Shin-Etsu Chemical (4063) - Earnings Growth Increasingly Driven by Electronics
Shin-Etsu’s recently lacklustre share price performance stands in contrast to its strong Q1 earnings. Some investors may be concerned by the low OP guidance announced at Q1, but management confirms that this merely reflects ‘low visibility,’ as opposed to any specific concerns. The shares weakened after Sumco (3436) announced plans for more 300mm wafers, but we do not expect this to slow Shin-Etsu’s strong earnings momentum.
We raise our FY17 OP estimate by ¥18.1bil, of which ¥14.7bil is in Semiconductor Silicon, where prices are rising faster than we had premised. We update information on 300mm wafers and add an analysis of 200mm markets.
PVC & Chemicals showed robustness in Q1. We leave our FY17 estimates unchanged, however, awaiting details of the impact of Hurricane Harvey. PVC and caustic soda are benefiting from stronger pricing leverage.
We note a change in earnings composition toward technology, reflecting the notable strength by semiconductor silicon and electronic materials.
Key Points
- ArF photoresists are poised to grow as TSMC (2330 TT) ramps up 10nm chips.
- Shintech (US) will complete its ethane cracker in 2018, positioning it to capture the value of the entire PVC chain, including ethylene.
- The shares generally trade on a premium, reflecting strong positioning and sound financials. We estimate a FY17 PER of 20.6x and PBR of 1.9x, which can be considered high. EV/OP of 11.7x, on the other hand, does not appear excessive.
- We have raised our FY17 ROE estimate to 11.4% (previously 10.3%) on a cash-adjusted basis. Shin-Etsu appears capable of hiking its dividend to ¥210 (previously we estimated ¥180) by FY21.
Shin-Etsu Chemical is mainly engaged in the manufacturing and sales of polyvinyl chloride and organic chemicals, silicon, functional chemicals, semiconductor silicon, electronic and functional materials, and others. Co.'s principal products include polyvinyl chloride, caustic soda products, methanol, chloromethane, silicon products, cellulose derivatives, silicon metal, poval (polyvinyl alcohol), synthetic pheromones, semiconductor silicon products, rare earth magnets, encapsulation materials, photoresists, photomask blanks, synthetic quartz products, epoxy molding compounds, pellicles, and resin processed products. Co. is also engaged in the export of plant equipment and others.
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