Ushio is a stock that hasn't enjoyed any material performance since the LDP took over last November. It is a prime candidate for stocks highly likely to outperform, as we find it unloved and undervalued.
LCD-related names such as Ushio have been to the “Dark
side of the moon” The Pink Floyd album title “Dark Side of the Moon” reminds us of the LCD
industry, a lonely and dark place, but a bright sun on the horizon. We find the
album’s song equally as appropriate as a nickname for Ushio (“Money”), a
mid-size light source maker for semiconductor and LCD applications, which has
net cash of over half its market cap and thus an undervalued going concern in
our view.
Experience the next "Great Gig in the Sky"!
Ushio’s balance sheet is overflowing
with net cash, gets a decent tailwind from the currency depreciation, and its
stock has underperformed the market by 50% in the past year. The slowdown in
DCP sales and LCD-related weakness has damaged the company’s prospects for near
term profits. Investors tend to focus on DCP and non-cinema businesses at
Christie, optical equipment (UX, EUV), and LCD-related products. Given Ushio’s
large net cash position, the valuation for Ushio’s going concern appears to be
too low given its exposure to new growth areas in EUV, LED, and chip packaging.
PE is 16x FY3/14 EPS and 7x EPS after stripping out net cash. We initiate
coverage with a LONG rating and target price of Y1,450, 44% upside.
Consol. ¥bn
|
Sales
|
yoy
|
OP
|
yoy
|
RP
|
yoy
|
NP
|
yoy
|
EPS
|
P/E
|
P/CF
|
ROE
|
Yield
|
FY
31/03
|
|
|
|
|
|
|
|
|
¥
|
x
|
x
|
%
|
%
|
2010
A
|
119
|
-1%
|
7.3
|
-19%
|
9.3
|
-7%
|
7.1
|
+103%
|
53
|
19
|
21
|
4.7
|
2.0%
|
2011
A
|
145
|
+22%
|
14.0
|
+93%
|
17.4
|
+87%
|
9.6
|
+35%
|
72
|
14
|
21
|
6.1
|
2.2%
|
2012
A
|
150
|
+3%
|
10.7
|
-24%
|
13.1
|
-24%
|
8.8
|
-9%
|
66
|
15
|
10
|
5.5
|
2.2%
|
2013
CoE
|
145
|
-3%
|
8.0
|
-25%
|
10.0
|
-24%
|
5.5
|
-37%
|
42
|
24
|
|
|
2.2%
|
2013
CONS
|
143
|
-5%
|
7.6
|
-29%
|
9.7
|
-26%
|
5.3
|
-40%
|
40
|
25
|
|
3.3
|
2.2%
|
2013
ARJE
|
143
|
-5%
|
7.0
|
-34%
|
8.7
|
-34%
|
4.5
|
-49%
|
34
|
30
|
5
|
2.7
|
2.2%
|
2014
CONS
|
147
|
+3%
|
9.7
|
+28%
|
11.5
|
+19%
|
7.0
|
+33%
|
53
|
19
|
|
4.5
|
2.2%
|
2014
ARJE
|
154
|
+8%
|
10.9
|
+54%
|
12.4
|
+43%
|
8.1
|
+80%
|
61
|
16
|
2
|
7.4
|
2.5%
|
2015
ARJE
|
162
|
+5%
|
12.3
|
+13%
|
13.9
|
+12%
|
9.1
|
+13%
|
69
|
15
|
2
|
7.2
|
2.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
Trailing PBR:
|
0.8x
|
Source: Company, Bloomberg, chips and dips
Catalysts
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. We believe upside catalysts are attractive and
outweigh downside risk. Catalysts include:
1.
Ushio
will benefit from a large FOREX tailwind of approximately 2.5% of OP per Y1
move in FY3/14.
2.
Order
activity for LCD equipment appears to be picking up recently.
3.
New
products should increase traction in 2014.
4.
EUV
push forward will continue to increase the value of Ushio’s subsidiary Xtreme Technologies.
A potential M&A of the sub is a distinct possibility in our view. Rival
Cymer was just bought by ASML.
Valuation
“Money, it’s a gas, grab that cash with both
hands and make a stash…” –Pink Floyd
Valuation
is compelling as PBR is near a +20-year historical low. Ushio’s PE of 16x PE
our FY3/14 EPS versus 26x for peers is also attractive. Ushio is an above
average company regarding quality of management and track record, yet it trades
at a discount to peers as well as a relatively low historical multiple.
