Semiconductor Equipment - Berenberg Bank

ASM International NV
Small/Mid-Cap: Technology Hardware
Investment summary
We base our investment thesis on Buy-rated ASMI on the following five points.
1. We expect the ALD market to reach €700m in the next three years:
ASMI generates 60% of its revenue from the ALD market. We expect the
addressable market to expand to €700m (a rise of c20%) in the next three
years, driven by increasing HKMG adoption in foundries and logic. In 2012,
the HKMG process was only adopted by Intel (100% of 22nm capacity),
TSMC (60% of 28nm capacity) and Samsung (100% of 32nm capacity, 0% of
28nm capacity). We expect TSMC, Samsung and other tier two foundries
(such as Globalfoundries and UMC) to increase their HKMG-based capacity
significantly in the next two years because HKMG is essential for building
20nm/below chips. We do not expect ASMI to lose market share: it has
accumulated a comprehensive IP portfolio on ALD technology. TEL, the only
other main player in this market, currently licenses ASMI’s IP to make ALD
tools.
2. Market expansion driven by new epitaxy tools: ASMI’s previous epitaxy
tool (17% of revenue) only addressed the power devices and analog markets;
however, in 2012, it released a new epitaxy tool model (Intrepid XP) that
targeted the logic market. We expect the epitaxy market to expand to €500m
in the next three years from €423m today (a rise of c9% per year). Given
ASMI’s strong relationship with Intel and Intel’s dual-sourcing policy, we
believe that ASMI could gain orders from Intel and serve as its secondary
supplier, after AMAT. We believe its market share may, therefore, expand
from the current 10% level to 11% in 2015.
3. ASMI’s front-end business worth more than $800m today: AMAT and
Francisco Partners offered to acquire ASMI’s front-end business for $800m in
2008. The price looked expensive due to a private equity buyout valuation
premium before the financial crisis. We believe the front-end business is worth
more than $800m today (worth $949m as per our valuation) because it is in a
better position than it was in 2008. This is because: 1) ASMI’s market share in
the ALD market has risen by 6% since 2008 to 44% in 2012; 2) 3D NAND
will boost PE CVD (14% of revenue) in 2014/15, an opportunity that did not
exist in 2008; and 3) ASMI could gain epitaxy orders with its newly launched
tool and increase its exposure to strong logic capex.
4. Further ASMP share disposal is a catalyst given investor frustration:
ASMI’s share price is affected by its holding in ASMP, a non-strategic asset.
We think that management has aligned its interest with shareholders (as
demonstrated by the founder’s comments at the 2012 AGM). ASMI has
already sold down a 12% tranche, and we expect it to sell further tranches
following the September lock-up expiry. The market has been disappointed
that the full stake was not disposed of. Our view is that a structured selling of
the holding is the optimal approach as a better value can be realised.
5. SOTP – 65% of ASMI’s share value comes from ASMP: In our SOTP,
65% of ASMI’s share value comes from its 40% holding in ASMP, which we
value based on ASMP’s share price after applying a 5% holding discount. We
value ASMI’s front-end business at €10/share by applying 14x P/E on 2014
EPS of €0.81.
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