Denso Impacted by Automobile Supply Chain Disruption but Expects Strong Medium-Term Margin Expansion

We raise Denso’s fair value estimate to JPY 9,200 from JPY 8,800, after raising our midcycle operating margin assumption. Denso’s progress on its continued structural improvements over the past year has exceeded our expectations. While margins have been impacted due to rising components/logistics costs (along with the automotive industry), excluding these costs, the company estimates it should have reached 10% operating margin in fiscal 2021, which is ahead of our forecasts. Further, sales of its higher-margin electrification products remain strong, as the company continues to expand its track record of OEMs outside Toyota Motor, and over the medium term, we expect higher value-added products like its heat pump and third generation ADAS components will replace its lower-margin counterparts like air conditioner products for ICE automobiles and first generation ADAS components. As such, we now project midcycle operating margin in fiscal 2025 to be at 11.0% from 10.6% previously. Going forward, progress on its restructuring initiatives in Europe/North America can potentially change our outlook on midcycle margins.