AEM HOLDINGS LTD (SGX:AWX)
UMS HOLDINGS LIMITED (SGX:558)
Singapore Semicon Equipment - Decent Demand Dynamics
Demand intact; supply reverting to normal
- AEM Holdings (SGX:AWX) and UMS Holdings (SGX:558) posted solid 1Q20 performance, and read-across is favourable. See AEM Announcements, UMS Holdings Announcements.
- Intel (AEM’s customer) is progressing with leading edge investments, while AMAT (UMS’ customer) is seeing record orders.
- We raise FY20-22E EPS for UMS by 3-5% to factor in robust outlook from AMAT. Maintain BUY on UMS with higher ROE-g/COE-g Target Price of SGD1.00 from SGD0.96.
- Semiconductor and equipment industries are “critical” in many countries, reducing the odds of further Covid-19 disruption as the year progresses.
UMS (SGX:558): AMAT has record orders; gained share in 2019
- UMS observed that visibility has not changed since Feb-20. We believe record orders and backlog from Applied Materials (AMAT, key customer) and Lam Research (AMAT’s key competitor) is evidence that demand fundamentals are intact.
- Drivers are unchanged, being sustained spending from logic and foundry as chipmakers continue with development plans at the leading edge, and improving dynamics that is supportive of increased memory investments through FY20.
- VLSI Research found that AMAT gained significant share in PVD in 2019. AMAT’s Endura, which UMS assembles modules for, is a flagship product for PVD. AMAT’s view for sequentially higher revenues over the next two quarters present upside potential for UMS, in our view.
AEM (SGX:AWX): Intel continues to spend on 10, 7 and 5nm
- While Intel’s “more disciplined” approach to 2020 capex likely infers slight downside to the USD17b guidance earlier in the year, it emphasized that spending for 10, 7 and 5nm will be on schedule. This is important as we see new Intel products as a key driver of AEM’s prospects. Hence, we stay positive towards AEM’s FY21E prospects.
Risks
- On 15-May, the US Department of Commerce issued a new ruling aimed at curbing shipment of chips to Huawei from chipmakers using U.S. technologies. This may create uncertainty for AMAT, and in turn UMS. If this ruling successfully limits Huawei’s rollout of 5G infrastructure in China, this may also affect the rate of growth of AEM’s TMS business ( < 5% of FY20E sales). Other risks include
- Contingent on fundamentals staying intact, we remain accumulators on dips for AEM and UMS.
Raising UMS’ estimates to reflect AMAT strength
- We raise FY20-22E EPS by 3-5% for UMS to reflect strong momentum from AMAT (earnings takeaways below). As such, our ROE-g/COE-g Target Price rises to SGD1.00, based on 2.1x FY20E P/B (prev: 2x), in turn based on average FY20-21E ROE of 17.7% and LTG of 2%.
- See
US hardens stance against Huawei
- On 15-May, the US Department of Commerce announced new rules that require any chipmaker using U.S. technology to get a license before they can sell to Huawei. The new restrictions is expected to cut off Huawei’s access to TSMC, which makes chips or the former’s HiSilicon unit.
- As TSMC uses many U.S. technologies for its chipmaking process, including those from Applied Materials (TSMC accounted for 14% of AMAT’s FY19 revenue), we think TSMC would have to forgo sales to Huawei to comply with this rule. This may in turn create uncertainties of AMAT’s equipment sales to TSMC. Various estimates suggest Huawei contributes around low-to-mid teens percent of TSMC’s revenue. We see this development as a potential downside risk for UMS.
- If this development manages to restrict Huawei’s access to critical chips and in turn limit Huawei’s 5G roll-out in China, this may negatively affect AEM’s test & measurement solutions (TMS) business too. We expect TMS to contribute less than 5% of AEM’s sales in FY20E.
- We believe China may retaliate to this latest move by the US Department of Commerce. As such, we will also monitor for other second order effects.
Takeaways from semicon sector's latest available results
Applied Materials:
- Demand strong; record backlog: Weak 2QFY20 performance was due to supply side disruptions. AMAT is entering 3QFY20 with record orders and backlog. Continue to expect semiconductor business to deliver double-digit growth for the year.
- Demand drivers: Logic and foundry demand at leading edge is “very healthy”, and customers are pushing ahead with development roadmaps. Sees incremental strength from memory customers, driven by sustained trends in normalizing inventory and improved pricing.
- Post-Covid-19 outlook: AMAT views that companies will boost business continuity plans with increased use of automation, IOT and AI. AMAT has expressed its view that it is a winner of these trends over several quarters.
