Mitsubishi Electric Undervalued, but Reforms of Governance and Automobile Business Much Needed

We retain our JPY 1,900 fair value estimate for Mitsubishi Electric Corp. The share price has declined to below book value levels recently, likely on concerns about reduced orders/sales from supply chain disruptions in the automotive industry (a major customer base), the impact of headwinds ranging from the China lockdown to rising materials and logistics costs, and the April 21 announcement regarding the latest discovery of more misconduct following a string of scandals over improper quality assurance tests. Despite the likelihood that the automobile production slowdown will especially affect sales of automobile equipment (and to a lesser extent, other products like power semiconductors), we expect electric vehicle/battery-related capital investments will continue to support demand for MEC’s factory automation systems. Further, we think investments and demand in the digital space, like semiconductors and 5G/smartphone, will serve as a tailwind for the FA systems and electronic device businesses. While investors will need to be patient as the company gradually undergoes governance reforms, we believe MEC is undervalued and there is medium- to long-term upside potential.