Semiconductor Equipment - Berenberg Bank

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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, <strong>Berenberg</strong> 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 28
ASML Holding NV Technology Hardware 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
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