Shin-Etsu Chemical (4063) FY17 Q1 Conference Call Comment – Strong Q1

Key Points 

• Shin-Etsu issued FY17 guidance below consensus, as we assumed they would in our report of July 19, Shin-Etsu Chemical – Pillars of Strength. OP guidance of ¥268bn compares to consensus of ¥286bn.
• The low guidance will probably be ignored after FY17 Q1 OP surged by 23.5% YoY to ¥74.1bn. During Q&A management confirmed that there were no special factors in Q1, nor do they see any particular concrete risks going forward – except of course for the assumption of ¥105/US$ for Q2~Q4. Simply annualizing the Q1 figure points toward full-year OP of virtually ¥300bn. 
• Semiconductor silicon OP continues to rise, as illustrated below. As new contracts for 300mm wafers come into force, OP should continue to grow ‘in linear fashion’ throughout FY17. Shin-Etsu could add 300mm capacity by the end of 2018, but this is contingent upon further price negotiations. Prices for 200mm (8”) wafers are now being negotiated upward as well, although Shin-Etsu expresses no intention of hiking 200mm capacity. Recently, even 6” and 5” wafer markets have become tight. 
• PVC OP surged consecutively, after Q4 was subdued by scheduled maintenance and lower seasonal demand. Improving global caustic soda markets are adding a further tailwind.
  There was little discussion of the Electronic & Functional Materials during the call, but conditions appear to be strong throughout the segment. We view this as one of the most promising areas for Shin-Etsu, as its ArF photoresists for 10nm processes should begin to gain momentum during the current quarter.