.2 84.2Long-term liabilities 98.3 93.8 93.8 93.8 93.8Total liabilities 272.1 292.4 273.5 275.2 277.5Common equity 955.8 1,123.1 1,283.8 1,445.4 1,616.1Preferred equity 0.0 0.0 0.0 0.0 0.0Minorities etc 0.0 0.0 0.0 0.0 0.0Net Assets 955.8 1,123.1 1,283.8 1,445.4 1,616.1Liabilities & net assets 1,243.7 1,431.3 1,573.5 1,736.9 1,909.9*includes convertibles and preferred stock which is being treated as debt

Per share (JPY)Book value per share 4,515 5,305 6,085 6,851 7,661Tangible book value per share 4,515 5,305 6,085 6,851 7,661

Financial strengthNet debt/equity (%) (23.9) (30.1) (28.0) (34.0) (38.9)Net debt/total assets (%) (18.3) (23.6) (22.9) (28.3) (32.9)Current ratio (x) 3.9 4.1 5.1 5.9 6.7CF interest cover (x) n/a n/a n/a n/a n/a

Valuation 2014A 2015A 2016E 2017E 2018EP/E (x) * 31.7 17.6 14.2 13.6 12.6P/E @ target price (x) * 49.0 27.3 22.0 21.0 19.5Reported P/E (x) 31.7 17.6 14.2 13.6 12.6Dividend yield (%) 0.9 1.3 1.6 1.9 2.1P/CF (x) 13.7 9.6 9.6 9.0 8.4P/FCF (x) 43.1 17.5 42.8 15.8 14.7Price/book (x) 3.1 2.6 2.3 2.0 1.8Price/tangible book (x) 3.1 2.6 2.3 2.0 1.8EV/EBITDA (x) ** 13.7 8.9 6.8 6.2 5.5EV/EBITDA @ target price (x) ** 22.5 15.3 12.0 11.2 10.6EV/invested capital (x) 3.4 3.0 2.6 2.4 2.2

** Pre exceptional & pre-goodwill and fully diluted **EBITDA includes associate income and recurring non-operating income



Disclaimers and Disclosures

APPENDIX

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Company Ticker Disclosure (as applicable)

Murata Manufacturing 6981 JP 2, 3, 4

Company Ticker Price (as of 08-Feb-2016 closing price) InterestN/A N/A N/A N/A



History of change in investment rating and/or target price

Murata Manufacturing (6981 JP)

Masahiro Wakasugi started covering this stock from 09 Oct 2013 Price and TP are in local currency Valuation and risks: Our TP of JPY21,600 is based on a FY3/17E P/E multiple of 21x. Downside risks include delays 1) by emerging countries in migrating to 3G, 2) China in shifting to LTE, 3) industrialised countries in introducing LTE and LTE-Advanced, 4) a sharp JPY appreciation. Sources: FactSet; BNP Paribas

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3,000

6,000

9,000

12,000

15,000

18,000

21,000

24,000

27,000Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16

Murata Manufacturing Target Price(JPY)

Date Rating Target price Date Rating Target price Date Rating Target price09-Oct-13 Buy 9,000.00 15-May-14 Buy 11,900.00 18-Feb-15 Buy 17,100.0012-Nov-13 Buy 9,500.00 05-Sep-14 Buy 12,200.00 29-May-15 Buy 23,600.0003-Dec-13 Buy 10,700.00 07-Oct-14 Buy 14,400.00 06-Oct-15 Buy 21,900.0027-Jan-14 Buy 11,800.00 11-Nov-14 Buy 15,800.00 18-Nov-15 Buy 23,000.00


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Additional Disclosures Target price history, stock price charts, valuation and risk details, and equity rating histories applicable to each company rated in this report is available in our most recently published reports available on our website: http://eqresearch.bnpparibas.com, or you can contact the analyst named on the front of this note or your BNP Paribas representative. All share prices are as at market close on 8 February 2016 unless otherwise stated.

RECOMMENDATION STRUCTURE

Stock Ratings Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price. BUY (B). The upside is 10% or more. HOLD (H). The upside or downside is less than 10%. REDUCE (R). The downside is 10% or more. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. * In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. Industry Recommendations Improving (): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months. Stable (previously known as Neutral) (): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months. Deteriorating (): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months. Country (Strategy) Recommendations Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

RATING DISTRIBUTION (as at 9 February 2016)

Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report. © 2016 BNP Paribas Group

Total BNP Paribas coverage universe 730 Investment Banking Relationship (%)

Buy 424 (58.1%) Buy 28.54

Hold 191 (26.2%) Hold 34.55

Reduce 115 (15.8%) Reduce 33.04


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