Semiconductor Equipment - Berenberg Bank

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Semiconductor Equipment Technology Hardware Shrinkage brings growth, but not for everyone ● We believe that the semiconductor equipment industry has entered a recovery cycle from beginning of 2013, after declining by 16% in 2012 due to weak memory spending. ASML, Applied Materials (AMAT), Tokyo Electron (TEL), ASM International (ASMI) and KLA Tencor Corp (KLA) are seeing or guiding for order recovery compared with the 2012 trough level. We expect this order recovery trend to continue as 1) foundry/logic orders are likely to remain strong, driven by a 28nm capacity expansion and a 20nm/16nm FinFET ramp-up, and 2) memory orders are expected to pick up from the 2012 level after a better supply/demand balance since the start of 2013, driven by the ramp-up of NAND 20nm and smaller nodes, DRAM 30nm and smaller nodes and 3D NAND. ● Key debates: 1) Will the semiconductor cycles be as cyclical in the future as previously? 2) Where are we in the cycle now? 3) What will the impact be of Apple switching/buying into its foundry partners? 1) We believe the semiconductor cycle will remain cyclical, but less volatile compared with historically, as a) memory capex, which caused fluctuations previously, is likely to be less volatile as memory-makers have become more conservative in their spending, b) logic/foundry capex is likely to remain strong, as competition intensifies in the consumer devices market. 2) As the industry entered an order recovery cycle at the beginning of 2013, we expect that we will exit the recovery phase by end- 2013/early 2014, and enter a more muted growth period, as a) Intel and Samsung’s capex is likely to be spent in H2, which will drive order growth in 2013 H2, b) foundry/logic capex is likely to remain at the current level over the next three years until 2016 (TSMC indicated that its 2014 capex will be similar to that in 2013), c) memory capex has recovered since mid-2013. We believe that memory capex growth in the next three years will not drive any significant total capex growth, as it will only account for 29% of total capex, versus 33-57% of total capex in the peak years. 3) We believe that Apple’s foundry switch is likely to provide small positive upside for some equipment vendors, depending on their exposure to the various foundry/logic players. The foundry order switch is likely to create new capacity addition demand, which could give a short-term boost to overall capex. ● The growth potential of different equipment vendors differs, as they are each exposed to different fabrication processes. We rank the vendors’ growth potential (between 2012 to 2017) as follows: 1) ASML – 100% exposure to the lithography market, which is growing at a CAGR of 18%, driven by demand for ever smaller chips; 2) ASMI – 60% exposure to the atomic layer deposition (ALD) market, which is growing at a CAGR of 15%; 3) KLA – 100% exposure to process control market (growing at a CAGR of 6%), although AMAT may gain market share from it; 4) SUSS – 30% exposure to the micro-electro-mechanical systems (MEMS) market, which is growing at a CAGR of 12%; 5) LAM – 50% exposure to the silicon etching market (growing at CAGR 4%); 6) AMAT – a diversified portfolio, but with 61% market exposure to growth markets and 39% to legacy markets; benefiting from the capex growth trend; 7) TEL – 60% exposure to legacy markets. ASML Holding Hold (initiation) Current price Price target EUR67.68 EUR73.00 19/07/2013 Amsterdam Close ASM International Buy (initiation) Current price Price target EUR27.49 EUR31.00 19/07/2013 Amsterdam Close Suess Microtec Buy (initiation) Current price EUR7.65 Price target EUR9.40 19/07/2013 XETRA Close Applied Materials Hold (initiation) Current price USD16.56 Price target USD14.40 18/07/2013 New York Close Tokyo Electron Sell (initiation) Current price JPY4,790 Price target JPY4,331 19/07/2013 Tokyo Close Rating system: Absolute 22 July 2013 Tammy Qiu Analyst +44 20 3465 2673 tammy.qiu@berenberg.com Jean Beaubois Specialist Sales +44 20 3207 7835 jean.beaubois@berenberg.com 4
Semiconductor Equipment Technology Hardware ● In this note, we initiate coverage on ASML with a Hold recommendation (PT €73) as we believe all positive news is well understood and priced in at the current price level. We initiate with Buy ratings on ASMI (PT €31), as it has a 44% market share and no direct competitor in the growing ALD market, and on Suess Microtec (SUSS) (PT €9.4), as we believe the lithography segment can drive strong growth for SUSS in 2014 and 2015 without a significant contribution from other segments. We initiate with a Hold rating on AMAT (PT $14.4) as we can only see it gaining a further 1% in market share. We also initiate with a Sell rating on TEL (PT ¥4,331), as ~60% of its revenue is exposed to low-growth markets. 5
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