Semiconductor Equipment - Berenberg Bank

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Tokyo Electron Ltd Technology Hardware 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 128
Tokyo Electron Ltd Technology Hardware 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. • <strong>Semiconductor</strong> 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. 129
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Semiconductor Equipment - Berenberg Bank

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