RNECY - Renesas Electronics: Stock Price Has Run Its Course

2023-06-14 04:54:43 ET

Summary

• Renesas Electronics' exceptional growth in 2022 is attributed to robust organic expansion within its automotive and Industrial/Infrastructure/IoT segments, rather than the Dialog Semiconductor acquisition.
• The automotive segment experienced a substantial upswing (39.53% growth) due to increased partnerships, particularly with major automakers in Japan and China, while the Industrial/Infrastructure/IoT segment (39.58% growth) benefited from the release of new products in the IoT space.
• Despite the stock price experiencing a 120% surge since October 2022, the revised price target for the company indicates a marginal upside of only 0.55%, leading to an adjusted rating of Hold.

In our previous analysis of Renesas Electronics Corporation ( RNECF ), (RNECY) we examined the overall business segment of the company's microcontroller units (MCUs), which accounted for 38% of its revenue. It was evident that Renesas was experiencing a decline in market share, dropping from 18.1% in 2019 to 16.8% in 2021. Our analysis revealed that although Renesas had a positive growth in MCU revenue, it was below the industry average. This was attributed to the company's performance and product breadth disadvantage compared to its competitors. However, Renesas remained the dominant player in the automotive MCU market, with a market share of 28.6%, benefiting from its superior performance over competitors.

In this current analysis of Renesas Electronics, we followed up on the company as its stock price has increased by 120% and exceeded our price target previously. We delved into the factors behind the remarkable surge in revenue growth of 51.1% YoY in FY2022, which far exceeds the company's five-year average growth of 7.65%. However, its growth has had a slowdown in Q1 2023 revenues at 3.7% YoY based on the recent briefing but management has expressed optimism for a potential recovery in growth during the second half of the year. Firstly, we examine the impact of the Dialog semiconductor acquisition on revenue growth. Subsequently, we explore the drivers propelling growth in the company's two segments, namely Automotive and Industrial/Infrastructure/IoT, while excluding the influence of Dialog's revenues.

Strong Revenue Growth Not Driven by Dialog Semiconductor Acquisition

Source: Company Data, Khaveen Investments

Based on the table above, the company's total revenue grew by 51.1% in 2022 which is more than five times the 5-year average growth rate of 7.65%. The automotive segment (42.93% of total revenue) grew 39.53% in 2022, higher than 35.57% in 2021 and the 5-year average growth rate of 11.31%. Based on its annual report , this was due to the increase in the sale of semiconductor devices that control automobile engines as well as devices used in sensing systems. Moreover, the Industrial/Infrastructure/IoT segment (56.3% of total revenue) grew 64.07%, higher than the 2021 growth rate of 41.79% and the average growth rate of 21.87%. According to management, this was attributed to an increase in revenue in "factory automation, PC/mobile, and datacenters".

Renesas acquired Dialog Semiconductor in August 2021 with a purchase price of JPY 631,075 mln. Based on Dialog's five-year average revenue growth rate, we estimated its 2022 revenue to be around JPY 208,000 mln (13.8% of Renesas' total 2022 revenue). Even when excluding our estimated Dialog revenues, Renesas grew by 39.6%, well above its 2021 growth rate of 29.6% and the average of 5.32%.

According to Renesas, Dialog Semiconductor's products have synergies with both of Renesas' reportable segments. In terms of automotive , Renesas and Dialog products have come together for smart cameras, tire pressure monitoring systems and wireless battery management systems. For the Industrial/Infrastructure/IoT segment, Dialog products are mainly used for IoT and Industrial purposes. An example in the IoT segment is Quick Connect IoT, which utilizes Dialog's ultra-low power Bluetooth device to help boost the performance of Renesas MCUs. On the Industrial side, Dialog's "high power density AC/DC chipset" is used in Renesas' 100W adapter.

Before the acquisition of Dialog, Renesas derived 48% of its revenues from the automotive segment and 50% from Industrial/Infrastructure/IoT. Using this breakdown, we obtained the revenues for both segments without the effect of Dialog. Both segments still grew above the previous year as well as the 5-year average growth rate, with the automotive segment growth at 39.53% and Industrial/Infrastructure/IoT growth at 39.58%. However, Dialog did support the growth of Industrial/Infrastructure/IoT as the segment grew by 64.07% when including Dialog revenues, but the automotive segment growth with and without Dialog revenues was almost the same.

In conclusion, Dialog Semiconductor's acquisition is not the key driver of Renesas' growth in FY2022, as there was strong organic growth in both the automotive (39.53%) and Industrial/Infrastructure/IoT segments (39.58%) which led to exceptional performance for the company. However, a key observation from the table above is that revenue growth had a drastic change, going from low negative growth in 2018,2019 and 2020 to 29.6% in 2021, which was the year the Dialog acquisition took place. Although there may not be much of a direct impact from Dialog on Renesas's revenue growth, we believe there could be product integrations between Dialog and Renesas that fueled the revenue growth in the past two years. Therefore, along with new partnerships, we then looked at new product releases from Renesas to determine if it has had an impact on the staggering revenue growth.

Automotive Segment Growth Supported by Partnerships

In this point, we compiled and examined the company's new partnerships and product releases in 2021 and 2022 within the automotive segment to determine whether these factors could explain its above-average segment growth of 39.53% excluding the automotive revenues from Dialog.