We also compare Ushio to peer
companies in the semiconductor/LCD/lighting equipment industries including
rival Iwasaki Electric (6924), fellow equipment maker Disco (6146), as well as
LCD/semiconductor equipment peers Nikon, Tokyo Electron (8035) Dainippon Screen
(7735), Ulvac (6728), and overseas peers Cymer and Barco.
Background
Ushio is a mid-size lamp and optical
equipment maker with a market cap of Y131bn. Its key products are UV lamps for
semiconductor and LCD production, digital cinema projectors for movie theatres,
LCD production equipment, and chip packaging equipment. The firm boasts
dominant market share in several of its key products, which has allowed it to
above average OP margins over the past 20 years. Despite the global downturn in
2008-2009, Ushio remained profitable in every major product group, a tribute to
its superior market share and cost control.
Product breakdown
By sales, Ushio’s main products are various lamps and equipment which
feature light sources. Some of the main products are UV lamps, cinema lamps,
data projector lamps, halogen lamps, DCPs, UV equipment, and UX-series gear.
Halogen lamps and other conventional
lamps and light sources are for daily illumination applications. These rather
stable traditional businesses have allowed the firm to maintain positive
returns on an operating level for the past 20 years, far more stable than its
peers in LCD and semiconductor sectors. Products such as UV lamps are extremely
high market share and command premium profit margins. As can be seen below, UV
lamps have more than twice the impact on OP as sales. Cinema lamps are also
high margin products.
Recent developments
Three areas of special interest at
Ushio are non-cinema sales, Xtreme Technologies, and UX-series products.
Non-cinema
products are mainly
projectors used in simulation, control rooms, and virtual reality. Sales at
Christie were growing rapidly in FY3/12. Applications include VE (visual
environment) which is virtual reality and simulation for defense, shipbuilding,
manufacturing industries. BP (business products) are control room displays,
large venue projection mapping, etc. for infra, entertainment, broadcasting
industries. Revenues were up 18% YoY last year and should continue at 20% CAGR
for several years. Profit is similar to other cinema business, and R&D
spending should be limited going forward as they already invested quite a bit
in non-cinema. Rivals are Barco (Belgium) for high-end products and Panasonic
in low-end (BP). Sony and NEC don’t have much presence in non-cinema businesses..
Xtreme
Technologies, Ushio’s
subsidiary, makes EUV light sources for semiconductor lithography. Xtreme
competes with USA Cymer in EUV light sources. The main customer is ASML. ASML’s
NXE 3100 uses 1 Xtreme light source at IMAC for R&D purposes. Roadmap for
EUV is about 2015-2016 for production, but Intel’s recent investment to ASML’s
EUV program could accelerate development and mass production of EUV tools and
semiconductors. Last year Intel committed $333 million to ASML for R&D in
EUV lithography. Meanwhile, ASML announced it will take over Cymer late last
year. The impact of ASML purchase of Cymer isn’t clear, but Cymer’s technical
hurdles with EUV continue despite ASML’s endorsement. 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 products are used in semiconductor
packaging. In Ushio’s UV equipment segment, sales were Y3.7bn in Q4, half of
which was UX sales. UX-4 units for LED packaging in the illumination
application are still soft this year, but UX-5 for CPU packaging (mainly Intel
direct wire bonding for CPU) should see more activity next year. ASPs for both
tools are Y0.2bn for revenues this year of Y6bn. Profit margins appear to be
higher than average for UX series. 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.
SWOT analysis
Strengths: Ushio is arguably the market leader in cutting edge
light sources for semiconductors, LCDs, and other technology applications. This
technological lead has allowed Ushio to capture top shares in many areas including
UV lamps, cinema lamps, data projector lamps, etc. Ushio boasts a dominant 80%
market share in highly profitable UV lamps for LCD, semiconductor and
electronics applications. The firm manufactures various light sources such as
halogen lamps, metal halide lamps, and discharge lamps for more conventional
domestic applications in illumination for buildings, autos, etc. Although the margins
are lower, demand is stable and reliable and Ushio enjoys a strong brand name
in these sectors.
Ushio has a very strong balance sheet
with Y78bn in net cash including long-term investments. Ushio’s market cap is
Y132bn, and thus the implied market value for its operations is only Y55bn, or
about 7x EPS. We forecast net cash level to rise above Y100bn next year, the
first time since 2007. Ushio’s share price broke through Y3,000 in 2007 and now
trades at the Y1,000 level. Ushio’s strong balance sheet allows it to invest
aggressively in R&D for new products.
