Semiconductor Equipment - Berenberg Bank

BERENBERG EQUITY RESEARCH
Semiconductor
Equipment
Shrinkage brings growth,
but not for everyone
Tammy Qiu
Analyst
+44 20 3465 2673
tammy.qiu@berenberg.com
Jean Beaubois
Specialist Sales
+44 20 3207 7835
tammy.qiu@berenberg.com
22 July 2013
Technology Hardware

For our disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and
our disclaimer please see the end of this document.
Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and
the disclaimer at the end of this document.

Table of contents
Shrinkage brings growth, but not for everyone 4
Helicopter view of the names 6
Key debates 7
Snapshot on capex trends and vendor exposures 10
How much are chip-makers spending? 12
Where are chip-makers spending? 21
Companies
AMSL: The best positioned player, but priced in 28
AMS International: Front-end business undervalued 53
Suess Microtec: Small, but active in growing markets 74
Applied Materials: Recovery and growth priced in 92
Tokyo Electron: Mainly exposed to legacy markets 117
Disclosures in respect of section 34b of the German Securities
Trading Act (Wertpapierhandelsgesetz – WpHG) 137
Contacts: Investment Banking 140
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Semiconductor Equipment
Technology Hardware
Shrinkage brings growth, but not for everyone
● We believe that the semiconductor equipment industry has entered a
recovery cycle from beginning of 2013, after declining by 16% in 2012
due to weak memory spending. ASML, Applied Materials (AMAT),
Tokyo Electron (TEL), ASM International (ASMI) and KLA Tencor
Corp (KLA) are seeing or guiding for order recovery compared with
the 2012 trough level. We expect this order recovery trend to continue
as 1) foundry/logic orders are likely to remain strong, driven by a
28nm capacity expansion and a 20nm/16nm FinFET ramp-up, and 2)
memory orders are expected to pick up from the 2012 level after a
better supply/demand balance since the start of 2013, driven by the
ramp-up of NAND 20nm and smaller nodes, DRAM 30nm and
smaller nodes and 3D NAND.
● Key debates: 1) Will the semiconductor cycles be as cyclical in the
future as previously? 2) Where are we in the cycle now? 3) What will
the impact be of Apple switching/buying into its foundry partners?
1) We believe the semiconductor cycle will remain cyclical, but less
volatile compared with historically, as a) memory capex, which
caused fluctuations previously, is likely to be less volatile as
memory-makers have become more conservative in their
spending, b) logic/foundry capex is likely to remain strong, as
competition intensifies in the consumer devices market.
2) As the industry entered an order recovery cycle at the beginning
of 2013, we expect that we will exit the recovery phase by end-
2013/early 2014, and enter a more muted growth period, as a)
Intel and Samsung’s capex is likely to be spent in H2, which will
drive order growth in 2013 H2, b) foundry/logic capex is likely to
remain at the current level over the next three years until 2016
(TSMC indicated that its 2014 capex will be similar to that in
2013), c) memory capex has recovered since mid-2013. We believe
that memory capex growth in the next three years will not drive
any significant total capex growth, as it will only account for 29%
of total capex, versus 33-57% of total capex in the peak years.
3) We believe that Apple’s foundry switch is likely to provide small
positive upside for some equipment vendors, depending on their
exposure to the various foundry/logic players. The foundry order
switch is likely to create new capacity addition demand, which
could give a short-term boost to overall capex.
● The growth potential of different equipment vendors differs, as they
are each exposed to different fabrication processes. We rank the
vendors’ growth potential (between 2012 to 2017) as follows:
1) ASML – 100% exposure to the lithography market, which is
growing at a CAGR of 18%, driven by demand for ever smaller
chips;
2) ASMI – 60% exposure to the atomic layer deposition (ALD)
market, which is growing at a CAGR of 15%;
3) KLA – 100% exposure to process control market (growing at a
CAGR of 6%), although AMAT may gain market share from it;
4) SUSS – 30% exposure to the micro-electro-mechanical systems
(MEMS) market, which is growing at a CAGR of 12%;
5) LAM – 50% exposure to the silicon etching market (growing at
CAGR 4%);
6) AMAT – a diversified portfolio, but with 61% market exposure to
growth markets and 39% to legacy markets; benefiting from the
capex growth trend;
7) TEL – 60% exposure to legacy markets.
ASML Holding
Hold (initiation)
Current price Price target
EUR67.68 EUR73.00
19/07/2013 Amsterdam Close
ASM International
Buy (initiation)
Current price Price target
EUR27.49 EUR31.00
19/07/2013 Amsterdam Close
Suess Microtec
Buy (initiation)
Current price
EUR7.65
Price target
EUR9.40
19/07/2013 XETRA Close
Applied Materials
Hold (initiation)
Current price
USD16.56
Price target
USD14.40
18/07/2013 New York Close
Tokyo Electron
Sell (initiation)
Current price
JPY4,790
Price target
JPY4,331
19/07/2013 Tokyo Close
Rating system: Absolute
22 July 2013
Tammy Qiu
Analyst
+44 20 3465 2673
tammy.qiu@berenberg.com
Jean Beaubois
Specialist Sales
+44 20 3207 7835
jean.beaubois@berenberg.com
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Semiconductor Equipment
Technology Hardware
● In this note, we initiate coverage on ASML with a Hold recommendation (PT
€73) as we believe all positive news is well understood and priced in at the
current price level. We initiate with Buy ratings on ASMI (PT €31), as it has a
44% market share and no direct competitor in the growing ALD market, and
on Suess Microtec (SUSS) (PT €9.4), as we believe the lithography segment can
drive strong growth for SUSS in 2014 and 2015 without a significant
contribution from other segments. We initiate with a Hold rating on AMAT
(PT $14.4) as we can only see it gaining a further 1% in market share. We also
initiate with a Sell rating on TEL (PT ¥4,331), as ~60% of its revenue is
exposed to low-growth markets.
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Semiconductor Equipment
Technology Hardware
Helicopter view of the names
Figure 1: Market share and market growth potential
High
Market share
Low
Low
High
Addressable market growth
Source: Berenberg estimates
Figure 2: Relative share performance
01/01/2008 01/01/2009 01/01/2010 01/01/2011 01/01/2012 01/01/2013
Source: Bloomberg data
AMAT ASMI ASML TEL Suess
Figure 3: Valuation matrix
ROE*
Dividend
yield*
No.1 ASML 19.7% AMAT 2.5% AMAT 9.7% TEL 26.5%
No.2 AMAT 17.1% TEL 1.5% ASMI 6.2% SUSS 17.6%
No.3 SUSS 9.1% ASML 0.9% ASML 4.5% AMAT 16.7%
No.4 TEL 6.3% ASMI - TEL 4.3% ASMI 8.9%
No.5 ASMI 6.2% SUSS - SUSS 1.6% ASML 6.5%
* based on Berenberg estimation of 2014 performance
Net cash based on 2012 YE balance
Source: Bloomberg data, company data, Berenberg estimates
FCF yield*
Net cash/marcap
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Semiconductor Equipment
Technology Hardware
Key debates
Will the semiconductor space remain as cyclical as before?
We believe the semiconductor cycle is going to remain cyclical, but less
volatile compared to history. Over the past decade, we have seen cycle peaks in
2000, 2007 and 2011, followed by a capacity digestion period, ie trough cycles in
2002 and 2009, driven by different market trends. Memory was the main driver for
the 2000 and 2008 cycle peak, and logic/foundry drove the peak cycle with
memory in 2011.
Figure 4: Semiconductor capex to remain flattish for the next two years
USD mn
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
-
35%
30%
25%
20%
15%
10%
5%
0%
Semi capex $mn Semi equipment revenue $mn Semi capex/semi revenue %
Source: Gartner data, Berenberg estimates
The 2000 cycle was driven by 1) strong PC demand, 2) increased DRAM content
per PC, 3) increased capacity for 0.13 micron, 0.18 micron and 300mm.
In 2007, the cycle was driven by 1) Apple’s Nano/Shuffle products and other
portable media players, which led NAND demand, 2) a DRAM demand increase
due to increased adoption of 64-bit processors, Microsoft Vista and the Sony
PlayStation 3 (PS3) launch, 3) an increased mobile phone DRAM demand, and 4)
DRAM, Logic and NAND moving to smaller nodes.
The 2011 cycle was influenced by 1) smartphone/tablet demand offset by PC
demand, 2) leading-edge chip increases (logic: 28nm; NAND: 20nm; DRAM:
30nm) as the consumer electronics market grew.
We believe future cycles will be less volatile: In the future, we believe the
semiconductor capex trend will be less cyclical compared to previous cycles for the
following reasons.
1) Memory-makers become more conservative in their spending: The
previous three peak cycles were driven by memory. Memory-makers have
tended to double their capex in the peak years (ie 2000, 2004-2007, 2010) and
cut capex by half in the following one/two years. Following the 2012 memory
price slump, memory-makers became more cautious and are now ramping up
addition capacity slower than before. Therefore we believe the cycle volatility
caused by memory spending will be significantly reduced.
2) Foundry/logic spending is likely to remain strong: Intel, Samsung
(excluding memory) and Taiwan Semiconductor Manufacturing Company
(TSMC) (which together account for 78% total foundry/logic capex) are
heavily exposed to the consumer electronic markets, and the competition in
the market is further intensified by the war between Apple, Samsung,
Qualcomm, Intel and ARM. We believe that these companies have no choice
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Semiconductor Equipment
Technology Hardware
but to keep spending to maintain their leadership in the consumer devices
market.
Where are we in the cycle?
We believe we are halfway into the current recovery cycle, and will enter a
more muted growth phase by the end of 2013 or early 2014: ASML, AMAT,
TEL, ASMI, KLA and LAM have all shown improved order intake/shipment
levels from the beginning of 2013, compared to end-2012; hence, we believe we
have entered a recovery cycle from the 2012 trough.
We believe we may exit the recovery phase and enter a more muted growth phase
of the cycle by end-2013/early 2014 for the following reasons.
1) Samsung and Intel’s capex is likely to be spent in H2 and will drive order
growth in H2 2013.
2) TSMC, Samsung, Intel, Globalfoundries and other logic/foundry players
have all budgeted higher/similar capex compared to 2012, and total logic
and foundry capex is currently at a historical high (2013E: $37bn). After
2013, we expect foundry/logic capex to remain at flattish until 2016. In
addition, TSMC has indicated that its 2014 capex will be similar to the
2013 level. We expect the solid order intake level to be maintained after
2013/early 2014, but growth is likely to be muted.
3) Memory spending has already picked up from the 2012 trough level since
mid-2013. ASML, KLA and LAM have all indicated that memory spending
is recovering. We estimate memory capex to grow at 11-15% in the next
four years. However, as it only accounts for 29% of total capex, which is
too small to drive significant capex hikes. Historically, memory spending
used to account for up to 57% of total capex and hence had a greater
impact on overall capex.
Will the Apple/Samsung/TSMC/Globalfoundries shift be a zero
sum game?
In our view, any shift is a small positive for equipment vendors, depending
on which of them Apple is shifting to: Since last year, there has been much
speculation about whether Apple will shift its foundry orders from Samsung to
TSMC/Intel, and whether Apple will buy fabrication plants (fabs) from United
Microelectronics Corporation (UMC) or Globalfoundries. In our opinion, these
shifts can be a small positive on a net basis for some equipment vendors, instead of
simply a zero sum game. The new foundry is likely to build capacity which was not
required previously; at the same time, the old foundry may cut its original spending
level, but it may have already committed some capex as fab-building projects are
multi-year projects.
If Apple moves to TSMC, we believe ASML, AMAT, ASMI, and LAM will all
benefit, as: 1) TSMC’s 20nm is lithography-intensive, and it only buys from ASML;
2) AMAT has a strong relationship with TSMC (although the decrease in the
Samsung order may have a negative impact on AMAT); and 3) TSMC 20nm is high
K metal gate (HKMG)-based, which requires the ALD tool from ASMI.
If Apple chooses Intel for its foundry orders, we believe TEL may benefit, with
ASML also benefiting, but to a lesser extent, as 1) TEL has a close bond with Intel
in relation to its etching tools, 2) AMAT does not have a strong relationship with
Intel, 3) ASML may receive new orders, but it has to share Intel orders with Nikon,
and 4) Intel’s capacity is 100% HKMG-based, which only leaves limited upside for
ASMI.
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Semiconductor Equipment
Technology Hardware
If Apple buys Globalfoundries’ fabs, we believe ASML, TEL, ASMI, AMAT and
LAM may all benefit, as 1) leading-edge nodes are lithography-intensive, providing
upside for ASML, 2) TEL is strong at Globalfoundries in etching, 3) LAM has
close relationships with foundries in etching, 3) AMAT has strong links in
deposition with foundries, 4) Globalfoundries’ HKMG adoption rate is currently
quite low, so it may require more ALD tools from ASMI to ramp up capacity as
required.
If Apple buys UMC’s fabs, we believe ASML, ASMI, AMAT and LAM could
benefit as 1) leading-edge nodes are lithography-intensive, and hence are a strong
suit for ASML, 2) LAM benefits from good relationships with foundries in etching,
3) AMAT is strong in deposition with foundries, and 4) UMC may need to ramp
up its HKMG processes, which would benefit ASMI.
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Semiconductor Equipment
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Snapshot on capex trends and vendor exposures
In our view, the capex level of the industry is likely to be flattish over the next two
years (5% up in 2014 and 3% up in 2015), and increase by 10% in 2016 due to
450mm migration, driven by strong foundry/logic and memory spending recovery.
Semiconductor equipment vendors’ growth potential differs from one vendor to
another, as they are each exposed to different fabrication processes. We believe
ASML and ASMI are likely to benefit from their sales addressable market (SAM)
expansion, while TEL is likely to suffer from its declining SAM.
Capex to remain flattish in 2014/2015
Memory – NAND capex to return to growth and accelerate in 2014/15
NAND capex is likely to return to growth in 2013 (up 6%) and accelerate in
2014/2015 (up 15% and 20% respectively), driven by the high capital requirements
of 20nm/below node, and 3D NAND.
We believe NAND vendors are unlikely to increase capex significantly in the near
future as they did historically in peak years (39-115% growth), as 1) the spending
pattern has become more conservative since the 2012 trough period, 2) Samsung’s
new NAND fab, Micron’s DRAM-NAND conversion, and Toshiba’s capacity
resumption may provide new capacity in next two years, and 3) the low-/mid-end
smartphone/tablet, which is likely to be the driver for the consumer devices
market, requires less NAND content than high-end products.
Memory – DRAM stable 5% growth in 2013/2014
DRAM capex growth is likely to be stable and grow at 5% in 2013 and 2014,
enabling a limited expansion of 30nm/20nm capacity.
We believe DRAM capex will not increase significantly as: 1) capacity expansion
demand is low (as per our conversations with industry sources, current capacity is
sufficient to support annual bit growth of about 30%); 2) mid-/low-end consumer
devices require less DRAM content per box; and 3) smartphone/tablet DRAM
demand is not sufficient to offset the decline in PC unit growth as the content per
box is less (0.6GB versus PCs at 4.2GB).
Foundry/logic players remain solid, contributing 60% of total capex
Foundry/logic players are heavily exposed to the consumer electronic markets, as
Samsung and Intel manufacture their own chips for their smartphones, tablets and
Ultrabooks, Apple contracts the Samsung foundry and TSMC for its chip
manufacturing requirements and fabless players such as Qualcomm, Mediatek and
Nvidia contract foundries like TSMC, Globalfoundries and UMC for their chip
manufacturing.
As a result of the increasing competition within the consumer electronics market,
the chip-makers/device vendors require the most advanced chips in order to
differentiate their end-products. The foundry/logic players are therefore under
pressure to maintain their technology leadership, and all the major players are
ramping up 20nm in 2013, to be followed by 16/14nm in 2014. We thus believe
foundry/logic spending will remain solid, and will contribute about 60% of
semiconductor capex.
Growth potential differs as market exposure differs
Semiconductor equipment vendors’ growth potential differs from one to another,
as each vendor is exposed to different fabrication processes.
We believe the lithography, ALD, epitaxy deposition, process control and 3D
packaging markets have considerable growth potential, driven by node shrinking
and 3D wafer stacking demand, hence ASML, ASMI, KLA and SUSS are likely to
outperform other equipment suppliers. We believe TEL will suffer from its high
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Semiconductor Equipment
Technology Hardware
exposure to legacy markets such as dielectric etching.
In the table below, we rank the market growth potential of the various markets,
and relevant exposure of each of the key vendors. The vendors with high
exposures to the growing markets are likely to outperform.
Figure 5: Ranking by growth potential
Lithography 18.0%
Deposition - ALD
3D bonding
CAGR
Comment
Equipment Vendor's Main market exposure (market share 2012)
2012-2017 ASML ASMI AMAT TEL SUSS KLA LAM
15.0%
14.0%
Deposition - Epitaxy 7.5%
Printing smaller chips requires
leading edge lithography tools
Demand increase as HKMG is
required for 20nm and smaller
node.
Revenue may triple once volume
adoption starts in 2016/17
Extensively used for new chip
designs, such as FinFET, 3D NAND
100%
(74% share)
60%
(44% share)
11%
(89%
share)
6%
(44% share)
13%
(no.1 share)
Process control 6.0%
Demand increases as chip design
gets more complex
9%
(76% share)
100%
(54% share)
Deposition - PE CVD 5.0% Demand driven by 3D NAND
Etching - Silicon 4.0% Demand driven by FinFET, 20nm
19%
(47% share)
8% 8%
(14% share) (9% share)
50%
(59% share)
Photoresist processing 1.4%
Demand decrease as legacy
lithography tool demand declines,
hence total lithography tool
shipment decreases.
34%
(89% share)
Deposition - PVD 0.5% Grow slower than PE CVD
Etching - Dielectric 0.5%
Ion Implanter
Source: Gartner data, Berenberg estimates
Demand shifts to silicon etching as
new chip designs like FinFET,
20nm.
-2.5% HKMG require less implant steps
21%
(78% share)
11%
(76% share)
20%
(63% share)
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Semiconductor Equipment
Technology Hardware
How much are chip-makers spending?
Semiconductor equipment vendors supply equipment used in the chipmanufacturing
process. Historically, semiconductor equipment industry revenues
are closely correlated to semiconductor capex levels, which are determined by the
capital intensity of the semiconductor industry (see Figure 6).
Figure 6: Semi equipment revenue versus semi capex
USD mn
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
-
35%
30%
25%
20%
15%
10%
5%
0%
Semi capex $mn Semi equipment revenue $mn Semi capex/semi revenue %
Source: Gartner data, Berenberg estimates
As shown in Figure 7, foundry and logic, memory and integrated device
manufacturer (IDM) players are the three main groups of capex spenders within
the sector, although the capex mix varies over time. IDMs were the main spenders
in the early 2000s, replaced by memory chip manufacturers in 2004/2005 following
the high memory demand from Apple (for its Nano/Shuffle products), Microsoft
(Vista), Sony (PS3) and mobile handset manufacturers. Foundry and logic chipmakers
became the biggest spenders in 2011 due to the ramp-up of fabless players
and greater outsourcing from IDMs. Over the next few years, we expect semi
capex to comprise: 1) strong foundry and logic spending driven by consumer
electronics growth; 2) a normalisation in memory spending; and 3) shrinking IDM
spending as increased capital requirements push IDMs to use more foundry
services instead of in-house manufacturing.
Figure 7: Three main semi capex spenders
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E
Foundry+logic IDM Memory (NAND+DRAM)
Source: Gartner data, Berenberg estimates
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Semiconductor Equipment
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The amount of capex from these three types of chip-makers will depend on their
end-market demand and technology roadmap. We estimate the aggregate capex will
remain flattish between 2013 and 2015. We expect 450mm migration-related capex
to start increasing in 2016 from logic/foundry chip-makers, which will lead a 10%
growth in overall capex (see Figure 8).
Figure 8: Total capex to be flat in 2014/2015 and boosted in 2016 by 450mm spending
$mn
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
Source: Gartner data, Berenberg estimates
Memory – NAND spending will normalise from now
NAND capex grew aggressively from 2000 to 2007, outgrowing total
semiconductor capex over the period. During this time, NAND bit shipments grew
by c190%, fuelled by the increase of portable applications, such as digital cameras
and personal digit assistants in 2000, followed by growth of Apple’s Nano/Shuffle
products after launch in 2003. Since this period of rapid expansion, the NAND
spending cycle tended to follow the spending cycle of total semiconductor capex
(see Figure 9).
Figure 9: NAND capex versus total semi capex growth
% growth
200%
150%
100%
50%
0%
-50%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E
Foundry&logic IDM Memory
-100%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
NAND Capex
Total Capex
Source: Gartner data
From the second half of 2011, the NAND industry struggled due to oversupply
after its significant expansion phase; this was largely the result of softer demand in
USB storage, fewer bundled cards with smartphones and channel inventory
clearing. As a result, the NAND price fell by 42% in 2012 and 33% in 2011. In July
2012, Toshiba cut its utilisation rate by 30% (6-8% aggregate NAND capacity), and
indeed all NAND vendors have become more conservative in adding new capacity.
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Toshiba and Micron are ramping up capacity slower than before, Samsung
switched its NAND line 14 to LSI and has been converting its NAND production
capacity in Austin, Texas since Q2 2012 to LSI (logic), and SK Hynix readjusted
Fab M12’s capacity to produce both DRAM and NAND instead of being a
dedicated NAND fab.
Figure 10: NAND demand/supply
Mns of 1GB Eqv 2010 2011 2012 2013E 2014E
Demand/Supply
NAND demand 11,295 20,195 32,131 45,872 62,992
Growth 65.7% 78.8% 59.1% 42.8% 37.3%
NAND supply 11,247 20,004 31,946 44,318 62,966
Growth 72.5% 77.9% 62.1% 38.7% 42.1%
ASP ($) 1.86 1.24 0.74 0.62 0.48
Sufficiency 99.6% 99.1% 100.9% 96.7% 100.0%
By Application
Tablets 4.5% 8.5% 7.3% 5.3% 6.1%
PC 0.2% 0.2% 0.6% 1.3% 2.0%
Server 0.1% 0.1% 0.1% 0.1% 0.1%
Feature phone & sm 20.2% 22.3% 22.2% 21.5% 19.2%
SSD 6.7% 12.8% 19.4% 29.2% 35.0%
Data Card 46.5% 38.5% 32.9% 26.2% 23.6%
Other 21.8% 17.6% 17.4% 16.4% 14.0%
Source: Gartner data, Berenberg estimates
We expect NAND bit shipments to grow at a modest level (40-50%) over the next
three years (see Figure 10 above), mainly driven by demand for Solid State Drive
(SSD) and, to a lesser extent, smartphones and tablets. The main portion of bit
growth (40%) will come from node shrinking (more chips can be made from the
same wafer as chip size shrinks); therefore, wafer capacity addition is likely to grow
at a very low level.
Figure 11: NAND content/box
(GB Eqv) 2010 2011 2012 2013E 2014E 2015E 2016E
Tablet 27.2 25.4 15.7 11.6 14.8 17.7 21.5
Growth 100% -7% -38% -26% 28% 19% 22%
Smartphone & Feature phones 1.4 2.5 3.9 5.1 6.3 8.8 12.6
Growth 70% 73% 61% 30% 23% 39% 43%
Solid State Drives (SSD) 77.3 98.8 148.6 170.4 190.9 223.1 265.0
Growth 35% 28% 50% 15% 12% 17% 19%
Data Cards 1.1 1.4 1.8 2.0 2.5 1.7 1.9
Growth 27% 34% 22% 15% 22% -32% 13%
Source: Gartner data, Berenberg estimates
We believe NAND vendors are unlikely to invest heavily in capacity additions in
the near future because: 1) Samsung’s new mega NAND fab and Micron’s DRAM
to NAND conversion will add new capacity in the next two years; 2) we estimate
that the growth of smartphones and tablets will be driven by mid-/low-end
products with low NAND content per box.
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Figure 12: NAND shrinkage roadmap
NAND H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H2 2012 2013E 2014E 2015E
Samsung
Toshiba/SanDisk
Micron(Elpida)
-3xnm/4xnm
-3xnm/4xnm
-27nm
-24nm
-21nm
SK Hynix -3xnm/4xnm
-26nm -20nm
-19nm started 2012 end,
- 21nm/19nm
-16nm start in H2
-25nm -20nm started in 2012 H1,
-50% capacity on
-19nm started in 2012 end,
-19nm as main capacity
-1Y(18nm-15nm) start in 2013
-16nm start in 2013 end
-16nm expansion
-21/19/16nm
-Start 3D NAND
-16nm expansion
-16nm start in 2013 end,
-20nm/16nm
-mainly ship 20nm,
- start 16nm in Q3
-1znm (12-14nm),
-1Y nm/1xnm
-3D NAND.
Source: Gartner data, Berenberg estimates
Most vendors are currently building NAND at 19nm/20nm node, and are planning
to start 16nm node at the end of the year (see Figure 12 above). We believe 16nm
will mature in 2014, and vendors will enter 1Znm (12nm-14nm) and 3D NAND in
2014/2015.
Figure 13: NAND capex/revenue versus bit growth trend
250%
NAND
200%
150%
100%
50%
0%
-50%
-100%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Gartner data
NAND capex/rev
Bit growth
Historically, NAND bit growth was highly correlated to NAND capex/sales, as
shown in Figure 13. We believe the capex/revenue ratio is likely to be around 30-
40% for the next few years, as the NAND bit shipment growth rate is slowing
down to 40-50% from its historical level of 80-200%.
We estimate NAND capex will grow by 20% in 2014/2015 after 6% growth in
2013; reflecting the high amount of capital investment required to ramp up
production of 1Y/1Znm in 2014/2015 and prepare for 3D NAND.
Memory – DRAM spending pattern structurally changed
Historically, DRAM capex has shown a bigger fluctuation versus total
semiconductor capex during different spending cycles (2000, 2005-2007, 2008-
2009) (see Figure 14). From the 1980s to 2007, the growth of the DRAM market
was linked to the success of the PC and gaming industries. The capex peak in 2000
was driven by strong PC demand following the Pentium 4 launch and increased
DRAM content per PC. The 2004 peak was driven by the increased adoption of
dual-cores, 64-bit processors and PS3 demand. From 2007 to 2011, the rise of
smartphones and tablets drove DRAM market growth, although this was offset by
the weak performance of the PC market.
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Semiconductor Equipment
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Figure 14: DRAM capex versus total semi capex growth
% growth
200%
150%
100%
50%
0%
-50%
-100%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
DRAM Capex
Total Capex
Source: Gartner data
Following the capacity digestion period of 2011-2012 and the 9% capacity cut in
2012, independent researcher Gartner forecasts that the DRAM market will enter
an over-demand phase in late 2013 at the earliest (see Figure 15). The growth of
DRAM demand will be driven by smartphone and tablet unit shipments, and
content per box growth.
From now on, DRAM bit shipment is likely to grow at a moderate rate of
30% rather than its historical level of 70%: 1) We believe the growth of the
smartphone and tablet market will be driven by mid-/low-end products with low
content per box (see Figure 16); 2) the demand uptick from smartphone and tablet
shipment is not sufficient to offset the decline in PC unit growth because
smartphones and tablets have a much lower content per box compared with PCs;
and 3) content per box growth is slowing down.
Figure 15: DRAM demand/supply
Mns of 1GB Eqv 2010 2011 2012 2013E 2014E
Demand/Supply
DRAM demand 1,912 2,842 3,747 4,756 6,214
Growth 43.8% 48.6% 31.9% 26.9% 30.7%
DRAM supply 1,962 2,925 3,830 4,613 5,886
Growth 44% 49.0% 31.0% 20.5% 27.6%
ASP ($) 2.60 1.30 0.86 0.72 0.54
Sufficiency 102.6% 102.9% 102.2% 97.0% 94.7%
By Application
PC 51.6% 44.3% 39.0% 48.8% 45.1%
Tablets 0.2% 1.1% 2.4% 6.1% 8.1%
Smartphones 3.3% 6.1% 12.3% 18.2% 21.7%
Feature phones 2.4% 2.3% 1.8% 1.1% 0.8%
Server 8.4% 11.8% 11.8% 13.9% 13.6%
Consumer 7.7% 5.2% 4.0% 5.3% 4.8%
Other 26.4% 29.1% 28.7% 6.6% 6.1%
Source: Gartner data, Berenberg estimates
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Semiconductor Equipment
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Figure 16: DRAM content/box
2010 2011 2012 2013E 2014E 2015E 2016E
PC 2.8 3.5 4.2 4.6 5.0 5.7 6.4
Growth 15% 25% 21% 10% 9% 13% 13%
Tablet 0.3 0.5 0.6 0.9 1.5 2.2 2.7
Growth - 81% 25% 60% 62% 43% 26%
Smartphone 0.2 0.4 0.6 0.8 1.1 1.5 1.9
Growth 19% 74% 72% 30% 33% 38% 29%
Featrue phone 0.3 0.5 0.6 0.9 1.5 2.2 2.7
Growth 1% 81% 25% 60% 62% 43% 26%
Server 18.0 35.2 45.0 53.2 57.7 77.6 111.8
Growth 43% 96% 28% 18% 8% 34% 44%
Source: Gartner data, Berenberg estimates
In previous years, there has been DRAM capex investment in both capacity
expansion and technology migration. As per our conversations with various
industry sources, the current level of DRAM capacity in place is sufficient to
support annual bit growth of about 30% for the next five years. This level will,
therefore, be sufficient to meet our demand forecast (30% growth rate) (see Figure
15). Micron has even indicated that wafer capacity will decline in 2013 and 2014.
Therefore, we are only going to see capex investment on shrinkage, instead of
additional capacity building, apart from the remaining part of SK Hynix’s fab M12
expansion, which is likely to be very little.
Figure 17: DRAM shrinking roadmap
DRAM
Samsung
Micron
H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H2 2012 2013E 2014E 2015E
- 40nm started H1 2010 -Started 28nm Q4 2011,
-40nm/35nm/28nm.
-32nm stated 2012 Q1,
-50nm
-42nm &32nm
-25nm started
2012 end,
-23nm start in 2013
- expand 2Y(23nm/25nm)/28nm
-start and expand 24nm in 2013
end/2014,
-32nm &24nm , skip 28nm.
-2Ynm & 2Znm
(20nm/21nm).
- 24nm/2Znm
Elpida
SK Hynix
-44nm
-42nm
-38nm started Q1 2011,
-40nm/38nm
-32nm started Q1 2012,
-42nm & 32nm.
-plan to ramp up 25nm,
- expand 30nm/2xnm.
-3xnm account for 70%,
-28nm mass production started 2012 end,
-23nm start in 2013
- expand 28nm/23nm
-23nm & 2Znm
(20nm/21nm).
Others
-45nm/42nm/30nm
-30nm&2xnm start and expand
-2Xnm/2Znm
Source: Company data
In 2011 and 2012, all DRAM suppliers actively migrated down from the
50nm/40nm node to the 30nm/20nm node (see Figure 17). Process node
migration has slowed down after the accelerated period following the industry’s
adoption of ArF immersion stepper in 2009/10. Today, physical barriers and the
delay of the introduction of extreme ultraviolet (EUV) lithography have raised
technical hurdles for DRAM-makers, compared with the industry’s previous
migration from 5Xnm to 3Xnm.
All three of the main DRAM suppliers plan to expand their 20nm capacity over the
next three years to 2016. Various DRAM vendors have told us that the node size
for DRAM could fall to 12nm/8nm after the 20nm generation. We therefore
estimate shrinkage-related capex will remain at a similar level for DRAM-makers
from 2014 to 2016.
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Semiconductor Equipment
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Figure 18: DRAM capex/revenue versus bit growth trend
DRAM
100%
80%
60%
40%
20%
0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
DRAM Capex/revenue
Bit growth
Source: Gartner data
Historically, DRAM capital intensity was positively correlated to bit growth (see
Figure 18). As discussed above, we expect DRAM bit growth to grow at a
moderate 30% rate compared with its historical level of 70%. The spending pattern
(capex/sales) of the DRAM industry is therefore likely to undergo structural
change from the previous 40-60% level to 19-25%.
We estimate that DRAM capex will remain flat or slightly down in 2013 even if the
ASP improves, as DRAM-makers are likely to spend conservatively for the time
being. We may start to see a small capex uptick in 2014/2015 because: 1) DRAMmakers
may begin to spend more as they see sustainable profitability; and 2) most
DRAM-makers plan to start or expand their 2Ynm (25/24/23nm) output in 2014,
followed by 2Znm production in 2015. We could even see substantially higher
capex growth if DRAM-makers start to upgrade current fab to facilitate EUV tools
in 2014/2015, as the EUV tools are much bigger and heavier than previous
lithography tools.
Foundry and logic – the main spenders keep spending
Foundry and logic capex grew at c22% from 2007-2012, versus total capex which
was down by c1% during the same period. The strong capex growth was linked to
the consumer electronics boom that began in 2009/2010.
We expect the consumer electronic market to maintain solid growth over the
next few years, driven by the intensified competition between vendors and form
factor innovations. Logic players such as Intel and Samsung, are exposed to the
trend because they manufacture the chips they use in own devices, while TSMC,
the Samsung foundry, Globalfoundries and other foundries are exposed because
they receive manufacturing orders from fabless players such as Apple, Qualcomm,
Nvidia, Broadcom and Mediatek (see Figures 19 and 20).
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Semiconductor Equipment
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Figure 19: Foundry revenue components
$mn
30,000
Foundry revenue by customer type
25,000
20,000
15,000
10,000
5,000
-
2007 2008 2009 2010 2011 2012
Fabless IDM Other
Source: Gartner data
Figure 20: Foundry grow with fabless
Foundry revenue growth
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
2007 2,008 2,009 2,010 2,011 2,012
Fabless
Total Foundry revenue
Source: Gartner data
Apple, Samsung, Intel and other device vendors have been competing for market
share by delivering end-products with higher specifications, lower power
consumption, smaller form factors and lower price points. These ultimately require
the use of chips which are manufactured with leading edge technology. As a result,
Intel, Samsung, TSMC, Globalfoundries and others will be under pressure to
maintain their current spending to adhere to their aggressive shrinkage roadmap.
Due to the greater capital intensity required to develop leading-edge technology, we
believe that there will be fewer players that can afford, and are willing, to invest in
such advances. We estimate that 90% of foundry and logic capex will come from
Samsung, TSMC, Intel and Globalfoundries in 2016, compared with 66% in 2007
and 50% in 1999 (see Figure 21). Due to their large exposure to the consumer
electronics market, and the intensified competition within that market, we believe
these companies have no choice but to keep spending.
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Semiconductor Equipment
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Figure 21: Samsung, Intel, TSMC and Globalfoundries capex versus total capex
$mn
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E2014E2015E2016E
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: Gartner data, Berenberg estimates
Samsung, Intel, TSMC, GF Capex
% of total semi capex
Figure 22: Foundry/logic shrinking roadmap
Foundry/Logic
H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H2 2012 2013E 2014E 2015E
TSMC
-40/65nm contribute 53% revenue in 2010,
-28nm started Q3 2011, 22% Q4 2012 rev
-28nm good yield in HKMG & Poly SiON at 2012 end,
-expand 28nm,
-28nm mature,
-20nm & 16nm FinFET risk - 20nm/16nm start
production,
volume production,
-20nm/16nm,
-10nm FInFET R&D.
Samsung
UMC
GF
Intel
-40nm
-65nm&finer eqv 35% rev, - 40nm eqv 10% above rev in Q4
-40nm eqv low single digit. 2011,
- 45nm,
-started 32nm at 2010 end.
-32nm
-32nm HKMG started in 2011,
-45/32nm supply constrain,
-32nm yileld improved,
-45nm/32nm
-22nm 3D, main node in 2013
-start 14nm end of 2013
-started 28nm started with good yield
in 2012 end,
-28nm both HKMG & Poly SiON
-28nm start, contribute low
-28nm&20nm,
-40nm contribute 15% revenue by 2012 esingle digit % by YE,
-14nm tape out.
mainly Poly SiON
-28nm started and
good yield at year
end,
-20nm
-start 14nmFinFET in 2013
-20nm,
-develop 14nm XM
-14nmXM
-14nm 3D
-20nm/14nm
-10nm FInFET R&D
-14nm FinFET risk
production start
-20nm/14nm,
-10nm FInFET R&D.
-10nm 3D,
-next 7nm and 5nm
Source: Company data, Berenberg estimates
The roadmap in Figure 22 above shows that all major foundry and logic players
plan to start production of 16/10nm in 2014/2015 after 20nm in 2013. From a
technology perspective, 20nm node and beyond are much more capital-intensive
than 28nm node due to the double/multiple patterning or the EUV required in
their manufacturing process.
Considering that Intel has historically re-used 80% of its tools for the next
technology node, and Samsung/TSMC could follow the same route as shrinkage
becomes more expensive, we forecast c3% growth in capex from 2013 to 2015. We
also expect 450mm investment to start taking place in 2016 with an 18% uptick in
capex.
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Semiconductor Equipment
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Where are chip-makers spending?
The semiconductor equipment vendors usually specialise in tools used in either one
or more chip fabrication steps. In Figure 23, we lay out the exposures of different
equipment suppliers within the chip fabrication process, and their relative market
share in wafer fab equipment capex. The total wafer fab equipment capex was
$38bn in 2012 – 81% of total capex.
Figure 23: Chip fabrication process
Silicon ingots up to 300mm in diameter
Ingots sliced into wafer and polished
ShinEtsu, Sumco, Siltronic
Deposition: $6bn market (15.7% total semi equipment)
AMAT 47%, TEL 12%, LAM 11%, ASMI 5%
Grows, coats or transfer a material onto wafer, known as thin film deposition. Eg:
SiO 2 which is widely used. (the yellow layer in pic) Performed by CVD/Pasma/PVD
treatment systems.
Si Wafer
Photoresist processing - Coating:
$1.6bn market (4.2%)
TEL 89%, Dainippon 7%, Suss 1%
Wafer is coated with chemical photoresist, thus pattern on
photomask transferred to wafer surface after exposure.
Photoresist:
JSR, TOK,RHEM,ShinEtsu
Chemical photoresist.
SiO 2
SiO 2
Photoresist
Lightsource:
Cymer, Gigaphoton, Ushio
Si Wafer
Lithography:
$6.5bn market (17.2%)
ASML 74%, Nikon 17%, Canon 2%
Wafer coated with photoresist exposed by
litho tool (machine focuses, aligns, and
moves the mask).
Photoresist processing - Development:
$1.6bn market (4.2%)
TEL 89%, Dainippon 7%, Suss 1%
Exposed region of wafer washed away by chemical, areas of with and without
photoresist produce the pattern from mask. Performed by Coater/developers.
Etching:
$7.5bn market (incl clean, Planarization), (19.5%)
LAM 29%. TEL 22%, Dainippon 18%, AMAT 12%
The thin film layer from ‘Deposition’ not covered by photoresist is etched away, to
permanently transfer pattern to wafer surface. Performed by Etch systems.
Doping:
$1.0bn market (2.7%) AMAT 76%, SEN 10%,
Introduces atoms of elements into silicon to alter the electrical properties in the
silicon dioxide free areas, forming transistors.
Photoresist stripping:
$0.2bn market (0.1%) Mattson 20%, PSK 19%, LAM 17%
Remaining photoresist is removed from etched wafer.
Part of lithography tools.
Photomask:
DNP, Toppanm
To create 1-1 correspondence on
wafer through litho.
Develop
Etching
Doping
DP:
The steps from PR coating to PR stripping repeats to
scale IC further scale to 20nm and beyond:
10-100 layers will be constructed on single
wafer
Wafer level Testing
Market Size $0.2bn, (0.1%) TEL 39%, Seimitsu 48%
Performed before on wafer by wafer probe.
Chips Packing:
Market Size $3.9bn, (10.1%)
Kulicke 19%, ASMP 16%
Wafer is sliced to Dies, and packaged to become chips
Wafer level Packing:
Market Size $1.4bn, (3.0%)
Mattson 20%, EV 6%, Ultratech 5%, Suss 4%
Packaging an IC at wafer level before dicing.
Source: Nikon, Berenberg data, Gartner data
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We believe the lithography, process control, and wafer level packaging markets
have the biggest growth potential, driven by node shrinkage and 3D packaging
demand, hence ASML, KLA and SUSS are likely to outperform other equipment
suppliers. We do not like the etching, deposition and die level packaging markets
because their growth potential is limited as a result of technology migration.
Figure 24: Capex on fabrication steps/total semiconductor capex
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2009 2010 2011 2012 2016E
Deposition Photoresist Processing Lithography
Etch, Clean and Planarization Doping Automation
Process Control Wafer-Level Packaging Die-Level Packaging
Test Equipment
Source: Gartner data
Figure 24 shows that deposition, lithography and etching and cleaning are the only
three process categories that individually account for more than 10% of total
semiconductor capex. The combined capex for these three categories was 34% of
total semiconductor capex in 2012. We expect the combined share of capex to
expand to 38% in 2016, driven mainly by lithography growth. Wafer level
packaging, due to its small base, has since 2003 seen the fastest growth at c10% per
annum, compared with c2.6% for total semiconductor capex.
Lithography – expanding market and ASML as monopolist
During the past decade, the lithography market has grown by c1.7% per year, while
total semiconductor capex has grown by 2.6% annually. Looking ahead to 2016, we
estimate that the lithography market will grow at c20%, four times faster than total
semiconductor capex. At a result, we estimate that lithography’s share of
semiconductor capex will expand to 20% in 2016 from 12% today.
As the chip-makers shrink from the 28nm mainstream node today to sub-10nm
over the next three to four years, the demand for lithography is likely to increase
significantly. According to TSMC, Intel and Samsung’s roadmaps, we believe 20nm
will be the mainstream node for logic and foundry in 2013/2014, which is likely to
be manufactured using the double patterning (DB) process. As a result, demand for
the most advanced argon-fluoride (ArFi) tools will double, and methodology tools
will also be needed to maintain an acceptable yield rate. Beyond 20nm, chip-makers
may adopt EUV or triple/quadruple patterning using ArFi tools, but in both cases
the lithography cost will increase significantly. The reason for this is that EUV may
cost €100m each versus ArFi costs of €40m, and triple/quadruple patterning may
need three to four times as many ArFi tools compared with single-patterning,
which is currently used in 28nm.
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Semiconductor Equipment
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Figure 25: Lithography market share
Nikon
15%
ASML
74%
NuFlare
Technology
7%
Canon
3%
JEOL
1%
Source: Gartner data
The market has a limited number of players because of the complexity of
lithography technology and the investment required to develop leading-edge
equipment (see Figure 25). We believe ASML’s market share will expand after the
EUV ramp-up. Nikon will lose market share to ASML because Intel, Nikon’s
biggest customer, has committed to ASML’s EUV technology by joining the
customer investment programme. We believe Nikon will not be a threat to ASML
in the future because the specification of its tools lags ASML’s, and it does not
have a credible EUV roadmap yet.
Deposition – flat growth, DP and EUV impact limited, benefit from 3D
NAND
During the past decade, the deposition market has declined by c1.7% compared
with the c2.6% growth in total semiconductor capex. Its share of total
semiconductor capex fell from 12% in 2004 to 10% in 2012. We expect the
deposition market to grow by c4% from 2012 to 2016, which is on par with total
semiconductor capex growth, and remains at 10-11% of total semiconductor
capex. Unlike etching, we do not expect the demand for deposition to rise with the
adoption of double patterning and FinFET designs. It may benefit from the rampup
of 3D NAND in 2015/2016.
Among the different deposition solutions, plasma-enhanced chemical vapour
deposition (PE CVD), ALD and epitaxy are likely to outgrow the deposition
market due to the increasing number of interconnecting layers within advanced
chips, HKMG adoption, and the ramp-up of 3D designs. At the same time, low
pressure chemical vapour deposition (LP CVD) and physical vapour deposition
PVD) are likely to underperform the deposition market (see Figure 26).
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Semiconductor Equipment
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Figure 26: Deposition solutions: PE CVD/ALD/epitaxy to
outperform
Deposition market by Solution
30%
25%
20%
15%
10%
5%
0%
2008 2009 2010 2011 2012
LP CVD PE CVD ALD APCVD/SACVD
PVD MO CVD Epitaxy
Source: Gartner data
Figure 27: Deposition market share
Tokyo Electron
12%
Lam Research
11%
Hitachi Kokusai
Electric 7%
ASM International 6%
Applied
Materials
47%
Others
15%
Veeco
4%
Source: Gartner data
As shown in Figure 27, AMAT holds a 47% share of the deposition market. It
dominates all major sub-segments, including PE CVD, PVD and epitaxy. TEL
holds the second-biggest market share at 12%, and is mainly concentrated in the
CVD market. We do not expect the market share structure to change significantly
in the next few years. We believe AMAT has continuously held the biggest market
share because of its strong position in PE CVD and PVD solutions. TEL’s market
share will benefit from ALD growth, and suffer from the decline in LP CVD
adoption. ASMI’s market share may increase from 5% today, driven by the
adoption of ALD and epitaxy.
Among deposition market players, we like ASMI the most as it is only exposed to
fast-growing ALD/epitaxy markets. We dislike TEL as it generates most of its
deposition revenue from LP CVD, and its ALD exposure is not big enough to
offset the LP CVD market’s decline. AMAT is widely exposed to this deposition
market and is a leader in growing solution markets such as epitaxy and PE CVD.
However, it is heavily exposed to PVD, which is growing but at a slower rate than
the ALD, epitaxy and PE CVD markets.
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Semiconductor Equipment
Technology Hardware
Etching – positive from DP, FinFET, 3D NAND and small negative from
EUV
During the past decade, the etching market has grown by c0.5% a year compared
with the c2.6% growth of total semiconductor capex. Its share in total
semiconductor capex fell from 15% in 2004 to 13% in 2012. We expect the
demand for etching to increase with the ramp-up of DP/multiple patterning,
FinFET design and 3D NAND. The demand for etching is likely to decline when
EUV starts to eliminate the double/multiple patterning processes, but the decline
will be offset by increased etching demand from EUV mask manufacturing
processes. Therefore, on a net basis, we believe the etching market will remain flat
or slightly down in the next three years, and will underperform the total
semiconductor capex.
Figure 28: Deposition solutions – PE CVD/ALD/epitaxy to outperform
Etching market by Solution
40%
35%
30%
25%
20%
15%
10%
5%
0%
2008 2009 2010 2011 2012
Bevel Edge Removal Metal Etch Dielectric Etch
Silicon Etch
Other Ethc
Source: Gartner data
Among the different etching solutions, silicon etching, which is dominated by
LAM and Hitachi, is likely to outperform the etching market and take capex away
from dielectric etching. This is because DP and 3D NAND/memory use more
silicon etching steps. FinFET design uses both silicon etching and dielectric
etching, and therefore has a neutral impact on the demand of silicon and dielectric
etching steps (see Figure 28).
Figure 29: Etching market share
Tokyo Electron
29%
Applied
Materials
10%
Lam Research
47%
Hitachi High-
Technologies
9%
Others
5%
Source: Gartner data
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Semiconductor Equipment
Technology Hardware
Figure 29 shows that LAM dominates the etching market, with a 47% market share
in 2012, followed by TEL, with a share of 29%. TEL may lose share in etching due
to its focus on the low-growth dielectric etching market. AMAT has a 10% market
share of the etching market. In 2011 and 2012, it lost 9% of its market share in the
etching market, from both dielectric and silicon etching. In our opinion, winning
back the lost share from LAM and Hitachi will not be easy.
In the etching market, we think LAM will outperform as it has the greatest share in
silicon etching. We think TEL will underperform because of its heavy exposure to
dielectric etching (63% share). AMAT has a 10% share of the etching market. It
generates more revenue from silicon etching than dielectric etching, and has a
higher market share in silicon etching.
Wafer level packaging
The wafer level packaging market has doubled during the past 10 years. Its share of
semiconductor capex went up from 1.7% in 2004 to 3% in 2012. The growth was
mainly driven by solid TSV equipment demand, and offset by the fall in demand
for contact probers, which are used in testing (see Figure 30). We expect the
growth of the wafer level packaging market to remain robust, driven by 3D
packaging, although this solution is still not widely adopted by chip-makers. 3D
packing will gain more traction and become the key enabler for scaling after EUV’s
physical limit is reached. Chip-makers will then pay more attention to 3D
stacking/packaging solutions. We believe Samsung and other leading chip-makers
have already started pilot production lines using 3D packaging technology.
Figure 30: Wafer level packaging market trend
Wafer Level Packaging market by Solution
40%
35%
30%
25%
20%
15%
10%
5%
0%
2008 2009 2010 2011 2012
Litho Tool TSV Tool Bump Processing
Packaging inspection
Others
Source: Gartner data
Figure 31: Wafer level packaging market share
Lam Research
3%
Rudolph
Technologies
6% Ulvac
5%
Source: Gartner data
Others
42%
Disco
15%
Applied
Materials
9%
Tokyo Electron
3%
Suss MicroTec
4%
EV Group
7%
Ultratech
6%
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Semiconductor Equipment
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SUSS is the main beneficiary of this trend because of its exposure to 3D packaging
wafer bounders, which have the highest growth potential within the wafer level
packaging market. AMAT might benefit to a lesser extent through its exposure to
bump processing, which is experiencing slower growth than wafer bounders. TEL
will not benefit from the market expansion because its market share in wafer level
packing is concentrated on the declining contact probers equipment area. If
Samsung or other chip-makers manages to release a high-quality showcase chip
next year, the adoption rate may accelerate as its competitors will not want to miss
any major chip design solution.
27

