Tokyo Electron (8035) Next Generation Growth
We see firming demand for FY17 on the migration to next generation chips as well as upside to FY16 OP – we think by 4-7% above company guidance, which already looks to the highest sales and earnings since FY07.
Demand is strong for logic chips while next-generation miniaturization and 3D NAND provide an extra, high-margin boost. Over half of the 10% sales growth we see for FY16 is based on these next-generation products. Memory demand is the sole soft spot but only down mid-single digits YoY thanks to firm data centre demand and some PC inventory replenishment. Chinese smartphones are also providing an additional boost to logic chips as they go upmarket. We see firming demand for FY17 on the migration to next generation chips as well as upside to FY16 OP – we think by 4-7% above company guidance, which already looks to the highest sales and earnings since FY07.
Demand is strong for logic chips while next-generation miniaturization and 3D NAND provide an extra, high-margin boost. Over half of the 10% sales growth we see for FY16 is based on these next-generation products. Memory demand is the sole soft spot but only down mid-single digits YoY thanks to firm data centre demand and some PC inventory replenishment. Chinese smartphones are also providing an additional boost to logic chips as they go upmarket.
Key Points
- FY16Q1 record SPE orders to make a full contribution to Q3 earnings
- Soft memory demand offset by strong logic /next generation demand
- FPD business (7% of sales; 3-4% of OP) firm on small panel demand
- ¥10bn in FY16 extraordinary losses anticipated by management from the Kumamoto quake in April; flow-thru EPS should improve in FY17 and FY18 as one-offs drop out
- Tokyo Electron looks undervalued for FY16 and particularly FY17 as it tends to trade on a high-teen PER in cyclical upswings (currently 15.5x and 12.5x on PSA numbers). EV/OP of 9.1x is below the sector average and perhaps 20-25% below fair value.
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.
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.
The founding partners have worked closely together for twenty years and the team has more than doubled in size since 2012.
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