Quick Change at Yageo

Quick Change at Yageo
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In reference to passive components, we have mentioned Taiwan-based Yageo (2327.TT) a number of times concerning its leading share position in a number of passive component categories and its top 3 position in MLCC (Multi-layer Ceramic Capacitors), all of which the company has developed through acquisitions that target large vertical application segments and leverage those through direct sales and relationships with EMS providers and distributors.  Yageo is the share leader in SMD Resistors (34%), Tantalum Capacitors (43%), and 3rd in MLCCs (15%) and Inductors (13%) and continues to maintain a well balanced mix of components across the company as shown in Figure 1.

Yageo - 2Q Sales by Product Category - Source: SCMR LLC, Company Data

However, the company faces the same demand issues as other CE component manufacturers and is looking to bring up the share of its specialty products and lower its exposure to commodity components, with the goal of bringing up product segments that carry higher (premium) margins to 75% on a long-term basis.  That said, if we break down Yageo’s 2Q results by application category, we see that the ‘commodity segments (consumer, computer, & communications) represent 46% of sales, with 54% falling into ‘premium categories, which carry higher margins, longer order cycles, and have a higher barrier to entry.
What makes Yageo interesting is that last month the company made two acquisitions in a new product application segment that if included in 2Q results, would lower the ‘commodity’ share of sales from 46% to 36%, while increasing the premium segment from 54% of sales to 64% of sales (see Figure 2 & Figure 3), a major step toward the long-term goal of 75%.    Both acquisitions, which cost a total of $755.8m US, are in a new product category, that of sensors, including thin-film temperature sensors, electro-mechanical sensors, and electronic switches, all of which have applications in industrial and automotive applications (both premium categories) and putting the overall new sensor category at ~20% of sales based on 2021 sales from both acquired companies.

Yageo - 2Q Sales by Application Segment - Source: SCMR LLC, Company Data

Yageo - 2Q Sales by Application Segment - Adjusted - Source: SCMR LLC, company data

​All in, while we are not recommending Yageo to investors[1], we found it interesting that within a month the company’s two acquisitions changed the financial make-up of the company substantially and added another growth segment to the company’s component portfolio that is growing between 7% and 9% CAGR between 2021 and 2026.  This reduced the company’s exposure to cyclical /commodity components, with the company paying roughly 2x 2021 sales, and while the final closings will likely extend into 2023, we see it as an intelligent response to the volatility seen in many basic components over the last two years while not moving far from the company’s core manufacturing expertise, a far better response than the usual rhetoric of  ‘we will be focusing on more profitable product segments’, which usually translates into relatively minor changes to product structure and a quick return to ‘how it was’ as the cycle turns upward.


[1] We do not make specific company recommendations, nor do we have any stake in, affiliation with, or receive compensation from any company mentioned in our notes