ASML Holding NV
Technology Hardware
The best positioned player, but priced in
• We initiate coverage of ASML with a Hold recommendation and a
price target of €73. Our recommendation is based on the following
factors. 1) We believe ASML is the best-quality semiconductor
equipment company. It is 100% exposed to the lithography market,
which we expect to double to $14bn by 2016. We expect ASML’s
share of that market to expand from 74% to 80% by 2016. 2) ASML
supplies lithography tools used in the chip fabrication process. It has a
100% share of the extreme ultraviolet (EUV) market, which is
essential for printing leading-edge chips. 3) However, we believe the
market has mostly priced in these positive factors at ASML’s current
~€70 level.
• Key debates: 1) Can ASML deliver EUV with 69 wafer per hour
(wph) throughput by 2014? 2) What demand is there for EUV tools?
3) Is Nikon a threat to ASML’s position? 4) How will developments in
EUV affect ASML’s margin?
1. ASML has shown decent EUV progress over the last two
quarters, and its acquisition of Cymer (2012) has strengthened its
R&D capability. We believe it is very likely that ASML will deliver
EUV with 69wph by mid-2014 as targeted.
2. Our end-market demand analysis shows that chip-makers will
need a total of 95 EUV tools between 2013 and 2016 for building
required leading-edge chip capacity to meet demand for leadingedge
chips. We expect ASML to ship 15, 24 and 50 tools in 2014,
2015 and 2016 respectively.
3. We do not see Nikon as a threat to ASML’s leadership position in
the next 3 to 4 years, as it is focusing on pushing current
technology (ArFi tools). The depreciation of the yen is unlikely to
give Nikon a competitive advantage over ASML, as we believe the
industry is price-inelastic.
4. The initial ramp up of EUV tools carries a 25% margin and is
margin-dilutive. Once ASML improves efficiency and Intel’s
contribution starts to materialise, we believe EUV (a 47% margin
by 2016) will be margin-accretive in 2015 and 2016.
• Our revenue and EPS forecasts are in line with consensus.
• Our price target of €73.00 implies a 12x P/E based on EPS estimates
of €7.4/share, discounted by a 10% WACC. We have adopted this
EPS estimate because it reflects the earnings power that EUV will, in
our opinion, realise in 2016. The 12x P/E is 10% higher than the
middle of its historical P/E range to reflect ASML’s potential 6%
market share increase from 2010 to 2016.
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E 2016E
Sales 5,651 4,732 5,034 6,580 7,344 9,346
EBIT 1,467 1,146 808 1,445 2,035 3,014
Net profit 1,467 1,146 890 1,494 1,902 2,900
Y/E net debt (net cash) -1,998 -1,012 -550 -983 -2,461 -4,613
EPS (proforma) 3.42 2.68 2.18 3.60 4.97 7.36
CPS 4.86 1.66 1.67 3.99 6.25 8.09
DPS 0.40 0.44 0.51 0.53 0.61 0.84
Gross margin 43.4% 42.4% 39.9% 41.1% 43.2% 45.5%
EBIT margin 29.0% 24.4% 17.5% 23.9% 30.1% 35.8%
Dividend yield 0.6% 0.7% 0.8% 0.8% 0.9% 1.2%
ROCE 42.6% 28.2% 11.8% 18.8% 22.1% 25.9%
EV/sales 4.9 5.9 5.5 4.2 3.8 3.0
EV/EBIT 16.9 23.9 31.5 17.6 12.5 8.3
P/E 19.8 25.2 35.5 19.7 13.9 9.3
Source: Company data, Berenberg
Hold (initiation)
Rating system
Current price
EUR 67.68
Absolute
Price target
EUR 73.00
19/07/2013 Amsterdam Close
Market cap EUR 28,701 m
Reuters ASML.AS
Bloomberg ASML NA
Share data
Shares outstanding (m) 420
Enterprise value (EUR m) 28,152
Daily trading volume 1,521,170
Performance data
High 52 weeks (EUR) 68
Low 52 weeks (EUR) 40
Relative performance to SXXP AEX
1 month 10.1 % 7.1 %
3 months 19.1 % 15.5 %
12 months 22.6 % 28.3 %
Key data
Price/book value 4.2
CAGR sales 2011-2014 18.5%
CAGR sales 2012-2016 28.3%
Business activities:
ASML is the world’s leading provider of
lithography systems for the semiconductor
industry. It designs, develops, integrates,
markets and services the lithography tools used
by its customers.
22 July 2013
Tammy Qiu
Analyst
+44 20 3207 2673
tammy.qiu@berenberg.com
Jean Beaubois
Specialist Sales
+44 20 3207 7835
jean.beaubois@berenberg.com
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ASML Holding NV
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Investment summary
Our investment thesis on Hold-rated ASML is based on the following five points.
1. ASML’s market share likely to expand from 74% to 80% in 2016: ASML
ships 86% of the most-advanced ArFi tools and holds a 100% share of the
EUV market. Chip-makers require EUV or other leading-edge tools to make
smaller chips, we therefore expect ASML’s market share to expand from the
current 74% to 80% in 2016.
We do not believe that Nikon will benefit from the depreciation of the yen,
and gain share from ASML. In our opinion, chip-makers are unlikely to switch
tool vendors purely due to lower price because: 1) high specification and
reliability are more important because they can affect yield rates; and 2) the
extra reconfiguration and integration cost associated with new tools can easily
exceed savings from tool prices.
2. EUV is essential for shrinkage – €5bn revenue in 2016: We expect EUV to
be widely adopted as it saves 34% on cost compared with existing double
patterning (DP) technology. From our end-market analysis, we conclude that
chip-makers will require a total of 95 tools by 2016 if they are to produce in
line with their roadmap. We estimate the revenue contribution from EUV to
be €1.2bn, €2.3bn and €5.0bn in 2014, 2015 and 2016 respectively, which
accounts for 18%, 31% and 54% of ASML’s total revenue.
We do not expect ASML to lose EUV market share to Nikon before
2017/2018, because: 1) Nikon is unlikely to release any EUV tools for
commercial use before 2015/16, and all major chip-makers will have three to
four ASML tools in place by that time; 2) Nikon’s recent presentation shows
that it is focused on 450mm equipment development instead of EUV; 3)
despite its dual-sourcing policy, Intel is unlikely to order any EUV tools that
Nikon develops unless such tools show the same level of performance
compared as ASML’s tool. We think Intel now buys over 50% of its new tools
from ASML compared with less than 40% in 2009. This is because the
performance of Nikon’s tools lags ASML’s equipment.
3. Lithography market to double by 2016: The level of lithography investment
increases as chip sizes shrink. This is true regardless of whether manufacturers
adopt an EUV or a DP solution. As a result, we expect the lithography market
to double by 2016 to $14bn (20% of total capex) from $7bn in 2012 (12% of
total capex).
4. However, we think the above factors are well understood by the market,
and priced into the stock price: ASML’s share price has tripled since the
start of 2011 because: 1) the company has made positive progress on the
development of its EUV tool, and management has retained, and is likely to
achieve, its target of 105 watts of light source power in 2014; 2) all chipmakers
have laid out aggressive shrinkage plans to enter lithography-intensive
20nm/16nm by 2014/2015; 3) Nikon is not focusing on EUV and we do not
expect it to have any EUV model before 2015/2016, so ASML is likely to
maintain its monopoly; 4) ASML’s customer co-investment programme (in
which TSMC, Samsung and Intel have all invested in ASML to support its
EUV and 450mm development) has demonstrated that the mainstream chipmakers
recognise the company’s status as a technology leader.
However, given that the stock price has nearly doubled since the beginning of
2012, we are concerned that any execution issues that ASML has with its light
source power, alongside industry or market speculation about alternative
29

ASML Holding NV
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technology or materials, could hamper further share price performance.
AMAT said at the US Semicon West 2013 conference in July that
semiconductor companies are currently focusing more on new materials than
they are on lithography scaling, ie EUV should have a minimal impact on the
industry. AMAT also quoted that a fabless company suggested that 90% of its
performance improvement came from materials, and only 10% from
lithography. In addition, the consumer electronics market is currently driven
by demand for mid- to low-end products, which do not require the most
advanced chips. The demand for leading-edge chips could, therefore, decline if
demand for mid- to low-end products rises.
5. Valuation: Our price target of €73.00 implies a 12x P/E based on EPS
estimates of €7.4/share, discounted by a 10% WACC. We have adopted this
EPS estimate because it reflects the earnings power that EUV will, in our
opinion, realise in 2016. Our 12x P/E has assigned a 10% premium to
ASML’s historical mid-recovery-cycle P/E (9x-13x) to reflect ASML’s more
competitive position (market share: 80% by 2016 compared with the last
recovery cycle of 2010, when it had a market share of 70%).
ASML’s RoE is the highest within our coverage, and it has the lowest dividend
yield, FCF yield and net cash/market cap.
Figure 1: Valuation matrix
Dividend
ROE*
Cash/marc
yield*
FCF yield* Net cash/marcap
No.1 ASML 19.7% AMAT 2.5% AMAT 9.7% TEL 26.5%
No.2 AMAT 17.1% TEL 1.5% ASMI 6.2% SUSS 17.6%
No.3 SUSS 9.1% ASML 0.9% ASML 4.4% AMAT 16.7%
No.4 TEL 6.3% ASMI - TEL 4.3% ASMI 8.9%
No.5 ASMI 6.2% SUSS - SUSS 1.6% ASML 6.5%
* based on Berenberg estimation of 2014 performance
Net cash based on 2012 YE balance
Source: Berenberg estimation, company data
Key catalysts
The following are the key catalysts for the share price.
1) Further progress on EUV light source: Management has retained its target
for 105 watts by mid-2014, and expects to reach 80 watts by
September/October 2013. We think ASML’s acquisition of Cymer has further
strengthened its R&D capability on EUV, and believe that ASML is likely to
reach 105 watts by 2014 as targeted.
2) DRAM and NAND order recovery provides order intake/revenue
upside: After seeing DRAM orders recover in Q2, we believe memory orders
will accelerate in the coming quarters, especially NAND orders. Companies
such as KLA and LAM have indicated improving memory orders/spending
compared with the 2012 trough last quarter.
3) Chip-makers accelerate their roadmap on shrinkage: In our opinion, chipmakers
could accelerate their shrinkage plans in next few months, as the level
of competition in the consumer electronics market intensifies.
4) Nikon fails to release EUV tools: We think Nikon is unlikely to announce
any EUV-related progress until 2014/2015, as its current focus is on 450mm.
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Key risks
The following are the key risks for the stock.
1) EUV feasibility and potential delay: We believe that with its acquisition of
Cymer ASML is the only player able to deliver EUV tools. However,
challenges remain to achieve the 105-watt target by mid-2014. For example,
light source power is still at 55 watts today, and we may see new problems
such as heat management as light source power increases.
2) Semiconductor spending pause as consumer electronics market
saturates: Smartphone and tablets have driven capex spend in past few years,
if these markets become saturated, then as slower investment phase will result.
3) Alternative technology steals EUV’s market: We believe alternative
solutions, such as electron beam (E BEAM) and directed self-assembly (DSA),
are unlikely to replace EUV today, because E BEAM currently has a low
throughput, and DSA requires significant process control equipment
investment. However, in long run, they can be threats to EUV demand if
throughput is improved.
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The quasi-monopolist in the lithography market
The lithography market today has three players: ASML, Nikon and Canon. In
2012, ASML held a 74% market share by revenue – compared with Nikon’s 15% –
and a 66% market share by shipment (see Figures 2 and 3). ASML focuses on the
high end of the market and ships 86% of the most-advanced ArFi tools, which
have an average selling price of €40m. Nikon and Canon mainly ship legacy tools,
which cost €5m-10m each. Nikon lags ASML in ArFi tool development, which is
the current mainstream lithography tool used by chip-makers. Nikon shipped its
first ArFi tool in Q1 2009, whereas ASML started shipping in 2004. Canon only
supplies legacy KrF and i-Line tools, and has no ArFi product.
ASML will not, in our opinion, lose market share in the future. Lithography tools
are usually fully integrated into chip-manufacturing process, so a manufacturer that
wants to switch tool vendors must reconfigure its process and incur a significant
initial service cost.
Figure 2: Lithography market share by revenue
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2013E 2014E 2015E 2016E
ASML Nikon Canon
Source: Company data, Company data, Berenberg estimates
Figure 3: Lithography market share by shipment
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Nikon ASML Canon Lithratoch-Stepper ISI
Source: The Information Network
We believe EUV and ArFi tools will continue to be the mainstream lithography
tools used by chip-makers for the foreseeable future, and generate the majority of
the industry’s revenue. At the same time, legacy tools will be phased out slowly
over the next four years.
32

ASML Holding NV
Technology Hardware
We estimate that ASML will hold an 80% share of the market in 2016, and
maintain its current penetration rate with existing customers. We do not expect
Nikon to develop EUV tools before 2015, and its ArFi tool’s throughput lags
ASML’s tool. The throughput of Nikon’s NSR-S622D ArFi tool, released in
January 2013, is 200wph versus 250wph of ASML’s NXT:1970Ci (to be released in
Q3 2013). Throughput is a key specification watched by chip-makers, as higher
wph means greater efficiency and cost-reduction per chip. We expect Nikon’s
shipments to remain at low levels and Intel will remain its main customer.
Figure 4: Lithography tool unit shipment
Type ASP units 2009 2010 2011 2012 2013E 2014E 2015E
I-Line EUR 4-5m ASML 12 23 20 15 15 12 8
Nikon* 4 16 35 16 21 20 15
Canon 8 23 45 43 40 38 38
KrF EUR 9-12m ASML 17 68 87 78 52 50 32
Nikon* 16 12 28 3 6 8 10
Canon 3 6 7 3 3 2 1
ArF Dry EUR 20-23m ASML 10 12 11 4 4 8 8
Nikon* 1 1 3 8 11 8 8
Canon 0 0 0 0 0 0 0
ArFi EUR 35-40m ASML 31 94 101 72 69 72 67
Nikon* 15 28 18 13 15 13 8
Canon 2 0 0 0 0 0 0
EUV EUR 70-100m ASML 0 0 3 1 3 15 24
Nikon* 0 0 0 0 0 0 2
Canon 0 0 0 0 0 0 0
Total 119 283 358 256 239 246 221
ASML% 59% 70% 62% 66% 60% 64% 63%
Nikon% 30% 20% 23% 16% 22% 20% 19%
Canon % 11% 10% 15% 18% 18% 16% 18%
Source: Company data, Berenberg estimates
*Nikon 2012: FY March 2013
We do not believe that the depreciation of the yen will give Nikon a competitive
advantage over ASML. Chip-makers are unlikely to switch vendors purely to
obtain a lower price: the reconfiguration and integration costs associated with new
tools is likely to be more than the difference in ASP. Furthermore, chip-makers
usually value tool specifications and reliability more than they do price points.
33

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EUV drives ASML’s future success
EUV is the key enabler of Moore’s law, and ASML holds 100%
market share
Semiconductor manufacturing is driven by Moore’s law, which states that the
number of transistors on an affordable chip will double every two years. As chipmakers
start to print 20nm chips, and subsequently 10nm, 7nm and 5nm chips, the
EUV solution is both cheaper and simpler than ArFi solutions. ASML’s coinvestment
programme demonstrated the commitment from Intel, Samsung and
TSMC to this technology, and ASML is recognised as technology leader in this
field.
The DP/multi-patterning (MP) process using ArFi tools (which exposes the wafer
twice instead of once in order to reduce the printed feature size) is now the
mainstream solution for printing 20nm chips. However, manufacturers claim that
this process is too costly because it increases the number of lithography exposures
per wafer, meaning that they must either reduce output or buy more tools. EUV
enables chip-makers to expose the critical layer in just one exposure instead of two.
In terms of total cost per wafer (see Figure 5 below), EUV delivers cost savings of
34% compared with ArFi’s DP process, even if EUV tools cost twice as much to
buy.
Figure 5: EUV solutions deliver a cost benefit
by ArFi
by EUV
Overall patterning cost
(incl litho, etching, etc)
€70.82/wafer
€46.44/wafer
Litho cost
€23.36/wafer
€31.74/wafer
2*ArFi exposures/layer 1*EUV exposure/layer
Litho cost/total cost 33% 68%
Source: ASML data
Apart from the cost savings, EUV simplifies the fabrication process by halving the
steps and cycle time required in DP (see Figure 6 below). Chip-makers are likely to
allocate more “critical layers” – the layers on a chip that require the highest
resolution and precision to EUV from ArFi. Logic/foundries players are likely to
pick up EUV first to meet the demand for small chip designs from for consumer
electronics devices, and because it is more expensive for them to use DP
compared to memory players.
34

ASML Holding NV
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Figure 6: EUV simplifies the process and the cost
Source: ASML data
Source: AMSL data
ASML currently has a 100% share of the EUV market, and we do not expect this
to change even after Nikon introduces its EUV tool after 2015/16. Lithography
tools are usually fully integrated into the chip-manufacturing process, so
manufacturers that want to switch tool vendors must reconfigure their processes
and incur significant initial service costs. On our estimates, all major chip-makers
will have three to four ASML EUV tools in place by 2015. It is therefore unlikely
that they will place any EUV orders with Nikon. Even Nikon’s biggest customer,
Intel, is unlikely to buy Nikon’s tools, unless they are superior to ASML’s. This is
very unlikely in our view.
Figure 7: ASML EUV status versus Nikon
EUV status ASML Nikon
Light source power 55 watt 10 watt @2012
Wafer throughput 43 wph 8 wph
Adoption can be used for 20nm required for 16nm-11nm
-ArFi is the primary tool for sub 20nm process,
View on EUV -EUV will be adopted as soon as wph meets requirement
-Limited focus on EUV,
TWINSCAN NXE:3100
EUV tools
na
TWINSCAN NXE:3300
First shipment Q4 2010 na
Machine shipped 6 shipped na
11 for 2013,
Order in place
na
8-12 potential order for 2014
- 2015: 30-36 tools,
-Introduce EUV earliest 2015,
Capacity
- 2016/2017:60-66 tools
-EUV in volume in 2018/2019.
Source: Company data, Berenberg estimates
Source: Company data, Berenberg estimates
We estimate that ASML will ship 15, 24 and 50 EUV in 2014, 2015 and 2016
respectively, contributing €1.2bn, €2.3bn and €5.0bn respectively to its revenues.
35

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We believe 2016 shipments will be strong as chip-makers will start to allocate more
layers to EUV as they gain more experience of the technology, and because
DP/MP is currently too complex/expensive to be used in 20nm/10nm mass
production.
Our assumptions for tools shipped are based on our end market analysis (see
Figure 8 below).
Our assumptions are as follows.
• Foundry/logic players (excluding Intel) will reach 340,000wpm 28nm
and 60,000wpm 20nm/16nm capacity in 2013, and will continuously
expand 20/16nm wafer capacity to reach 270,000wpm in 2016, which is
less than 28nm capacity today: TSMC stated that 20/16nm could be a bigger
node compared to 28nm. We have taken a conservative approach in making
our 20/16nm capacity assumption, as TSMC may re-use equipment from 28nm
if it ramps up aggressively on 20/16nm. We estimate that 10nm capacity will
begin to ramp up from 2016 and reach 20,000wpm in 2016. We included four
EUV R&D tools in our analysis and assigned €70m ASP for each of them,
which is lower than the normal EUV ASP of €100m.
• DRAM starts to adopt EUV in 2015, and migrates 53% of total wafer
capacity to 30nm and below in 2016: We have been conservative here to
reflect the memory spending pause. DRAM-makers plan to shift 69% capacity
to 30nm or less, according to their various statements. We included two EUV
R&D tools in our analysis, with an ASP of €70m each.
• NAND starts to adopt EUV in 2016, and migrates 65% of total wafer
capacity to 20nm and below in 2016: We have taken a conservative approach
on NAND, too, to take account of the expected memory spending pause.
NAND-makers plan to shift 83% capacity to 20nm or less, according to their
various statements.
3D NAND is less lithography intensive compared to 20nm/10nm NAND
design. Our analysis suggests the impact of 3D NAND on total capex is likely
to be small. We estimate that the maximum negative impact on EUV demand
by 3D NAND is 3 EUV tools.
• Intel will have 85,000wpm capacity on 22nm and 33,000wpm on 14/10nm
in 2016, and it will re-use ArFi tools in 2014 when 14nm/10nm first ramps up.
• In terms of market share, we assume ASML to have:
o 100% of the EUV order from all chip-makers;
o 100% of the ArFi/ArF tool order from foundry/logic (excluding Intel),
DRAM and NAND players;
o 60% of the KrF/I Line tool orders from foundry/logic (excluding Intel),
DRAM and NAND players;
o 60% of the ArFi,/ArF tool orders from Intel;
o 50% of the KrF/I Line tool order from Intel.
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Figure 8: End-market demand analysis
2013E 2014E 2015E 2016E
Foundry/logic (excl Intel)
28nm wpm 340,000 340,000 340,000 340,000
add 140,000 0 0 0
20nm/16nm wpm 60,000 130,000 200,000 270,000
add 60,000 70,000 70,000 70,000
10nm wpm - - - 20,000
add - - - 20,000
Total Capex add $mn 4,591 2,254 4,401 6,433
ASML get tool (EUV, ArFi, ArF only) 72 34 44 90
EUV 4 2 23 36
ArFi 56 28 18 26
2013E 2014E 2015E 2016E
DRAM
Total wafer capacity 1,200,840 1,200,840 1,236,865 1,273,971
shift to

