Semiconductor Equipment - Berenberg Bank

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ASML Holding NV Technology Hardware 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
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