Pushing the envelope to the Xtreme…
Opportunities: EUV for next generation semiconductor
lithography is one of Ushio’s new products with large potential payout on the
horizon. Ushio’s subsidiary Xtreme Technologies competes in a 2-horse race with
Cymer in EUV light sources. Ushio has a decent track record in semiconductor
lithography in UV lamps and Gigaphoton, its ex-subsidiary with Komatsu. Xtreme’s
prospects for high profits are quite attractive in our view.
Ushio’s digital cinema projectors for
US movie theatres have undergone explosive growth in the past 5 years. Growth
of DCPs has slowed, but Ushio’s sells cinema replacement lamps for DCPs, which
is growing rapidly on the back of higher DCP installed base. Ushio makes
semiconductor packaging equipment called UX-series products, which are a
relatively new product line-up and growing quickly as well.
As mentioned above, Ushio’s large cash
position allows it to search for new profit streams for the firm. The cash also
could allow Ushio to increase dividends or share buybacks. Ushio has
consistently paid high dividends and bought back shares, paying a 2.4% yield
last year and buying back 1.1% of its shares.
Strengths Weaknesses
• Leading edge technologies in light sources • LCD capex weakness negative for equipment
• Stability in traditional lighting products • DCP units higher penetration in western countries
• Pristine balance sheet, high net cash • Too much cash and investments on balance sheet
Opportunities Threats
• Xtreme technologies: EUV next gen. semic. • Semiconductor shift from UV lamps to laser light sources
• DCP lamps, non-cinema, UX-series • Slowdown of high growth in digital cinema projectors
• Massive cash position pay-out to SHs • EUV light source rivalry, high development costs
Weaknesses: Ushio also supplies manufacturing
equipment such as curing and excimer cleaning gear for LCD production, which
utilizes its core light source technologies. LCD capex tapered 2 years ago as
LCD panel makers’ profits collapsed. Given the few number of large panel
players, capex spending is naturally unpredictable. Although there is strategic
capex in small displays, large capex should be mundane as TV and PC demand is
soft.
DCP units have reached a fairly high
level of penetration in the US and Europe after several years of high growth. Although
demand is still strong for DCP units in China and emerging areas, the high
growth era is over in our view. As mentioned above, Ushio has a cash-rich
balance sheet, which has its advantages. However, it also prevents it from
maximizing ROE and shareholder value.
Threats: UV lamps for semiconductors were a
strong growth driver 10 years ago until recent times, but a shift from UV to
laser technology has phased out UV lamps in semiconductor steppers to some degree.
Semiconductor UV lamp demand is falling while LCD UV lamp growth is rather
mundane as well.
DCPs are slowing to -14% growth this
year from +50% growth last year. A risk is further slowdown in unit shipments,
although the replacement demand for cinema lamps mitigates the DCP unit
slowdown somewhat.
Other potential threats include rivalry
from Cymer in EUV light sources, a key area for Ushio. Cymer’s costs have shot
up significantly recently as it accelerates its EUV R&D, which has hurt its
margins. The risk is pressure on Ushio to invest in expensive R&D without a
guarantee of future profits in EUV. However, Intel’s recent investment in ASML’s
EUV technology provides assurance that chipmaker’s will adopt EUV sooner rather
than later.
Product Line-Up:
UV lamps, which were 12% of sales the
past 3 years, are high margin and a large earnings driver. Ushio is the
dominant UV lamp supplier with 80% WW market share (for both semiconductor and
LCD steppers). Recently, LCD applications have overshadowed semiconductors as
the core growth driver for UV lamps. Five years ago, LCD and semiconductor UV
lamps ratio was about one-to-one, but currently LCD lamps are about double
semiconductor lamps in revenues.
Product Line-Up:
UV lamps, which were 12% of sales the
past 3 years, are high margin and a large earnings driver. Ushio is the
dominant UV lamp supplier with 80% WW market share (for both semiconductor and
LCD steppers). Recently, LCD applications have overshadowed semiconductors as
the core growth driver for UV lamps. Five years ago, LCD and semiconductor UV
lamps ratio was about one-to-one, but currently LCD lamps are about double
semiconductor lamps in revenues.
Semiconductor steppers, which utilize
lithography technology to transmit circuit images on to silicon wafers, are
shifting light sources from UV lamps to excimer laser light sources, which have
shorter wavelengths. This allows for narrower line widths in the silicon
circuitry. The current installed base of UV lamp steppers (i-line) still exists
amongst global semiconductor producers, but growth in installed base of i-line
steppers has flattened in recent years. We expect the installed base to
eventually erode to excimer laser steppers (KrF, ArF) in future years. Thus,
semiconductor-related UV lamp demand should be directly tied in to chip
utilization rates.