ASML Holding NV
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Lithography market to double in size by 2016
Consumer electronics will be the main driver of semiconductor growth in the next
few years, in our opinion. Chip-makers are actively scaling their chip sizes down to
facilitate the new generation of device designs, which are smaller, lighter, more
power-efficient and have better performance. As shown in Figure 9 below, all the
major chip-makers are planning to enter lithography-intensive 20nm/10nm node
in 2013/2014, and then expand their leading-edge chip output afterwards. As chipmakers
shrink down the technology roadmap, they require more lithography tools
which can print to smaller nodes.
Figure 9: Chip-maker roadmap
2010 2011 2012
2013E 2014E 2015E
Foundry/Logic
TSMC
-40/65nm
-28nm HKMG & Poly SiON
-28nm/20nm/16nm FinFET -28nm/20nm/16nm -20nm/16nm/10nm FinFET
Samsung -40nm -45/32nm HKMG -28nm HKMG & Poly SiON -20nm
-20nm/14nm/10nm FinFET
UMC -65nm/40nm - 40nm -40nm
-28nm Poly SiON -28nm/20nm/14nm -14nm FinFET
GF - 45nm/ 32nm 45nm/32nm
-28nm -20nm/14nm XM -14nmXM -20nm/14nm/10nm FinFET
Intel -32nm -22nm 3D, 14nm end of 2013
-14nm 3D -10nm 3D/7nm/5nm
NAND
Samsung -27nm -21nm
-19nm -19nm/16nm -16nm -12nm/14nm/3D NAND
Toshiba/SanDisk -24nm -19nm
-19nm/3D NAND. -16nm -12nm/14nm/3D NAND
Micron(Elpida)
- 25nm -20nm -1Y(18/15nm)/3D NAND -16nm/14nm/12nm/3D NAND
SK Hynix
-26nm -20nm - 16nm/3D NAND -14nm/12nm/3D NAND
DRAM
Samsung - 40nm -40nm/35nm/28nm -25nm - 2Y(23nm/25nm)/28nm
-2Ynm & 2Znm (20/21nm).
Micron -50nm -32nm
-24nm
- 24nm/2Znm
Elpida
SK Hynix
-42nm
-44nm
-32nm
-40nm/38nm
-25nm
-3xnm/28nm/23nm
Others
-45nm/42nm/30nm -30nm&2xnm
Source: Company data, Berenberg estimate
Source: Company data, Berenberg estimates
The level of lithography investment needs to increase as chip size
decreases: Until EUV technology becomes available, DP/MP with ArFi tools will
continue to be the mainstream solution used in printing 20nm chip (the DP/MP
process exposes the wafer twice, rather than once, to achieve smaller chip size.
Using logic fab as an example, the lithography investment needed for building a
22/20nm fab is 1.8x greater than for building a 32/28nm fab (see Figure 10
below), as more ArFi and methodology tools are required.
Figure 10: Lithography tools required in leading-edge fab
All scenarios are based on “typical” process using 2012 system productivity levels
Source: ASML data, Berenberg estimates
-23nm & 2Znm (20/21nm)
-2Xnm/2Znm
Logic fab 45k wafers/month equipment required
Logic 32/28nm 22/20nm by Double Patterning 10nm by EUV
ArFi ArFi ArFi ArFi EUV EUV
ArFi ArFi ArFi ArFi ArFi
ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi
ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi ArFi
ArF ArF ArF ArF ArF ArF ArF
KrF KrF KrF KrF KrF KrF KrF KrF KrF KrF KrF
KrF KrF KrF KrF KrF KrF KrF KrF KrF KrF KrF KrF KrF KrF KrF
I-Line I-Line I-Line I-Line I-Line
Lithography cost €600mn Cost 1.8 times more: €1,080mn Lithography cost €820mn
9 more ArFi: 9*€40mn=€360mn 2 EUV tools: 2 * €100m=€200mn
Metrology: €5-€7mn/ArFi tool
Metrology: €5-€7mn/ArFi tool
37 litho layers 40 litho layers
38 litho exposures 52 litho exposures
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Figure 11: Lithography market double in 2016
USD mn
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E
Lithography capex Semiconductor capex Lithography as % total capex
25%
20%
15%
10%
5%
0%
Source: Company data, Berenberg estimates
The lithography market has grown by c1.7% over the past 10 years, while total
semiconductor capex has fallen by c0.5% (see Figure 11). As stated above, chipmakers
are constantly working to reduce the size of chips – and the smaller the
chip the more it costs to print. We therefore expect the lithography market to grow
at c20% for the next three years to reach $14bn in 2016, and for lithographyrelated
capex as a percentage of total semiconductor capex to increase from 12%
today to 20% in 2016. In our view, ASML, which is 100%-exposed to this market,
will certainly benefit from this trend.
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Gross margin expansion
We expect ASML’s group adjusted gross margin to reach 45.9% in 2016 from
41.9% in 2013. The following factors will contribute to this increase.
1. We expect the EUV gross margin to improve after a two-year ramp-up
period: We expect the EUV tools gross margin to reach ~45% in mid-2015,
after volume shipment has begun. The EUV gross margin currently stands at
25%.
2. Intel’s €829m investment in R&D will be recognised in ASML’s gross
margin over the next five years: Based on the level of business activity
between ASML and Intel, we assume that a fifth of Intel’s investment (€166m)
will be included in the figure in 2015, producing a minimum gross margin
contribution in 2016 of 1.8%.
3. We expect the group margin excluding EUV to reach 43.5% in 2016 due
to the increased top line and growth in the high-margin service and software
segment (€1.2bn revenue in 2016 versus €930m in 2012).
4. Cymer’s positive gross margin impact: Cymer’s adjusted gross margin was
56% in Q2 2013, higher than ASML’s average group gross margin (41.8% in
Q2 2013). We expect the Cymer acquisition to lead to a 50bp increase in the
group gross margin by 2016.
We expect that with its current product portfolio, ASML will be able to maintain
its existing profitability level given ASP stability. In addition, chip-makers look at
total cost of ownership – ie the cost saving from a more efficient process or higher
yield rate usually justifies the higher ASPs of new generation tools.
Figure 12: ASML tool ASP will not decrease over time
EUR mn
35
30
25
20
15
10
5
0
2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E
Source: ASML data, Berenberg Bank estimates
Source: AMSL data, Berenberg estimates
ArFi NXT:1950i roadmap: 2011 2012 extensions 2013+ extensions
Matched Machine Overlay 5.5nm 4.5nm 3.5nm
On Product Overlay 9nm 6nm 4nm
CDU 3nm 1.5nm 1nm
Total focus control budget 110nm 90nm 70nm
Throughput 190WPH 230WPH 250WPH
Defects 10 defects/wafer 10 defects/wafer

ASML Holding NV
Technology Hardware
Key catalysts
In our view, the following events could be catalysts for the share price.
1. Further progress on EUV light source: EUV light source power is the
bottleneck making it difficult for ASML to achieve the desired throughput
level for it to be commercially viable. Cymer achieved 55 watts (43wph) in
March 2013, and it is aiming to deliver 105 watts (69wph) by mid-2014. If
Cymer announces any major progress on light source development towards
that target, or even reaches 105 watts before mid-2014, then the stock price
would react positively.
In our opinion, the Cymer acquisition increased the likelihood of ASML being
able to achieve its 105-watt target before mid-2014. ASML has announced
decent progress in recent quarters, and management is confident that the
company can reach 105-watt light source power by mid-2014.
2. DRAM and NAND order growth: Memory orders have recovered from
their trough in Q1 2013, and accounted for 35% of total orders in Q2. We
believe that further improvement in memory orders would benefit ASML’s
revenue and share price.
In our opinion, we believe memory spending is increasing. 28% of KLA’s
order were memory orders last quarter, up 60% from its December 2012
quarter orders (17% of which were memory), and it expects memory to
contribute 33% of orders in the June quarter. LAM has also indicated a
strengthening in memory orders in H1; its memory shipment portion
increased from a low 20% in December to 31% in the March quarter. We
therefore believe it to be very likely that ASML’s memory order level will
increase in the coming quarters, driven by customers such as Samsung and
Toshiba.
3. More aggressive shrinkage: Aggressive shrinkage plans will ultimately lead
to a higher level of demand for EUV tools and ArFi tools, versus current
modelled expectations.
The chip-makers’ roadmaps are already aggressive, in our view, and so the
opportunity for further acceleration in shrinkage terms would appear to be
low. However, as competition intensifies in the consumer electronic market,
Intel, TSMC and Samsung may bring their roadmaps forward in a bid to
secure a technology leadership position.
4. A delay in Nikon’s EUV development, or its exit from the EUV market:
Nikon, ASML’s only competitor in this segment, is looking to introduce EUV
after 2015/16. If Nikon delays this plan, or exits the EUV market altogether
due to technical issues, we believe this would have a beneficial effect on
ASML’s share price.
We do not believe that Nikon will make an announcement on its EUV plans
soon. It has stated that it is focusing on the ArFi market and that it expects its
ArFi tool to extend to 20nm chip designs, while EUV is only required for
printing 16nm/11nm chips. Therefore, we believe the timeframe for Nikon to
announce any possible delay or EUV plan would be end-2014 at the earliest or
2015, when it starts to focus on EUV production.
41

ASML Holding NV
Technology Hardware
Financials
P&L – EUV a future driver; foundry/logic orders solid
ASML’s revenue is made up of tool revenue and software and service revenue. We
model ASML’s revenue based on shipments of different types of tools.
Figure 13: ASML tool revenue model
2011 2012 2013E 2014E 2015E 2016E
Shipment units
I-Line 20 15 15 12 8 8
KrF 87 78 52 50 32 28
ArF Dry 11 4 4 8 8 12
ArF Immersion 101 72 69 72 67 49
EUV 3 1 3 15 24 50
New 195 146 126 141 123 131
Refurbished 27 24 17 16 16 16
Total 222 170 143 157 139 147
ASPs (E m)
I-Line 3 4 4 4 4 4
KrF 11 12 12 10 10 10
ArF Dry 20 22 23 23 23 23
ArF Immersion 35 38 42 45 45 45
EUV 39 42 70 81 96 100
Blended 22 22 27 33 42 53
New System (inc EUV) 24 25 30 36 47 59
Refurbished 4 8 5 6 6 6
Revenues by technology
I-Line 1% 1% 2% 1% 1% 0%
KrF 19% 24% 16% 10% 6% 4%
ArF Dry 5% 2% 2% 4% 3% 4%
ArF Immersion 72% 71% 74% 62% 51% 28%
EUV 2% 1% 5% 23% 39% 64%
Revenues by technology
I-Line 62 56 61 48 32 32
KrF 945 908 632 520 333 291
ArF Dry 221 86 92 184 184 276
ArF Immersion 3,540 2,710 2,875 3,238 3,015 2,202
EUV 116 42 210 1,210 2,300 5,000
New system sales 4,772 3,621 3,790 5,104 5,768 7,705
Refurbished sales 112 180 80 96 96 96
Total Eqpmt sales (E m) 4,884 3,802 3,870 5,200 5,864 7,801
Total equip sales (exl EUV) 4,768 3,760 3,660 3,990 3,564 2,801
Source: Company data, Berenberg estimates
We expect EUV shipments to increase in volume in 2015 and 2016 after ramping
up slowly in 2013 and 2014. We expect logic/foundry companies to gradually
allocate more layers to EUV from ArFi as they gain more experience of it, and
memory-makers to start adopting EUV after throughput improves over time. We
estimate EUV will contribute the majority of ASML’s total tool revenue from 2016
onwards.
In 2013 and 2014, we expect ArFi tools to contribute the majority of ASML’s total
revenue and unit shipment. The adoption of the DP process by logic/foundry
players in 20nm node will drive solid demand for ArFi tools in 2013 and 2014.
Starting in H2 2014, the demand of ArFi is likely to decrease as the onset of EUV
reduces demand for DP. From this point, ArFi tools will then only be used for
non-critical layers.
42

ASML Holding NV
Technology Hardware
Figure 14: ASML tool revenue/shipment by technology
EUR mn
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Revenue by Technology
2011 2012 2013E 2014E 2015E 2016E
I-Line KrF ArF Dry ArF Immersion EUV
Unit mn
250
Shipment by Technology
200
150
100
50
0
2011 2012 2013E 2014E 2015E 2016E
I-Line KrF ArF Dry ArF Immersion EUV
Source: Company data, Berenberg estimates
The main contributor to orders and revenue has shifted to the foundry/logic
segment from memory since 2010. Foundry accounted for 45% of ASML’s order
book and 60% of its revenue in 2012. We expect the trend to continue until
memory investment recovers. Memory players Micron and SK Hynix have both
indicated that they have only made conservative capacity additions apart from their
node migration. Demand from the foundry/logic segment however is likely to
remain solid, driven by strong growth in the consumer electronics market and
increasing competition between Intel, Samsung, TSMC and others.
43

ASML Holding NV
Technology Hardware
Figure 15: ASML booking/revenue by end-market
100%
Bookings by end market
80%
60%
40%
20%
0%
2011 2012
IDM Foundry Memory
Source: Company data
Revenue by end market
100%
80%
60%
40%
20%
0%
2011 2012
IDM Foundry Memory
Source: Company data
ASML’s software and service segment comprises metrology products and holistic
lithography software, designed to help customers optimise tool performance,
achieve greater printed feature resolution and reduce overall production costs. As
chip size scales down, ever higher levels of precision are required, which we believe
will lead to increased demand for metrology and holistic software over the next few
years as manufacturing processes become ever more complex.
44

ASML Holding NV
Technology Hardware
Figure 16: ASML P&L overview
2011 2012 2013E 2014E 2015E 2016E
Tool revenue ex EUV 4,768 3,760 3,660 3,990 3,564 2,801
EUV revenue 116 42 210 1,210 2,300 5,000
Software & Service 767 930 984 1,060 1,140 1,190
Cymer 0 0 180 320 340 355
Total revenues 5,651 4,732 5,034 6,580 7,344 9,346
Gross profit exEUV 2,451 2,005 1,957 2,207 2,041 1,736
Gross margin ex-EUV 44.3% 42.7% 42.1% 43.7% 43.4% 43.5%
Gross profit EUV 0 0 53 370 983 2,350
Gross Margin EUV 0.0% 0.0% 25.0% 30.6% 42.7% 47.0%
Gross profit Cymer- reported 0 0 -1 125 149 162
Gross margin Cymer- reported 0.0% 0.0% -0.7% 39.0% 43.8% 45.7%
Corporate Gross Profit - reported 2,451 2,005 2,008 2,702 3,172 4,249
Corporate Gross Margin reported 43.4% 42.4% 39.9% 41.1% 43.2% 45.5%
Corporate Gross Profit - adj 2,450 2,005 2,111 2,754 3,212 4,289
Corporate Gross Margin -adj 43.3% 42.4% 41.9% 41.9% 43.7% 45.9%
R&D - adj 590 589 875 920 800 760
SG&A - ajd 219 259 295 304 280 260
Other (income) expenses 0 0 -65 -120 -120 -120
OPEX - Adj 808 848 1,105 1,104 960 900
Op profit - reported 1,641 1,157 880 1,570 2,212 3,349
opm - reported 29.0% 24.4% 17.5% 23.9% 30.1% 35.8%
Op profit - adj 1,641 1,157 1,006 1,650 2,252 3,389
opm - adj 29.0% 24.4% 20.0% 25.1% 30.7% 36.3%
PBT - reported 1,649 1,151 870 1,570 2,212 3,349
Tax Expense 182 4 62 126 177 335
Effective Tax Rate % 11.0% 0.4% 7.2% 8.0% 8.0% 10.0%
Net income - Reported 1,467 1,146 808 1,445 2,035 3,014
Net income - adj 1,467 1,146 925 1,518 2,072 3,050
No of Shares 426 424 420 417 413 410
No. of shares diluted 429 427 424 421 417 414
EPS - Reported 3.42 2.68 1.91 3.43 4.88 7.27
EPS - adj 3.42 2.68 2.18 3.60 4.97 7.36
Source: Company data, Berenberg estimates
We estimate that ASML’s total revenue to be €5,034m in 2013, and grow at CAGR
23% to reach €9,346m in 2016, driven by EUV tool shipment and high ASP. In
2016, we expect EUV to contribute 54% of total revenue, with revenue from other
tools declining over time.
We estimate adjusted group gross margins will decline from 42.4% in 2012 to
41.9% in 2013, primarily due to initial EUV shipment at below the group average
gross margin (25%). We expect the group gross margin to improve over time due
to 1) an EUV gross margin uptick, 2) increased group revenue level leading to
leverage, and 3) increased services revenue and Cymer consolidation.
45

ASML Holding NV
Technology Hardware
Strong cash and consistent dividends
ASML’s €1.6bn of net cash (€3.8/share) at the end of Q2 2013 accounted for 5%
of its market cap. The strong cash position will enable the company to explore all
possible M&A opportunities, and more importantly, ensure a consistent level of
R&D investment to maintain its technology leadership position.
ASML generated €532m of free cash flow in 2012, down from €1,770m in 2011,
due to a decrease in sales and EUV downpayments. We expect the timing of EUV
downpayments may cause fluctuations in free cash flow in 2013 and 2014 before
EUV ramps up in volume. Fluctuations in free cash flow fluctuation should end
after 2015, when EUV can deliver a more consistent level of operating cash flow.
Capital expenditure is guided up to €370m for 2013 (7.3% of 2013E sales), from
€172m in 2012, due to EUV and 450mm facility expansion. We estimate capex will
remain at a similar level until 2015, and return to €200m after all EUV- and
450mm-related facility expansion is complete. The overall cash position will not be
adversely impacted by the rising capex, as it will be offset by operating cash flow
growth over time.
ASML has a history of consistent dividend payouts as well as rising dividends. It
raised 2012 dividends to €0.53/share, from €0.46/share in 2011, equal to a 20%
payout ratio. If ASML distributes 17% (the average payout ratio in 2010-2012) of
net income, we estimate that the dividend will increase to €1.3/share in 2016,
which is a 2% dividend yield based on our price target.
Figure 17: stable dividend payout
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
25%
20%
15%
10%
5%
0.00
2011 2012 2013E 2014E 2015E 2016E
EPS DPS Payout ratio
0%
Source: Company date, Berenberg estimates
ASML began a share buyback programme in 2011. It has executed €1.13bn in share
buybacks to date, and announced another €1bn repurchase for 2013-2014 in Q1
2013.
46

ASML Holding NV
Technology Hardware
Valuation
Our price target of €73.00 is based on a P/E valuation. The price target of €73.00
implies a 12x P/E based on EPS estimates of €7.4/share, discounted by a 10%
WACC back to 2014. We adopted the EPS estimate which fairly reflects EUV’s
earning power as EUV is the main growth driver for ASML, in our opinion. EUV
revenue is expected to grow by a CAGR of 188% over the next three years, and
contribute 54% of revenue and 55% of the gross profit in 2016. We estimate EUV
shipments to be fully ramped up in 2016.
ASML traded at 7x to 24x forward P/E during the semiconductor industry
recovery cycle between end-2009 to 2011 (see Figure 18). We believe we have now
entered another recovery cycle from the beginning of 2013, as noted by front-end
players such as ASML, AMAT, TEL and KLA which have started to see order
levels pick up. ASML was trading at 9x to 13x in June-September 2010, which was
six months after the start of the last recovery cycle.
Our P/E of 12x is 10% higher than the middle point of historical 10x-13x midrecovery
cycle P/E. This premium is assigned to reflect ASML’s stronger
competitive position compared to 2010. ASML held a 70% market share in 2010;
we expect it to hold a more than 80% by 2016, and dominate the EUV market.
Figure 18: 10% P/E premium for the market leader
Source: ASML
Source: Bloomberg data
Figure 19: Peer group valuation
Company Name PE EV/EBIT EV/Sales
FY 2013E FY 2014E FY2015E FY 2013E FY 2014E FY2015E FY 2013E FY 2014E FY2015E
NIKON CORP 14.12 13.42 12.25 9.83 8.28 8.53 0.82 0.80 0.87
ASM INTL NV 27.03 14.02 13.19 50.89 10.49 13.21 3.13 1.91 1.52
APPLIED MATERIAL 23.30 13.18 11.92 17.43 10.77 4.87 2.35 1.92 0.91
KLA-TENCOR CORP 16.94 13.21 11.26 9.43 7.59 2.97 2.46 2.21 0.95
LAM RESEARCH 20.99 11.64 10.15 14.73 8.28 2.90 1.74 1.44 0.58
ULVAC INC na 10.21 7.36 25.28 12.27 15.08 0.82 0.75 1.04
DAINIPPON SCREEN 28.32 14.13 14.41 67.36 11.63 13.66 0.76 0.70 0.81
TOKYO ELECTRON 48.60 20.98 18.74 25.57 9.75 5.61 1.16 1.02 0.72
Mean 22.41 13.85 12.41 27.57 9.88 8.35 1.66 1.34 0.92
Median 22.14 13.32 12.09 21.36 10.12 7.07 1.45 1.23 0.89
ASML HOLDING NV 25.04 15.67 12.17 21.81 10.74 2.10 4.80 3.73 0.67
Source: Bloomberg data
47

ASML Holding NV
Technology Hardware
Key risks
1. EUV feasibility: If ASML and Cymer fail to improve EUV light power to the
required 105-watt level before mid-2014, we believe its share price will be
negatively affected.
In our opinion, ASML/Cymer is the only player with the capability to deliver
EUV tools with the required throughput level. The Cymer acquisition further
increased the likelihood of ASML achieving the 105-watt target by mid-2014.
Management retained its 105-watt light source power target in Q2 and
indicated that it expected to achieve 80 watts by September/October 2013.
2. Semiconductor spending pause: ASML’s future success depends on how
aggressive chip-makers shrink and on demand for leading-edge chips. The
consumer electronics devices market has been driving demand for smaller
chips in the past few years, so any slowdown in this market will affect spend.
In our opinion, the consumer electronics market is unlikely to slow down in
next few years due to strong demand from developing countries; however, we
do expect intensified competition. Intel, Samsung, Apple and fabless players
are likely to use leading-edge chip technology as a differentiation factor.
Therefore the chance of chip-makers pausing investment in leading technology
is very low.
3. Alternative technology: EUV is now seen as the most credible method to
achieve further shrinkage; however, development of other technologies such as
E Beam and DSA (directed self assembly) are still ongoing.
In our opinion, alternative solutions like E BEAM, DSA are unlikely to replace
EUV as the cost-effective solution for printing leading-edge node. E
Beam/multi-beam is currently suffering significant throughput limitations. The
throughput for a single machine is less than 1wph. DSA is a method of using
block copolymer material to generate a repeatable pattern. As per Gartner data,
DSA has the potential to significantly reduce lithography costs, as only single
patterning is needed. It may potentially be used for 14nm, but the associated
cost is prohibitive.
48

ASML Holding NV
Technology Hardware
Company background
ASML is the world’s leading provider of lithography systems for the semiconductor
industry, and manufactures lithography tools that are critical to the production of
integrated circuits or chips. It designs, develops, integrates, markets and services
the lithography tools used by its customers. Customers include all major foundry,
logic and memory chip-makers and IDMs.
Figure 20: ASML’s customers
Company
Samsung
Intel
TSMC group
SK Hynix
Globalfoundries
Toshiba/Sandisk
UMC
Micron
Sony
Infineon
Source: ASML
ASML has a broad product portfolio for lithography tools, and it regularly
refreshes tools to deliver a high specification.
Figure21: Product portfolio
Industry
Memory/Logic/Foundry
Foundry/Logic
Foundry
Memory
Foundry
Memory
Foundry
Memory
IDM
IDM
ASML Product porfolio:
EUV Resolution Throughput start shipping
TWINSCAN NXE:3300 22nm/18nm 2013:43wph 2013 Q2
TWINSCAN NXE:3100 22nm/20nm 2013:43wph 2010 Q4
ArFi
TWINSCAN NXT:1970Bi Estimate 2014
TWINSCAN NXT:1960Bi Estimate 2013
TWINSCAN NXT:1950i 38 nm >=230wph, aim250wph 2009 Q3
TWINSCAN XT:1950Hi 38 nm >=148 wph 2009 H1
TWINSCAN XT:1900Gi (OLD) 40 nm >=131 wph 2007 July
TWINSCAN XT:1700Fi (OLD) 45 nm >=122 wph 2006 Q1
ArF
TWINSCAN XT:1450H 65 nm >=162 wph 2007 Mid
TWINSCAN XT:1450G 65 nm >=145 wph 2004
KrF
TWINSCAN XT:1000H 80 nm 2008 Mid
TWINSCAN XT:860K 110 nm >=210 wph 2007/2008
TWINSCAN XT:800K 120 nm >=220 wph 2007/2008
TWINSCAN XT:875G(OLD) 90 nm >=150 wph 2007 H2
TWINSCAN XT:870G(OLD) 110 nm >=150 wph 2007 H2
I Line
TWINSCAN XT:400K 350 nm >=220 wph 2008
TWINSCAN XT:450G (OLD) 365 nm >=141 wph 2008 H2
TWINSCAN XT:400G(OLD) 365 nm >=149 wph 2007 Nov
Source: ASML data
49

ASML Holding NV
Technology Hardware
ASML shareholder structure
ASML has approximately 408m ordinary shares outstanding with a nominal value
EUR0.09 each, listed at both NYSE Euronext Amsterdam and NASDAQ in New
York. The free float percentage is 77.32%. The shareholder structure at end-2012
end is shown below.
Figure 22: Holding structure at end-2012
Stichting
Administratiekantoor
TSMC/TSMC*
5%
Blackrock Inc
6%
Stichting
Administratiekantoor
MAKTSJAB/
Intel*
15%
FMR LLC
9%
Other
52%
Capital Group
International, Inc
13%
*Major shareholders have the same voting rights as other shareholders, with exception Intel and TSMC (and related
foundations) in the Customer Co-Investment Program
Source: ASML
Customer co-investment programme
In July 2012, ASML announced a customer co-investment programme to accelerate
development of EUV and 450mm technology. Intel, Samsung and TSMC invested
€4.4bn in total, for 23% of ASML’s share capital and €1.1bn in R&D funding. The
shares issued under the programme only carry voting rights under exceptional
circumstances, and are not transferable for two and a half years after issuance.
The R&D contribution from Intel will be recognised through the revenue line after
EUV shipment ramp-up. Samsung’s and TSMC’s R&D contribution will be
recognised through operating income.
We view the co investment programme as positive for both chip-makers and
ASML. For ASML, it demonstrates that customers recognise EUV as Moore’s Law
enabler, and that ASML has a leading position in this field. For chip-makers, the
investment contribution helps ASML deliver a clearer and accelerated roadmap for
EUV and 450mm.
Management
CEO Peter Wennink
Peter Wennink became CEO in July 2013. Previously, he was executive vice
president, CFO and a member of the management board from 1999.
50

ASML Holding NV
Technology Hardware
Financials
Profit and loss account
Year-end December (EUR m) 2011 2012 2013E 2014E 2015E 2016E
Sales 5,651.0 4,732.4 5,034.2 6,579.7 7,343.8 9,345.8
Cost of sales 3,201.4 2,727.5 2,923.6 3,825.6 4,131.4 5,057.2
Gross profit 2,449.6 2,004.9 2,110.6 2,754.1 3,212.4 4,288.6
Selling, General and Administrative Expenses 218.5 259.3 294.5 304.0 280.0 260.0
Research and development 589.9 588.7 874.8 920.0 800.0 760.0
Other operating expenses 0.0 0.0 -64.5 -120.0 -120.0 -120.0
Unusual or infrequent items 0.0 0.0 126.2 80.0 40.0 40.0
EBIT 1,641.2 1,156.9 879.6 1,570.1 2,212.4 3,348.6
Interest expenses -7.4 6.2 9.3 0.0 0.0 0.0
Extraordinary income/loss 0.0 0.0 0.0 0.0 0.0 0.0
EBT 1,648.6 1,150.7 870.3 1,570.1 2,212.4 3,348.6
Taxes 181.6 4.3 62.3 125.6 177.0 334.9
Net income from continuing operations 1,467.0 1,146.4 807.9 1,444.5 2,035.4 3,013.8
Income from discontinued operations (net of tax) 0.0 0.0 0.0 0.0 0.0 0.0
Net income 1,467.0 1,146.4 807.9 1,444.5 2,035.4 3,013.8
Minority interest 0.0 0.0 0.0 0.0 0.0 0.0
Net income (net of minority interest) 1,467.0 1,146.4 807.9 1,444.5 2,035.4 3,013.8
Source: Company data, Berenberg estimates
51

ASML Holding NV
Technology Hardware
Balance sheet
Year-end December (EUR m) 2011 2012 2013E 2014E 2015E 2016E
Intangible assets 154.4 159.1 2,776.1 2,729.0 2,682.0 2,635.0
Property, plant and equipment 1,053.6 1,029.9 1,335.1 1,537.0 1,698.8 1,830.6
Deferred taxe asset (LT) 38.7 39.4 52.5 52.5 52.5 52.5
Other assets 307.3 350.2 309.6 309.6 309.6 309.6
Fixed Assets 1,554.0 1,578.6 4,473.3 4,628.1 4,742.9 4,827.7
Liquid assets 2,731.8 1,768.0 1,285.2 1,719.0 3,196.2 5,348.7
Inventories 1,624.6 1,857.0 3,203.4 3,328.1 3,692.7 3,950.5
Accounts receivable 880.6 605.3 956.3 1,120.4 1,042.3 1,213.9
Current income tax assets 231.7 1,233.1 1,222.5 1,222.5 1,222.5 1,222.5
Current Assets 5,706.8 5,832.3 6,959.7 7,682.2 9,446.0 12,027.8
TOTAL 7,260.8 7,410.9 11,433.0 12,310.3 14,188.9 16,855.5
Shareholders' equity 3,444.2 4,066.9 6,842.5 7,692.7 9,221.2 11,636.2
Minority interest 0.0 0.0 0.0 0.0 0.0 0.0
Bonds (long term) 0.0 0.0 0.0 0.0 0.0 0.0
Deferred taxes 849.8 501.4 654.8 654.8 654.8 654.8
Long-term debt 733.8 755.9 735.6 735.6 735.6 735.6
Other liabilities 0.0 0.0 0.0 0.0 0.0 0.0
Non-current liabilities 3,444.2 4,066.9 6,842.5 7,692.7 9,221.2 11,636.2
Current liabilities 2,233.0 2,086.3 3,200.2 3,227.2 3,577.3 3,828.9
TOTAL 7,260.8 7,410.5 11,433.0 12,310.3 14,188.9 16,855.5
Source: Company data, Berenberg estimates
Cash flow statement
EUR m 2011 2012 2013E 2014E 2015E 2016E
Net profit/loss 1,467 1,146 828 1,445 2,035 3,014
Depreciation and Amortisation 165 187 211 235 235 235
Changes in deferred taxes 63 -120 0 0 0 0
Other 89 204 222 247 247 247
Change in working capital 286 -713 -561 -262 64 -178
Cash flow from operating activities 2,071 704 700 1,665 2,581 3,318
Capex -301 -172 -370 -390 -350 -320
Income from asset disposals 0 0 0 0 0 0
Other cash flow from investing activities 0 -948 -236 0 0 0
Cash flow from investing activities -301 -1,120 -606 -390 -350 -320
Long term debt issuance 2 0 0 0 0 0
Loan and receivable repayments -2 -3 -2 0 0 0
Purchase of own shares -669 3,638 -357 -620 -500 -500
Dividends paid -173 -189 -216 -221 -254 -347
Others -150 -3,992 0 0 1 2
Cash flow from financing activities -992 -546 -575 -841 -754 -846
Effects of exchange rate changes on cash 4 -2 1 0 0 0
Increase/decrease in liquid assets 0 0 0 0 0 0
Liquid assets at end of period 2,732 1,768 1,285 1,719 3,196 5,349
Source: Company data, Berenberg estimates
52

