Monday, April 15, 2013

Ushio (6925): I can see the light

We had a positive impression of Ushio during our March visit, and gathered that the upside potential for an earnings recovery outweighs the downside risks. Ushio’s Q2 downward revision last fall was mainly due to lower than expected optical, LCD-related, and other equipment sales. Q3 trend showed little improvement for those areas with sales down QoQ. The firm will most likely miss its FY OP forecast of Y8.0bn (Y2.5bn for Q4), but not by a large margin. Order activity for equipment appears to be picking up recently. Finally, Ushio will benefit from a large FOREX tailwind of approximately 2.5% of OP per Y1 move in FY3/14.

EUV: The impact of ASML purchase of Cymer isn’t clear, but Ushio hints that it might be negative for Xtreme’s business as it allows Cymer and ASML to share technology more freely. Xtreme appears to have the edge in duty cycle while Cymer had the higher wattage last year. Cymer has achieved 50 watts at 40% duty cycle. Ushio achieved 45 watts at 100% duty cycle recently and 51 watts at 80% duty cycle. At the International Symposium on EUV Lithography held in Belgium in October, 2012, Ushio made an announcement of stable operation on the EUV light source for the past half year at IMEC (Belgium), experimental results of high output power up to 74 watts, and verification of feasibility of 250 watt output power. Ushio will continue promoting DPP (Discharge Produced Plasma) EUV light source.

UX-series: UX-4 demand is still soft as LED capex for general illumination is still too far out to drive sales. UX-5 sales for CPU/MPU packaging were sluggish as clients such as Ibiden didn’t invest aggressively this past year. UX-7 was recently released for TSV, etc. and is focused on 2.5D and 3D packages, and should be shipping in spring 2013 for CPU, DRAM and other device makers. There are about 10 clients currently. Ushio expects several units to ship in FY3/14 with 1 unit priced at about Y0.3bn

Other LCD equipment: Large panel capex is sluggish while small panel capex is modestly firm. Ushio is expecting a recovery this summer powered by China-related LCD capex which could lead to 10-20% YoY sales growth in FY3/14.

UV lamps: Sales remained weak in Q3 at Y3.3bn, falling from Y3.2bn in Q2. Sales should rebound to 5-10% growth in FY3/14.

DCP units were down slightly QoQ in Q3 and have been falling about 20-30% YoY this year. Next year the market could stabilize as 40% of sales are to Asia which is still growing.

Adtec subsidiary sales were still sluggish in Q3. Light source sales were slightly better in Q3, rising QoQ and YoY owing to non-cinema buoyancy such as simulators, control rooms, DCP installation revenues, etc.

New products: The hottest new products are UX-7 and an LCD optical aligner. GaN on GaN LED for lighting and a drug detection kit for trials are both rather minor at this point.

Forex: Forex impact should remain Y0.2bn for every Y1 move against the $USD for OP, and Y0.3bn for RP next year. Y0.2bn of OP would equate to 2.5% of OP or 3.0% of RP this year, which is fairly sensitive. The company hasn’t been considered a currency sensitive stock in the past, but has increased its dollar-based businesses over the past five years.

Non-operating income was Y1.6bn in Q3 owing mainly to currency gains of Y0.8bn and unrealized stock gains on stock holdings of Y0.3bn.

The stock is down 13% in past year, underperforming the market and peers. PBR very low at 0.8x when considering that Y50bn in net cash and market cap of only Y132bn. PE is 23x FY3/13 EPS but drops to 17x FY3/14 consensus EPS, which we deem conservative. The firm expects a rise in sales and profits in FY3/14, although they could low-ball their projection to avoid another downward revision. FOREX tailwind next year is significant, with approximately 42% upside in RP if yen remains at Y94 to the $USD. Full year earnings are May 9.

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