LCD steppers, however, do not utilize
laser technology, as the light wavelength is a less important issue. Thus, if
the LCD production utilization recovers, we expect Ushio’s LCD UV lamps to
increase sales as well. UV lamp sales were down 11% YoY and flat QoQ in Q3 of
FY3/13 owing to lower production of PC and TV panels at LCD makers. We believe
that the LCD environment will improve slightly in CY2013 for Ushio as LCD
volumes recover. Last week, Corning, the largest LCD glass maker, forecasted
5-10% LCD TV unit growth and 10% PC unit growth (including tablets) for CY2013.
Digital
cinema projectors
Ushio’s consolidated subsidiary
Christie Digital Systems’ digital cinema projectors (DCPs) were extremely high
growth last year with unit growth of 52% in FY3/12. Unit shipments of
projectors were over 10,000 units versus 6,600 units in FY3/11. We project
units to fall by 15% YoY to 8,700 units this year owing to high penetration in
Europe and the US. On the other hand, cinema lamps should grow 10-15% this year
as DCP lamps replacement demand drives sales.
We believe that Christie has a large 70%
market share over rivals Sony, NEC, and Barco. Sony is a competitor, but also
uses Ushio’s lamps in its projectors. New markets include Europe, France, Asia,
and Japan where competitors such as Barco, Sony, and NEC have a heavier
presence, but Christie is the only company to have significant experience in
the cinema industry. Total screens WW are approximately 75,000, in which
Christie has shipped about 25,000 units to date. Hence, the penetration rate
for the DCPs is 35% for Christie only. Two positive catalysts for DCP is the
organic growth of cinemas in Asia and emerging markets and the natural increase
in replacement demand for DCP lamps.
Ushio’s subsidiary, makes EUV light
sources for semiconductor lithography. Unlike its ex-subsidiary Gigaphoton,
Ushio has chose to go it alone against Cymer in EUV. The roadmap for mass
production via EUV was thought to be 3-4 years in future, but Intel’s recent
investment to ASML’s EUV program could accelerate development. Intel announced
on July 9 that it will commit $333 million to ASML for R&D in EUV
lithography. We don’t factor in to our model potential profits from Xtreme yet,
but it is conceivable that the business will contribute significantly to earnings
in 2014 and after.
EUV light source (Discharge Produced Plasma)
We think that the Gigaphoton
experience is a solid example of Ushio’s prowess in litho light sources. Ushio
established Gigaphoton with Komatsu in the 1990’s as a 50% owned equity-method
company. Gigaphoton had robust sales and net profit and was a major contributor
to equity method earnings with approximately 8% of total net profit in both
FY3/07 and FY3/08. Sales in FY3/07 and FY3/08 soared for excimer lasers to stepper
makers, rising 78% YoY and 55% YoY. Gigaphoton gained market share from number
one player Cymer (USA), which had the top share at about 60%. Cymer used to
dominate the market with a virtual monopoly before Gigaphoton was officially created
in 2000. Cymer and Gigaphoton are the only 2 laser light suppliers for excimer
Kr2 and Ar2 steppers.
UX-series products are used in
semiconductor printed circuit board (PCB) production. UX-4 units are for LED
packaging which have been in decline, but UX-5 should rise sharply for CPU
packaging (direct wire bonding for CPU). We believe that UX-5 sales were 4
units last year and 20 units projected for this year with high profit margins.
LED capex is sluggish currently as LCD backlight capex in past 2 years was
strong, but general illumination LED capex is an attractive new sub-application
for UX-series.
Financials
The forex impact is Y0.2bn for every
Y1 move against the $USD for OP, and Y0.3bn for RP. Some of Ushio’s dividend
income in non-operating income are based in $USD, which increases RP when the
yen depreciates. Much of the $USD exposure is through Christie’s DCP business,
which is based in North America. The tailwind from the currency in FY3/14 is
significant, with approximately 52% upside in RP and 42% upside in OP if yen
remains at Y98 to the $USD.
Non-operating
income is unusually high for Ushio given its holdings in equity method subsidiaries.
Ushio also has Y48bn in investment assets, which tend to yield above average
interest income and investment gains.
In FY3/12, OP decreased after a
rebound in FY3/11, owing to a slowdown in LCD-related equipment and UV lamp
sales. We predict that margins recover as a weaker yen raises profitability
overseas while the core businesses recover overall.
