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ASM Pacific: optimistic about semiconductor cycle recovery; Maintain outperformance industry rating

Source: Huake   |   Date:2020-11-06

CICC released its Research Report on ASM Pacific on November 3. The summary is as follows:

The revenue in the third quarter of 2020 is in line with expectations, but the gross profit margin is lower than our expectations

The company's revenue in the third quarter of 2020 was US $551 million (about HK $4.268 billion, a year-on-year increase of 2.6% and a month on month increase of 1.2%), which was at the top of the company's guidelines, in line with our previous forecast and market consensus expectations. In the third quarter, the company's overall gross profit margin was 32.9% (down 182bps year-on-year and 228bps month on month). The gross profit margin was lower than our previous forecast and market consensus expectation, mainly due to the continued weak demand for CIS packaging equipment and the product structure combination related to SMT solutions. The company's net profit in the third quarter was HK $232 million, lower than our previous forecast and the consensus expectation of the market. In the third quarter, the company's order volume was USD 583 million (a year-on-year increase of 13.5% and a month on month increase of 23.5%).We continue to be optimistic about the company's revenue growth prospects in 2021. The current stock price of the company corresponds to 16 times the price earnings ratio in 2021. We believe that the current valuation is still attractive and maintains outperforming the industry rating.

Development trend

The order situation in the third quarter is optimistic, indicating signs of recovery of the semiconductor industry in the future; The long-term growth momentum remains unchanged. We believe that the company's orders in Q3 are optimistic (the number of orders usually peaked in Q2). In the third quarter, the demand for mainstream packaging was strong. The orders of semiconductor solutions business increased by 27% month on month, and the orders of SMT business increased by 37% month on month, indicating that the company's business is gradually recovering. The advanced packaging market is huge (the market scale is expected to exceed US $40 billion in 2025), and the compound annual growth rate of mini / microled market is expected to achieve high growth in the next five years. Considering the company's equipment competitiveness, we believe that the company will become one of the biggest beneficiaries of the mini / microled market.

We expect that the gross profit margin of SMT business may continue to decline to the bottom; The company's overall gross profit margin is expected to improve in the fourth quarter, but there may be little room for improvement. Although the company's share in China's SMT equipment market has increased, the company's overall gross profit margin has been under pressure since the second quarter of 2019, mainly because the gross profit margin in the Chinese market is relatively low (Chinese customers prefer to choose equipment with less customized services)In addition, affected by the epidemic, the demand for downstream automobile and industrial fields weakened, resulting in the gross profit margin of SMT business falling below 30% in the third quarter. However, due to the good orders in the automotive and industrial fields in the third quarter, the CFO of the company is optimistic about the recovery of SMT business profit margin in the future. In addition, the company expects that the increase of CIS orders is expected to optimize the revenue structure in the fourth quarter, so as to improve the company's profitability. However, the recent demand growth is mainly based on the low base in the early stage, and the overall gross profit margin of the company may not be significantly improved.

Sino US trade frictions have limited impact. The management said that except for nexx, the company does not use American technology in other businesses. As the company's advanced packaging customers mainly come from IDM manufacturers (such as Intel) and the first tier chip foundry (such as TSMC / Samsung), we believe that the impact of Sino US trade friction on the company's current business is limited.

Profit forecast and valuation

We believe that the second wave of epidemic may lead to the delay of SMT equipment delivery and the recovery of the company's overall gross profit margin, but we continue to be optimistic about the company's revenue growth prospects. Based on this, we will reduce the revenue and net profit forecast in 2020 by 2% and 16% respectively, keep the revenue forecast unchanged in 2021, and reduce the net profit forecast by 7%. Maintain the outperformance rating of the industry, reduce the target price by 8% to HK $115, corresponding to 21.7 times the price earnings ratio in 2021 (the median value of the previous cycle valuation), which has 39% upside space compared with the current stock price.

The demand of the semiconductor industry is under pressure due to the impact of the epidemic.

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