Shin-Etsu Chemical (4063) – Pillars of Strength
Shin-Etsu will likely issue FY17 guidance below consensus estimates when it announces Q1 earnings on July 25th. If so, we will not be too concerned. Consensus OP stands at about ¥286bil (+19.9% YoY). We estimate OP of ¥275.3bil, still a hefty 15.4% YoY improvement.
Differing estimates for Shin-Etsu and even more for Sumco (3436) are occurring due to varying assumptions for 300mm wafer price hikes – an area where numerous scenarios remain possible.
Shin-Etsu remains a superior core holding candidate in our view. Strong earnings momentum is being maintained by above-average volume growth, improving product mix and increasing vertical integration.
Key Points
- We estimate strong volume growth by PVC, silicone, photomask blanks and optical fiber preform. TSMC’s recent guidance for a surge in 10nm chip sales in Q3 points toward strong photoresist sales. Rising 300mm wafer prices should support expanding wafer margins.
- Shintech’s completion of its US$1.4bil ethane cracker in 2018 H1 will give the company access to the ethylene portion of the PVC supply chain.
- The shares generally trade on a premium, reflecting strong positioning and sound financials. We estimate a FY17 PER of 22.7x and PBR of 1.9x. EV/OP of 12.6x, on the other hand, does not appear excessive.
- We estimate FY17 ROE of 10.3% on a cash-adjusted basis. Shin-Etsu appears capable of hiking its dividend to ¥180 by FY21.
Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods.
PSA produces both company and sector reports. The focus of PSA’s research is to identify winners and losers as new technologies impact the top and bottom lines of corporations. Critical to our research is the clear explanation of how these new technologies work and how they impact companies and industries.
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