In a building frenzy, it’s good to sell the tools. Japan’s Tokyo Electron, 8035 -3.32% one of the world’s largest semiconductor equipment makers, could be a good bet as China strives to develop its own chip industry.
The Huawei saga has exposed how vulnerable China is to American technology supremacy. The Department of Commerce further tightened restrictions on Huawei’s access to chips using U.S. technology this week. Given U.S. dominance in semiconductor equipment, the new rules put Huawei’s survival in doubt.
If Huawei truly goes under, however, that would further accelerate Beijing’s push to create its own semiconductor industry. China introduced new tax incentives this month for chip makers. It has set up national funds to invest in the industry and chip companies have raised billions of dollars this year on China’s Nasdaq-like exchange, the STAR market.
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That means more demand for chip-making tools as Chinese companies ramp up production capacity, benefiting companies like Tokyo Electron. China’s contract chip maker Semiconductor Manufacturing International increased its planned capital expenditure for 2020 to $6.7 billion this month, as the company raised $7.7 billion in a Shanghai listing. That’s more than twice the initial forecast of $3.1 billion at the beginning of the year. Chinese memory-chip makers Yangtze Memory Technologies and ChangXin Memory Technologies will also likely ramp up production as they try to catch up with rivals such as Samsung Electronics and SK Hynix.
Bernstein has estimated that the global wafer-fabrication equipment market will rise 10% this year, with 70% of that growth coming from China. Spending from Chinese chip makers could continue to push the market to new highs: Goldman Sachs expects China’s semiconductor equipment spending to grow on average 31% annually in the next five years.
Tokyo Electron focuses on front-end chip-making processes, and is particularly strong in products such as etchers and coaters/developers: It has 91% market share in the latter. China accounted for about a fifth of Tokyo Electron’s semiconductor equipment sales in the 12 months ended June, so it’s in a good position to profit from China’s increased spending. The stock also looks relatively cheap compared with other chip-equipment firms. Tokyo Electron’s enterprise value to expected earnings before interest, taxes, depreciation and amortization stands at 12.6—higher than its historical average, but lower than peers such as Lam Research and KLA.
Japanese semiconductor equipment maker Tokyo Electron could be a good bet as China looks to develop its own chip industry.
Photo: yuya shino/ReutersGiven trade tensions between the U.S. and China, Chinese buyers may prefer Tokyo Electron and other non-U.S. firms over American suppliers where possible. But the company isn’t immune to the conflict. For one, it may not be able to circumvent U.S. sanctions. It will also be almost impossible for Chinese chip makers to build a full production line if the U.S. decides to ban every single one of them from buying American equipment.
It is uncertain whether China will successfully mint its own semiconductor champions, but it is certainly going all out to try. Chip-making-equipment firms with good technology and a position on the outskirts, rather than in the center, of the geopolitical firing line look poised to benefit.
Write to Jacky Wong at JACKY.WONG@wsj.com
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