ASM International NV
Small/Mid-Cap: Technology Hardware
Front-end business undervalued
• We initiate coverage on ASMI with a Buy recommendation and
a price target of €31. ASMI supplies deposition equipment which is
used in the chip fabrication process; its ALD and epitaxy tool are
essential in manufacturing leading-edge chips. We are buyers for the
following reasons: 1) we expect the ALD market (60% revenue) to
grow at a CAGR of 20% to €700m over the next three years, driven
by the new chip designs; 2) ASMI holds a 44% market share of the
ALD market, and we believe it will maintain this as its comprehensive
intellectual property (IP) portfolio has created high entry barriers for
other players; 3) following the release of its Intrepid XP epitaxy tool,
ASMI may receive orders from Intel due to its strong relationship
with Intel and Intel’s dual sourcing policy; 4) its 40% holdings in ASM
Pacific Technology Ltd (ASMP) accounts for 65% of ASMI’s share
value as per our SOTP valuation. We expect holdings to decrease over
time and this will act as a catalyst for the stock.
• Key debates: 1) What is the value of ASMI front-end business? 2)
will ASMI dispose of more ASMP shares?
1. AMAT and Francisco Partners offered ASMI $800m for its
front-end business in 2008. We believe the front-end business is
worth more than $800m today ($949m/€730m as per our
valuation) as ASMI is in a better position than it was in 2008,
given it has gained a 6% ALD market share, and it may gain an
Intel order with its newly launched epitaxy tool.
2. ASMI has taken down its position from a controlling 53% to
40% in Mar 13, .i.e. from a consolidated to a below the line item.
This in our opinion was a 1st step, i.e. no longer have control of
ASMP’s business. The lock up period will expires in September;
we think further disposal will be likely thereafter.
• Our revenue forecasts for in line with consensus, and our EPS are
10%, 8% and 10% above consensus for 2013, 2014 and 2015. We
believe that the gross margin will increase as a result of top-line
growth, and that ASMI can offset its increasing R&D levels with costsavings.
• Our €31 price target is based on an SOTP valuation. We value ASMI’s
front-end operation at €11/share by applying a 14x P/E multiple on
2014 EPS excluding ASMP at €0.81. The 14x P/E multiple is the
average P/E of its peers excluding TEL, as TEL usually trades at a
P/E premium due to its strong cash position. We value the back-end
operation based on ASMP’s listed price, applying a 5% holding
discount.
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
Sales 1,634 1,418 559 477 499
EBIT 366 88 25 61 68
Net profit 187 7 1,470 125 133
Y/E net debt (net cash) -191 -206 -252 -363 -475
EPS (GAAP) 3.12 0.15 22.98 1.95 2.09
EPS (Proforma) 2.38 0.23 0.95 1.95 2.09
CPS 3.93 0.76 0.25 2.03 1.68
DPS 0.36 0.49 4.78 0.00 0.00
Gross margin 35.6% 31.1% 33.9% 40.0% 41.0%
EBIT margin 22.4% 6.3% 4.6% 12.8% 13.7%
Dividend yield 1.4% 1.8% 17.6% 0.0% 0.0%
ROCE 22.6% 1.8% 3.3% 6.2% 6.1%
EV/sales 0.8 0.9 2.4 2.8 2.7
EV/EBIT 3.6 15.0 52.4 21.8 19.4
P/E 8.8 183.2 1.2 14.1 13.2
Source: Company data, Berenberg
Buy (initiation)
Rating system
Current price
EUR 27.49
Absolute
Price target
EUR 31.00
19/07/2013 Amsterdam Close
Market cap EUR 1,736 m
Reuters ASMI.AS
Bloomberg ASM NA
Share data
Shares outstanding (m) 63
Enterprise value (EUR m) 1,461
Daily trading volume 244,210
Performance data
High 52 weeks (EUR) 31
Low 52 weeks (EUR) 24
Relative performance to SXXP AEX
1 month 0.7 % -2.2 %
3 months 10.2 % 6.6 %
12 months -35.9 % -30.1 %
Key data
Price/book value 0.9
CAGR sales 2011-2014 -29.4%
CAGR sales 2012-2015 140.5%
Business activities:
ASMI is a leading supplier of semiconductor
equipment, materials and process solutions for
the wafer processing industry. It supplies
equipment used for the deposition process.
Non-institutional shareholders:
Arthur Del Prado 18%
22 July 2013
Tammy Qiu
Analyst
+44 20 3207 2673
tammy.qiu@berenberg.com
Jean Beaubois
Specialist Sales
+44 20 3207 7835
jean.beaubois@berenberg.com
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Investment summary
We base our investment thesis on Buy-rated ASMI on the following five points.
1. We expect the ALD market to reach €700m in the next three years:
ASMI generates 60% of its revenue from the ALD market. We expect the
addressable market to expand to €700m (a rise of c20%) in the next three
years, driven by increasing HKMG adoption in foundries and logic. In 2012,
the HKMG process was only adopted by Intel (100% of 22nm capacity),
TSMC (60% of 28nm capacity) and Samsung (100% of 32nm capacity, 0% of
28nm capacity). We expect TSMC, Samsung and other tier two foundries
(such as Globalfoundries and UMC) to increase their HKMG-based capacity
significantly in the next two years because HKMG is essential for building
20nm/below chips. We do not expect ASMI to lose market share: it has
accumulated a comprehensive IP portfolio on ALD technology. TEL, the only
other main player in this market, currently licenses ASMI’s IP to make ALD
tools.
2. Market expansion driven by new epitaxy tools: ASMI’s previous epitaxy
tool (17% of revenue) only addressed the power devices and analog markets;
however, in 2012, it released a new epitaxy tool model (Intrepid XP) that
targeted the logic market. We expect the epitaxy market to expand to €500m
in the next three years from €423m today (a rise of c9% per year). Given
ASMI’s strong relationship with Intel and Intel’s dual-sourcing policy, we
believe that ASMI could gain orders from Intel and serve as its secondary
supplier, after AMAT. We believe its market share may, therefore, expand
from the current 10% level to 11% in 2015.
3. ASMI’s front-end business worth more than $800m today: AMAT and
Francisco Partners offered to acquire ASMI’s front-end business for $800m in
2008. The price looked expensive due to a private equity buyout valuation
premium before the financial crisis. We believe the front-end business is worth
more than $800m today (worth $949m as per our valuation) because it is in a
better position than it was in 2008. This is because: 1) ASMI’s market share in
the ALD market has risen by 6% since 2008 to 44% in 2012; 2) 3D NAND
will boost PE CVD (14% of revenue) in 2014/15, an opportunity that did not
exist in 2008; and 3) ASMI could gain epitaxy orders with its newly launched
tool and increase its exposure to strong logic capex.
4. Further ASMP share disposal is a catalyst given investor frustration:
ASMI’s share price is affected by its holding in ASMP, a non-strategic asset.
We think that management has aligned its interest with shareholders (as
demonstrated by the founder’s comments at the 2012 AGM). ASMI has
already sold down a 12% tranche, and we expect it to sell further tranches
following the September lock-up expiry. The market has been disappointed
that the full stake was not disposed of. Our view is that a structured selling of
the holding is the optimal approach as a better value can be realised.
5. SOTP – 65% of ASMI’s share value comes from ASMP: In our SOTP,
65% of ASMI’s share value comes from its 40% holding in ASMP, which we
value based on ASMP’s share price after applying a 5% holding discount. We
value ASMI’s front-end business at €10/share by applying 14x P/E on 2014
EPS of €0.81.
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Figure 1: Valuation matrix
ROE*
Dividend
yield*
FCF yield* Net cash/marcap
No.1 ASML 19.7% AMAT 2.5% AMAT 9.7% TEL 26.5%
No.2 AMAT 17.1% TEL 1.5% ASMI 6.2% SUSS 17.6%
No.3 SUSS 9.1% ASML 0.9% ASML 4.5% AMAT 16.7%
No.4 TEL 6.3% ASMI - TEL 4.3% ASMI 8.9%
No.5 ASMI 6.2% SUSS - SUSS 1.6% ASML 6.5%
* based on Berenberg estimation of 2014 performance
Net cash based on 2012 YE balance
Source: Berenberg estimation, company data
Based on our 2014 estimates, ASMI’s ROE is 6.2%, which is lower than that of
ASML, AMAT, SUSS and TEL. It does not have a stable dividend policy in place.
Its free cash flow yield is 6.2%, which is lower than SUSS and AMAT.
Key catalysts
The following are the key catalysts for the stock.
● ASMP share disposal: In our opinion, there is little synergistic or strategic
reason for keeping ASMP shares, as ASMP was operated independently from
the beginning. We think that a structured selling of the holding will be positive
for the share price.
● Order intake recovery in the coming months: We believe ASMI is likely to
announce further order growth in the next six to 12 months, driven by the
semiconductor cycle recovery and ALD orders as chip-makers are expanding
their leading-edge chip manufacturing capacity.
● New epitaxy orders from logic: In our opinion, ASMI may not gain much
market share from AMAT in the epitaxy market, but it could become a
secondary supplier to Intel, given Intel’s dual-sourcing policy.
Key risks
The following are the key risks for the stock.
● Leading-edge chip technology-related spending pause: We do not expect
the capex on the most advanced chip technology to pause until 2017/2018,
when we expect consumer electronic devices demand from emerging markets to
become saturated.
● Availability of alternative technology: We are not yet concerned about the
threat from alternatives to ALD such as PE CVD, as PE CVD is currently
lagging ALD in terms of its ability to achieve the required layer uniformity level.
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Strong fundamentals unrecognised
Consensus focus on front-end implied valuation
The main focus of consensus lies on ASMI’s implied valuation for its front-end
business, which has had a negative market cap since 2007 (see Figure 2). As a
result, the pair trade of long ASMI/short ASMP was well known and widely
discussed among investors, who predicted that ASMI’s share price would re-rate
after it divests its ASMP holdings, and that ASMP’s share price would slump upon
ASMI’s disposal.
Figure 2: ASMI had negative market cap since 2007
EUR bn
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
160%
140%
120%
100%
80%
60%
40%
20%
0%
Source: Bloomberg data
ASMI marcap
ASMP as % of ASMI marcap
In March 2013, ASMI divested 12% of its holding in ASMP, and ASMI’s share
price fell by as much as 24% in the two months following the disposal. The slump
occurred because 1) the market was expecting ASMI to sell more than 12% of its
ASMP holdings and 2) investors were concerned about when and even if there will
be further share disposals.
We believe the market currently has a low expectation of further divestment once
the lock-up period expires in September 2013, and a further disposal could be a
catalyst for ASMI’s share price. However, we also analyse ASMI from a different
angle. We believe its front-end business will also drive strong performance in the
long run and make the stock an attractive investment.
New chip designs trending in ASMI’s favour
ASMI has a solid front-end business that generated 91% of its revenue from the
deposition market in 2012, according to data from market researcher Gartner.
While the total deposition market will grow by c5% between 2012 and 2017
according to Gartner data, we believe that the ALD, PE CVD and epitaxy subsectors
will outperform the total deposition market.
AMAT dominates the deposition market, while ASMI’s market share has always
been small: its market share in 2012 was c5.2% (see Figure 2). Compared with
AMAT and LAM, which supply a broad range of deposition equipment, ASMI
focuses on specific segments, including ALD, epitaxy and PE CVD. We expect
ASMI to benefit from the new generation of mainstream chip designs, which
include 20nm/10nm HKMG, FinFET and 3D NAND, given that 1) its ALD tool
is essential in leading-edge chip manufacturing processes, such as HKMG, 2) its
epitaxy tool is required in the manufacturing of FinFET chips and 3D NAND, and
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3) the ramp-up in 3D NAND may drive PE CVD tool demand.
Figure 3: Deposition market share
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2012 2011 2010 2009 2008
AMAT TEL LAM/Novellus Hitachi ASMI Veeco Aixtron
Source: Gartner data
ALD will grow as HKMG adoption increases
ASMI generates 70% of its front-end revenue from ALD equipment sales. We
expect robust ALD growth due to the increased adoption of the HKMG process.
The HKMG process is currently only used in some 28nm solutions but it will
become mandatory for 20nm and smaller nodes, as it increases the transistor
capacitance and allow chips to function with reduced power needs. The ALD
process enables chip-makers to form thin films atom by atom, which enables the
precise chip-manufacturing process required by advanced nodes. It offers better
uniformity, surface roughness and thickness control than other solutions.
Currently, Intel, TSMC and Samsung have adopted HKMG for some products.
Globalfoundries has limited HKMG for 28nm, and UMC is due to ramp up
HKMG 28nm in 2014 at the earliest. We expect that HKMG will be used by more
logic/foundries as they scale down to 20nm and below. At the same time, HKMG
layers will increase with shrinkage.
We expect the ALD market to grow by a CAGR of 20% pa in next three years,
versus the total deposition market grow which will grow by 6% during the same
period according to Gartner’s estimates.
Figure 4: ALD growth versus total deposition market
$mn
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
ALD Deposition ALD/deposition
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Source: Gartner data, Berenberg estimates
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ASMI shares the ALD market with TEL/Hitachi (see Figure 5). We expect ASMI
to maintain its high market share because: 1) it has already established a strong
relationship with the mainstream foundry/logic players, all of which we believe
have committed to using ASMI’s ALD tools; 2) ASMI has, since it became the first
player in this market in 1999, built a comprehensive ALD-related IP portfolio that
has raised the ALD market’s entry barriers; and 3) TEL is not really a competitor
for ASMI because it only has batch ALD systems, while ASMI is more focused on
single-wafer processing equipment.
TEL licenses its ALD IP from ASMI and focuses on batch ALD equipment used
in memory-makers. The only reason ASMI licensed its ALD IP to TEL is because
the batch system is mainly used by a memory-maker with which TEL has a strong
relationship, and is therefore hard for ASMI to penetrate. ASMI’s management has
made a strong commitment to remain the leader in ALD technology and it has
dedicated a further eight years R&D to turning ALD into a process that can be
used reliably and efficiently by advanced semiconductor chip-makers.
Figure 5: ALD market share
100%
80%
60%
40%
20%
0%
2008 2009 2010 2011 2012
ASMI
TEL/Hitachi
Source: Gartner data
Epitaxy may open up new opportunities
ASMI’s current epitaxy exposure is concentrated on power devices and analog
end-markets. In 2012, it released Intrepid XP, which targets the logic market. The
epitaxy process is used extensively in FinFET and 3D NAND manufacturing. Its
growth is, therefore, likely to be solid because all logic/foundries are releasing
FinFET designs in 2013/2014 while 3D NAND will be in mass production from
the end of 2014 and will mature in 2015 (see Figure 6).
Figure 6: Epitaxy growth versus total deposition market
$mn
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Epitaxy Deposition Epi/deposition
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Source: Gartner data, Berenberg estimates
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ASM International NV
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AMAT holds a dominant 89% share in the global epitaxy market (see Figure 7) and
ASMI currently holds a 9% share. ASMI only addresses the power devices and
analog markets, which are highly cyclical and low-growth (the analog market fell by
4.8% from 2011 to 2012). We do not expect it to gain significant market share
from AMAT because AMAT is already well established with logic/foundry players.
However, we believe that ASMI may be able to serve as a second supplier to Intel
after AMAT, given its strong relationship with Intel.
Figure 7: Epitaxy market share
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2008 2009 2010 2011 2012
Applied Materials ASM International
Source: Gartner data
PE CVD boost by 3D NAND
PE CVD equipment is mainly used in building interconnecting layers in the chip
manufacturing process. We believe the 3D NAND design which requires multilayer
stack deposition is likely to boost the demand for PE CVD equipment. The
roadmap of main NAND vendors shows that 3D NAND is likely to be
manufactured in volume in 2015 after ramping up at the end of 2014.
Gartner forecasts that the PE CVD market will grow by c5.4% between 2012 and
2017, versus total deposition market growth of 5.0% during the same period (see
Figure 8 below).
Figure 8: PE CVD growth versus total deposition market
$mn
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
PE CVD Deposition PE CVD/deposition
24.0%
23.0%
22.0%
21.0%
20.0%
19.0%
18.0%
Source: Gartner data, Berenberg estimates
AMAT and LAM/Novellus are the biggest players in the PE CVD market, and we
do not expect ASMI’s market share to change significantly. However, it may still
benefit from the market’s growth in absolute revenue terms (see Figure 9).
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ASM International NV
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Figure 9: PE CVD market share
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Source: Gartner data
2008 2009 2010 2011 2012
AMAT ASMI Novellus /LAM
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Key catalysts
In our view, the following events could be catalysts for the stock.
5. ASMP share disposal: ASMI’s share price fell by 24% over the two months
following its divestment of 12% of ASMP in March 2013. Given the market
has very low expectations of further divestment in September; we believe the
share price will rise if ASMI does divest more.
In our opinion, ASMP was operated independently from the beginning, and
there is little synergistic or strategic reason for keeping ASMP shares, given
that its end-market exposure does not overlap with ASMI’s. Therefore ASMI
may dispose of more ASMP shares in the next two years, if not in September
2013.
6. Order intake recovery: As a semiconductor equipment vendor, ASMI’s order
level is cyclical and subject to the capex level of chip-makers. Signs of an order
recovery will ultimately lead to higher revenue and profitability, and will
therefore be positive for the share price.
In our opinion, ASMI will see an order recovery in the next 6 to 12 months. Its
front-end peers ASML, AMAT, KLA and TEL have all started to see order
intake growth from the beginning of 2013. Apart from the cycle-recoverydriven
order increase, ASMI’s ALD orders are likely to be fuelled by leading
foundries expanding their HKMG process-adoption rate in the next two years,
and tier two foundries may follow from 2014.
7. New Intel order for epitaxy product: ASMI’s epitaxy equipment previously
addressed the analog and power management markets, which are highly cyclical
and have a low growth rate (the analog market fell by 4.8% in 2012). In 2012,
ASMI released its Intrepid XP epitaxy model that targeted the logic segment.
We expect its share price to react positively if it wins market share in logic,
which would give it exposure to new opportunities, such as FinFET design.
AMAT dominates the global epitaxy market with an 89% market share. We
believe it is unlikely that ASMI will win significant share from AMAT
overnight, given that AMAT is well established with the big customers.
However, ASMI may gain some small orders as the secondary supplier to Intel,
with which it has a strong relationship.
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Valuation
ASMI’s valuation used to be dominated by its subsidiary, ASMP, with a negative
valuation assigned to the front-end business (see Figure 10). In March 2013, ASMI
reduced its holding in ASMP to 40%; ASMP now contributes 78% of ASMI’s
market capitalisation.
Figure 10: ASMI market cap versus ASMI’s ASMP shareholding
EUR bn
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
160%
140%
120%
100%
80%
60%
40%
20%
0%
Source: Bloomberg data
SOTP valuation
ASMI marcap
ASMP as % of ASMI marcap
Figure 11: Peer group valuation
Company Name PE EV/EBIT EV/Sales
FY 2013E FY 2014E FY2015E FY 2013E FY 2014E FY2015E FY 2013E FY 2014E FY2015E
NIKON CORP 14.12 13.42 12.25 9.83 8.28 8.53 0.82 0.80 0.87
APPLIED MATERIAL 23.30 13.18 11.92 17.43 10.77 4.87 2.35 1.92 0.91
ASML HOLDING NV 25.04 15.67 12.17 21.81 10.74 2.10 4.80 3.73 0.67
KLA-TENCOR CORP 16.94 13.21 11.26 9.43 7.59 2.97 2.46 2.21 0.95
LAM RESEARCH 20.99 11.64 10.15 14.73 8.28 2.90 1.74 1.44 0.58
ULVAC INC 0.00 10.21 7.36 25.28 12.27 15.08 0.82 0.75 1.04
DAINIPPON SCREEN 28.32 14.13 14.41 67.36 11.63 13.66 0.76 0.70 0.81
TOKYO ELECTRON 48.60 20.98 18.74 25.57 9.75 5.61 1.16 1.02 0.72
Mean 22.16 14.06 12.28 23.93 9.91 6.97 1.86 1.57 0.82
Median 22.14 13.32 12.04 19.62 10.25 5.24 1.45 1.23 0.84
Mean excl TEL 18.39 13.07 11.36
Median excl TEL 20.99 13.21 11.92
ASM INTL NV 27.03 14.02 13.19 50.89 10.49 13.21 3.13 1.91 1.52
Source: Bloomberg data
Our SOTP valuation of ASMI is based on the value of ASMI’s holding in ASMP
and the front-end business. Our valuation of ASMI’s share of ASMP reflects
ASMP’s listed price. We apply a 5% liquidation discount to ASMI’s shareholding in
ASMP. We value ASMI’s front-end business based on a P/E valuation of 14x 2014
adjusted EPS, excluding ASMP’s earning contribution.
ASMI currently holds 40% of ASMP, compared with 53% before March 2013. The
14x P/E is the mean P/E multiple of its peers for 2014 (see Figure 12) excluding
TEL. We excluded TEL from mean calculation because it trades at a premium
compared with its peers, due to its strong cash balance.
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Figure 12: SOTP valuation
ASMI SOTP valuation:
ASMI's ASMPT share
ASMI's holding 40%
ASMP's 40% marcap (Eur mn) 1,352
Valuation/ ASMI share (Eur ) 21
5% holding discount 20
ASMI Front end value
EPS 2014 ex ASMP contribution (Eur) 0.81
No. of shares (mn) 64
PE
14x
Front end valuation (€ mn) 730
Total valuation (Eur mn) 2,015
Price per share (Eur) 31
Source: Berenberg estimate, Bloomberg data
Worth more than $800m today
In 2008 June, AMAT and Francisco Partners offered to acquire ASMI’s front-end
business for $800m, of which $400m-500m was assigned to the ALD and PE
CVD segments. The price looked expensive due to a private equity buyout
valuation premium before the financial crisis. The offer was based on roughly 1.5x
total sales. The ALD and PE CVD segments contributed 47% of front-end
revenue at that time, according to Gartner data. The transaction was, however,
terminated because of the financial crisis.
In our opinion, ASMI is in a better position today than it was in 2008. We believe
it is currently worth more than $800m ($949m) (see Figure 13), while the ALD and
PE CVD businesses are worth more than $400m-500m.
Figure 13: Front-end business worth $800m today
Amount
Price offered in 2008 June $mn 800
Comment
Our valuation today €mn 730 Our SOTP valuation
@FX rate today €/$1.3 $mn 949 18% higher than $800mn
@FX rate 2008 June €/$1.6 $mn 1168 46% higher than $800mn
Source: Berenberg estimate, Bloomberg data
We believe ASMI is in a better position today than it was in 2008 for the following
reasons.
1) ASMI’s share of the ALD market has risen from 38% in 2008 to 44% today.
It is unlikely to lose market share in the future as its strong IP portfolio has
created a high entry barrier and TEL is not competing with ASMI in the same
end-market. The visibility of ALD’s growth potential is much higher today
than it was five years ago, because all mainstream logic/foundry players are
adopting HKMG solutions in their advanced chip manufacturing processes.
2) In 2014/2015, PE CVD growth will be fuelled by 3D NAND, which is a
growth driver that did not exist in 2008. PE CVD is expected to benefit from
3D NAND ramping up as the number of layers of the chip increase
significantly.
3) ASMI could gain logic customers through the epitaxy tool it released in 2012.
This would bring extra upside.
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Figure 14: ASMI is better positioned today
$mn 2008 2012 Change Market share change Comment
Deposition 252 309 23% Flat
Stayed at 5.2% deposition market
share.
PE CVD 82 44 -47% Down from 6% to 3% Lost share to LAM.
ALD 76 187 146% Up from 38% to 44%
Remain dominant, higher visibility
on market growth compared to
2008.
LP CVD 49 26 -46% Down from 5% to 3% Lost share to Hitachi
Epitaxy 45 53 17% Down from 18% to 10%
Market share down as ASMI only
focus on low growth analog and
power devices applications. It may
gain market share from AMAT with
new equipment launched which
targets logic players.
Source: Gartner data, Berenberg estimation
The market is concerned that the industry will not see memory capex expand at the
rate it did 2010. If this is correct, ASMI will lose some of its upside for PE CVD,
which is used in memory-makers. Our response, however, is that although the
memory market expanded in 2010 it has since pulled back, and PE CVD is not
ASMI’s main exposure. The focus should be on the ALD division, where it
generates the majority of its revenue.
As ASMI is in a better position today than it was in 2008, we believe the ALD and
PE CVD segment is now worth more than $400m-500m compared with 2008. In
our analysis below, the combined value of these two businesses is at least $575m
based on current FX rates. This value is 13% higher than the high end of the
AMAT and Francisco Partners offer, and is worth 41% more than the high-end of
that offer once the June 2008 FX rate is factored in.
Figure 15: ALD and PE CVD worth more today
Amount
Comment
Price offered in 2008 June $mn 400-500 for ALD, PECVD business
ALD, PECVD % of revenue in 2012 $mn 74% As per Gartner data
2013 group revenue €mn 398 Berenberg estimate
2013 ALD, PECVD revenue 2013 €mn 295 Assume 74% from ALD and PECVD
Value @1.5x sales €mn 442 In line with 2008 June valuation
@FX rate today €/$1.3 $mn 575 15% higher than top end $500mn offer
@FX rate 2008 June €/$1.6 $mn 707 41% higher than top end $500mn offer
Source: Berenberg estimation, Bloomberg for FX
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Key risks
1. Leading-edge related spending pause
The ALD tool is the main focus for ASMI, and its development was fuelled by
the industry’s adoption of the HKMG process. HKMG is essential for nodes
of 20nm and below, and the demand for this process will therefore plunge if
chip-makers suspend their investment in this most advanced chip technology.
Leading-edge chips are mainly used in consumer electronics. We do not expect
the market to slow down in the near future, as the intense level of competition
puts pressure on devices vendors to adopt such chips. However, spending may
not continue to be as high as today once emerging markets reach saturation in
2017/18 time frame.
2. Alternative technology
The ALD tool is preferred in leading-edge chip manufacturing because,
compared with CVD, it can accurately control the thickness of film layers.
However, we understand from our conversations with industry specialists that
CVD can achieve the same results as ALD if it is deposited slowly. The
growth potential for ASMI’s future top-line growth will, therefore, come
under pressure if chip-makers switch to a CVD-based process.
In our opinion, a process switch takes a long time to happen. Currently, the
HKMG process is mainly supported by ALD equipment, as CVD’s layer
uniformity is lagging behind ALD. We are therefore not concerned about it in
the next 12 to 18 months.
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ASM International NV
Small/Mid-Cap: Technology Hardware
Financials
ASMI has historically consolidated its ASMP results. However, following the
disposal of 12% of its ASMP shares on 15 March 2013, it has deconsolidated
these.
ASMI’s revenue model
We model ASMI’s revenue base on the front-end order intake trend.
Figure 16: Revenue model
Eur mn 2011 2012 2013E 2014E 2015E
Revenue 1,634 1,418 559 477 499
ASMI (front end) revenue 456 370 398 477 499
ASMP (back end) revenue 1,178 1,048 160 - -
Total New Orders 1,370 1,377 725 515 531
ASMI (front end) new orders 398 360 491 515 531
ASMI (front end) new orders yoy -2.2% -9.6% 36.3% 5.0% 3.0%
ASMP (back end) new orders 971 1,017 234 - -
Source: Berenberg estimates
We estimate that ASMI’s underlying revenue will reach €559m in 2013, €160m of
which will come from ASMP, and that the front-end operation’s revenue will grow
to €467m in 2014. This top-line growth will be driven by the rising demand for
ASMI’s equipment. With the increased adoption of HKMG in advanced chip
manufacturing processes and ASMI’s strong share of the ALD market, we expect
ALD equipment to increase its revenue contribution.
We also expect its epitaxy revenue to grow as it may receive Intel orders for its
new epitaxy tools. PE CVD is also contributing to revenue growth, but to a lesser
extent because ASMI’s share of the market is minor compared with AMAT’s and
LAM/Novellas’.
Revenue by customer/region
ASMI supplies equipment to the leading chip-makers in logic, foundry and
memory, primarily for their deposition processes. It generated more than 50% of
its revenue from its top three customers in 2012 (Intel, Samsung, TSMC we
believe), compared with 40% in 2011. This concentration of revenue is a result of
the concentration in capex spending and we expect it to last in the mid-term.
Figure 17: ASMI revenue breakdown by customer/region
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
2010 2011 2012
Top 3 customer No. 4-10 Rest
0%
2010 2011 2012
SE Asia EUROPE US Japan
Source: Company data
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ASM International NV
Small/Mid-Cap: Technology Hardware
Profit and loss – margin pick-up in 2013
Figure 18: Profit and loss
Eur mn 2011 2012 2013E 2014E 2015E
Revenue
ASMI (front end) 456 370 398 477 499
ASMP (back end) 1,178 1,048 160 - -
Total revenue 1,634 1,418 559 477 499
Gross profit
ASMI (front end) 172 124 151 191 204
ASMP (back end) 410 316 38
582 440 189 191 204
Gross margin
ASMI (front end) 37.8% 33.6% 37.9% 40.0% 41.0%
ASMP (back end) 34.8% 30.2% 24.0%
35.6% 31.1% 33.9% 40.0% 41.0%
R&D
ASMI (front end) 49 59 59 65 68
ASMP (back end) 81 91 17
129 149 76 65 68
SG&A
ASMI (front end) 61 65 62 65 68
ASMP (back end) 115 138 26
176 202 87 65 68
Operating profit
ASMI (front end) 63 1 30 61 68
ASMP (back end) 214 88 (4)
276 89 25 61 68
Operating margin
ASMI (front end) 13.7% 0.4% 7.5% 12.8% 13.7%
ASMP (back end) 18.1% 8.4% -2.7%
16.9% 6.3% 4.5% 12.8% 13.7%
Source: Berenberg estimates
We expect ASMI’s gross margin and operating margin to rise to the historical peak
level reached in the previous cycle. We estimate the company gross margin at 34%,
40% and 41% in 2013, 2014 and 2015 respectively. We forecast that the group
operating margin will be 5% in 2013, 13% in 2014 and 14% in 2015. We expect
R&D and SG&A expenses to increase between 2013 and 2015 but at a slower pace
than revenue growth.
Dividends policy and cash distribution
After a three-year dividend break between 2008 and 2010, ASMI distributed
consistently stable dividends from 2010 to 2012. In 2012, it announced it would
buy back 2m shares from shareholders. In addition to the dividend and the
repurchase programme, it is returning 65% of the ASMP divestment proceeds
(€4.25/share) to shareholders. In total, ASMI distributed €335m cash to investors
from 2011, which is equivalent to about 20% of its market capitalisation.
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ASM International NV
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Figure 18: ASMI dividends history
2010 2011 2012
Dividends/share* 0.4 0.5 0.5
Payout ratio 20.0% 14.7% 440.8%
* dividends over the year, and paid in subsequent year
Source: Company data
Source: Company data
Balance sheet and cash flow
At end-Q1 2013, it had €564m in cash and zero long-term debt. After the
proposed distribution of €274m to shareholders following the ASMP divestment,
we estimate ASMI will have a healthy balance sheet with €275m net cash.
We forecast ASMI will generate €104m and €82m free cash flow in 2014 and 2015
respectively, benefiting from the increase in profitability and the top line.
68

ASM International NV
Small/Mid-Cap: Technology Hardware
Company background
ASMI was founded by Arthur del Prado in 1968. It co-founded ASML with Philips
Electronics. It is a leading supplier of semiconductor equipment, materials and
process solutions for the wafer processing industry. It supplies equipment used for
ALD, PE ALD, PE CVD, low pressure (LP) CVD and oxidation/diffusion. It
currently holds 40% of shares in ASMP. ASMP is world’s largest assembly and
packaging supplier for the semiconductor and LED industries, and is a leading
supplier of stamped and etched lead frames.
Figure 19: Product portfolio
Technology
ALD
LP CVD
PECVD
Products
EmerALD XP ALD
Pulsar XP ALD
Eagle XP8 ALD
Advance Vertical Furnace A412
Advance Vertical Furnace A400
Dragon XP8
Epitaxy Epsilon 2000
Epsilon 3200
Intrepid XP Epitaxy
Source: Company data
Holding in ASMP
ASMP was founded in 1975 as the Asian marketing arm of ASMI. It has been
operating independently since incorporation. ASMP was formally listed on the
Hong Kong Stock Exchange in 1989, and ASMI, as the parent company held 53%
of ASMP’s shares before Mar 2013.
At its AGM in May 2012, ASMI announced that it had appointed Morgan Stanley
and HSBC to carry out a study into why the market had failed to recognise the
market value of the company’s combined business (front end and back end).
Subsequently, ASMI has analysed alternative solutions for crystallising the frontend
business value, including a larger or full secondary placement of ASMP shares,
a spin-off of ASMP, a sale of its ASMP stake, the sale of its front end, ASMP
integration and a 100% ASMP acquisition. Due to concerns about pricing and tax
efficiency, the company concluded that a partial secondary placement of 8% to
12% of ASMP shares was the most suitable way to address the lack of recognition
of ASMI’s combined business value.
In March 2013, ASMI disposed of a 12% of stake in ASMP, and the company
intends to distribute approximately 65% of the proceeds from disposal. The lockup
period will expire in September 2013.
ASMI shareholder structure
ASMI has approximate 64m outstanding ordinary shares, listed at both NYSE
Euronext Amsterdam and at NASDAQ in New York. The free float percentage is
74%. The shareholder structure at the end of 2012 is shown below.
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ASM International NV
Small/Mid-Cap: Technology Hardware
Figure 20: Holding structure as at end-2012
Arthur del Prado
18%
Aberdeen
67%
10%
5%
Capital Group
companies
Others
Source: Company data
Management
Chuck del Prado, the son of Arthur del Prado, became ASMI’s CEO in 2008.
Between 1989 and 1996, Chuck Del Prado held several marketing and sales
positions at IBM Nederland NV. From 1996 to 2001, he worked in various
manufacturing and sales management positions at ASML in Taiwan and the
Netherlands. He was appointed director of marketing, sales and service of ASM
Europe in March 2001. From 2003 to 2007, he was president and general manager
of ASM America. From 1 January 2008 to 29 February 2008, he acted as executive
vice president front-end operations at ASM America.
Peter AM Van Bommel became CFO on 1 September 2010. Mr Van Bommel
joined Philips in 1979. From the mid-1990s until 2005 he acted as CFO of several
business units of the Philips group. Between 2006 and 2008 he was CFO at NXP,
formerly Philips Semiconductors. He was CFO of Odersun AG, a manufacturer of
thin-film solar cells and modules until 31 August 2010. In April 2012, Mr Van
Bommel was appointed a member of the supervisory board and a member of the
Audit Committee of the Royal KPN NV.
70

ASM International NV
Small/Mid-Cap: Technology Hardware
Financials
Profit and loss account
Year-end December (EUR m) 2011 2012 2013E 2014E 2015E
Sales 1,634.4 1,418.0 558.6 477.5 498.7
Cost of sales 1,052.3 977.6 369.3 286.5 294.3
Gross profit 582.1 440.4 189.3 191.0 204.5
Selling, General and Administrative Expense 176.4 202.0 87.4 65.0 68.0
Research and development 129.4 149.2 76.3 65.0 68.0
Other operating expenses 0.0 0.0 0.0 0.0 0.0
Amortisation of intangible assets 0.0 0.0 0.0 0.0 0.0
Restructuring expenses -89.8 0.9 0.0 0.0 0.0
EBIT 366.1 88.3 25.3 61.0 68.5
Net interest expenses 15.0 14.6 0.7 0.0 0.0
Other financial result 1.8 -6.9 3.9 0.0 0.0
Extraordinary income/loss 0.0 0.0 1,409.8 0.0 0.0
EBT 353.0 66.7 1,438.3 61.0 68.5
Taxes 36.7 26.3 6.5 9.1 10.3
Net income from continuing operations 316.3 40.4 1,431.8 51.8 58.2
Income from discontinued operations (net of tax) - - - - -
Net income 316.3 40.4 1,431.8 51.8 58.2
Minority interest 129.4 33.3 -2.7 0.0 0.0
Share of profit of associates 56.9 24.6 34.0 72.9 75.3
Net income (net of minority interest) 186.9 7.2 1,470.0 124.7 133.5
Source: Company data, Berenberg estimates
71

ASM International NV
Small/Mid-Cap: Technology Hardware
Balance sheet
Year-end December (EUR m) 2011 2012 2013E 2014E 2015E
Intangible assets 52.1 51.9 11.5 11.5 11.5
Property, plant and equipment 260.2 275.4 39.0 10.3 -18.4
Other assets 74.1 56.1 1,423.2 1,508.9 1,597.4
Fixed Assets 386.4 383.5 1,473.7 1,530.8 1,590.6
Liquid assets 390.3 290.5 255.6 367.6 480.3
Accounts receivable 330.9 304.8 89.0 76.1 79.5
Inventories 376.7 403.4 116.6 90.4 92.9
Other current assets 82.7 80.0 6.3 5.4 5.6
Deferred taxes 14.4 18.0 5.3 5.3 5.3
Current income tax assets 0.9 0.9 0.5 0.5 0.5
Current Assets 1,195.8 1,097.6 473.3 545.2 664.0
TOTAL 1,582.2 1,481.0 1,947.0 2,076.0 2,254.6
Shareholders' equity 659.8 738.4 1,851.9 1,997.7 2,173.6
Minority interest 297.9 308.1 0.0 0.0 0.0
Long-term debt 15.3 12.6 0.0 0.0 0.0
Subordinated capital 135.1 0.0 0.0 0.0 0.0
Provisions 6.8 5.3 0.0 0.0 0.0
Deferred taxes 0.9 1.0 0.0 0.0 0.0
Pensions provisions 9.9 -6.0 3.4 3.4 3.4
Other liabilities 0.0 0.0 0.4 0.9 1.3
Non-current liabilities 659.8 738.4 1,851.9 1,997.7 2,173.6
Short-term debt 40.7 61.7 0.0 0.0 0.0
Accounts payable 157.5 151.8 62.2 48.2 49.5
Other accruals 152.9 170.7 22.9 19.6 20.4
Advance payments 42.7 0.0 0.0 0.0 0.0
Deferred income 0.0 0.0 0.0 0.0 0.0
Other liabilities 54.9 27.7 2.8 2.8 2.8
Current portion of long term debt 4.3 6.3 0.0 0.0 0.0
Current liabilities 456.5 421.6 91.4 74.1 76.3
TOTAL 1,582.2 1,481.0 1,947.0 2,076.0 2,254.6
Source: Company data, Berenberg estimates
72

ASM International NV
Small/Mid-Cap: Technology Hardware
Cash flow statement
EUR m 2011 2012 2013E 2014E 2015E
Net profit/loss 316.2 38.8 1,431.8 51.8 58.2
Depreciation and Amortisation 47.0 55.6 53.3 53.3 53.3
Other operating cash flows -78.9 33.7 -1,408.9 0.5 0.5
Change in working capital -67.6 -85.5 -60.2 22.7 -5.7
Cash flow from operating activities 216.7 42.5 15.9 128.3 106.2
Capex -85.4 -67.6 -24.6 -24.6 -24.6
Investment in Intangible assets -7.1 -4.6 -0.2 0.0 0.0
Payments for acquisitions -1.0 0.0 299.8 0.0 0.0
Income from asset disposals 0.0 0.3 0.0 0.0 0.0
Cash flow from investing activities -93.4 -71.9 275.0 -24.6 -24.6
Inflows resulting from the issue of shares 4.12 2.21 0.99 0.00 0.00
Purchase of own shares 0.0 -44.1 -1.1 0.0 0.0
Dividends paid -22.3 -27.5 -305.6 0.0 0.0
Other financing cash flows -37.1 -4.1 -21.9 8.2 31.0
Cash flow from financing activities -55.3 -73.5 -327.6 8.2 31.0
Effects of exchange rate changes on cash -18.1 3.1 1.5 0.0 0.0
Increase/decrease in liquid assets 49.9 -99.8 -35.2 111.9 112.7
Liquid assets at end of period 390.6 290.8 255.6 367.6 480.3
Source: Company data, Berenberg estimates
73