Source: Company Data, Khaveen Investments

From the table above, although there was a slight drop in the new product releases (19 to 17), there was a significant increase in the number of new partnerships from 2 to 7. Some of the new partnerships include Honda , VinFast and Tata Motors . Renesas will be providing its ADAS solutions to Honda, supplying a wide range of automotive products to VinFast and working with Tata Motors on developing centralized E/E architecture as well as supplying them with technologies such as ADAS.

From our previous analysis of Renesas, we identified the company as the automotive MCU market leader and was supported by its superior product performance compared to competitors. Apart from Honda, Renesas' partnerships with major automakers in Japan include Nissan and Toyota . Renesas also has partnerships with several large automakers in China such as BYD , SAIC Volkswagen and FAW . Cars produced in Japan and China, first and second in market share respectively, represented 42.8% of the world's automotive market. Thus, we believe this could be the reason not only for its strong segment performance in 2022 but also in 2021 where its automotive segment grew by 35.57%.

Additionally, Japan and China are the top two fastest -growing EV markets with Japan having a 119% YoY growth in 2022 and China growing by 87% YoY, according to Counterpoint Research. Adding on to that, according to Counterpoint Research, China accounts for nearly 59% of global EV sales with BYD, one of Renesas' partners, having market leadership with a 20% share. Therefore, the company not only has partnerships with automakers in the two largest automotive markets but also has partnerships with automakers that are in the fastest-growing EV markets.

In conclusion, we believe the surge in new partnerships in 2022 as well as existing partnerships with major automakers in Japan and China contributed to the strong automotive segment growth in 2022. We expect this to continue fueling the company's automotive segment growth as the electrification of vehicles continues to increase coupled with Renesas having a home field advantage being based in Japan which is the leader in the automotive market by country with 22.4% market share. From its latest earnings briefing , management highlighted Japanese automakers to be "relatively robust" compared to global production and could be a tailwind for growth in the second half of the year.

Industrial/Infrastructure/IoT Segment Growth Supported by New Product Releases in IoT

Besides the automotive segment, to analyze the growth driver for the Industrial/Infrastructure/IoT segment which grew by 39.58% YoY (without Dialog), we compiled and examined the new product releases and partnerships in 2021 and 2022 specifically within the IoT area as it accounted for 56% of the total segment revenue in 2021.

Source: Company Data, Khaveen Investments

As seen in the table, although there is an increase in the number of new partnerships, the big difference is in the number of new products released, which increased from 2 to 13. Some of the new products released include the industry's first RISC-V MCU, the DA1470x family of Bluetooth chips and two new cloud development kits. These new products help add to Renesas' impressive embedded processing product portfolio as well as increase their product offerings in the rapidly growing cloud computing market, which is forecasted to grow at 14.1% according to Grandview Research.

Upon closer examination, the date for the product releases in 2021 was on November 24th and December 8th. This was after the acquisition of Dialog Semiconductors. Moreover, on December 20th, 2021, Renesas acquired Celeno Communications, a company that focuses on the "development and sale of connectivity devices such as Wi-Fi 5, Wi-Fi 6 and IoT chipsets". Relating this to our previous coverage of Renesas, we concluded that non-automotive MCUs had a product disadvantage and low product breadth compared to competitors. Looking at the picture below , with a couple of acquisitions (Dialog and Celeno) and partnerships ( Panthronics and Sequans ), Renesas has been able to build an IoT product portfolio that covers a wide range and data rate. Therefore, we believe Renesas is developing its products with both companies it has acquired or partnered with, which could improve product performance and increase its product breadth.

In conclusion, we believe IoT has been a key driver for the unprecedented growth in the Industrial/Infrastructure/IoT segment, due to the surge in new product releases. However, we believe the rise in product releases was due to product integration with companies Renesas has either acquired or partnered with. Additionally, we expect the segment of the company to continue expanding as Renesas has recently completed its acquisition of Panthronics, one of its current IoT partners.

Risk: High Net Debt

Source: Company Data, Khaveen Investments

Renesas has a high net debt with the cash-to-debt ratio being 0.3x and net debt being 19.5% of market capitalization in 2022. However, the company has a good interest coverage ratio with EBITDA interest coverage at 95.6x and EBIT interest coverage at 78.1x. Still, we believe its high leverage could limit the company's ability to acquire new companies in the future, and not rely on M&A to fuel its growth.

Valuation

In summary, our assessment reveals that Renesas' remarkable growth in 2022 could be attributed not to the Dialog semiconductor acquisition, but rather to robust organic expansion within its automotive and Industrial/Infrastructure/IoT segments. We posit that the automotive segment experienced a substantial upswing (39.58% growth) due to increased partnerships, particularly with major automakers in Japan and China. Furthermore, we attribute the growth in the Industrial/Infrastructure/IoT segment (39.58% growth) to the release of new products in the IoT space (constituting 56% of the segment), resulting from successful integration with acquired or partnered companies. However, it is worth noting that the company's revenue growth has slowed down in the most recent quarter, with a modest 3.7% year-on-year increase, and management has provided guidance for a potential contraction of -4.5% in Q2, primarily attributed to market growth headwinds but management anticipates a recovery in the second half of the year.

Considering our analysis, we have derived a revised price target for the company at JPY2,489.23 (USD17.80) based on analyst consensus , which is slightly higher by 14% than our previous analysis of JPY2,176.92. That said, this updated price target indicates a marginal upside of only 0.55%, as the stock price has experienced a substantial surge of 120% since our last coverage in October 2022. Consequently, we have adjusted our rating for the company to a Hold .

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