Tokyo Electron (8035): More Next-Generation Growth
Share prices of the SPE makers tend to move well ahead of their earnings cycle. We continue to argue for a FY17 peak, though FY18 and FY19 profits levels should remain at high absolute levels. While some demand is being brought forward, the positive impact to earnings from next-generation products should be long-lasting.
H1 results surpassed even the highest analyst forecasts as sales and profit recognition of the near record-high Q1 order backlog (Taiwan orders reached an all-time high) came earlier than expected, defying the typical 4-6 months’ time lag following order receipt. More surprising yet was Q2’s sequential quarterly orders of nearly ¥200bn, underscored by management commentary that this order level looks set to continue thru to H1 FY17.
The new driver for TEL earnings is the move to next-generation product, namely 3D NAND flash and 10nm / 7nm miniaturization. This 3D stacking of chips, as opposed to planar 2D, plus the higher densities, both benefit TEL’s etching speciality. Here, it aims to double global share to 36% by CY19, along with a significant margin improvement. Meanwhile, in the mainstream market, strength in logic devices, flash memory and some recovery in DRAM are all supportive of earnings. A common theme for H1 automation maker results was strong semiconductor industry capex, particularly important for leading global pneumatic equipment maker SMC (6273 JP); and supportive for Yaskawa (6506 JP), KHI (7012 JP) and Ebara (6361 JP).
High plateau earnings can be expected for the next few years. TEL recently committed to a minimum 50% dividend pay-out ratio, which at present perches the FY16 dividend yield at just over 3%. We lift our FY16 profit estimates by 6-8% but keep our FY17 and FY18 numbers intact.
Key Points
- FY17 OP very likely to exceed FY16’s on improved product mix
- FY17 EPS boost from drop-out of Kumamoto quake-related charges
- Management sees strong orders at least thru H1 FY17, with Korea a wild card
- Logic firm: SSD; data centre; China smartphone demand for memory
- An undemanding EV/OP 9.2x on our FY17 numbers (vs Topix ex-financials 13.6x and 15.2x for the semiconductor sub-sector); dividend yield 3%+.
Tokyo Electron is a supplier of semiconductor production equipment ("SPE") and flat panel display ("FPD") selling through global network that spans Japan, the U.S., Europe and Asia. Co.'s principal products are coater/developers, plasma etch systems, thermal processing systems, single wafer deposition systems, cleaning systems (auto wet station, single wafer cleaning system, pre-clean system and scrubber system), wafer prober, FPD coater/developers and FPD plasma etch/ash systems. In addition, Co., through its subsidiaries, is engaged in the provision of transportation services, insurance services, as well as the support services for Co.'s photovoltaic cell ("PV") production equipment.
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.
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