Suess Microtec AG
Small/Mid-Cap: Technology Hardware
Small, but active in growing markets
• We initiate on Suess Microtec (SUSS) with a Buy
recommendation and a price target of €9.4. SUSS supplies
equipment used for chip packaging, photomask cleaning, and 3D
integration, which will drive smaller chip sizes once shrinkage stops.
Our Buy rating is based on the following: 1) the lithography segment’s
strong performance (69% of SUSS’s revenue, and 100% of its profit),
which is sufficient to drive group revenue growth; 2) Tamarack
Scientific’s (acquired in 2012) margin may gradually converge to an
average lithography margin of 20%; 3) bonder segment revenue is
likely to triple in 2016/2017 once 3D bonder starts to ship in volume,
driven by chip-makers expanding their 3D packaging capacity; and 4)
the option value of more frequent cleaning for EUV photomasks as
the move to EUV is made – the photomask segment’s revenue could
double from the current €20m-40m level in 2015/2016.
• Key debates: 1) How will the company’s “bread-and-butter”
lithography segment perform in the future? 2) When will 3D bonding
tools show significant growth? 3) Could SUSS become an acquisition
target given its 3D bonding speciality?
1. We expect the lithography segment to grow at 22% in 2014 and
24% in 2015. With Tamarack’s contribution, semiconductor cycle
recovery momentum and its high-growth end-market exposure,
lithography is expected to contribute 100% of group revenue
growth and 95% of group profit growth in 2015. It can therefore
drive group growth even in the absence of a significant
improvement in the other segments.
2. 3D bonder volume shipments may not start before 2016/17, and
some chip-makers may start building pilot lines in 2014/15; our
bull-case assumption gives 9% and 8% revenue upside to our
current group revenue estimates in 2014 and 2015 respectively.
3. We think that an acquisition of SUSS’s 3D bonding business is
unlikely given that: a) AMAT has used EV Group since 2009,
and b) TEL may not have any further acquisition plans in the
near term after acquiring Oerlikon and FSI in 2012.
• Our EPS forecasts are 8% and 11% above consensus for 2014 and
2015. We believe that the lithography segment will be able to drive
total revenue and profit growth even without a material improvement
from the bonder and photomask divisions. We estimate the
lithography operating margin will slowly normalise to 20% after
Tamarack’s integration.
• Our €9.4 price target is based on 14x P/E on 2014 adjusted EPS of
€0.67. The 14x P/E is at the mid of the historical 11-18x multiple
applied in the middle of the order recovery cycle.
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
Sales 175 164 153 188 215
EBIT 19 12 -8 19 29
Net profit 15 8 -8 13 20
Y/E net debt (net cash) -46 -26 -5 -7 -21
EPS (reported) 0.77 0.49 -0.40 0.67 1.04
EPS (Proforma) 0.77 0.41 -0.04 0.67 1.04
CPS 2.43 1.34 0.26 0.38 1.09
DPS 0.00 0.00 0.00 0.00 0.00
Gross margin 37.8% 35.0% 30.0% 36.5% 38.8%
EBIT margin 10.6% 7.2% -5.5% 9.9% 13.7%
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0%
ROCE 12.9% 7.5% -6.0% 9.6% 13.1%
EV/sales 0.6 0.7 0.9 0.7 0.6
EV/EBIT 5.4 10.4 -17.0 7.5 4.3
P/E 10.0 15.8 -19.3 11.4 7.4
Source: Company data, Berenberg
Buy (initiation)
Rating system
Current price
EUR 7.65
Absolute
Price target
EUR 9.40
19/07/2013 XETRA Close
Market cap EUR 147 m
Reuters SMHNn.DE
Bloomberg SMHN GY
Share data
Shares outstanding (m) 19
Enterprise value (EUR m) 142
Daily trading volume 73,041
Performance data
High 52 weeks (EUR) 10
Low 52 weeks (EUR) 7
Relative performance to SXXP TecDAX
1 month -7.1 % -8.4 %
3 months -12.2 % -13.7 %
12 months -35.3 % -39.9 %
Key data
Price/book value 1.2
Net gearing 0.0%
CAGR sales 2012-2015 9.5%
CAGR EPS 2012-2015 28.8%
Business activities:
Suess is a leading supplier of equipment and
process solutions for the semiconductor and
LED industry.
22 July 2013
Tammy Qiu
Analyst
+44 20 3207 2673
tammy.qiu@berenberg.com
Jean Beaubois
Specialist Sales
+44 20 3207 7835
jean.beaubois@berenberg.com
74

Suess Microtec AG
Small/Mid-Cap: Technology Hardware
Investment summary
Our investment thesis on Buy-rated SUSS is predicated on four points.
• Lithography can drive growth on its own, even without any contribution
from the bonder and photomask divisions: We estimate group revenue and
profit will grow at 14% and 58% respectively in 2015, with the lithography
segment contributing 100% of group revenue growth and 83% of profit growth
in 2015.
The lithography segment is likely to show an organic growth rate similar to
historical recovery cycle growth of ~15% in 2014 and 2015, and generate a
~20% peak cycle margin. Tamarack’s contribution may triple to €30m by 2015,
as SUSS is aiming to gain half of the back-end lithography market (a $60mn
market). Along with Tamarack’s contribution, growth momentum from the
semiconductor recovery cycle and strong growth in end-markets such as
MEMS, we expect lithography to drive group revenue and profit growth on its
own, without the company having to rely on significant improvements in other
segments.
• 3D bonder revenue may triple in 2016/17: Industry experts believe 3D
integration could be one way to extend Moore’s law (ie that the number of
components on integrated circuits doubles approximately every two years) once
the physical shrinkage limit for chips is reached at ~5nm/3nm. Market
researcher Yole Development expects the market to grow from $150m today to
$500m-1bn in the next few years. In our opinion, even though we are not likely
to see large order intakes before 2015/2016, the segment’s revenue could triple
once volumes ramp up in 2016/2017. Our bull-case scenario for SUSS (seven
tool shipments for 2014 and 2015 versus two tools by our estimates) suggests
9% and 8% revenue upside and 42% and 18% operating profit upside for 2014
and 2015 respectively compared to our current forecasts.
• EUV photomask cleaning provides potential upside: SUSS holds a 100%
share of the EUV photomask-cleaning tool market and an 80% share of the
argon fluoride immersion (ArFi) photomask-cleaning tool market (combined
market size: €50m-60m). We may see significant revenue upside in this segment
once EUV volume shipments start in 2016, as EUV photomasks are likely to
require more frequent cleaning than conventional photomasks as their structure
is much more complex.
• Valuation – at the middle of the range of historical multiples: Our price
target of €9.4 is based on 14x P/E on 2014 adjusted EPS of €0.67, which is
towards the middle of the historical 11-18x multiple range applied in the middle
of the order recovery cycle.
Figure 1: Valuation matrix
ROE*
Dividend
yield*
FCF yield* Net cash/marcap
No.1 ASML 19.7% AMAT 2.5% AMAT 9.7% TEL 26.5%
No.2 AMAT 17.1% TEL 1.5% ASMI 6.2% SUSS 17.6%
No.3 SUSS 9.1% ASML 0.9% ASML 4.4% AMAT 16.7%
No.4 TEL 6.3% ASMI - TEL 4.3% ASMI 8.9%
No.5 ASMI 6.2% SUSS - SUSS 1.6% ASML 6.5%
*based on Berenberg estimates of 2014 performance. Net cash based on 2012 YE balance
Source: Berenberg estimates, company data
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Suess Microtec AG
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Based on our 2014 estimates, SUSS’s ROE is lower than ASML’s and AMAT’s. Its
FCF yield is lower than the front-end equipment vendors’, as we expect it will
supply more 3D bonder demonstration tools to potential customers in 2014/2015,
which is negative for operating cash flow.
Key catalysts
The key catalysts to drive the share price include the following.
1) Further 3D bonder orders received from mainstream chip-makers:
Samsung may release a showcase chip in 2014 that could be a trigger for other
chip-makers to start placing orders. The other mainstream chip-makers may
also build pilot lines if Samsung’s chip gains traction in the market.
2) EUV photomasks require more frequent cleaning than conventional
photomasks: EUV photomasks have a more complicated structure compared
to conventional photomasks, and they may therefore need to be cleaned more
frequently. We believe more data points will become available once EUV
ramps up in 2014/2015.
3) Order recovery: The front-end semiconductor equipment vendors have all
reported/guided improved order levels in recent quarters compared to 2012
levels. As a back-end player, SUSS is likely to see order improvement in the
coming quarters.
Key risks
The key risks include the following.
1) The timeframe for 3D bonder adoption remains uncertain and the
division is currently loss-making: In our opinion, the 3D bonder division is
not likely to receive orders in volume until 2015/16 and will remain lossmaking
in 2014 and 2015.
2) The photomask division has a lower operating margin than the
lithography division (5% versus 21% in 2012) and dilutes the group
operating margin: If EUV photomasks do not require more frequent
cleaning than conventional photomasks, the division is likely to remain
margin-dilutive.
76