- Gaining market share: According to VLSI Research, AMAT outperformed in both semiconductor equipment and services last year. Deposition technology was especially strong, with PVD gaining 7 points of share. We note that UMS participates in Endura, which is a key PVD product for AMAT.
- Covid-19 developments; sequential growth in 3Q and 4QFY20: AMAT emphasizes that in many countries, its industry is designated as “critical infrastructure”. AMAT expects its semiconductor revenues to be up single digits in 3Q FY20E sequentially, and “higher again” in 4QFY20E, on the back of broadening demand to more customers. This translates to strong double-digit growth for the year.
- Memory read-across: AMAT is not seeing strong capacity additions from memory customers, but investments based on technology roadmaps are progressing to plan as this affects cost structure of memory chipmakers when industries recover. AMAT continues to view memory investments as a swing factor for earnings, in particular for 4QFY20.
Lam Research:
- WFE market: Lam Research currently estimates low to mid USD50b as a reasonable estimate for WFE spending in 2020. This contrasts the previous estimate of mid-to-high USD50b shared in Feb-20, and USD46-47b in 2019.
- Demand strong: While Lam Research is not providing guidance for the quarter ending Jun-20, it notes that demand for equipment remains “very strong” in 1H20. The absence of guidance was due to highly fluid and uncertain scenarios due to Covid-19.
- Demand drivers; record backlog: Lam Research believes WFE spending is being driven by customers spending in strategic initiatives. These include foundry and memory technology transitions that will be critical to both the capability and competitiveness of relevant chipmakers when global markets recover from the effects of Covid-19. Lam Research exited the Mar-20 quarter with record backlog, and emphasized that revenue potential is limited by supply side disruptions, while demand dynamics are still strong and at similar levels to Jan-20.
- Supply dynamics: Lam Research believes should reach higher output capability in 2H20 over 1H20 as supply chain and capacity bottlenecks are gradually resolved. Amid disruptions, Lam Research is working with all customers to prioritize critical shipments (e.g. tools for critical R&D, or to resolve capacity bottlenecks).
- Optimistic towards memory: Lam Research reiterated that memory chipmakers under-invested in 2019, causing supply growth to be well below long-term demand. As such, Lam Research remains confident of the healthy fundamentals of the memory market, notwithstanding short-term uncertainty.
TSMC
- Maintains capex guidance: TSMC has maintained capex guidance of USD15- 16b for 2020. While it acknowledges near-term uncertainties as a result of Covid-19, TSMC emphasizes the growth potential of 5G-related and high performance computing over the next few years. Capex spent in 2020 is largely in anticipation of growth in future years.
Intel
- Disciplined approach to capex: Intel did not update on the original 2020 capex plan of USD17b. However, Intel will lower capex a little bit as it adopts a “disciplined” approach to ensure capacity introductions are in line with market demand in 2H20 as well as to maintain resilient free cash flow. Around 6-8 weeks of capex are pushed out beyond 2020, but capex important for 10nm, 7nm, and 5nm will be on schedule.
- Outlook: Intel expects strong data centre business in 1H20 (but expects weaker enterprise and government demand in 2H20); Intel also sees 2H20 headwinds from softer PC demands, as well as industrial, retail and automotive end-markets.
- Aims to be base station market leader by 2021: Intel won major design wins from Ericsson, Nokia and ZTE. Intel is a major silicon provider for 5G infrastructure.
Micron
- Capex: Maintaining USD7-8b capex guidance for FY20, although this is subject to adjustment based on demand requirements.
- Inventory: 2QFY20 inventory days was 134 (1QFY20: 121, normalized level: 110). The increase was expected, due to
- seasonally weaker demand,
- decision to hold more NAND inventory due to transition to replacement gate later in the year, and
- increased raw material inventories due to heightened uncertainties.
SK Hynix
- Capex: Maintains guidance of significantly lower capex in 2020.
- Inventory: Inventory levels for DRAM and NAND have normalized in 1Q20. NAND and DRAM inventory levels expected to fall further in 2Q20.
Samsung Electronics
- Capex: For memory, Samsung Electronics will continue expansion plans and investment in node migrations as planned. In foundry, investments are focused on expanding capacity of advanced EUV process nodes.
- Inventory: NAND inventory levels are still staying at normal levels, having normalized since end-2019. DRAM should approach normalized levels in 2Q20. Looking at its own and customers’ inventory levels, Samsung Electronics views that the possibility of large memory price correction as a result of inventory adjustment is limited, as compared to the late 2018 cycle.
Gene Lih Lai CFA
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2020-05-18
SGX Stock
Analyst Report
4.040
SAME
4.040
1.00
UP
0.960
