Semiconductor Equipment - Berenberg Bank

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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 118
Tokyo Electron Ltd Technology Hardware 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 119
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Semiconductor Equipment - Berenberg Bank

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