Suess Microtec AG
Small/Mid-Cap: Technology Hardware
Small, but active in growing markets
SUSS is heavily exposed to various growing end-markets, including MEMS, 3D
integration and EUV lithography equipment. It supplies equipment used by
packaging/assembling companies, MEMS manufacturers, integrated device
manufacturers (IDMs) and lithography photomask shops. It has optimised its endmarket
exposure through various acquisitions and disposals over the past few years.
3D bonding – revenue may triple in 2016/2017
The hottest topic in the semiconductor industry today is how to deliver smaller
chips with less power consumption, better performance and more functionality.
Shrinking the size of chips used to be the only solution adopted by chip-makers. As
current chip design is likely to approach its physical limits at 7nm/5nm, 3D
integration is viewed as the most feasible way to continue delivering smaller chips.
Yole Development expects the bonding market to grow from $150m today to
$500m-1bn once volume adoption starts – therefore SUSS’s bonder revenue may
triple from €30m to €100m in 2016/17.
Stacking, which can be done at the die or wafer level, is one of the key primary
technologies that enables 3D integration. It works by vertically stacking individual
chip components and interconnecting them by means of TSV (through-silicon via)
(see Figure 2 below). Shorter signal paths, reduced power consumption, enhanced
bandwidths and smaller surface areas can be achieved by stacking dies or wafers on
top of each other.
Figure 2: 3D stacking and TSV
Source:www.nist.gov
Source: electronicsbus.com
SUSS has received two orders from a leading IDM (Samsung we believe) for 3D
bonders to build its 3D pilot line. If Samsung releases a sample chip next year, the
remaining chip-makers are very likely to follow suit. Due to the high level of
competition, chip-makers will want to remain diversified and become involved in
all possible mainstream chip designs.
3D integration has yet to be adopted by mainstream chip-makers as the main focus
currently is on shrinking chip size and the performance/power consumption gain
from 3D integration is less than that from chip shrinking/FinFET. We believe the
mainstream chip-makers are likely to start working on 3D pilot lines while
continuing to shrink chips. In our model, we have included one shipment each for
2014 and 2015. Our bull-case scenario assumes all mainstream IDMs, memory and
packaging houses will start building their pilot lines in 2014/2015. Excluding the
chip-makers already working with EV Group (Intel and Micron, we believe), the
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Suess Microtec AG
Small/Mid-Cap: Technology Hardware
demand could amount to around seven new tools for 2014 and 2015 (one each for
the top three packaging houses ASE, Amkor and SPIL, one for IBM, one for
Toshiba/Sandisk, one for Hynix and one for TSMC), which is five more than our
current estimate for 2014 and 2015 combined. The maximum revenue upside is 9%
and 8% for 2014 and 2015 respectively, and operating profit upside is 42% and
18% respectively, as the bonder segment is likely to reach break even.
The bonder division has been loss-making in the past, and has wiped out half of
the group’s operating profit for the past three years. The company has indicated
that revenue of €30m-40m is required to break even. In our forecast, we expect the
division’s revenue to reach €29m by 2015, and the operating loss will narrow
significantly from €12m in 2012 to €5.4m, driven by higher revenue levels and
future cost savings from improved efficiency (€2m-€3m/year).
SUSS supplies wafer bonders, coater/developers, mask aligners and exposure
equipment used in the 3D integration process. It shares the market with EV Group
and has a leading market share in the temporary bonders market. If 3D bonding
gains traction with other IDMs over the next two years, and becomes one of the
mainstream solutions in 2016/2017, we may see the risk of other big front-end
players such as AMAT and TEL joining the market.
EUV photomask cleaning – potential upside
EUV equipment is currently viewed as the only credible path for shrinking chip
size without significantly increasing the cost. Currently, the mainstream chipmakers
use ArFi tools for manufacturing leading-edge chips. We expect EUV tools
to be shipped in volume in 2015/2016, with annual shipments of 24 and 50
respectively (see Figure 3 below).
Figure 3: EUV shipment ramp-up
Unit mn
250
Shipment by Technology
200
150
100
50
0
2011 2012 2013E 2014E 2015E 2016E
I-Line KrF ArF Dry ArF Immersion EUV
Source: Company data, Berenberg estimates
Currently, photomasks are cleaned after 5,000 lithography exposures, but it is
unclear how regularly EUV photomasks should be cleaned. In our opinion, the
photomask division will at least maintain its current €20m-40m run-rate for the
foreseeable future, although a more frequent cleaning requirement – if decided –
would provide further upside.
SUSS holds a 100% share of the EUV photomask cleaning equipment market. The
market size is relatively small (currently €50m-60m), hence the big equipment
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players such as TEL and AMAT do not focus on this area – although we would
expect them to join the market if it expands significantly.
MEMS – smartphone- and tablet-driven
The MEMS market provides 30% of SUSS’s revenue: As per Gartner data, the
non optical sensor market grew by 14% in 2012, mainly driven by smartphone and
tablets. MEMS sensors included in smartphones and tablets include accelerometers,
gyroscopes, e-compasses, three-axis magnetometers and pressure sensors. Apple
and Samsung were the biggest buyers of MEMS motion sensors in 2012, and we
expect to see more and more tier two vendors such as Sony, ZTE and even China
whitebox vendors (like xiaomi) incorporating MEMS sensors into their devices. As
per iSuppli research, China-based handset and tablet-makers doubled their
purchasing of MEMS motion sensors in 2012.
Not only are more vendors installing MEMS into their devices, the number
of MEMS sensors in smart devices is also growing. Apple pioneered the use of
MEMS sensors (accelerometers, light sensors) in the iPhone2. In Samsung’s new
flagship model Galaxy S4 released in 2013, there is a wealth of different sensors
including the accelerometer as well as pressure, RGB light, geomagnetic, proximity,
gyroscope, barometer, gesture temperature and humidity sensors. Today, smart
devices contains up to nine sensors, and we believe this number will grow as
vendors incorporate more sensors in their products to deliver a better user
experience and new functionality.
In the next few years, we expect the total MEMS industry is forecast to grow at
c12%, mainly driven by the demand from smartphone and tablets (see Figure 4
below).
Figure 4: MEMS end-markets by application
$mn
10,000
9,000
8,000
7,000
24.0%
6,000
5,000
4,000
20.2% 3,000
2,000
1,000
0
2011 2012 2013E 2014E 2015E 2016E 2017E
Mobile phones Tablet Consumer Automotive Industrial Military Wired Storage Computer
Source: Gartner data, Berenberg Estimation
SUSS’s exposure, coating and bonding equipment are essential in MEMS
manufacturing. It shares the market with TEL and EV Group; we do not expect
any significant changes in market share structure in the near future. TEL holds a
dominant market share in coaters/developers (photoresist processing), and its main
focus is on supplying equipment used in the front-end semiconductor fabrication
process rather than the MEMS market. SUSS currently supplies equipment used in
MEMS manufacturing to more than 100 customers, and generates about 30% of its
revenue from the MEMS market. We expect that its high level of diversification
and technology leadership will enable it to benefit from the MEMS market growth.
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Key catalysts
In our view, the following events could be the catalysts for the stock price.
1. 3D bonder orders from other mainstream chip-makers: SUSS’s share
price increased by 10% on 28 March 2013 on the news that it had received a
bonder order from a leading IDM (Samsung, we think). This demonstrates
that 3D bonding designs are being recognised by mainstream chip-makers.
If SUSS received further orders from other mainstream chip-makers and
packaging houses, its share price would likely react positively.
We believe Samsung may be planning to release sample chips using a 3D
stacking design in 2014 following the recent bonder order. We believe it
could be a trigger for other chip-makers to start building R&D/pilot lines
based on 3D bonding solutions. Given the intensified competition among
chip-makers today, they will not want to lag behind their competitors in any
area. SUSS may therefore see an increase in 3D bonder orders as early as
the second half of 2014, which would benefit its share price.
2. More frequent EUV photomask cleaning: EUV masks require
sophisticated cleaning tools due to their complex structure. SUSS has a
100% share of the EUV photomask cleaning market. Conventional
photomasks need to be cleaned every 5,000 exposures; however, it is unclear
how regularly EUV photomasks need to be cleaned. Should it be decided
that EUV photomasks need to be cleaned more regularly, there will be a
surge in demand for cleaning tools and SUSS will be the main beneficiary.
In our opinion, visibility on the cleaning tools required for EUV
photomasks is currently low. The growth of the photomask segment will at
least be maintained in line with today’s rate, and we can only see upside
revenue potential. We are expecting further datapoints after the EUV rampup
from mid-2014.
3. Order recovery: SUSS generates 69% of its revenue from the lithography
segment. Any sign of an order recovery will be positive for its share price.
The higher the order intake, the higher the revenue growth and operating
margin improvement due to increased utilisation rates.
In our opinion, front-end equipment vendors such as ASML, AMAT, LAM
and KLA have all reported improved order levels in recent quarters
compared to end-2012. SUSS focuses on the back end of the
semiconductor fabrication process, so it is likely to see an order recovery
from end-2013. We believe the company may start to see order increases in
the coming quarters, therefore, as the back-end players may start to place
orders as soon as they see signs of a front-end recovery.
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Valuation
Our €9.0 price target is based a P/E of 14x on 2014 adjusted EPS of €0.67/share.
The P/E of 14x was based on its historical multiple.
Historically, SUSS has traded at 9x to 20x forward P/E during a semiconductor
industry recovery cycle (end-2009 to 2011). We believe the industry entered a
recovery cycle from the beginning of 2013, marked by front-end players registering
a pick-up in orders. SUSS, as a back-end player, would expect to see its own
recovery start after a three- to six-month delay. It was trading at an 11x to 18x
multiple between December 2010 and March 2011, which was 12 months after the
front-end players began their recovery cycle.
We have taken the mid-point (14x) of the historical multiple (11x-18x).
Figure 5: Peer group valuation
Company Name PE EV/EBIT EV/Sales
FY 2013E FY 2014E FY2015E FY 2013E FY 2014E FY2015E FY 2013E FY 2014E FY2015E
NIKON CORP 14.12 13.42 12.25 9.83 8.28 8.53 0.82 0.80 0.87
APPLIED MATERIAL 23.30 13.18 11.92 17.43 10.77 4.87 2.35 1.92 0.91
ASML HOLDING NV 25.04 15.67 12.17 21.81 10.74 2.10 4.80 3.73 0.67
ASM INTL NV 27.03 14.02 13.19 50.89 10.49 13.21 3.13 1.91 1.52
KLA-TENCOR CORP 16.94 13.21 11.26 9.43 7.59 2.97 2.46 2.21 0.95
LAM RESEARCH 20.99 11.64 10.15 14.73 8.28 2.90 1.74 1.44 0.58
ULVAC INC na 10.21 7.36 25.28 12.27 15.08 0.82 0.75 1.04
DAINIPPON SCREEN 28.32 14.13 14.41 67.36 11.63 13.66 0.76 0.70 0.81
TOKYO ELECTRON 48.60 20.98 18.74 25.57 9.75 5.61 1.16 1.02 0.72
Mean incl TEL&Nikon 22.70 14.05 12.38 26.93 9.98 7.66 2.01 1.61 0.90
Median incl TEL&Nikon 23.30 13.42 12.17 21.81 10.49 5.61 1.74 1.44 0.87
Back end players
ASM PACIFIC TECH 28.35 16.78 15.32 24.57 14.64 4.10 2.91 2.41 0.73
SUSS MICROTEC nm 12.29 7.85 nm 4.67 6.47 0.80 0.67 0.76
ULTRATECH INC* 33.99 17.78 na 18.67 19.10 na 3.21 2.49 na
Mean Back end companies 20.78 15.62 7.72 14.42 12.80 3.52 2.31 1.86 0.50
Median Back end companies 28.35 16.78 7.85 18.67 14.64 4.10 2.91 2.41 0.73
*Ultratech Inc 2015 consensus is not available
Source: Bloomberg data
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Key risks
1. Timing of 3D bonding adoption: The substrate bonder division has a -50%
operating margin, and made a €12m loss in 2012 (group operating profit:
€10m). It has never been profit-making in the past. The substrate bonder
division is likely to keep making a loss until it begins volume shipments.
In our opinion, 3D bonding has a bright future once the industry reaches the
physical lithography shrinkage limit. However, the timeframe for volume
adoption is unclear. Management has indicated that the division requires a
revenue run-rate of €30m-40m/year to reach breakeven. The extra €7m-17m
revenue will require SUSS to ship 1-3 more tools more each year compared to
2012, which may be a challenge in the short term, in our opinion.
2. The photomask division dilutes group operating profit: SUSS’s photomask
revenue may remain at the €20m-40m level if it turns out that EUV photomasks
do not require a more regular cleaning process. The segment is profit-dilutive as
its operating margin is lower than the lithography division’s (5% versus 21% in
2012). It accounted for 10% of total group operating profit in 2012.
We believe the photomask division will remain profit-dilutive at the operational
level as it has a lower operating margin compared to the lithography segment. If
further data point shows that EUV photomasks need to be cleaned more
regularly than conventional photomasks, SUSS may enjoy a period of high
growth before other equipment vendors join the market. However, we are not
expecting to see any significant growth in this segment until mid-2014, which is
when we believe EUV will ramp up.
3. Margin pressure: The main profit generator for SUSS has always been the
lithography segment, which generated 100% of group operating profit in 2010,
2011 and 2012. The profitability level is highly cyclical and highly dependent on
the top-line level. The operating margin for the division was 20% for Q4 2011,
and 2% in Q1 2013.
The Tamarack acquisition is margin-dilutive as well, as it has a low level of
profitability compared with the lithography segment.
In our opinion, the profitability of the lithography division is likely to improve
in the coming quarters as the top line recovers from the 2012 trough. Tamarack
is only likely to account for a small part of lithography revenue in the next two
years – 10% in 2014, 14% in 2015 – hence the margin dilution is not likely to be
significant. We expect Tamarack to slowly converge to the average lithography
operating profit level starting from 2015, as integration completes.
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Financial
Profit and loss account
We model SUSS’s revenue based on the order intake trend. The lithography
segment has a shorter lead time compared to substrate bonder and photo mask
equipment, thus the order trend in the lithography segment is likely to be reflected
in the top line earlier than the other two segments.
Figure 6: Revenue forecast
2011 2012 2013E 2014E 2015E
Revenues (Eur millions)
Lithography 111.5 113.2 96.9 118.0 145.9
Substrate Bonder 20.5 23.1 24.2 28.5 29.2
Photo mask equipment 36.3 22.9 26.4 36.0 34.2
Other 7.1 4.8 5.4 6.0 6.0
Total 175.4 164.0 152.9 188.5 215.3
Percent of total
Lithography 64% 69% 63% 63% 68%
Substrate Bonder 12% 14% 16% 15% 14%
Photo mask equipment 0% 14% 17% 19% 16%
Other 0% 3% 4% 3% 3%
Total 75% 100% 100% 100% 100%
year-over-year % change
Lithography 25% 2% -14% 22% 24%
Substrate Bonder -17% 13% 5% 18% 3%
Photo mask equipment 97% -37% 15% 36% -5%
Other 1% -32% 12% 11% 0%
Total 26% -6% -7% 23% 14%
Source: Company data, Berenberg estimates
Lithography: SUSS mainly focuses on the mid-/back end of the semiconductor
fabrication process, and so is affected by the semiconductor cycle with a three- to
six-month delay compared to front-end-focused semiconductor equipment players
like ASML, AMAT and KLA. The front-end players have seen an order recovery
from Q1 2013; we therefore expect SUSS’s order intake to rebound from Q2.
We expect total order intake to grow to €163m in 2013. Revenue is likely to
decrease in 2013 due to the low order intake towards the end of 2012 and weak Q1
revenue. We estimate that revenue will rebound in 2014 following the order
recovery.
Substrate bonder: After receiving the temporary bonder order from a leading
IDM (Samsung, we think), management indicated that no further orders were
expected from the same buyer or from its peers in the short term. We estimate that
order intake and revenue levels will remain flat at the €20m-30m level for the time
being, but will start to grow at high speed once other leading IDMs/foundries start
to adopt 3D bonding as part of their chip-manufacturing process.
Photomask equipment: We estimate photomask equipment revenue will remain
flattish (€20m-40m) further data proves that EUV photomask requires more
regular cleaning. As per ASML’s EUV roadmap, the first batch of EUV tools will
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be dispatched from mid-2014, and we may have better visibility on the division’s
revenue potential closer to that date.
Revenue by region
SUSS’s customers include large packaging companies, semiconductor IDMs, LED
manufacturers and mask shops. The company generates the majority of its revenue
from Taiwan, where many of the packaging companies are based. The share of
revenue from Europe increased in 2012 due to the MEMS-related manufacturing
equipment demand.
Figure 7: Revenue breakdown by region
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2010 2011 2012
Europe North America Japan Rest of Asia
Source: Company data
Profit margin
SUSS’s profitability depends on its product mix and factory utilisation. Among
different product categories, lithography has the highest margin, followed by
photomask equipment; substrate bonder is currently loss-making and management
is not expecting it to be profitable in 2013.
We estimate the gross margin will decrease from 35% to 30.3% in 2013 due to a
lower revenue base, and a product mix shift towards substrate bonders, which are
lower-margin. We expect the gross margin to improve in 2014 and 2015 due to an
increased top line and improved factory utilisation.
We estimate the company to reach breakeven at the operating margin level
(excluding one-off write offs from the bonder segment) in 2013, and then gradually
returning to 2011 profitability levels. The increasing level of profitability is believed
to be driven by a higher gross margin, improved profitability of the substrate
bonder segment, and a cost saving resulting from the corporate structure
optimisation.
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Figure 8: Profit and loss
2011 2012 2013E 2014E 2015E
Revenues 175.4 163.8 152.9 188.5 215.3
YOY 26.1% -6.6% -6.7% 23.3% 14.2%
Cost of goods sold 109.1 106.4 107.0 119.6 131.8
Gross profit 66.4 57.4 45.9 68.8 83.5
% of revenues 37.8% 35.0% 30.0% 36.5% 38.8%
Research & development 12.9 9.7 9.6 10.3 10.8
% of revenues 7% 6% 6% 5% 5%
SG&A 35.8 37.6 37.8 41.0 44.5
% of revenues 20% 23% 25% 22% 21%
Operating Income 18.6 11.7 -8.4 18.6 29.4
% of revenues 10.6% 7.2% -5.5% 9.9% 13.7%
Operating income (ADJ) 18.6 10.3 -1.6 18.6 29.4
% of revenues 10.6% 6.3% -1.0% 9.9% 13.7%
Lithography 25.5 23.7 11.3 19.2 28.1
Substrate Bonder -11.1 -12.0 -11.6 -8.2 -5.4
Photo mask equipment 5.3 1.1 2.8 4.4 4.2
Operating Margin (Pro forma)
Lithography 23% 21% 12% 16% 19%
Substrate Bonder -54% -52% -48% -29% -18%
Photo mask equipment 15% 5% 11% 12% 12%
EPS - GAAP 0.77 0.49 -0.40 0.67 1.04
EPS - Adj 0.77 0.41 -0.04 0.67 1.04
Common shares (millions) 19 19 19 19 19
Source: Company data, Berenberg estimates
Balance sheet and cash flow
At end-Q1 2013, SUSS had net cash of €18m. We expect the net cash level will be
€13m by end-2014 driven by earnings momentum. It had €85.7m in inventory on
the balance sheet at end-Q1, and inventory days of 343. The inventories are mainly
demo tools, and we expect the amount of demo tools it provides to potential
customers to increase once 3D bonders become attractive.
SUSS generated negative free cash flow in Q1 due to weak earnings and negative
working capital movement. The longer cash conversion cycle resulted from the
decrease in the revenue contribution from the lithography segment, which has a
shorter lead time.
We forecast SUSS to generate €17m free cash flow in 2015, and to benefit from the
increase in profitability and in the top line.
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Company background
SUSS is a leading supplier of equipment and process solutions for the
semiconductor and LED industry, with more than 60 years of engineering
experience. It focuses primarily on the mid- and back-end of the semiconductor
fabrication process, supplying equipment including mask aligners,
coater/developers and UV tool sets (see Figure 9 below), which are used in wafer
level packaging, advance packaging and MEMS manufacturing processes. It is also
involved in the front-end semiconductor fabrication process, specifically in terms
of supplying photomask cleaning tools. In 2012, SUSS acquired US-based
Tamarack Scientific, and enhanced its product portfolio meaningfully with
Tamarack’s laser processing and ultraviolet projection tools.
Figure 9: SUSS product portfolio
Lithography Substrate Bonder Photomask equipment
Spin/Spray Coater/Developer Wafer bonder
-ACS300 Gen2 -XBS300 -MaskTrack Pro
-ACS200 Gen 3 -XBC300 Gen2 -Mask Track
-ACS200 Plus -XBC300 -Asx series
-Gamma -CBC200 -HMx series
-Delta 12RC
-ABC200
-Delta Altaspray
-CB200M
-RCD 8
-SB6/8e (semi auto)
-Lab Spin 6 and Lab Spin 8 -SB6/8L
-HP8
-BA6/BA8
Mask Aligner
-BA8 Gen3
-MA 300 Gen 2
-CL 200/CL8
-MA 200 Compact
-MA150e
-MA 100/150e/Gen2
-MA/BA8 Gen3
-MA/BA6 Gen2
-MJB4
Source: Company data
End-markets
SUSS’s customers include large packaging companies, semiconductor IDMs, LED
manufacturers and mask shops. Its products are widely used in various endmarkets
including advanced packaging, 3D integration, MEMS and mask
manufacturing (see Figure 10).
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Figure 10: Products used in different end-markets
Front end
Back end
Segment Photomask equipment Lithography
Substrate Bonder
Products used MaskTrack Pro Exposure system Mask Aligher Coater/developer Wafer bonders
Process step Photomask cleaning Stepper, Scanner
Mask Aligner
(proximity exposure)
coating/developing Bond Alignment
(UV projection) Nano imprinting Permanent Bonding
Temporary Bonding
Mask manufacturing
Advanced Packaging
Markets
3D Integration
MEMS
LED
Source: Company data
Mask manufacturing: Photomask equipment is used for cleaning and processing
the photomasks used in the lithography process. SUSS currently holds an 80% share
of the mask cleaning equipment market for ArFi lithography tools. The most
advanced EUV lithography tools require the use of highly sensitive reflecting masks
instead of optical transmission masks, and operators need to use advanced mask
cleaning equipment: SUSS is currently the only provider of EUV mask cleaning
tools.
Advanced packaging (such as flip chip and wafer level packaging): With the
growing spread of Ultrabooks, tablets and smartphones which demand thin, light
designs, advanced packaging is preferred over traditional wire bonding for producing
thin, light designs. Flip chips are used as a cost effective solution for forming
electrical connections with small bump pitches instead of tradition wire. As a result,
the completed chip is much smaller and thinner, and the short wires allow higher
speed data processing. Wafer level packaging allows all steps of integrated circuit
packaging to be performed at wafer level, and reduces the size of the packaging
footprint so that no plastic housing and wires are needed.
3D integration: New 3D integration technology is likely to be developed in parallel
with shrinking as part of the constant requirement for smaller components, and is
expected to drive smaller chip sizes once shrinkage has reached its physical limit. 3D
stacking using through-silicon vias (TSV) is the one of the main 3D integration
solutions being considered. By stacking the chips or wafers on top of each other
instead of laying them out on a planar surface, 3D integration offers the advantages
of shorter signal paths, reduced power consumption, enhanced bandwidths and a
smaller surface area. Thinner wafers are usually required in 3D integration to reduce
the thickness of chips.
MEMS: MEMS are key components for automotive, industrial, medical, aerospace
and consumer electronics. MEMS sensors are used in applications ranging from
gaming, smartphone and medical testing to satellites. The manufacturing process for
MEMS requires highly specialised equipment to create mechanical structures. SUSS
has been supplying equipment to the MEMS industry ever since such products have
been produced in volume.
LED: SUSS solutions are used in three stages of the LED process: the structuring
of substrates, the structuring of LED chips and chip packaging.
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Acquisitions and divestments
SUSS has completed three acquisitions in recent years to enhance its
competitiveness (see Figure 11). In our opinion, all three deals are positive for
SUSS, as they have all helped it optimise its end-market exposure and focus on its
core target markets, including advanced packaging, 3D integration, MEMS and
LED.
Figure 11: SUSS’s M&A history
Name Amount Description Synergy for Suess
2012 Acquire
Tamarack Scientific
Co.,Inc
$9.34mn
Develops, manufactures and
distribute UV projection
lithography equipment
- Same target end market, advanced packaging, 3D
integration, MEMS and LED market,
-enhance product portfolio, supplying a comprehensive
range of equipment for mid/back end process
2010 Dispose Test system $6.29mn
Supply measurement and test
systems for semiconductor
industry
-Test system market was too competitive for any
suppliers to secure decent level of profit.
-Reduced exposure to high saturated testing market,
maintain profitability level
2010 Acquire HamaTech APE $5.08mn
Source: Company data, Berenberg
Leading photomask cleaning
equipment supplier
- helped SUSS to break into front end equipment
industry,
-set a strong fundamental for SUSS being the only
EUV mask cleaning tool supplier today.
Manufacturing plants
SUSS used to operate four different production facilities:
• Palo Alto (US) – photomask cleaning division (now sold);
• Waterbury (US) – wafer bonders;
• Garching (Germany) – mask aligners, coater/developers;
• Vaihingen (Germany) – mask aligners, coater/developers.
After it acquired HamaTech in February 2010, including its factory building at
Sternenfels, SUSS decided to consolidate its main operation (everything bar
ultraviolet projection and laser technology) in two locations. The transition was
completed in 2011, and SUSS currently operates from the following facilities:
• Garching (Germany) – mask aligners;
• Sternenfels (Germany) – wafer bonders, coaters/developers, photomask
equipment;
• Corona (US) – ultraviolet projection and laser technology.
In our view, this transition is positive for SUSS, as the integration of production
facilities has enabled it to reduce costs and simplify its corporate structure.
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Figure 12: Holding structure as at end-2012
Others,
79%
DWS Luxembourg, 3%
Henderson, 3%
Blackrock, 3%
Credit Suisse, 3%
DWS Frankfurt, 9%
Source: Company data
SUSS shareholder structure
SUSS has approximately 19m outstanding ordinary shares, listed at XETRA. The
free float percentage is 100%. The shareholder structure as at end-2012 is shown in
Figure 12.
Management
CEO Frank Averdung
Mr Averdung became CEO in February 2009. Prior to joining SUSS, he served as
managing director of Carl Zeiss SMS GmbH, Jena, and general manager at AMAT
in Munich.
CFO Michael Knopp
Mr Knopp became CFO in August 2007. Prior to joining SUSS, he was the
commercial managing director of Kemmax GmbH located in Essen, as well as
CFO of international operations of Canadian parent company Chemtrade
Logistics.
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Profit and loss account
Year-end December (EUR m) 2011 2012 2013E 2014E 2015E
Sales 175.4 163.8 152.9 188.5 215.3
Cost of sales 109.1 106.4 107.0 119.6 131.8
Gross profit 66.4 57.4 45.9 68.8 83.5
Research and development 12.9 9.7 9.6 10.3 10.8
Selling, General and Administrative expense 35.8 37.6 37.8 41.0 44.5
Other operating income 1.0 -1.7 -6.8 1.1 1.2
EBIT 18.6 11.7 -8.4 18.6 29.4
Interest expenses -1.8 -1.1 -1.1 -1.2 -1.2
Extraordinary income/loss 0.0 0.0 0.0 0.0 0.0
EBT 20.4 12.9 -7.2 19.8 30.6
Taxes 5.8 5.1 0.4 6.9 10.7
Net income from continuing operations 14.6 7.8 -7.6 12.9 19.9
Income from discontinued operations (net of tax) 0.0 1.5 0.0 0.0 0.0
Net income 14.6 9.3 -7.6 12.9 19.9
Minority interest 0.2 0.1 0.0 0.0 0.0
Net income (net of minority interest) 14.6 7.8 -7.6 12.9 19.9
Source: Company data, Berenberg estimates
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Balance sheet
Year-end December (EUR m) 2011 2012 2013E 2014E 2015E
Intangible assets 22.2 22.9 22.3 22.3 22.3
Property, plant and equipment 9.5 12.1 21.3 21.3 21.3
Other assets 6.1 2.4 4.1 4.1 4.1
Fixed Assets 37.7 37.3 47.7 47.7 47.7
Liquid assets 56.4 36.6 15.9 18.3 31.8
Accounts receivable 17.8 21.8 25.8 26.1 36.3
Inventories 71.6 82.2 86.6 97.8 97.9
Other current assets 4.2 2.6 4.3 4.3 4.3
Current Assets 150.1 143.1 132.6 146.4 170.3
TOTAL 187.7 180.4 180.4 194.2 218.0
Shareholders' equity 120.4 127.2 127.4 141.5 162.6
Minority interest 0.7 0.0 0.0 0.0 0.0
Long-term debt 4.3 4.0 4.0 4.0 4.0
Other Non Current liabilities 6.2 7.1 7.1 7.1 7.1
Non-current liabilities 10.5 11.0 11.0 11.0 11.0
Accounts payable 7.6 6.9 8.7 8.4 11.2
Short-term debt 10.1 0.3 0.2 0.2 0.2
Other liabilities 39.1 35.0 33.0 33.0 33.0
Current liabilities 56.9 42.2 41.9 41.6 44.4
TOTAL 187.7 180.4 180.4 194.2 218.0
Source: Company data, Berenberg estimates
Cash flow statement
EUR m 2011 2012 2013E 2014E 2015E
Net profit/loss 13.8 9.1 -0.8 12.9 19.9
Depreciation and Amortisation 6.4 6.8 4.6 4.6 4.6
Change in working capital -12.2 -15.9 -12.0 -11.7 -7.6
Other operating cash flows -1.8 -0.7 0.6 0.6 0.6
Cash flow from operating activities 6.1 -0.6 -7.7 6.4 17.5
Capex -3.4 -4.2 -13.1 -4.0 -4.0
Other cash flow from investing activities -1.9 4.3 -9.0 0.0 0.0
Cash flow from investing activities -5.3 0.1 -22.0 -4.0 -4.0
Loan and receivable repayments -0.2 -0.2 0.0 0.0 0.0
Increase/decrease in debt position 0.0 -0.1 -0.1 0.0 0.0
Others -0.4 -11.0 0.0 0.0 0.0
Purchase of own shares 0.0 0.0 0.0 0.0 0.0
Dividends paid 0.0 0.0 0.0 0.0 0.0
Cash flow from financing activities -0.6 -11.3 -0.1 0.0 0.0
Effects of exchange rate changes on cash 0.2 -0.1 0.2 0.0 0.0
Increase/decrease in liquid assets 0.5 -11.8 -29.6 2.4 13.5
Source: Company data, Berenberg estimates
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Recovery and growth priced in
• We initiate coverage on Applied Materials (AMAT) with a Hold
recommendation and a price target of $14.4. AMAT supplies
equipment used in semiconductor, flat panel display (FPD) and solar
cell manufacturing processes. Our Hold rating is based on the
following. 1) AMAT only addresses 72% of the total wafer fab
equipment (WFE) market (Gartner data), and would need to gain a
3-6% market share from its current customer base to gain a further 2-
4% total share by 2016, as targeted by management. We consider this
to be a challenging target as the market is highly consolidated and
AMAT’s competitors – LAM, TEL and KLA – are all trying to
expand/maintain their market share. 2) We think that at the $16.5
share price level, much of the good news such as cost savings and
WFE market share gain opportunities is priced in.
• Key debates: 1) Can AMAT achieve a 4% WFE share gain by 2016?
2) Will AMAT be able to gain market share in the process control
market from its competitor KLA? 3) Can management deliver the 5%
opex cut as targeted by 2016?
1. We expect AMAT to only gain a 1% share by 2016, as: a) its
WFE market share has never reached 22% in the past 10 years;
b) it would need to gain a 3-6% share from its current customer
base to reach the target, as it only addresses 72% of the WFE
market; c) its potential share gain from etching and process
control only translates into a 1% total WFE share gain by 2016,
according to our calculations.
2. We think AMAT can gain up to a 5% market share in process
control by 2016 from its competitor KLA, given the recent
release of its new Applied SEMVision G6 product and the new
president’s experience in the process control market.
3. We believe the new president and CFO, both of whom had good
track records at their respective previous posts at Varian Semi,
will improve the likelihood of AMAT achieving is 5% opex cut
target by 2016.
• Our forecasts are in line with consensus.
• We value AMAT on a P/E multiple basis: Our price target of
$14.4 implies a P/E of 12x based on our 2014 EPS estimate of $1.2.
The 12x P/E is the mid-point of the historical 10-14x multiple applied
in the middle of the semiconductor recovery cycle.
Hold (initiation)
Rating system
Current price
USD 16.56
Absolute
Price target
USD 14.40
18/07/2013 New York Close
Market cap USD 19,897 m
Reuters AMAT.O
Bloomberg AMAT US
Share data
Shares outstanding (m) 1,202
Enterprise value (USD m) 18,595
Daily trading volume 13,958,129
Performance data
High 52 weeks (USD) 17
Low 52 weeks (USD) 10
Relative performance to SXXP NASDAQ
1 month 3.3 % 3.0 %
3 months 21.5 % 15.7 %
12 months 36.2 % 34.9 %
Key data
Price/book value 2.7
Net gearing 0.0%
CAGR sales 2012-2015 3.4%
CAGR EPS 2012-2015 173.6%
Business activities:
AMAT supplies semiconductor
fabrication equipment, flat panel display
fabrication equipment and solar PV
manufacturing systems.
Y/E 31.10., USD m 2011 2012 2013E 2014E 2015E
Sales 10,517 8,719 7,784 9,438 9,626
EBIT 2,410 1,379 1,135 1,842 1,961
Net profit 1,928 109 451 1,382 1,471
Y/E net debt (net cash) -5,227 -1,046 -1,302 -2,268 -3,319
EPS (GAAP) 1.45 0.06 0.38 1.17 1.25
EPS (Proforma) 1.30 0.75 0.67 1.17 1.30
CPS 4.51 1.14 1.63 2.47 3.40
DPS 0.24 0.33 0.38 0.40 0.41
Gross margin 41.8% 40.9% 42.1% 43.7% 43.4%
EBIT margin 22.9% 15.8% 14.6% 19.5% 20.4%
Dividend yield 1.4% 2.0% 2.3% 2.4% 2.5%
ROCE 21.9% 1.5% 6.1% 17.1% 16.7%
EV/sales 1.6 1.9 2.2 1.8 1.7
EV/EBIT 6.9 14.5 16.4 9.4 8.1
P/E 11.4 269.3 43.9 14.2 13.2
Source: Company data, Berenberg
22 July 2013
Tammy Qiu
Analyst
+44 20 3207 2673
tammy.qiu@berenberg.com
Jean Beaubois
Specialist Sales
+44 20 3207 7835
jean.beaubois@berenberg.com
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Investment summary
Our investment thesis on Hold-rated AMAT is based on the following five points.
1. We remain cautious about the likelihood of a 2-4% WFE share gain: We
believe AMAT will gain a 1% share of the WFE market, rather than a 2-4%
share, for the following reasons.
From 2004 to 2012, AMAT’s share in WFE was between 15-20% (Gartner
data), and it never gained more than 1.1% share within any three-year
timeframe within that period.
AMAT only addresses 72% of the WFE market (Gartner data), so to gain a
further 2-4% share of the total market, it would need to gain by 3-6% from its
current customer base. We consider this to be a challenging target as the
market is highly consolidated and AMAT’s competitors are all also trying to
expand/maintain market share. For example, LAM is aiming to gain a 3-5%
etching share and a 4-8% deposition share, KLA expects its dollar amount
market share to maintain, and TEL is aiming to expand its etching market
share from 29% to 35% by 2015.
In etching, we expect AMAT to gain a less than 1% market share through
silicon etching expansion – which is less than a 1% WFE share. There are
several reasons for the limited share gain: 1) all the main chip-makers are
already penetrated by one/several equipment vendors; 2) AMAT benefits less
from the 3D NAND-driven etching opportunity than LAM due to its lower
memory exposure; 3) the etching market is becoming more competitive, with
LAM aiming for a 3-5% share gain by 2016, and TEL is looking for a 6% gain
by 2015.
In process control, we expect AMAT to gain a maximum 5% of market
share to reach its peak market share of 20% (which equates to a 1% WFE
share) by 2016, as: 1) new president Gary Dickerson can leverage his 18 years’
experience at KLA to increase AMAT’s penetration; 2) it has a strong 60%
position in the defect review market (however, this only amounts to a 6%
share of the total process control market, hence it will be insufficient to drive
a bigger market share gain); 3) AMAT is less experienced in process control
compared with KLA and indeed lost a 7% defect review share to KLA in
2012 as KLA’s new tool is considered to be of superior quality.
We do not think AMAT will gain etching and process control market
share through acquisition: In our view, AMAT is only interested in chasing
the market leaders, given its Varian acquisition. LAM and TEL hold the
biggest etching market shares (47% and 29% respectively), and KLA holds the
biggest process control market share, but we do not think AMAT is in a
position to acquire LAM or KLA: LAM’s and KLA’s market caps are $8bn
and $10bn respectively, which translate to 67% and 83% respectively of
AMAT’s total balance sheet of $12bn. Having taken up ~$2bn debt to acquire
Varian in 2011, we do not expect it to further stretch its balance sheet. We
also think it unlikely that AMAT will buy TEL, as TEL is mainly exposed to
the declining dielectric market.
2. WFE spending to reach $37bn by 2016: We expect AMAT’s semiconductor
revenue to reach $6.7bn excluding any market share gain ($7bn including
expected share gain) in 2016, thus exceeding the 2007 peak level of $6.5bn,
driven by the strong WFE spending environment. AMAT is most closely
linked to WFE spending among the front-end equipment vendors, due to its
more diversified product portfolio and balanced revenue exposure to
growth/declining markets compared to peers.
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In our opinion, WFE spending could reach the $37bn mark in 2016, which
was the peak level attained in 2011 and 2007. The strong WFE spending is
expected to be driven by new technology such as FinFET, 20nm, 3D NAND
and 450mm migration. AMAT, TEL, LAM and the SEMI trade association
have all estimated that WFE spending will rise to $37bn-40bn in 2016/17.
3. Our bull-case $1.7 peak EPS is 20% lower than AMAT’s 2016 bull-case
of $2.15: AMAT laid out its 2016 bull-case EPS of $2.15 during the Semicon
2013 event, citing 1) $37bn in WFE spending, 2) a 4% WFE market share gain
from 2012 (up from 18% to 22% WFE market), 3) $1bn in Display revenue
(equating to a 5% market share gain, and 3) cost-cutting in the material costs
area and lower opex/revenue from 25% of revenue today to 20%, 4) a tax rate
decrease of 2-3% to 22%. The $2.15 EPS suggests a fair value of $20.8 by end-
2014 using our 12x P/E.
AMAT laid out similar revenue/share gain targets in 2010, 2011 and 2012, but
did not achieve all of them. We believe it is different this time, as the new
president and CFO both had strong execution records when they were with
Varian Semi. The new management team may be able to nudge AMAT into a
better position to achieve these targets, especially the cost saving target.
Our 2016 bull-case EPS estimate of $1.7 is 20% lower than AMAT’s bull-case
of $2.15. The delta is down to our belief that AMAT will gain a 1% WFE
market share rather than a 4% gain, and a lower gross margin (200bp) as a
result of a drop in revenue.
4. Solar/Display will remain a profit drag: Solar and Display revenue
accounted for 10% of group revenue in 2012, resulting in a combined loss. In
our opinion, the Display segment may return $1bn in revenue by 2016 (9% of
AMAT’s total revenue), which is the level of revenue attained in 2008 and
2010. However, it may remain margin-dilutive for the company as a whole as
its margin has always been lower than its Silicon Systems Group (SSG)
segment except in 2009, and TV-makers may exert pricing pressure on AMAT
as they struggle to make a profit. We believe the solar segment will continue
to make a loss for the next three years. AMAT’s cost-cutting initiative could in
our view narrow the operating loss from $184m to $100m in 2013, but
breakeven is unlikely.
5. Valuation: Our price target of $14.4 implies a P/E of 12x based on 2014
EPS estimates of $1.2. The 12x multiple was in the middle of range of the
historical 10-14x mid-recovery cycle P/E.
AMAT’s RoE is lower than ASML’s as its operating margin is lower. It has
the highest FCF yield and dividend yield among the companies in our
coverage universe.
Figure 1: Valuation matrix
ROE*
Dividend
yield*
FCF yield* Net cash/marcap
No.1 ASML 19.7% AMAT 2.5% AMAT 9.7% TEL 26.5%
No.2 AMAT 17.1% TEL 1.5% ASMI 6.2% SUSS 17.6%
No.3 SUSS 9.1% ASML 0.9% ASML 4.5% AMAT 16.7%
No.4 TEL 6.3% ASMI - TEL 4.3% ASMI 8.9%
No.5 ASMI 6.2% SUSS - SUSS 1.6% ASML 6.5%
*base on Berenberg estimation of 2014 performance
Net cash base on 2012 YE balance
Source: Berenberg estimate, company data
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Key catalysts
Key catalysts include the following:
1) an increase in orders driven by the semiconductor recovery cycle – in
our opinion, we are likely to see positive order intake in H2 2013 and 2014,
driven by a strong logic/foundry and memory recovery;
2) a process control share gain – in our opinion, with AMAT’s new product
cycle (Applied SEMVision G6) in process control, combined with its new
management’s experience in this market, we think it can gain 5% market share
in this segment;
3) a memory exposure gain – AMAT’s exposure to the memory market is
lower than LAM’s, hence it is likely to benefit less from 3D NAND market
expansion than LAM. We believe the share price will react positively if
AMAT gains more memory share.
Key risks
Key risks include the following:
1) a capex cut from Samsung, Intel and TSMC – in our opinion, however,
these companies are unlikely to cut capex any time soon, as they need to be
up to speed with the most advanced manufacturing technologies to maintain
their competitive advantage;
2) the sluggish solar energy segment will remain a drag on profit – we
believe the Energy and Environment Solutions (EES) solar division will
remain loss-making over the next three years. The cost-saving programme will
only narrow the 2013 operating loss to $137m from the $184m loss in 2012.
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Recovery and growth already priced in
In our bull-case scenario, we believe AMAT’s SSG revenue will grow at c6.2%
from now to 2016, and exceed the 2007 revenue peak by 2016, driven by 1) the
strong WFE spending environment (WFE spending is likely to grow from $30bn
today to $37bn in 2016 and $40bn in 2017), and 2) a 1% WFE share gain mainly
due to a 5% process control potential share gain. Our bull cash 2016 non-GAAP
EPS will reach $1.7, which has a CAGR of 23% pa from 2012 to 2016, driven by
an opex cut from 25% of revenue in 2012 to 20% by 2016. However, the $1.7
bull-case EPS is 20% lower than AMAT’s bull-case scenario $2.15.
Figure 2: 2016 bull-case EPS of $2.15
2016 AMAT bull case Berenberg Bull case Difference
WFE $bn 37.0 37.0 -
Market share 21.9% 19.0% -3%
Revenue 12.4 11.3 -9%
SSG 8.1 7.0 -13.6%
AGS 2.6 2.6 -
Non semi 1.7 1.7 -
GM 46.0% 44.0% -2.0%
Opex 2.5 2.3 -8.0%
Opex% 20.0% 20.0% 0.0%
OP% 26.0% 24.0% -2.0%
EPS 2.15 1.7 -20.9%
Share no mn 1,140 1,140 -
Source: Company data
AMAT’s 2016 bull-case EPS $2.15 is driven by 1) $37bn in WFE spending, 2) a
4% WFE market share gain from 2012 (up from 18% to 22% of the WFE market),
3) $1bn in Display revenue (equating to a 5% market share gain, and 3) costcutting
in the material costs area and lower opex/revenue from 25% of revenue
today to 20%, 4) a tax rate decrease of 2-3% to 22%. The $2.15 EPS suggests a fair
value of $20.8 by end-2014 using our 12x P/E and discounted using 11.4%
WACC.
AMAT laid out similar market share expansion/revenue targets previously, but did
not achieve all of them. In 2012, it aimed to gain market share in the etching and
inspection markets. As per Gartner data, its market share in etching was down 2%
from 2011 to 2012. In 2010, it aimed to gain 4% share in etching and 3% share in
inspection. As per Gartner data, its etching market share increased only 2% from
2009 to 2010, and its wafer inspection market share was only up 1%. In our
opinion, the new president and CFO, both of whom had good executing track
records, may put AMAT in a better position to achieve targets: however, we think
a 2-4% gain is a stretch.
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We remain cautious about the likelihood of a 2-4% share gain
AMAT is aiming to gain a 2-4% WFE market share by 2016, specifically in etching
and process control. As per Figure 3, the 2-4% share gain is an important element
of AMAT’s bull-case 2016 projection, and accounts for 28% of peak $2.15 EPS.
Compared to a flat market share, the extra 2% and 4% share gain would contribute
a 7% and 10% EPS CAGR respectively.
Figure 3: 4% share gain contributes 27% $2.15 EPS
AMAT projection
Berenberg
2012 0%
2%
vs
4%
vs
1%
vs
2016
share gain share gain 0% share gain share gain 0% share gain share gain 4% share gain
Share gain 0% 2% 4% 1% -3%
% of WFE 18% 18% 20% 22% 19% -3%
WFE $bn 29.7 37 37 37 37
SSG revenue $bn 5.5 6.7 7.4 11% 8.1 22% 7.0 -13%
Other $bn 3.2 4.3 4.3 4.3 4.3
8.7 11.0 11.7 7% 12.4 13% 11.33 -9%
GM % 40.9% 45% 46% 1% 46% 1% 44% -2%
Opex % 25.0% 20% 20% 0% 20% 0% 20% 20%
Opex $bn 2.2 2.2 2.3 7% 2.5 13% 2.3 -9%
Op% 15.9% 25% 26% 1% 26% 1% 24% -2%
Op profit $bn 1.4 2.7 3.0 11% 3.2 18% 2.7 -16%
tax rate % 26% 22% 22% 0% 22% 0% 22% 0%
EPS $ 0.75 1.55 1.95 26.1% 2.15 39% 1.70 -20.9%
EPS CAGRvs 2012 20% 27% 30% 23%
No. shares mn 1,275 1,140 1,140 1,140 1,140
Source: Company data, Berenberg estimates
In our opinion, AMAT will gain a 1% WFE share by 2016/2017, but it would be
challenging to gain a 2-4% share as:
1) from 2004 to 2012, AMAT’s share in WFE was between 15-20% (Gartner
data), and it has never before gained more than a 1.1% share within any threeyear
timeframe;
2) AMAT only addresses 72% of the WFE market (Gartner data), so to gain a
further 2-4% share of the total market, it would need to gain by 3-6% from its
current customer base. We consider this to be a challenging target as the
market is highly consolidated and AMAT’s competitors are all also trying to
expand/maintain market share;
3) it may gain 1% share in etching market as silicon etching market expansion,
which is less than 1% WFE share;
4) it may gain a maximum 5% market share in process control, which is a 1%
WFE share, as the process control market is 16% of WFE spending at peak;
5) we do not think AMAT will gain a 4% market share through acquisition in the
etching or process control markets.
Etching – we expect AMAT to gain a 1% share
The etching market is dominated by LAM, which has a 47% market share.
According to Gartner’s forecast, the etching market will remain about flat between
2012 and 2016: although silicon and metal etching will grow, dielectric etching is a
segment in decline.
By our calculations (see Figure 4), AMAT can achieve a 1% etching market share
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gain through silicon etching expansion – although if it wants a greater share, it will
have to gain it from competitors. This will be difficult as: 1) each of the major
equipment vendors already has an established relationship with one/all of the main
chip-makers; 2) the etching market is expected to be driven by 3D NAND, which
is an area in which AMAT may benefit less than LAM as it has lower memory
exposure. AMAT estimated its NAND sales addressable market (SAM) would
expand by 25% to 35%, versus LAM’s expectation of 35-55%; 3) the growing
complexity of the technology is making it more difficult for companies to compete
through product innovation; and 4) the market has always been competitive. In the
etching market, LAM has recently indicated that it is aiming to gain a 3-5% market
share by 2015/2016. TEL is aiming to increase its etching share from 29% to 35%
by 2015. As a result, we believe AMAT will only gain an extra 1% share, which is
less than 1% WFE share gain (LAM estimates that the etching market is 12-14% of
total WFE).
Figure 4: AMAT may gain a 1% etching share as the
market shifts
$mn 2,012 2016E Share Change
Etching market 4,060 4,291
LAM 42% 45% 3%
AMAT 9% 10% 1%
TEL 35% 32% -3%
hitachi 8% 9% 1%
of which Silicon etching 1920 2326 up c 5%
LAM 1,132 1,371
Hitachi 303 367
AMAT 264 320
TEL 174 210
of which Dielectric etching 1,968 1,855 down c1%
TEL 1,234 1,163
LAM 511 482
AMAT 101 95
of which Metal etching 98 110 up c3%
LAM 76 85
AMAT 14 15
Hitachi 8 9
Source: Gartner data, Berenberg estimates
Process control – we expect AMAT to gain maximum 5% share
AMAT has been trying to gain a process control market share from KLA since
2008/2009 but with limited success. In May 2013, it noted an inspection share
gain at both the foundry and logic level, which partly explains KLA’s weak result
last quarter. KLA guided 8% below consensus, and its wafer inspection booking
for Q1 2013 was 20% lower than the peak booking quarter.
In our opinion, AMAT may further gain some share in the process control market,
given that the new president Gary Dickerson is experienced in process control
market (18 years at KLA) and has a good execution track record. However, we
believe AMAT will only achieve a maximum market share of 15%, which was its
peak level between 2009 to 2012, and will only gain a 5% process control market
share (1% of WFE), because:
1) it is a strong player in the defect review market (with a 60% share) – however,
the defect review market only amounts to 6% of the total process control
market, hence it will not in itself be sufficient to drive significant growth;
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2) AMAT lags KLA in terms of technology and experience – it lost 7% of defect
review market share to KLA in 2012 (see Figure 5) as KLA’s new tool allows
it to identify and analyse 15nm defects which cannot be found by AMAT’s
tool;
3) KLA is well established with the main capex spenders such as Intel, TSMC,
Samsung, Globalfoundries, SK Hynix, Micro/Elpida and Toshiba/Sandisk –
AMAT’s relationship with these companies does not give it a competitive
advantage over KLA.
Figure 5: AMAT’s process control share fell by 2% in 2012
2012
2012 REV 2012 mkt share % 2011 mkt share %
Market size AMAT KLA AMAT KLA AMAT KLA
CD-SEM 533 52 0 9.7% 0.0% 14.0% 0.0%
Mask Inspection/Review 489 66 332 13.5% 67.8% 21.6% 65.3%
Optical Patterned Wafer Inspec 1,393 194 1,159 13.9% 83.2% 12.2% 84.5%
SEM Defect Review and Classif 234 156 54 66.6% 23.0% 73.4% 10.9%
Other Defect Review and Classi 6 0 0 0.0% 0.0% 0.0% 0.0%
AMAT&KLA common mkt 2,656 467 1,545 17.6% 58.2% 20.1% 59.2%
Other markets 1,760 842 47.8% 47.8%
Total Process Control 4,416 467 2,387 10.6% 54.1% 12.1% 54.7%
Source: Gartner data
We do not believe AMAT will gain share through M&A
Historically, AMAT used to gain market share through acquisition – ie it acquired
Varian in 2011 to obtain ion implant market exposure (Varian had a 75% share of
Ion implant market). However, we do not think AMAT will expand through
acquisition in the etching and process control segments:
1) judging by its Varian acquisition, we believe AMAT is only interested in
market leaders, therefore it may only be interested in LAM, KLA and TEL in
etching and process control markets (see Figures 6 and 7 below);
2) we do not think AMAT will acquire LAM or KLA as we do not expect it will
want to further stretch its balance sheet;
3) we do not think AMAT will buy TEL as the latter is mainly exposed to
declining dielectric market.
Figure 6: The etching market is already largely consolidated
100.00%
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Source: Gartner data
2012 2011 2010
LAM Hitachi AMAT TEL Mattson Others
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Figure 7: 21% of the process control market is shared by more than 20
players
100%
80%
60%
40%
20%
0%
2012 2011 2010
Source: Gartner data
KLA Hitachi AMAT Nanometrics Hermes Microvision
Carl Zeiss Rudolph Lasertec Nova Toray
Nikon SII Nano Rave Semilab Omron
JEOL Synopsys SEMES Dainippon Advantest
Others
2007 peak revenue will be exceeded in 2016, driven by strong WFE
spending
AMAT’s semiconductor revenue is more closely linked to the WFE spending cycle
compared with other front-end semi equipment vendors (see Figure 8). We believe
this is due to its more diversified product portfolio compared with peers and
balanced revenue exposure to legacy and growing markets (see Figures 9 and 10).
Figure 8: Semiconductor revenue is closely linked to WFE spending
200.0%
150.0%
100.0%
50.0%
0.0%
-50.0%
-100.0%
2006 2007 2008 2009 2010 2011 2012
ASML ASMI - front end AMAT TEL KLA LAM WFE
Source: Gartner data, Company data
Figure 9: AMAT has the most diversified product portfolio
Semiconductor Equipment AMAT LAM ASMI ASML TEL KLA
Lithography
Y
Photoresist Processing (Track)
Y
Deposition Y Y Y Y
Etch, Clean, and Planarization Y Y Y
RTP and Oxidation/Diffusion Y Y Y
Ion Implanter
Y
Process Control Y Y
Manufacturing Automation and Control Y
Wafer-Level Packaging Y Y Y Y
Die-Level Manufacturing Equipment Y Y
Test Equipment
Source: Company data, Gartner data
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Figure 10: AMAT has the most balanced market exposure
Growth markets exposure 2012 Legacy markets exposure 2012
ASML 100% 0%
ASMI 91% 9%
AMAT 61% 39%
LAM 74% 26%
KLA 100% 0%
TEL 23% 77%
Source: Gartner Data, Berenberg estimates
AMAT’s 2016 financial projection assumes WFE spend of $30bn-37bn: the highend
$37bn assumption gives AMAT 30% EPS upside compared with the $30bn
assumption.
Figure 11: WFE spend in 2016 to be $30bn-37bn
AMAT 2016 financial scenarios
bull case
WFE $bn 30.0 33.5 37.0 37.0
Market share 19.9% 19.9% 19.9% 21.9%
Revenue 9.9 10.8 11.7 12.4
SSG 6.0 6.7 7.4 8.1
AGS 2.5 2.6 2.6 2.6
Non semi 1.4 1.5 1.7 1.7
GM 44.0% 45.0% 46.0% 46.0%
Opex 2.1 2.2 2.4 2.5
Opex% 21.0% 21.0% 20.0% 20.0%
OP% 23.0% 24.0% 25.0% 26.0%
EPS 1.5 1.7 1.95 2.15
Share no mn 1,140 1,140 1,140 1,140
Source: Company data
We believe WFE spend can reach $37bn in 2016, which was the peak level seen
in 2011 and 2007. The strong WFE spend is likely to be driven by new technology
such as FinFET, 20nm, 3D NAND and 450mm migration, which is more
complex and capital-intensive than the technology in 2011 and 2007. All recent
WFE spending projections from the industry point to the same conclusion (see
Figure 12).
Figure 12: WFE could reach $40bn by 2017
$bn 2012 2013E 2014E 2015E 2016E 2017E
AMAT 30 -10%~flat yoy up 32~35 37
TEL 30 30 40
LAM 30 28~32
35~40
Gartner 30 27 32 37 36 39
SEMI 30 29 36
Berenberg 30 30 33 35 37 40
Source: Gartner data, company data, the SEMI trade organisation, Berenberg estimates
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AMAT is very likely to benefit from the strong spending environment. In our
view, if WFE steadily grows to $40bn in 2017, and assuming AMAT remains its
18% share in WFE (15-20% historically), SSG revenue will grow at c5.4% per year
from 2012 to 2017, and exceed its 2007 peak level of $6.5bn in 2016 ($6.7bn)
without any market share gain.
Figure 13: SSG exceeds 2007 peak in 2016 due to strong WFE spend
$mn
% of WFE
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
AMAT SSG WFE AMAT SSG/WFE
Source: Company data, Gartner data, Berenberg estimates
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Operating leverage
At Semicon 2013, AMAT’s management announced its target to decrease opex
from 25% of revenue to 20% of revenue by 2016. The cost-cutting is likely to
come from SG&A by lowering total SG&A from $1bn in 2012 to $840m by 2016
(a 17% reduction). AMAT’s level of innovation will not be impaired by this in our
opinion, as the R&D level is projected to reach 63% of opex from 56% in 2012
(17% higher than the 2012 level in dollar terms).
We see that AMAT is already taking initial steps to reduce its costs: for example, it
will carry out a week-long factory shut down in Q3. Judging by the new president’s
and CFO’s strong execution record in Varian Semi, we believe the cost-cutting
projects will be successful.
Solar and Display remain as profit drag
Display accounted for 5% revenue in 2012, with a 7% operating margin compared
to a 23% corporate average. The segment has recently shown signs of recovery.
Orders increased by 41% qoq in Q2, and returned to the 2011 level. Management
is expecting the strong momentum to continue, with $800m of orders expected in
FY 2013, to reach $1bn in revenue by 2016 (c21%). In our opinion, the display
segment may return to the $1bn revenue level by 2016, and we saw a similar
revenue level back in 2008 and 2010. However, the margin is likely to be dilutive
for the group as 1) the Display division’s operating margin has only once been
higher than SSG’s, in 2009, when SSG’s margin was 8% and was significantly
affected by the financial crisis, and 2) the main TV vendors such as Samsung, TCL
Corp, Sony and Panasonic are either making very lean margins or are loss-making
today, and may therefore place pricing pressure on AMAT.
The EES division (5% group revenue and always loss-making except in 2011) is
likely to remain loss-making in the next few years. Its order level was down by 43%
qoq in Q2, with revenue also down qoq, by 17%. AMAT managed to narrow the
operating loss from 96% to 89% by cutting costs, and is expecting a further $5m
per quarter in cost cuts by the end of 2013. In our opinion, cost-cutting could help
to narrow losses from $184m to $100m in 2013, but breakeven is unlikely in the
next three years.
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Key catalysts
In our view, the following factors will be the main share price catalysts.
1. Semiconductor recovery cycle, higher order intake: As with its peers,
AMAT’s share price is closely correlated to the semiconductor cycle, as
measured by equipment order intake and capex levels. Any sign that the
industry is moving towards the peak cycle will benefit AMAT’s share price.
In our opinion, the industry entered a steady recovery phase in Q1 2013.
ASML, AMAT, KLA, ASMI and TEL have all reported better order intake
levels than in 2012. We expect the positive order intake trend to continue in
H2 2013 and 2014, driven by strong logic/foundry orders and memory
recovery. We believe AMAT’s share price will benefit as a result.
2. Market share gain: Revenue growth for semiconductor equipment
companies is driven by SAM expansion and market share gain. AMAT has
stated in Q2 it had gained market share in the process control market.
Investors were encouraged by its comments regarding process control share
gain.
We do not believe there will be significant sustainable organic market share
gain in this industry. In each of the fabrication process, we now have one well
established dominant player followed by many small players. Any small player
that wants to gain significant market share needs to have better products than
the market leader, and its customers would need to recognise this. However,
given AMAT’s new process control product (Applied SEMVision G6) and its
new president had 18 experience in the market, we expect AMAT to announce
more share gains in coming quarters.
3. Memory customer gain: AMAT’s recent comment about the potential
upside from memory markets does not sound as encouraging as similar
comments made by LAM and KLA. We agree with management that 2014
capex will be driven by NAND and foundry.
In our opinion, if AMAT announce any share gain in memory in the coming
quarters, its revenue upside in 2015 will be bigger than it is today as it would
benefit from 3D NAND-related capex growth. As a result, its revenue and
share price would react positively as a result.
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Valuation
Our valuation is based on a P/E multiple. Our price target of $14.40 implies a P/E
of 12x based on 2014 EPS estimates of $1.20.
Historically, AMAT has traded between 8x and 24x P/E during the semiconductor
industry recovery cycle (from end-2009 to 2011 – see Figure 14). We believe we
entered the recovery cycle at the start of 2013, when an increase in order levels was
reported by front-end players such as ASML, AMAT, TEL and KLA. AMAT was
trading at 10-14x between June and September 2010, which was six months after it
entered the recovery cycle. Our P/E of 12x is in the middle of range of the
historical 10-14x mid-recovery cycle P/E, and it is in line with its peer group
median multiple based on 2014 earnings.
Figure 14: 8-14x P/E in the middle of the semiconductor recovery cycle
S Bl b d
Source: Bloomberg data
Figure 15: Peer group valuation
Company Name PE EV/EBIT EV/Sales
FY 2013E FY 2014E FY2015E FY 2013E FY 2014E FY2015E FY 2013E FY 2014E FY2015E
NIKON CORP 14.12 13.42 12.25 9.83 8.28 8.53 0.82 0.80 0.87
ASM INTL NV 27.03 14.02 13.19 50.89 10.49 13.21 3.13 1.91 1.52
ASML HOLDING NV 25.04 15.67 12.17 21.81 10.74 2.10 4.80 3.73 0.67
KLA-TENCOR CORP 16.94 13.21 11.26 9.43 7.59 2.97 2.46 2.21 0.95
LAM RESEARCH 20.99 11.64 10.15 14.73 8.28 2.90 1.74 1.44 0.58
ULVAC INC na 10.21 7.36 25.28 12.27 15.08 0.82 0.75 1.04
DAINIPPON SCREEN 28.32 14.13 14.41 67.36 11.63 13.66 0.76 0.70 0.81
TOKYO ELECTRON 48.60 20.98 18.74 25.57 9.75 5.61 1.16 1.02 0.72
Mean 22.63 14.16 12.44 28.12 9.88 8.01 1.96 1.57 0.89
Median 23.01 13.72 12.21 23.55 10.12 7.07 1.45 1.23 0.84
APPLIED MATERIAL 23.30 13.18 11.92 17.43 10.77 4.87 2.35 1.92 0.91
Source: Bloomberg data
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The share price has increased by 60% since November 2012, mainly due to the
improved semiconductor equipment order intake levels reported, comforting
statements on share gains and SAM expansion potential. Following the rally, the
P/E multiple stands at a higher level compared to the previous recovery cycle
multiple in 2011, without any significant EPS downwards revision. We believe this
multiple expansion is driven by momentum rather than strengthened
fundamentals.
Figure 16: forward P/E is higher than previous recovery cycle
Source: Bloomberg data
Figure 17: No EPS major revision
Source: Bloomberg data
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Key risks
The key risks to our investment case are as follows.
1. Capex cuts at Samsung, Intel and TSMC: AMAT generated 45% of its
revenue from Samsung, Intel and TSMC in 2012. Any capex cut or investment
delay from these three companies would thus have a significant impact on
AMAT due to the high level of customer/capex spender concentration.
In our opinion, Samsung, Intel and TSMC are not likely to reduce their capex
spending at any time soon. All of them are heavily exposed to the consumer
electronics market, which is highly competitive, and they have to keep up to
speed with the most advanced manufacturing technologies to maintain their
competitive advantage.
2. Sluggish solar energy market: The solar energy market as a whole has
suffered from oversupply in recent years. AMAT’s solar segment (EES) made
an adjusted operating loss of $46m in 2012 before impairment charges. Orders
were down by 88% yoy in 2012, and down by 43% qoq in Q2 2013. This
continuing underperformance will have a negative impact on total corporate
earnings.
In our opinion, the solar market will continue to underperform over the next
two years, until the oversupply issue is resolved. AMAT’s cost saving
programme may only be able to narrow the operating loss down to $137m in
2013 as per our estimate.
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Financials
AMAT’s revenue includes revenue from selling equipment used in semiconductors
for manufacturing, FPD fabrication and solar PV panel manufacturing processes. It
reports revenue under four segments: SSG, Applied Global Services (AGS),
Display and EES.
Order trend down for the remainder of 2013
SSG order intake has increased by 14% qoq (see Figure 18 below), which trended
to the same direction as its front-end semiconductor equipment peers.
Management guided that the full-year wafer fab equipment market would be
flat/down 10%, hence we expect the order intake to be down in Q3 and Q4, as the
ytd order is already higher than 55% of 2012 total order. In addition, a week-long
factory shutdown is due to take place in Q3, which we believe is an indication that
management may have already noted some early sign of slowing down. As a result,
we expect SSG orders to slow down in Q3 and Q4.
Figure 18: Order trend in 2013
Jan Q1 Apr Q2 Jul Q3 Oct Q4 2012 Jan Q1 Apr Q2 Jul Q3E Oct Q4E 2013E
(Dollars in millions)
SSG 1,418 1,969 1,166 741 5,294 1,363 1,551 1,365 1,338 5,616
AGS 517 650 531 576 2,274 544 481 481 481 1,987
Display 40 84 67 83 274 138 195 218 245 796
EES 33 62 35 65 195 68 39 39 40 186
Total 2,008 2,765 1,799 1,465 8,037 2,113 2,266 2,104 2,103 8,586
Out of total
SSG 71% 71% 65% 51% 66% 65% 68% 65% 64% 65%
AGS 26% 24% 30% 39% 28% 26% 21% 23% 23% 23%
Display 2% 3% 4% 6% 3% 7% 9% 10% 12% 9%
EES 2% 2% 2% 4% 2% 3% 2% 2% 2% 2%
QOQ % change
SSG 53% 39% -41% -36% -- 84% 14% -12% -2% --
AGS -8% 26% -18% 8% -- -6% -12% 0% 0% --
Display 100% 110% -20% 24% -- 66% 41% 12% 12% --
EES -62% 88% -44% 86% -- 5% -43% 1% 1% --
Total 26% 38% -35% -19% -- 44% 7% -7% 0% --
Source: Berenberg estimates
Revenue/order by customer/region
Samsung, TSMC and Intel are AMAT’s top three customers, accounting for
32%/45% of the group revenue in 2011/2012 respectively. The majority of its
revenue and order intake is from Asia. We expect to see a similar revenue/order
customer/region mix in the future, as Samsung, TSMC and Intel are expected to
remain the main capex spender in this sector.
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Figure 19: Revenue by customer
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2009 2010 2011 2012
Samsung TSMC Intel Others
Source: Company data
Figure 20: Revenue by region
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2009 2010 2011 2012
U.S. Japan Europe Korea Asia Pacific
Source: Company data
Figure 21: Orders by region
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2009 2010 2011 2012
U.S. Japan Europe Korea Asia Pacific
Source: Company data
Revenue – 2014 driven by logic/foundry
In 2014, SSG revenue is expected to increase by 26%, having fallen by 10% in 2013
(see Figure 22 below). The increase is likely to be driven by foundry and logic
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expanding 20nm output using DP, and by the expansion of HKMG process
adoption.
By late 2014/2015, the semiconductor equipment market will be driven by 3D
NAND- and FinFET-related spending. Recent comments from management
suggest that its expected memory order intake in H2 is likely to be less than 25% of
total orders, which is less positive than KLA’s and LAM’s recent results and
statements.
KLA is expecting memory to account for 44% of the June quarter’s total order
intake, up from 28% in the March quarter and 17% in the December quarter.
LAM’s memory shipment increased from a low 20% of total shipments in
December 2012 to 31% in the March quarter. We therefore believe that AMAT’s
memory exposure is not as great as peers KLA’s and LAM’s, hence its revenues
from the 3D NAND capex boost may be limited. We estimate a much smaller
revenue growth rate (3%) in 2015 following a 26% increase in 2014, due to
AMAT’s memory exposure is lower, and majority of the equipment required for
3D NAND capacity building would be shipping in 2014.
We estimate that the AGS division’s revenue will decrease in 2013, due to the
decreased order levels since H2 2012. Display revenue is expected to grow in 2014
driven by recent order increases, but we remain cautious about the sustainability of
a high order level. We estimate EES activity to remain at a low level, and we do not
expect a major improvement until the industrial oversupply issue has been
resolved.
Figure 22: Revenue model by segment
2011 2012 2013E 2014E 2015E
Revenues
(Dollars in millions)
SSG 5,414.0 5,536.0 4,945.3 6,186.7 6,359.5
AGS 2,413.0 2,285.0 2,037.0 2,115.0 2,237.3
Display 699.0 473.0 616.9 901.6 762.6
EES 1,991.0 425.0 184.3 234.4 267.0
Total 10,517.0 8,719.0 7,783.6 9,437.8 9,626.5
% of total
SSG 51.5% 63.5% 63.5% 65.6% 66.1%
AGS 22.9% 26.2% 26.2% 22.4% 23.2%
Display 6.6% 5.4% 7.9% 9.6% 7.9%
EES 18.9% 4.9% 2.4% 2.5% 2.8%
YOY % change
SSG 2.1% 2.3% -10.7% 25.1% 2.8%
AGS 29.3% -5.3% -10.9% 3.8% 5.8%
Display -22.2% -32.3% 30.4% 46.2% -15.4%
EES 34.5% -78.7% -56.6% 27.2% 13.9%
Total 10.1% -17.1% -10.7% 21.3% 2.0%
Opm (Pro forma)
SSG 32.8% 27.8% 25.0% 26.9% 28.0%
AGS 21.3% 23.2% 22.2% 22.6% 23.7%
Display 22.3% 6.8% 20.3% 23.8% 18.0%
EES 22.4% -43.3% -74.5% -9.0% -8.0%
Total 22.9% 15.8% 14.6% 19.5% 20.4%
Source: Berenberg estimates
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Margin to expand with revenue growth and cost saving
The SSG operating margin is expected to be down in 2013, with the cost saving
expected from its planned factory shutdown offset by the low margin achieved in
the first two quarters. However, we believe that the SSG margin will improve over
the next two years driven by an increase in the top line and further cost-saving
initiatives. We expect that the AGS operating margin will move with the top line,
and hence also expand in 2014 and 2015. The Display division’s operating margin
is projected to be 24% in 2014, due to the higher revenue level expected in this
segment. We expect display’s revenue to drop by 24% in 2015 after 54% growth in
2014, as we do not believe the strong order momentum will last. We believe that
the loss in EES will narrow over time from $184m in 2012 to $137m in 2013,
driven by the ongoing cost-saving programme.
We estimate the gross margin will expand as revenues increase, from 40.9% in
2012 to 42.1% in 2013 and 43.6% in 2014.
Figure 23: Profit and loss
Profit and Loss 2011 2012 2013E 2014E 2015E
(Dollars in millions)
Revenues 10,517.0 8,719.0 7,783.6 9,437.8 9,626.5
YOY % 10.1% -17.1% -10.7% 21.3% 2.0%
Cost of goods sold 6,118.8 5,153.0 4,504.3 5,317.6 5,451.4
Gross profit (proforma) 4,398.2 3,566.0 3,279.2 4,120.1 4,175.1
Gross margin (proforma) 41.8% 40.9% 42.1% 43.7% 43.4%
Research & development 1,113.0 1,236.0 1,283.6 1,379.3 1,347.7
Marketing & selling 436.4 471.8 413.7 445.3 442.8
General & administrative 439.0 479.2 447.4 453.0 423.6
Operating Income (proforma) 2,409.8 1,379.0 1,134.5 1,842.4 1,961.0
OP margin (proforma) 22.9% 15.8% 14.6% 19.5% 20.4%
Interest & other expense (income) 16.0 78.0 41.0 0.0 0.0
PBT (Pro forma) 2,393.8 1,301.0 1,093.5 1,842.4 1,961.0
Taxes (proforma) 670.0 342.0 294.5 460.6 451.0
Tax rate 28.0% 26.3% 26.9% 25.0% 23.0%
Net income before JV (proforma) 1,723.8 959.0 799.0 1,381.8 1,510.0
EPS - Pro forma $1.30 $0.75 $0.67 $1.17 $1.30
YOY % 47.7% -42.4% -16.7% 66.2% 4.0%
Common shares (millions) 1,329.8 1,274.8 1,203.8 1,197.5 1,194.5
Source: Berenberg estimates
Dividends and share buyback
AMAT has a history of paying a stable level of dividends. In March 2013, it raised
its quarterly dividend level from $0.09 to $0.10. Assuming it maintains its dividend
level, the payout ratio will be 33.5% and 30.5% in 2014 and 2015 respectively by
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our estimates. Compared to its peers, AMAT’s payout ratio is higher than ASML (
17% payout ratio), and lower than TEL (35% payout ratio).
Figure 24: Dividend payout
2010 2011 2012 2013E 2014E 2015E
Dividends/share $ 0.26 0.24 0.33 0.38 0.40 0.41
Payout ratio 29.5% 18.2% 44.6% 57.0% 34.7% 31.7%
Source: Company data, Berenberg estimates
AMAT repurchased $1,416m in shares in 2012. The total share buyback over the
past three years stands at $2,234m, which is 11% of its market cap. We believe
AMAT will keep returning cash to shareholders through share buyback and
dividends.
Balance sheet and cash flow
Following the aggressive share buyback and the $4.9bn Varian acquisition, AMAT’s
balance sheet is not as strong as it used to be. It had net cash of $904m at end-Q2.
We expect a net cash balance of $1,302m at end-2013.
In the absence of large-scale M&A, we expect AMAT to continue to generate
positive cash flow. We estimate that the company generated free cash flow of
$978m in 2013, $1,845m in 2014 and $1,929m in 2015, representing an FCF yield
of 5%, 10% and 11% for 2013, 2014 and 2015 respectively.
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Company background
AMAT was the biggest semiconductor equipment supplier worldwide by revenue
in 2012 according to Gartner data (see Figure 25). It supplies semiconductor
fabrication equipment, FPD fabrication equipment and solar PV manufacturing
systems. AMAT’s customers include manufacturers of semiconductor chips, LCDs,
solar PV cells and modules, and other electronic devices.
Figure 25: AMAT revenue split
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Source: Gartner Data
2008 2009 2010 2011 2012
Deposition Etch Clean&Planarization
RTP&Oxidation/Diffusion Ion Implanter Process Control
Automation&Control
Wafer-Level Packaging
Source: Gartner data
AMAT operates in four reportable segments: Silicon Systems Group (SSG),
Applied Global Services (AGS), Display and EES.
Figure 26: Segments
SSG
Description
Supplies semiconductor equipment used in chip fabrication processes including:
- Deposition,
- Etching,
- Cleaning & Planarization,
- Rapid Thermal Processing, Oxidation, Diffusion,
- Ion Implant,
- Process control,
- Wafer level packaging.
AGS
Helping customers to lower cost, improve equipment and fab performance and maximise return on asset.
- Provides semiconductor, display and solar customers with solutions that maximize output and
efficiency
- Largest supplier of software for automating semiconductor, display and solar factories
Display
Suppliers TFT-LCD equipment and services, which help make flat panel TVs more than 20% larger each
year without price increases
EES
Supplies PV equipment used in:
- Produce crystalline-silicon (c-Si), Solar PV cell and modules,
- Help accelerate global PV adoption by delivering cost-effective solutions to improve productivity and
increase cell efficiency
Source: Company data
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Compared to other major semiconductor equipment companies, AMAT has the
broadest product portfolio, used in different chip fabrication processes (see Figure
27).
Figure 27: product portfolio of equipment vendors
Semiconductor Equipment AMAT LAM ASMI ASML TEL KLA
Lithography
Y
Photoresist Processing (Track)
Y
Deposition Y Y Y Y
Etch, Clean, and Planarization Y Y Y
RTP and Oxidation/Diffusion Y Y Y
Ion Implanter
Y
Process Control Y Y
Manufacturing Automation and Control Y
Wafer-Level Packaging Y Y Y Y
Die-Level Manufacturing Equipment Y Y
Test Equipment
Source: Company data
Acquisitions
AMAT has been active in M&A during the past decade, acquiring Varian in 2011
and Semitool in 2009 – and although it attempted to acquire ASMI in 2008, it was
not successful. None of the companies that AMAT has acquired in the past few
years operate in the same segments as AMAT – thus there is no overlap with
AMAT in terms of market share. All the acquired companies have a dominant
market share in their respective segments. We believe that AMAT’s strategy is to
expand its total addressable market through acquisition, and to grow organically in
the areas in which it currently has a position.
Figure 28: M&A deals
2011 Acquire
Name Amount Description Synergy for AMAT
Varian Semiconductor
Equipment Associates,
Inc
$4,900mn
- Gain exposure to ion implantation market, where it do not
Leading supplier of ion have any share before and Varian had 75% share,
implantation equipment to -Enhance AMAT's Baccini Solar product portfolio with c-Si
the semiconductor and products,
solar industries - Supply chain synergy of $50-60mn in annual cost from
end of 2nd year.
2009 Acquire Semitool Inc $346mn
2008 Rejected ASM International $800mn
Supply equipment used in
chip packaging
Semiconductor equipment
vendor specialised in
ALD deposition tool
-Get exposure to advanced packaging and memory
industry's conversion to copper interconnect.
- Enhance its deposition product portfolio further,
- Benefit from ASMI's comprehensive IP portfolio on
ALD equipment.
Source: Company data, Berenberg, Bloomberg data
AMAT shareholder structure
AMAT has approximately 1,203m outstanding ordinary shares listed on the
NASDAQ stock exchange. The free-float percentage is 99%. The shareholder
structure in June 2013 is shown below.
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Figure 29: Holding structure in June 2013
Harris Associates, 6%
Others,
84%
Blackrock, 5%
Vanguard, 5%
State Street, 0%
Source: Bloomberg data
Management
Chairman and CEO, Michael Splinter
Michael Splinter took over the role of CEO in April 2003, and has been chairman
of the board of directors since March 2009. Prior to joining AMAT, Mr Splinter
was at Intel Corporation, where he held a number of positions, including executive
vice president and director of sales and marketing, and executive vice president and
general manager of the technology and manufacturing group.
CFO, Bob Halliday
Bob Halliday was appointed senior vice president and CFO in February 2013, after
the former CFO, George Davis, left to join Qualcomm. Mr Halliday was executive
vice president and CFO of Varian Semiconductor Equipment Associates prior to
AMAT’s acquisition of the company in November 2011. Since the acquisition of
Varian, Mr Halliday served as general manager of the implant business unit within
AMAT’s SSG. He previously worked at Ionics, a manufacturer of water treatment
capital equipment, where he served as COO and CFO.
President, Gary Dickerson
Gary Dickerson became president of AMAT in June 2012, and has been working
on integrating newly-acquired companies since joining AMAT following its
acquisition of Varian in November 2011. Mr Dickerson was CFO and a director of
Varian from 2004 until Varian was acquired by AMAT. Prior to joining Varian in
2004, Mr Dickerson served 18 years with KLA-Tencor Corporation, a supplier of
process control and yield management solutions for the semiconductor and related
industries, where he held a number of operations and product development roles
before being appointed COO in 1999 and then president and COO in 2002.
CTO, Om Nalamasu
Om Nalamasu has been group vice president and chief technology officer at
AMAT since January 2012, having served as corporate vice president and chief
technology officer since January 2011. Nalamasu joined AMAT in June 2006, and
until January 2011 was vice president of research and served as deputy chief
technology officer and general manager of the company’s Advanced Technologies
Group.
General manager of SSG, Ranhir Thakur
An executive vice president and general manager of SSG since December 2009,
Ranhir Thakur previously served as senior vice president and general manager of
SSG, and before then as senior vice president and general manager of the Thin
Film Solar and Display division.
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Financials
Profit and loss account
Year-end October (USD m) 2011 2012 2013E 2014E 2015E
Sales 10,517.0 8,719.0 7,783.6 9,437.8 9,626.5
Cost of sales 6,118.8 5,153.0 4,504.3 5,317.6 5,451.4
Gross profit 4,398.2 3,566.0 3,279.2 4,120.1 4,175.1
Sales and marketing 436.4 471.8 413.7 445.3 442.8
General and administration 439.0 479.2 447.4 453.0 423.6
Research and development 1,113.0 1,236.0 1,283.6 1,379.3 1,347.7
Other operating income - - - - -
Other operating expenses - - - - -
Unusual or infrequent items 0.0 0.0 0.0 0.0 0.0
EBIT 2,409.8 1,379.0 1,134.5 1,842.4 1,961.0
Interest income 0.0 0.0 0.0 0.0 0.0
Interest expenses 16.0 78.0 41.0 0.0 0.0
Income on ordinary activities before taxes 2,393.8 1,301.0 1,093.5 1,842.4 1,961.0
Extraordinary income/loss 0.0 0.0 0.0 0.0 0.0
EBT 2,393.8 1,301.0 1,093.5 1,842.4 1,961.0
Taxes 670.0 342.0 294.5 460.6 451.0
Net income from continuing operations 1,723.8 959.0 799.0 1,381.8 1,510.0
Source: Company data, Berenberg estimates
Balance sheet
Year-end October (USD m) 2011 2012 2013E 2014E 2015E
Property, plant and equipment 866.0 910.0 882.0 914.0 926.0
Other Assets 1,709.0 5,035.0 4,815.0 4,595.0 4,375.0
Fixed Assets 2,575 5,945 5,697 5,509 5,301
Inventories 1,701 1,272 1,331 1,278 1,228
Accounts receivable 1,532 1,220 1,286 1,235 1,186
Other current assets 879 673 750 750 750
Liquid assets 7,174 2,992 3,248 4,214 5,265
Current Assets 11,286 6,157 6,615 7,477 8,429
TOTAL 13,861 12,102 12,312 12,986 13,730
Shareholders' equity 8,800 7,235 7,393 8,068 8,811
Minority interest 0 0 0 0 0
Long-term debt 1,947 1,946 1,946 1,946 1,946
Non-current liabilities 8,800 7,235 7,393 8,068 8,811
Accounts payable 2,794 2,265 2,322 2,322 2,322
Other liabilities 320.0 656.0 650.0 650.0 650.0
Current liabilities 2,794 2,265 2,322 2,322 2,322
TOTAL 13,861 12,102 12,312 12,986 13,730
Source: Company data, Berenberg estimates
115