Cash level and
investment assets fell in FY3/09, but Ushio reversed that fall in FY3/10. The
past 2 years net cash level has remained fairly flat owing to higher capex
outflows.
In
the past 10 years, free cash flow has been overwhelmingly positive, falling
only slightly in 2 of 10 years. This is a tribute to Ushio’s stable profits and
relatively lean cost structure.
Valuation
The shares have
underperformed the TOPIX by 50% over the past year. On PE and PBR metrics,
Ushio’s stock is undervalued, in our view. PBR is 0.8x, an all-time low and far
below the 10-year average of 1.6x.
PBR very low at 0.8x when considering
that Y50bn in net cash and market cap of only Y132bn. PBR is below the average
of Ushio’s peers in Japan, but we believe Ushio’s future earnings prospects are
far greater than its peers. Ushio’s PE is 17x FY3/14 EPS is also below the
average peer PE, but Ushio has far more net cash than its peers, and thus PE
for market cap without net cash to earnings is 7x EPS.
Please refer to
the peer comparison chart below for full details.
Peer
comparison
|
|
|
|
|
|
|
|
|
Company
|
Sharp
|
Asahi Gl.
|
NEG
|
Ushio
|
Ulvac
|
Cymer
|
Average
|
Median
|
Stock
code
|
6753
|
5201
|
5214
|
6925
|
6728
|
CYMI
|
|
|
PE
trailing (X) FY3/13
|
-1
|
21
|
26
|
25
|
18
|
-90
|
18
|
21
|
PE
forward (X) FY3/14 ARJE
|
21
|
19
|
27
|
17
|
10
|
n/a
|
19
|
19
|
PE
forward (X) FY3/14
|
883
|
20
|
33
|
19
|
11
|
73
|
173
|
26
|
Historical
PBR (X) 10 yrs.
|
1.5
|
1.6
|
1.5
|
1.6
|
1.6
|
2.5
|
1.7
|
1.6
|
PBR
(X)
|
1.9
|
0.9
|
0.5
|
0.8
|
0.7
|
4.4
|
1.5
|
0.9
|
PBR
discount to hist.
|
122%
|
59%
|
37%
|
49%
|
43%
|
176%
|
81%
|
54%
|
Price/Sales
(X)
|
0.2
|
0.8
|
0.9
|
0.9
|
0.2
|
6.1
|
1.5
|
0.8
|
|
|
|
|
|
|
|
|
|
ROE
(%) FY3/12
|
-201%
|
4%
|
2%
|
3%
|
4%
|
-5%
|
-32%
|
3%
|
Operating
Margin FY3/12
|
-7%
|
8%
|
8%
|
5%
|
3%
|
4%
|
4%
|
5%
|
Dividend
yield FY3/12
|
2.9%
|
3.3%
|
2.9%
|
2.2%
|
2.6%
|
0.0%
|
2.3%
|
2.7%
|
PS/OPM
|
-2.6
|
10.0
|
10.8
|
17.6
|
7.1
|
142.7
|
30.9
|
10.4
|
*Cymer,
Asahi Glass Dec. FY, Ulvac June FY
|
|
|
|
|
|
|
Source: Bloomberg, Companies, ARJE
PBR
history: near trough levels
Upon close inspection of Ushio’s PBR
over history, the stock is very attractive in our view. Ushio’s stock has
bottomed at 1.5x estimated book value 4 times in the past 14 years, mainly
during bear stock markets. (The exception is last year during the financial
crises.) For example, the last 2 occurrences before 2008 were 1998 and 2003,
which was during the bottom of the Asian crises in 1998 (October, 1998) and the
Nikkei all-time low in March, 2003. Given the earnings recovery projected for
this year and next, we find trough level price as undervalued. Furthermore, we
forecast a ROE of 7.4% in FY3/14, significantly better than the 10-year lows of
1.6% and 2.3% in 2002 and 2009.
Our fair value is ¥1,450, 24x our EPS,
14x EPS + net cash and securities on Ushio’s balance sheet, and 1.2x PBR. For
reference, Ushio’s peer average PE is 26x for next year.
We note that Ushio has a comparatively
high level of share buybacks. In the last year, share buybacks have amounted to
1.5 million shares for a 1.1% reduction in shares outstanding. In addition,
Ushio has steadily increased its dividend payout and yield from a 0.8% average
yield from 1995-2004 to a 1.2% average from 2005-2009 to a 2.3% average in
2010-2012. Last year the yield was 2.2% and we forecast 2.5% for next year.
