Semiconductor Equipment - Berenberg Bank

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ASML Holding NV Technology Hardware 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. 30
ASML Holding NV Technology Hardware 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. 31
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Semiconductor Equipment - Berenberg Bank

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