Applied Materials Inc
Technology Hardware
Cash flow statement
USD m 2011 2012 2013E 2014E 2015E
Net profit/loss 1,928.0 109.0 450.8 1,381.8 1,470.8
Depreciation and Amortisation 246.0 422.0 416.0 408.0 408.0
Other 250.0 993.0 397.1 132.0 132.0
Cash flow from operations before changes in w/c 2,426.0 1,851.0 1,152.8 2,024.9 2,109.8
Change in working capital 4.0 327.0 -111.1 103.1 99.0
Cash flow from operating activities 2,426.0 1,851.0 1,152.8 2,024.9 2,109.8
Capex -209.0 -162.0 -175.0 -180.0 -180.0
Payments for acquisitions 0.0 -4,900.0 0.0 0.0 0.0
Other investing cash flow 919.0 392.0 292.0 0.0 0.0
Cash flow from investing activities 710.0 -4,670.0 117.0 -180.0 -180.0
Long Term Debt 1,730.0 0.0 0.0 0.0 0.0
Short Term Debt 0.0 -1.0 0.0 0.0 0.0
Repayment of borrowings 0.0 0.0 0.0 0.0 0.0
Purchase of own shares -350.0 -1,416.0 -348.0 -400.0 -400.0
Inflow resulting from the issue of shares 49.0 97.0 85.0 0.0 0.0
Dividends paid -314.0 -424.0 -455.6 -479.2 -479.2
Cash flow from financing activities 960.0 -1,744.0 -718.6 -879.2 -879.2
Effects of exchange rate changes on cash 6.3 -5.0 0.0 0.0 0.0
Increase/decrease in liquid assets 4,102.3 -4,568.0 551.2 965.7 1,050.6
Liquid assets at end of period 5,959.0 1,392.0 1,943.2 2,908.9 3,959.5
Source: Company data, Berenberg estimates
116

Tokyo Electron Ltd
Technology Hardware
Mainly exposed to legacy markets
• We initiate coverage of TEL with a Sell recommendation and a
price target of ¥4,331. TEL supplies equipment used for
semiconductor chip fabrication, FPD and photovoltaic (PV)
manufacturing. We are sellers because: 1) 77% of the revenues from
its semiconductor precise equipment (SPE) segment (which accounts
for 79% of revenue, and 100% profit) comes from lowgrowth/declining
markets; 2) the loss-making FPD and PV segment is
likely to remain weak, as the TV and solar markets remain sluggish.
• Key debates: 1) Can TEL benefit from new chip designs including
FinFET, 20nm and 3D NAND? 2) Has the recent depreciation of the
yen improved TEL’s competitive position versus other equipment
vendors? 3) Can it gain market share in the silicon etching market?
1. We estimate TEL’s SPE revenue will grow by 7% in 2013
and 6% in 2014 and will decline by 5% in 2015: The level of
growth is unlikely to be as strong as peers as its SPE revenue is
exposed to low-growth markets, such as photoresist processing,
dielectric etching and LP CVD,
2. We believe the depreciated yen versus the dollar will have a
very limited impact on TEL: We do not think chip-makers will
switch vendors purely for cost reasons, as they would incur extra
expenses related to process reconfiguration/testing. TEL’s ASP
may look attractive compared to peers AMAT and LAM, but
other Japan-based competitors (ie Hitachi, Dainippon) have the
same advantage.
3. Management aims to grow its silicon etching market share,
with growth driven by 20nm, FinFET and 3D NAND: We
remain sceptical about whether TEL can increase its silicon
etching share. It currently holds a 9% market share, but has fallen
behind LAM, AMAT and Hitachi (an 89% combined share).
These latter three already have strong positions with the main
foundry, logic and memory players, so we see little room for
TEL to expand.
• Compared to consensus, our FY 2014 and FY 2015 EPS are 8%
and 10% lower: We estimate revenue will remain flat from FY 2014
to FY 2015, given TEL’s 60% exposure to low growth markets, while
consensus is expecting 4% growth.
• Our ¥4,331 PT implies an EV/sales of 0.9x, which is the middle of
the historical EV/sales range (0.7-1.2x) during the semiconductor
recovery cycle.
Sell (initiation)
Rating system
Current price
JPY 4,790
Absolute
Price target
JPY 4,331
19/07/2013 Tokyo Close
Market cap JPY 910,222 bn
Reuters 8035.T
Bloomberg 8035 JT
Share data
Shares outstanding (m) 179
Enterprise value (JPY bn) 660
Daily trading volume 2,025,887
Performance data
High 52 weeks (JPY) 5,980
Low 52 weeks (JPY) 3,225
Relative performance to SXXP TOPIX
1 month -6.0 % -9.7 %
3 months -2.8 % -3.4 %
12 months 12.6 % -31.2 %
Key data
Price/book value 1516.5
Net gearing 0.0%
CAGR sales 2012-2015 6.0%
CAGR EPS 2012-2015 84.8%
Business activities:
Tokyo Electron supplies equipment used
for semiconductor chip fabrication, flat
panel display and photovoltaic
manufacturing.
Y/E 31.03., JPY bn 2011 2012 2013E 2014E 2015E
Sales 633 497 549 596 593
EBIT 60 13 17 53 52
Net profit 37 6 15 39 39
Y/E net debt (net cash) -247 -240 -250 -275 -321
EPS (GAAP) 205.04 34.07 82.02 218.51 214.99
EPS (Proforma) 205.04 34.07 82.02 218.51 214.99
CPS 1380.00 1340.17 1396.31 1532.27 1793.15
DPS 128.98 51.99 50.00 76.00 75.00
Gross margin 33.4% 31.9% 31.7% 33.3% 31.6%
EBIT margin 9.5% 2.5% 3.2% 8.9% 8.8%
Dividend yield 2.5% 1.0% 1.0% 1.5% 1.5%
ROCE 6.2% 1.0% 2.4% 6.3% 5.9%
EV/sales 1.0 1.3 1.2 1.1 1.1
EV/EBIT 11.0 53.4 38.0 12.0 11.3
P/E 24.8 149.1 61.9 23.2 23.6
Source: Company data, Berenberg
22 July 2013
Tammy Qiu
Analyst
+44 20 3207 2673
tammy.qiu@berenberg.com
Jean Beaubois
Specialist Sales
+44 20 3207 7835
jean.beaubois@berenberg.com
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Tokyo Electron Ltd
Technology Hardware
Investment summary
Our investment thesis on Sell-rated TEL is predicated on the following five points.
• TEL is mainly exposed to legacy markets: TEL generates 77% of its SPE
revenue from low-growth/declining markets. Compared to its peers ASML,
ASMI, AMAT, KLA and LAM, which respectively have 0%, 9%, 39%, 0% and
26% of their revenue exposed to low-growth/declining markets, TEL’s growth
opportunity from expansion in its current markets is the weakest of the six
companies. Therefore, we do not believe TEL will benefit from new chip
designs/semiconductor technology as much as its peers.
• TEL unlikely to return to 2007 peak: At the Semicon 2013 event in the US in
July, TEL shared its bull-case scenario. It expects its FY 2017 revenues (ie to
end-March 2018) to return to the FY 2007 peak level of ¥906bn from ¥497bn
in 2012, driven by market expansion and share gains in etching and cleaning
processes. We do not believe that TEL will be able to return to its 2007 peak
level for the following reasons.
o Revenue failed to return to the 2007 peak level during the last peak cycle
(2009-2011). TEL’s revenue reached ¥668bn during this period, which was
26% lower than the 2007 peak. The operating margin was 15% at the peak,
compared with 19% in 2007. We believe that this lower revenue and margin
was due to the impact of its exposure to low-growth markets.
o TEL’s SPE revenue as a percentage of total wafer fab equipment (WFE)
spending decreased from 20% in 2007 to 13% in 2012 excluding the impact
of FX movements. We estimate TEL’s share of WFE decrease to 12% in
2015 and 11% in 2017, as it is less likely to benefit from the new chip
designs compare with its peers.
o Our FY 2017 revenue estimate for TEL is ¥662bn (27% lower than TEL’s
bull-case scenario of ¥906bn), including SPE revenue of ¥450bn (applying
an 11% share of total WFE spending to TEL’s 2017 WFE estimate of
$40bn), FPD/PV revenue of ¥101bn (in line with the 2007 peak level, plus
¥32bn in solar revenue), and components revenue of ¥111bn (in line with
the 2007 peak). Our operating margin in FY 2017 is 15% (TEL’s estimate:
19%), including a ¥30bn cost saving compared with the 2012 level of
¥146bn.
Figure 1: We do not think TEL will return to 2007 peak
2007 2010 2012
2017E 2017E
TEL Berenberg
Delta %
Revenue JPY bn 906.1 668.7 497.3 906.0 661.8 -27.0%
SPE JPY bn 726.4 511.3 392.1 450.0
FPD/PV JPY bn 68.0 66.7 20.2 100.7
Components 111.1 91.3 84.7 111.1
OPM % 18.6% 14.6% 2.5% 19.0% 15.4% -3.6%
OP profit JPY bn 168.5 97.6 12.5 172.1 102.2 -40.6%
tax rate (effective) % 18.3% 26.9% 64.1% 30.0% 30.0% 0.0%
EPS JPY 594.0 401.7 34.1 672.5 399.2 -40.6%
no. share mn 178.9 179.0 179.2 179.2 179.2 0.0%
Source: Company data, Berenberg estimate
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o AMAT and LAM are also aiming to gain market share: AMAT is aiming to
gain a 2-4% WFE share by 2016, and LAM is looking to gain a 3-5% share
in the etching market and a 5-10% share in the cleaning market. In our view,
TEL is in a weaker position compared with AMAT and LAM in terms of
gaining share, as it does not have an established market position or
experience in these growing markets.
• Little upside from operating leverage and yen depreciation: TEL’s margin
may improve due to cost savings, but we believe the margin is unlikely to show
significant improvement without top-line growth. We estimate that the gross
margin will stay at the 33% level (34% in 2007) after cost savings are taken into
account. We estimate the operating margin will be 9% in 2015 (compared with
19% in 2007), assuming that the ¥10bn saving planned for 2013 happens each
year thereafter.
• Yen depreciation has had little impact: In our opinion, the yen depreciation
has had little impact on TEL from both an operational and competitiveness
perspective, as: 1) its operations are not heavily exposed to FX movements in
terms of yen contract prices and its manufacturing plants are located in Japan,
meaning that the effect on its operations/cost base is limited; 2) we believe
chip-makers care more about tool performance, reliability and supporting
services than price; and 3) Japan-based Hitachi and Dainippon have the same
FX advantage.
• The FPD/PV segment remain a profit drag: In our opinion, the FPD/PV
segment was always been a profit-dilutive segment for TEL. Between 2004 and
2012, the segment’s margin was 10% at peak, which is lower than the SPE
margin (which averaged 12.5% in 2004-2012). We estimate the segment will be
loss-making in 2013, 2014 and 2015 due to the weak TV and solar markets.
Management is targeting a profit in the solar business in two years’ time, but
expects it to remain sluggish in 2013 and 2014. A weak performance may trigger
impairments on the ¥22bn goodwill related to the Oerlikon Solar acquisition in
2012.
• Valuation: Our price target of ¥4,331 implies an EV/sales of 0.9x, which is the
middle of the historical EV/sales range of 0.7x-1.2x during the semiconductor
recovery cycle. We base our valuation on EV/sales instead of P/E, as TEL
trades at a premium P/E compared to its peers due to its strong cash position.
We believe EV/sales is the valuation methodology to reflect its weaker growth
potential compared with ASML, AMAT and ASMI.
TEL’s ROE is lower than ASML’s and AMAT’s as its operating margin is
lower. It has the strongest cash position among its peers.
Figure 2: Valuation matrix
ROE*
Dividend
yield*
FCF yield* Net cash/marcap
No.1 ASML 19.7% AMAT 2.5% AMAT 9.7% TEL 26.5%
No.2 AMAT 17.1% TEL 1.5% ASMI 6.2% SUSS 17.6%
No.3 SUSS 9.1% ASML 0.9% ASML 4.5% AMAT 16.7%
No.4 TEL 6.3% ASMI - TEL 4.3% ASMI 8.9%
No.5 ASMI 6.2% SUSS - SUSS 1.6% ASML 6.5%
*base on Berenberg estimation of 2014 performance
Net cash base on 2012 YE balance
Source: Berenberg estimate, company data
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Key catalysts
Key catalysts would include the following.
• Semiconductor/FPD/solar order recovery: In our opinion, TEL’s SPE
orderbook will likely remain flattish in the FY 2013 as weaker foundry spending
is offset by increasing memory spending, although we expect a slight increase
towards the end of CY 2013. Nevertheless, we do not expect flat panel and
solar orders to recover in the next few quarters.
• Market share gain in the silicon etching segment: We believe TEL has little
room to expand in the global silicon etching market, as LAM, Hitachi and
AMAT already hold a combined 89% market share, and have penetrated all the
mainstream chip-makers.
Key risks
Key risks include the following.
• The FPD/solar segments remain a drag on group profit: The
underperformance of the FPD and solar segments are in line with what we are
seeing at AMAT. We expect these two divisions to remain sluggish and indeed
loss-making in 2014 and 2015.
• Semiconductor spending pause: We are not concerned about the expected
pause in semi capex over the next four years, as chip-makers are ramping up
new chip designs such as FinFET, 20nm and 3D NAND. However, TEL may
benefit from this ramp-up to a lesser extent compared with front-end peers
such as AMAT, ASML and ASMI as 77% of its SPE revenue is exposed to lowgrowth
markets.
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Tokyo Electron Ltd
Technology Hardware
TEL is mainly exposed to legacy markets
TEL supplies SPE, FPD/PV equipment and electronic components and computer
networks (EC) equipment. The SPE segment generates 79% of group revenue and
100% of its profit. The FPD/PV division is currently loss-making and the EC
division has a 2% margin. We believe that TEL’s performance will be mainly
driven by the SPE segment; any positive newsflow related to other segments may
help the share price but not its business fundamentals.
In the SPE segment, TEL has a diversified product portfolio including photoresist
processing, deposition, etching and wafer level packaging equipment. It generates
the majority of its revenue from the photoresist processing, deposition and etching
markets (see Figure 3 below).
Figure 3: TEL’s revenue from equipment
Etch, 27%
Clean, and
Planarization,
11%
Deposition, 17%
RTP and
Oxidation/Diffusion, 5%
Photoresist
Processing
(Track), 34%
Wafer-Level Packaging, 6%
Source: Gartner data, Berenberg estimates
TEL generates 77% of its SPE revenue from its legacy markets such as photoresist
processing, LP CVD and dielectric etching, where it holds dominant market
shares. It has 23% of SPE revenue coming from growing markets such ALD and
silicon etching, where its market share is relatively small (see Figure 4 below).
Compared to peers ASML, ASMI, AMAT, KLA and LAM, we believe TEL’s
growth perspective to be the weakest, due to its high exposure in legacy markets.
Consequently, it may not stand to benefit as much from new chip
designs/semiconductor technology as its peers.
As shown in Figure 4 below, ASML’s, ASMI’s, AMAT’s, KLA’s and LAM’s
exposure to legacy markets are much smaller compared to TEL. If we assume that
market shares will remain the same, TEL is likely to have the lowest growth rate
among its peer group during 2012-2017.
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Figure 4: TEL is mainly exposed to legacy markets
Market exposure
High Growth markets
2012-
2017
CAGR
% of
revenue
2012
market
share
Low Growth/Declining markets
Market exposure
ASML Lithograhy +18% 100% 74% no exposure to low growth market
2012-
2017
CAGR
% of
revenue
2012
market
share
2012-
2017
Growth
CAGR
18.0%
ASMI ALD deposition +15.0% 60% 45% LP CVD 1.0% 9% 51%
Epitaxy +7.5% 17% 9%
PE CVD +5.0% 14% 9%
91% 9%
AMAT PE CVD +5.0% 19% 47% Ion implanter -2.5% 11% 76%
Epitaxy +8.0% 11% 89% Dielectric etching 0.5% 1% 5%
Silicon etching +4.0% 8% 14% PVD 0.0% 21% 78%
CMP&cleaning +3.0% 6% 59% RTP Thermal -3.0% 7% 42%
Process control +6.0% 9% 76%
Wafer level packaging excl conta +12.0% 6% 9%
Fab automation +4.0% 3% 16%
61% 39%
KLA process control +6.0% 100% 54% no exposure to low growth market
LAM Silicon etching +4.0% 50% 59% Dielectric etching 0.5% 14% 26%
Metal etching +6.0% 4% LP CVD 1.0% 3% 10%
Wafer level packaging excl conta +12.0% 1% Bevel edge removal -2.4% 3% 100%
PE CVD +5.0% 15% 40% Cleaning (spin.spray processor) -2.0% 6% 15%
ECD +4.0% 4%
74% 26%
TEL ALD deposition +15.0% 6% 44% Photoresist processing 1.4% 34% 89%
Silicon etch +4.0% 8% 9% LP CVD 1.0% 12% 51%
WL packaging-excl contact prob +12.0% 5% 3% Dielectric etching 0.5% 20% 63%
WL packaging- contact prob +3.0% 4% 39% RTP oxidisation/diffusion -1.5% 3% 22%
Cleaning (spin.spray processor) -2.0% 9% 13%
23% 77%
11.1%
3.3%
6.0%
3.2%
2.4%
Source: Gartner Data, Berenberg estimates
Photoresist processing
TEL generates 34% of its revenue from photoresist processing equipment. It had a
dominant, 89% share of the global photoresist processing market in 2012, followed
by its closest competitor Dainippon, with a 7% share (see Figure 5).
Figure 5: Photoresist processing market share
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2010 2011 2012
Source: Gartner Data
TEL Dainippon SEMES Suss FSI
In our opinion, the photoresist processing market is likely to underperform the
total semiconductor capex over the next few years. Demand for photoresist
processing equipment is associated with unit growth of lithography equipment, as
each photoresist coater/developer usually supports one lithography tool. As the
new generation of lithography tools becomes more efficient in terms of
throughput, and demand for legacy tools declines, the total number of lithography
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Tokyo Electron Ltd
Technology Hardware
tools is likely to grow at a slower pace. Gartner forecasts the photoresist
processing market will grow by c1.4% between 2012 and 2017, versus growth in
semiconductor capex of c4.1%.
In 2015-16, when extreme ultraviolet lithography (EUV) starts to ship in volume,
we may potentially see a higher top-line growth rate. The photoresist used for
EUV is different from conventional lithography tools and requires a different type
of photoresist equipment which may carry a high ASP. However, there is little
visibility on revenue upside.
Etching
TEL generates 27% of its revenue from etching equipment, with a 29% market
share globally in 2012. Some 85% of TEL’s etching revenue comes from shipping
dielectric etching equipment, with the remainder from silicon etching equipment. It
holds a dominant 63% share in the dielectric etching market, and a 9% share in
silicon etching (LAM leads this market with a 59% share).
Etching market trends have moved against TEL over the past two years (see
Figure 6) as the total addressable market (TAM) for dielectric etching has fallen by
c20%, while the silicon etching TAM increased by c4% between 2010 and 2012.
Figure 6: Etching market solutions
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: Gartner Data
2010 2011 2012
Bevel Edge removal Dielectric Etch
Metal Etch
Other
Silicon Etch (including TSV)
This trend should continue over the next few years, driven by new chip
manufacturing processes including double patterning (DP) and FinFET in
logic/foundry, and 3D NAND in memory. From a process point of view, DP uses
more silicon etching steps than single patterning (SP), as does FinFET. The
memory chip manufacturing process currently requires that 55% of etching steps
are carried out using silicon etching technology, and this percentage is expected to
rise to 60% for 3D NAND. As a result, TEL’s TAM may shrink at an accelerated
pace in the near future, unless it can offset this loss by gaining market share in
silicon etching.
TEL aims to increase its overall market share in etching from 29% currently to
35% by 2015, as well as gain silicon etching market share. We remain sceptical
about whether TEL can gain market share because the silicon etching market is
crowded and competitive. LAM, Hitachi and AMAT all hold a bigger market share
than TEL (Figure 7) and are currently shipping silicon etching tools to mainstream
logic/foundries, while TEL is mainly supplying dielectric tools to these chipmakers.
It would be hard for the latter to switch vendors due to process
reconfiguration costs.
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Figure 7: Silicon etching market share
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2010 2011 2012
Lam Hitachi AMAT TEL Mattson
Source: Gartner Data
Deposition
TEL generates 17% of its revenue from the deposition market, and had a 12%
global market share in 2012. It generates 73% of its deposition revenue from LP
CVD tools (with a 51% market share; Hitachi is the next biggest player – see
Figure 8) and the rest from atomic layer deposition (ALD) tools.
Figure 8: LP CVD market share
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2010 2011 2012
TEL LAM+novellus AMAT hitachi LAM+novellus AMAT hitachi
Soucre: Gartner Data
Source: Gartner data
LP CVD equipment is used mainly in memory manufacturing processes and some
poly silicon logic processes. In the future, we may see some LP CVD process
demand being cannibalised by plasma-enhanced (PE) CVD solutions, as memory
chip-makers migrate to 3D NAND. We may also see LP CVD lose logic market
share as chip-makers shift to HKMG technology which uses ALD. We believe the
LP CVD market will remain flattish in 2014-15, driven by memory spending offset
by reduced logic adoption.
The ALD market is growing quicker than the LP CVD market, as it is associated
with the adoption of HKMG in mainstream logic/foundries. However, ALD
revenue growth may be too small to drive TEL’s total top-line growth.
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TEL unlikely to return to 2007 revenue peak, despite its bullcase
scenario expectations
At the Semicon 2013 event, TEL gave a more bullish outlook on its WFE
spending expectations than AMAT and LAM. It expects the WFE market to reach
$40bn in 2017 (which would represent c6% growth from 2012 to 2017), while
AMAT and LAM expect $30bn-37bn and $30-35bn WFE spending respectively in
2016 (c3.1% growth from 2012 using the mid-point of their WFE spending
projection). In its bull-case scenario, it expects FY 2017 (ending March 2018)
revenue to return to its FY 2007 peak level of ¥906bn, up from ¥497bn in 2012,
driven by market expansion and share gains in etching and cleaning processes.
We do not think that TEL will be able to return to its 2007 peak revenue level for
the following reasons.
1) During the last peak cycle (2009-2011), TEL’s revenue reached a peak of
¥668bn, which was 26% lower than the 2007 peak level. The peak operating
margin was 15% during this period (lower than the 19% achieved in 2007). We
believe the lower revenue and operating margin level was due to the impact of
its exposure to low-growth markets.
Figure 9: TEL unlikely to return to 2007 revenue peak
2007 2010 2012
2017E 2017E
TEL Berenberg
Delta %
Revenue JPY bn 906.1 668.7 497.3 906.0 661.8 -27.0%
SPE JPY bn 726.4 511.3 392.1 450.0
FPD/PV JPY bn 68.0 66.7 20.2 100.7
Components 111.1 91.3 84.7 111.1
OPM % 18.6% 14.6% 2.5% 19.0% 15.4% -3.6%
OP profit JPY bn 168.5 97.6 12.5 172.1 102.2 -40.6%
tax rate (effective) % 18.3% 26.9% 64.1% 30.0% 30.0% 0.0%
EPS JPY 594.0 401.7 34.1 672.5 399.2 -40.6%
no. share mn 178.9 179.0 179.2 179.2 179.2 0.0%
Source: Company data, Berenberg estimate
2) TEL’s SPE revenue as a percentage of total WFE spending has been
decreasing over the past five years, from 20% in 2007 to 13% in 2012,
excluding the impact of FX movements (see Figure 10). We estimate that this
share will fall to 12% in 2015 and 11% in 2017, as it is less likely than peers to
benefit from the new chip designs.
Figure 10: Share of WFE down from 20% to 12%
WFE $bn
TEL SPE Rev/WFE
45
40
35
30
25
20
15
10
5
-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
WFE $bn TEL/WFE
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Source: Gartner data, company data, Berenberg estimate
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3) Our FY 2017 revenue estimate for TEL (see Figure 9) is ¥662bn (27% lower
than the TEL bull-case scenario), comprising SPE revenue of ¥450bn (ie after
applying the 11% share to TEL’s 2017 $40bn WFE estimate), FPD/PV
revenue of ¥101bn (in line with 2007 peak levels, and includes solar revenue
of ¥32bn), and components revenue of ¥111bn (in line with the 2007 peak).
Our operating margin estimate for FY 2017 is 15% (TEL’s estimate: 19%),
including a ¥30bn cost saving compared to the 2012’ ¥146bn level.
4) TEL is aiming to gain share in the etching and cleaning markets, although so is
AMAT (which plans to gain a 2-4% WFE share by 2016) and LAM (which is
looking to gain by 3-5% in etching and by 5-10% in the cleaning market). In
our opinion, with neither an established market position nor experience of
these growing markets, TEL is in a weaker position than AMAT and LAM to
gain share.
Yen depreciation – limited impact
The yen has depreciated by 30% against the US dollar since 2012. However, we
believe the impact on TEL has been limited. From an operational/cost
perspective, its operations are not heavily exposed to FX movements. TEL’s sales
contracts are mostly denominated in yen and it hedges its foreign-currency
exposures. Its main manufacturing plants are all based in Japan. Therefore the
impact on its operations/cost base is limited.
From a competitiveness perspective, the depreciation in the yen makes TEL’s
prices more competitive compared to its US peers AMAT’s and LAM’s. However,
we do not expect TEL to benefit much from this, as we do not believe chipmakers
will switch vendors purely because of lower prices. From our conversations
with industry specialists, chip-makers care more about equipment performance,
reliability and support services than price.
Even if chip-makers did switch due to lower prices, TEL’s gain could still be very
limited as it only competes with US competitors in some of its end-markets and
other Japan-based competitors such as Hitachi and Dainippon have the same
advantage.
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Key catalysts
In our view, the following factors will be the main share price catalysts.
• Semiconductor/FPD/solar order recovery: As with its peers, TEL trades on
its order intake level. Any sign of order recovery in the semiconductor, FPD or
solar industries would be positive for TEL’s share price.
We believe TEL has already seen a positive order trend for semiconductors
over the past two quarters, and we believe the company is likely to see similar
order levels in the coming quarter as weaker foundry spending is offset by
stronger memory spend. ASML, KLA and LAM have all shown early
indications of a memory recovery recently and we expect TEL also to benefit.
But while FPD and solar orders doubled in the last quarter (Q4 FY 2013)
compared to Q3, we do not expect the orderbook to show material
improvement in the near future as the solar and FPD markets remain sluggish.
On a net basis, we expect a slight recovery in orders in the coming quarter,
mainly driven by the semiconductor segment.
• Market share gain in high-growth markets: TEL is mainly exposed to lowgrowth
markets such as deposition, LP CVD and dielectric etching. Its only
high-growth market is silicon etching, where growth is likely to be fuelled by
20nm DP, FinFET and 3D NAND chip designs. Management is keen to
increase TEL’s market share in silicon etching and we believe any market share
gain will be positive for TEL’s share price.
In our opinion, the silicon etching market is crowded: LAM (with a 59% share),
Hitachi (16%) and AMAT (14%) all hold higher market shares than TEL (9%).
LAM has strong relationships with logic and foundry players, while AMAT has
strong relationships with memory players, hence we believe TEL has very
limited opportunities to increase market share.
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Valuation
Our valuation is based on an EV/sales multiple. TEL trades at a premium P/E
multiple compared to its peers, as it has a solid cash position. Its cash/market cap
ratio (see Figure 11) was higher than its peers’ for the majority of 2006-2012.
Hence, we use EV/sales as a valuation methodology for TEL instead of P/E to
reflect its weaker growth potential compared to ASML, ASMI and AMAT.
Figure 11: Stronger cash position compared to peers
2006-2012
Cash/marcap 2006 2007 2008 2009 2010 2011 2012 avg
TEL 14.8% 21.3% 23.2% 26.9% 31.4% 27.3% 26.5% 24.5%
ASML 6.1% 4.7% 4.1% 3.8% 7.2% 10.1% 6.5% 6.1%
ASMI 6.4% 6.1% 4.8% 11.1% 8.7% 13.9% 8.9% 8.6%
AMAT 17.9% 20.8% 19.3% 18.2% 21.7% 40.0% 16.7% 22.1%
LAM 14.6% 9.3% 14.7% 8.0% 11.5% 29.4% 39.7% 18.2%
KLA 25.2% 18.5% 17.1% 14.4% 16.6% 22.0% 27.4% 20.2%
Source: Company data, Bloomberg data
Historically, TEL has traded at 0.7x-1.2x EV/sales in a semi recovery cycle. Our
price target of ¥4,331 implies a EV/sales of 0.9x, which is in the middle of this
range, but lower than its better quality peers (ASML, ASMI, AMAT, KLA and
LAM). We believe that the lower multiple is justified due to its lower growth
potential and profitability.
Figure 12: Peer group valuation
Company Name PE EV/EBIT EV/Sales
FY 2013E FY 2014E FY2015E FY 2013E FY 2014E FY2015E FY 2013E FY 2014E FY2015E
NIKON CORP 14.12 13.42 12.25 9.83 8.28 8.53 0.82 0.80 0.87
APPLIED MATERIAL 23.30 13.18 11.92 17.43 10.77 4.87 2.35 1.92 0.91
ASML HOLDING NV 25.04 15.67 12.17 21.81 10.74 2.10 4.80 3.73 0.67
ASM INTL NV 27.03 14.02 13.19 50.89 10.49 13.21 3.13 1.91 1.52
KLA-TENCOR CORP 16.94 13.21 11.26 9.43 7.59 2.97 2.46 2.21 0.95
LAM RESEARCH 20.99 11.64 10.15 14.73 8.28 2.90 1.74 1.44 0.58
ULVAC INC na 10.21 7.36 25.28 12.27 15.08 0.82 0.75 1.04
DAINIPPON SCREEN 28.32 14.13 14.41 67.36 11.63 13.66 0.76 0.70 0.81
Mean 19.47 13.19 11.59 27.10 10.00 7.92 2.11 1.68 0.92
Median 22.14 13.32 12.04 19.62 10.61 6.70 2.04 1.68 0.89
TOKYO ELECTRON 48.60 20.98 18.74 25.57 9.75 5.61 1.16 1.02 0.72
Source: Bloomberg data
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Key risks
The key risks to our investment case are as follows.
• FPD/PV segment: TEL’s FPD/PV business was loss-making in FY 2012, and
management has guided that the division will continue to make a loss over the
next six months. The segment’s continuing underperformance is likely to have a
negative impact on total corporate earnings, and may trigger a heavy
impairment charge on goodwill related to its end-2012 acquisition of Oerlikon
Solar.
In our opinion, the underperformance of the FPD and solar divisions is in line
with the experience of AMAT. We expect the two markets to remain sluggish in
the near future, until the solar supply/demand balance improves and TV
manufacturers start investing in new technology or capacity. TEL has ¥22bn of
goodwill related to the Oerlikon solar acquisition, which is likely to be impaired
if we see continuing underperformance.
• Semiconductor spending pause: TEL generates 79% of sales and 100% of
profit from its SPE division. The performance of SPE is highly correlated to
chip-makers’ capex spend. If chip-makers’ capex level falls as the consumer
electronics market reaches saturation, or technology migration starts to
decelerate, TEL’s shipments, revenue and profit margin could be hit.
In our opinion, capex spending is likely to remain strong over the next few
years, driven by consumer devices growth in emerging markets. We believe
there will be a capex uptick driven by 450mm migration in 2016. As a result, we
are not too concerned about the expected capex pause in the next couple of
years.
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Financials
Profit and loss account
TEL’s revenue includes revenue from SPE, FPD and PV equipment and EC
components.
TEL’s revenue model
We model TEL’s revenue based on front-end order intake trends.
Figure 13: TEL revenue forecast
(Yen Billions) F13E (3/2014) F14E (3/2015) F15E(3/2016)
FY H1E H2E F13E H1E H2E F14E H1E H2E F15E
Orders
Orders 210.7 254.6 465.2 232.4 219.5 451.8 232.7 240.2 472.9
Semiconductor Equipment 198.7 240.6 439.2 217.4 204.5 421.8 214.7 222.2 436.9
Movement YOY
Orders 7% 3% 5% 10% -14% -3% 0% 9% 5%
Semiconductor Equipment 39% 21% 28% 9% -15% -4% -1% 9% 4%
Revenue - Total 262.5 286.7 549.2 308.5 287.1 595.5 289.9 303.2 593.1
Semiconductor Equipment 200.0 220.6 420.6 233.7 210.7 444.5 206.9 219.2 426.1
FPD Equipment 12.0 13.6 25.6 14.1 15.7 29.8 16.0 18.0 34.0
PV Solar 8.0 10.0 18.0 16.0 16.0 32.0 20.0 20.0 40.0
Electronic Components 42.5 42.5 85.0 44.6 44.6 89.3 47.0 46.0 93.0
Movement YOY
Revenue - Total -2% 24% 10% 18% 0% 8% -6% 6% 0%
Semiconductor Equipment -7% 24% 7% 17% -4% 6% -11% 4% -4%
FPD Equipment 30% 24% 27% 17% 15% 16% 13% 15% 14%
PV Solar - - - 100% 60% 78% 25% 25% 25%
Electronic Components 0% 1% 0% 5% 5% 5% 5% 3% 4%
Source: Company data, Berenberg estimates
We expect TEL’s equipment order intake to slightly increase in FY 2013 (ending
March 2014), with a recovery in memory spend likely to drive its deposition
segment, and with the mainstream logic/foundry segment starting to ramp up
20nm/16nm FinFET mass production capacity. Order intake for FY 2014 (ending
March 2015) will fall slightly as TEL is mainly exposed to low-growth and declining
markets.
We remain cautious about order intake for FPD/PV equipment and expect orders
to increase at a moderate level.
We estimate TEL’s underlying revenue will reach ¥549bn in FY 2013, which
includes a ¥420bn contribution from the SPE segment, growing to ¥444bn in FY
2014.
Revenues and orders by customer/region
TEL supplies equipment to the leading chip-makers in the logic, foundry and
memory markets. The majority of its orders in FY 2013 came from foundry
customers, in line with total capex spending trends, as foundry customers are the
main buyers.
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Figure 14: TEL order breakdown by customer type
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY 2010 FY 2011 FY 2012 FY 2013
MPU, System LSI, Others Foundry NAND DRAM
Source: Company data
Profit margin
We expect TEL’s operating margin to increase from 3.2% in FY 2013 to 8.9% in
FY 2014, and 8.8% in FY 2015, due to factory loading improvement following
semiconductor order recovery.
Balance sheet and cash flow
TEL has a strong balance sheet, with ¥240bn net cash, and zero debt at the end of
FY 2013. We expect TEL will maintain its healthy balance sheet for the near future
and have ¥321bn of net cash at FY 2015.
We forecast TEL to generate ¥19bn free cash flow in FY 2013, ¥38bn in FY 2014
and ¥60bn in FY 2015.
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Company background
Founded in 1963, TEL is a world-leading supplier of SPE, FPD, PV and EC
equipment.
It supplies a broad range of SPE which are used in different chip manufacturing
processes, and generates the majority of its revenue from shipping SPE. Its
customers include major foundry, logic and memory chip-makers and IDMs.
Figure 15: TEL product portfolio
TEL Product portfolio:
Semiconductor Production Equipment: Flat panel display equipment:
Coater/Developer - photoresist processing FPD Coater/developers
Clean track Lithius Pro V/Lithius pro V-i CS Series
Clean track Lithius Pro/Lithius pro i Exceliner
Clean track Lithius/lithius i+
Clean track act 12/Clean track Act 8 FPD etch/ash systems
Clean track Act 12 SOD/clean track ACT 8 SME Series
Clean Track act M
HT Series
SE eries
Wafer deposition:
Impressio
Triase SPAi
Triase Ti/TiN
Triase W
Triase High K CVD
Etching tools:
Telius SP
UNITY Me
Tactras
Wafer bonding/debonding
Synapse V/Spnapse Z
Synapse S
Surface preparation tools:
Auto wet station Expedius +
Auto wet station Expedius -i
Gas Chemical Etch system Certas WING
Single Wafer cleaning system - Cellesta+
Single Wafer cleaning system - Cellesta-i
Scrubber system - NS 300+HT
Scrubber system - NS 300+
Source: Company data
Its EC division acts as a distributor of a wide range of sophisticated electronic
components and computer network equipment.
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TEL’s shareholder structure
TEL has approximately 180m outstanding ordinary shares listed on the Tokyo
Stock Exchange, with a 94% free float. The shareholder structure at the 2012
financial year-end (March 2013) is shown below.
Figure 16: Holding structure at end-FY 2012
The Master Trust Bank of
Japan, Ltd. (trust account),
11%
Other, 81%
Japan Trustee Services
Bank, Ltd. (trust account),
8%
Source: Company data
Management
Chairman, president and CEO Tetsuro Higashi
Mr Higashi joined TEL in 1996, and took over the role of president and CEO in
Apr 2013, after former CEO Hiroshi Takenake resigned for health reasons.
Executive vice president Hikaru Ito
Mr Ito was appointed executive vice president of the SPE sales division and general
manager in 2003.
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Profit and loss account
Year-end March (¥ bn) 2011 2012 2013E 2014E 2015E
Sales 633.1 497.3 549.2 595.5 593.1
Cost of sales 421.6 338.5 375.2 397.0 405.9
Gross profit 211.4 158.7 174.0 198.5 187.1
Administrative and selling expenses 69.5 73.0 83.6 71.5 60.0
General and administration - - - - -
Research and development 81.5 73.2 73.0 74.0 75.0
Impairment charges - - - - -
EBIT 60.4 12.5 17.4 53.0 52.1
Interest income 4.1 6.1 6.1 6.1 6.1
Interest expenses -0.5 -2.0 -2.0 -2.0 -2.0
Income on ordinary activities before taxes 64.0 16.7 21.5 57.2 56.3
Extraordinary income/loss -3.4 1.1 0.0 0.0 0.0
EBT 60.6 17.8 21.8 57.5 56.6
Taxes 23.4 11.4 6.5 17.2 17.0
Net income from continuing operations 37.2 6.4 15.0 40.0 39.3
Income from discontinued operations (net of tax) - - - - -
Net income 37.2 6.4 15.0 40.0 39.3
Minority interest 0.5 0.3 0.3 0.8 0.8
Net income (net of minority interest) 36.7 6.1 14.7 39.2 38.5
Source: Company data, Berenberg estimates
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Balance sheet
Year-end March (¥ bn) 2011 2012 2013E 2014E 2015E
Intangible assets 4.7 59.9 56.1 52.3 48.5
Property, plant and equipment 126.9 135.7 122.7 109.2 95.7
Financial assets 45.0 58.4 58.4 58.4 58.4
Fixed Assets 176.6 254.0 237.2 219.9 202.6
Liquid assets 211.8 190.5 190.5 190.5 190.5
Financial investments 35.4 49.6 59.7 84.1 130.8
Inventories 149.5 135.7 150.5 163.2 162.5
Accounts receivable 150.3 100.5 111.3 120.7 120.2
Other current assets 60.1 45.2 44.2 48.0 47.8
Other accruals - - - - -
Current Assets 607.1 521.5 556.3 606.4 651.8
TOTAL 783.6 775.5 793.5 826.3 854.4
Shareholders' equity 587.9 594.4 600.2 625.7 650.8
Minority interest 10.7 10.7 10.7 10.7 10.7
Bonds (Long term) 0.0 0.0 0.0 0.0 0.0
Long-term debt 0.0 0.0 0.0 0.0 0.0
Pensions provisions 54.6 56.6 56.6 56.6 56.6
Other liabilities 5.6 7.1 7.9 8.3 8.5
Non-current liabilities 587.9 594.4 600.2 625.7 650.8
Short-term debt 0.0 0.0 0.0 0.0 0.0
Accounts payable 47.0 36.3 40.1 42.4 43.4
Other current liabilities 0.0 0.0 0.0 0.0 0.0
Other liabilities 77.8 70.4 78.0 82.6 84.4
Current liabilities 124.8 106.7 118.1 125.0 127.8
TOTAL 783.6 775.5 793.5 826.3 854.4
Source: Company data, Berenberg estimates
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Cash flow statement
¥ bn 2011 2012 2013E 2014E 2015E
Net profit/loss 36.7 6.1 14.7 39.2 38.5
Depreciation of fixed assets 24.2 26.6 30.0 30.5 30.5
Amortisation of intangible assets 0.0 0.0 3.8 3.8 3.8
Other 8.8 -12.4 0.0 0.0 0.0
Change in inventory 19.5 13.8 -14.8 -12.7 0.7
Change in accounts receivable -13.9 49.8 -10.8 -9.4 0.5
Change in Current assets -6.2 14.9 0.9 -3.7 0.2
Change in accounts payable -6.6 -10.7 3.8 2.3 1.0
Change in current liabilities -36.6 -7.4 7.6 4.5 1.9
Change in other liabilities 3.8 3.5 0.8 0.5 0.2
Non Controlling interest change 0.1 0.0 0.0 0.0 0.0
Cash flow from operating activities 29.7 84.3 36.0 55.0 77.2
Capex -39.5 -21.7 -17.0 -17.0 -17.0
Income from asset disposals 1.1 3.6 0.0 0.0 0.0
Financial investments 3.2 -13.4 0.0 0.0 0.0
Investment in Intangible assets -0.5 -1.2 0.0 0.0 0.0
Payments for acquisitions 0.0 -55.1 0.0 0.0 0.0
Other cash flow from investing activities 27.3 -109.0 0.0 0.0 0.0
Cash flow from investing activities -8.4 -141.8 -17.0 -17.0 -17.0
Long Term debt issuance 0.0 0.0 0.0 0.0 0.0
Short Term debt issuance 0.0 0.0 0.0 0.0 0.0
Purchase of own shares 0.7 0.2 0.0 0.0 0.0
Dividends paid -23.1 -9.3 -9.0 -13.6 -13.4
Other financing cash flow -4.9 -1.5 0.0 0.0 0.0
Cash flow from financing activities -27.3 -10.6 -9.0 -13.6 -13.4
Effects of exchange rate changes on cash -0.3 -5.3 0.0 0.0 0.0
Increase/decrease in liquid assets -6.3 -73.5 10.1 24.4 46.7
Liquid assets at end of period 158.7 85.3 95.3 119.7 166.4
Source: Company data, Berenberg estimates
136

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Disclosures in respect of section 34b of the German Securities Trading Act
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Company
Applied Materials Inc
ASM International NV
ASML Holding NV
Suess Microtec AG
Tokyo Electron Ltd
Disclosures
no disclosures
no disclosures
no disclosures
no disclosures
no disclosures
(1) Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) and/or its affiliate(s) was Lead
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Historical price target and rating changes for Applied Materials Inc in the last 12 months (full coverage)
Date Price target - USD Rating Initiation of coverage
22 July 13 14.40 Hold 22 July 13
Historical price target and rating changes for ASM International NV in the last 12 months (full coverage)
Date Price target - EUR Rating Initiation of coverage
22 July 13 31.00 Buy 22 July 13
Historical price target and rating changes for ASML Holding NV in the last 12 months (full coverage)
Date Price target - EUR Rating Initiation of coverage
22 July 13 73.00 Hold 22 July 13
Historical price target and rating changes for Suess Microtec AG in the last 12 months (full coverage)
Date Price target - EUR Rating Initiation of coverage
22 July 13 9.40 Buy 22 July 13
Historical price target and rating changes for Tokyo Electron Ltd in the last 12 months (full coverage)
Date Price target - JPY Rating Initiation of coverage
22 July 13 4331.00 Sell 22 July 13
Berenberg distribution of ratings and in proportion to investment banking services
Buy 41.83 % 51.52 %
Sell 19.20 % 9.09 %
Hold 38.97 % 39.39 %
Valuation basis/rating key
137

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138

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I, Tammy Qiu, hereby certify that all of the views expressed in this report accurately reflect my personal views
about any and all of the subject securities or issuers discussed herein.
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Third-party research disclosures
Company
Applied Materials Inc
ASM International NV
ASML Holding NV
Suess Microtec AG
Tokyo Electron Ltd
Disclosures
no disclosures
no disclosures
no disclosures
no disclosures
no disclosures
(1) Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject
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James Chappell +44 (0) 20 3207 7844 Dr. Christian Schulz +44 (0) 20 3207 7878 Bjoern Lippe +44 (0) 20 3207 7845
Andrew Lowe +44 (0) 20 3465 2743 Robert Wood +44 (0) 20 3207 7822 Anna Patrice +44 (0) 20 3207 7863
Eoin Mullany +44 (0) 20 3207 7854 Stanislaus von Thurn und Taxis +44 (0) 20 3465 2631
Eleni Papoula +44 (0) 20 3465 2741 FOOD MANUFACTURING
Michelle Wilson +44 (0) 20 3465 2663 Fintan Ryan +44 (0) 20 3465 2748 OIL & GAS
Andrew Steele +44 (0) 20 3207 7926 Asad Farid +44 (0) 20 3207 7932
BEVERAGES James Targett +44 (0) 20 3207 7873 Jaideep Pandya +44 (0) 20 3207 7890
Philip Morrisey +44 (0) 20 3207 7892
Josh Puddle +44 (0) 20 3207 7881 GENERAL RETAIL & LUXURY GOODS REAL ESTATE
Bassel Choughari +44 (0) 20 3465 2675 Kai Klose +44 (0) 20 3207 7888
BUSINESS SERVICES John Guy +44 (0) 20 3465 2674 Estelle Weingrod +44 (0) 20 3207 7931
William Foggon +44 (0) 20 3207 7882
Simon Mezzanotte +44 (0) 20 3207 7917 HEALTHCARE TECHNOLOGY
Arash Roshan Zamir +44 (0) 20 3465 2636 Scott Bardo +44 (0) 20 3207 7869 Adnaan Ahmad +44 (0) 20 3207 7851
Konrad Zomer +44 (0) 20 3207 7920 Alistair Campbell +44 (0) 20 3207 7876 Sebastian Grabert +44 (0) 20 3207 7834
Charles Cooper +44 (0) 20 3465 2637 Daud Khan +44 (0) 20 3465 2638
CAPITAL GOODS Louise Hinds +44 (0) 20 3465 2747 Ali Khwaja +44 (0) 20 3207 7852
Frederik Bitter +44 (0) 20 3207 7916 Tom Jones +44 (0) 20 3207 7877 Tammy Qiu +44 (0) 20 3465 2673
Benjamin Glaeser +44 (0) 20 3207 7918
William Mackie +44 (0) 20 3207 7837 HOUSEHOLD & PERSONAL CARE TELECOMMUNICATIONS
Margaret Paxton +44 (0) 20 3207 7934 Jade Barkett +44 (0) 20 3207 7895 Wassil El Hebil +44 (0) 20 3207 7862
Alexander Virgo +44 (0) 20 3207 7856 Seth Peterson +44 (0) 20 3207 7891 Usman Ghazi +44 (0) 20 3207 7824
Felix Wienen +44 (0) 20 3207 7915 Stuart Gordon +44 (0) 20 3207 7858
INSURANCE Laura Janssens +44 (0) 20 3465 2639
CHEMICALS Tom Carstairs +44 (0) 20 3207 7823 Paul Marsch +44 (0) 20 3207 7857
John Philipp Klein +44 (0) 20 3207 7930 Peter Eliot +44 (0) 20 3207 7880 Barry Zeitoune +44 (0) 20 3207 7859
Evgenia Molotova +44 (0) 20 3465 2664 Kai Mueller +44 (0) 20 3465 2681
Jaideep Pandya +44 (0) 20 3207 7890 Matthew Preston +44 (0) 20 3207 7913 TOBACCO
Sami Taipalus +44 (0) 20 3207 7866 Erik Bloomquist +44 (0) 20 3207 7870
CONSTRUCTION Kate Kalashnikova +44 (0) 20 3465 2665
Chris Moore +44 (0) 20 3465 2737 MEDIA
Robert Muir +44 (0) 20 3207 7860 Robert Berg +44 (0) 20 3465 2680 UTILITIES
Michael Watts +44 (0) 20 3207 7928 Emma Coulby +44 (0) 20 3207 7821 Robert Chantry +44 (0) 20 3207 7861
Laura Janssens +44 (0) 20 3465 2639 Andrew Fisher +44 (0) 20 3207 7937
DIVERSIFIED FINANCIALS Sarah Simon +44 (0) 20 3207 7830 Oliver Salvesen +44 (0) 20 3207 7818
Pras Jeyanandhan +44 (0) 20 3207 7899 Lawson Steele +44 (0) 20 3207 7887
Sales
E-mail: firstname.lastname@berenberg.com; Internet www.berenberg.de
Specialist Sales Sales Sales Trading
BANKS LONDON HAMBURG
Iro Papadopoulou +44 (0) 20 3207 7924 John von Berenberg-Consbruch +44 (0) 20 3207 7805 Paul Dontenwill +49 (0) 40 350 60 563
Matt Chawner +44 (0) 20 3207 7847 Alexander Heinz +49 (0) 40 350 60 359
CONSUMER Toby Flaux +44 (0) 20 3465 2745 Gregor Labahn +49 (0) 40 350 60 571
Rupert Trotter +44 (0) 20 3207 7815 Karl Hancock +44 (0) 20 3207 7803 Chris McKeand +49 (0) 40 350 60 798
Sean Heath +44 (0) 20 3465 2742 Fin Schaffer +49 (0) 40 350 60 596
INSURANCE David Hogg +44 (0) 20 3465 2628 Lars Schwartau +49 (0) 40 350 60 450
Trevor Moss +44 (0) 20 3207 7893 Zubin Hubner +44 (0) 20 3207 7885 Marvin Schweden +49 (0) 40 350 60 576
Ben Hutton +44 (0) 20 3207 7804 Tim Storm +49 (0) 40 350 60 415
HEALTHCARE James Matthews +44 (0) 20 3207 7807 Philipp Wiechmann +49 (0) 40 350 60 346
Frazer Hall +44 (0) 20 3207 7875 David Mortlock +44 (0) 20 3207 7850
Peter Nichols +44 (0) 20 3207 7810 LONDON
INDUSTRIALS Richard Payman +44 (0) 20 3207 7825 Mike Berry +44 (0) 20 3465 2755
Chris Armstrong +44 (0) 20 3207 7809 George Smibert +44 (0) 20 3207 7911 Stewart Cook +44 (0) 20 3465 2752
Kaj Alftan +44 (0) 20 3207 7879 Anita Surana +44 (0) 20 3207 7855 Simon Messman +44 (0) 20 3465 2754
Paul Walker +44 (0) 20 3465 2632 Stephen O'Donohoe +44 (0) 20 3465 2753
MEDIA
Julia Thannheiser +44 (0) 20 3465 2676 PARIS PARIS
Miel Bakker (London) +44 (0) 20 3207 7808 Sylvain Granjoux +33 (0) 1 5844 9509
TECHNOLOGY Dalila Farigoule +33 (0) 1 5844 9510
Jean Beaubois +44 (0) 20 3207 7835 Clémence La Clavière-Peyraud +33 (0) 1 5844 9521 SOVEREIGN WEALTH FUNDS
Olivier Thibert +33 (0) 1 5844 9512 Max von Doetinchem +44 (0) 20 3207 7826
TELECOMMUNICATIONS
Julia Thannheiser +44 (0) 20 3465 2676 ZURICH CORPORATE ACCESS
Stephan Hofer +41 (0) 44 283 2029 Patricia Nehring +44 (0) 20 3207 7811
UTILITIES Carsten Kinder +41 (0) 44 283 2024
Benita Barretto +44 (0) 20 3207 7829 Gianni Lavigna +41 (0) 44 283 2038 EVENTS
Benjamin Stillfried +41 (0) 44 283 2033 Natalie Meech +44 (0) 20 3207 7831
Sales Charlotte Kilby +44 (0) 20 3207 7832
FRANKFURT BENELUX Charlotte Reeves +44 (0) 20 3465 2671
Michael Brauburger +49 (0) 69 91 30 90 741 Miel Bakker (London) +44 (0) 20 3207 7808 Sarah Weyman +44 (0) 20 3207 7801
Nina Buechs +49 (0) 69 91 30 90 735 Susette Mantzel (Hamburg) +49 (0) 40 350 60 694 Hannah Whitehead +44 (0) 20 3207 7922
André Grosskurth +49 (0) 69 91 30 90 734 Alexander Wace (London) +44 (0) 20 3465 2670
Boris Koegel +49 (0) 69 91 30 90 740 CRM
Joerg Wenzel +49 (0) 69 91 30 90 743 SCANDINAVIA Greg Swallow +44 (0) 20 3207 7833
Ronald Bernette (London) +44 (0) 20 3207 7828 Laura Cooper +44 (0) 20 3207 7806
Marco Weiss (Hamburg) +49 (0) 40 350 60 719
US Sales
E-mail: firstname.lastname@berenberg-us.com
BERENBERG CAPITAL MARKETS LLC
Member FINRA & SIPC
Andrew Holder +1 (617) 292 8222 Julie Doherty +1 (617) 292 8228 Jonathan Paterson +1 (646) 445 7212
Colin Andrade +1 (617) 292 8230 Kelleigh Faldi +1 (617) 292 8288 Jonathan Saxon +1 (646) 445 7202
Cathal Carroll +1 (646) 445 7206 Emily Mouret +1 (646) 445 7204
Burr Clark +1 (617) 292 8282 Kieran O'Sullivan +1 (617) 292 8292
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