Hitachi High Tech (8036), “High on SPE”

Hitachi High Technologies (8036) is one of the first technology firms to report earnings each quarter along with Nidec (6594), and thus the earnings meeting was well attended today. OP missed slightly for both FY3/13 results and FY3/14 projection (versus consensus). OP for FY3/13 was Y19bn, 5% below the firm’s Y20bn forecast and 8% below consensus’ Y20.6bn. OP for FY3/14 was projected by HHT to be Y28bn, a 39% increase, but again below the consensus OP of Y29bn. Given the conservative forex assumptions and low medical forecasts, we came away with a slightly positive impression.

Forex: Impact is not huge but material at Y0.3bn per Y1 move against dollar and Y1 against euro, which totals about 1.4% of total OP for each Y1 move. Assumption is conservative for this year at Y95 for $1 and Y120 for euro versus current rates of Y98 and Y128. At current rates, OP should gain Y1.7bn from current forecast. Compared to last year, tailwind from the forex at current rates is Y4.5bn for $USD and Y2.1bn for euro for a total of Y6.6bn, which would account for 73% of the profit increase this year.

Electronic devices (SPE, etc.): The main profit increase is to come from the electronic devices division, which OP is projected to rise from Y13 to Y17bn this year. HHT forecasts a strong recovery in orders in SPE during the 2H, rising to Y62bn from Y50bn in 1H and Y51bn in the 2H of last year. Process equipment (etch) should rise 14% while CD-SEM, etc. should increase by 10% this year. By device type, NAND and logic are the growth drivers while foundry and MPU are rather flat for capex. HHT’s key silicon etch product market share was 16% in 2012, 2^nd to Lam Research, according to Gartner. HHT assumes that its gate etching, measuring instruments, etc. will outgrow the 5% total SPE market growth in 2013. Investment is starting for 20nm foundry gear and 14nm MPU gear. HHT foresees capex for miniaturization for 2xnm in DRAM as well. Initial production of 3D NAND is also expected. Process technologies such as FinFET and double patterning are both contributing to demand for SPE. OLED gear shipment timing and profits, 450 mm wafer equipment forecast, and medical division profit shortfall were also questioned after the presentation.

Nikon: I've got that ma-ma feeling...

Neutral impression. Nikon (7731) suffered a harsh downward revision in Q3 owing to weak performance of the camera division as a drop in demand in Asia last November hurt sales. Nikon also revised down its FY forecast in Q2 due to softness in its IC stepper business to non-Intel clients. Normally there would be a buying opportunity for a quality name like Nikon after a sharp sell-off alla 2009, 2010, and 2011. However, we believe that there is limited upside despite the massive underperformance in the past 3 months.

Cameras

Since November 2012, SLR camera demand has been noticeably softer than expected, particular in Asia. SLR camera demand “tanked” in November, which created excess inventory and price cuts. Nikon produced too many SLR units last summer in anticipation of strong demand in Asia/China. Asia is about 30% of total global camera market and Nikon expected 10-15% YoY growth in Q3, but growth was only 7% YoY. Inventories should be reduced to a reasonable level this past quarter (Q4). Nikon believes that Canon also produced too many camera units. Reasons for the subdued SLR demand in China could be popularity of iPhones which cannibalize camera sales or the new premier’s (Li Keqiang) desire to reduce luxury goods consumption in China. In another push to stem reckless consumption, China banned radio and TV ads promoting gift giving last month, according to a story published in the China Daily.

Q4 camera sales appear to be rather sluggish. The latest CIPA data showed -21% YoY growth for SLR value in February. Mirrorless camera sales were worse, falling 34% YoY in February. We think that Nikon will have to produce strong growth in March in order to make its Q4 camera 36% YoY forecast.

In February, Nikon cut Y20bn in its OP projection for the camera division on lower margins as inventory is cleared out. Nikon believes that ASPs will be soft until Q1 of FY3/14, and recover in Q2. Profit margin did not benefit from the yen depreciation in Q3 as prices were already fixed and the yen didn’t weaken until the end of November. Q4 Nikon should get a Y3bn OP tailwind from the weaker yen but still needs to clear out some excess inventory, which will hurt pricing.

OP in cameras        31,796	15,621	3,791	2,792	54,000	Q1       19,600	Q2       22,200	Q3       10,600
19.0%	9.9%	2.8%	2.2%	9.2%	10.3%	11.6%	5.1%

What’s the next driver of growth? Nikon still believes that SLR growth will be 10-15% YoY for 2013-2015. We find this more difficult to swallow given the proliferation of smart phone cameras and recent demand problems in China.

Lithography

Nikon’s litho outlook remains relatively unchanged, although recent weakness in PC sales does not bode well for capex growth in 2013. One long-term key issue is how will 450 mm impact Nikon’s competitiveness. Nikon claims that the shift to 450 mm wafers will provide a good opportunity to gain market share because ASML’s twinscan tool is disadvantaged when the wafer area doubles in 450 mm wafers. (alignment accuracy of 2.0 difficult to achieve). Nikon has sent prototypes to Intel for 450 mm. Only 3 firms are investing in 450mm now: Intel, Samsung, TSMC, but only Intel is investing in Nikon (450 mm ArF immersion). All 3 firms are investing in ASML however. One bright spot in lithography for Nikon is LCD steppers, which are slated to recover to 20% YoY growth in FY3/14.

FOREX: The profit sensitivity is large for Nikon at about 2.5% of OP per Y1 move against the dollar and euro. For next year, OP should rise by Y0.6bn for each Y1 depreciation against the $1USD, and Y1.5bn for each Y1 move against the euro. We calculate euro impact as Y30bn, and $USD impact as Y9bn for a total of Y39bn increase from FOREX in FY3/14. If OP is the company forecast of Y48bn for FY3/13, the FOREX OP gain itself would prop earnings by 81% to Y87bn. Consensus is currently Y83bn for FY3/14 OP, and thus most of these FOREX gains appear to be factored in assuming limited revenue growth in cameras and litho tools.

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.

Tokyo Electron (8035): A good bet

Positive impression. Q3 orders of Y95bn for SPE/FPD were up 27% QoQ, above the firm’s original guidance of “slightly up”, owing to strong Taiwan foundry and US (MPU and Korean maker with US factory) orders. Memory capex is sluggish from Samsung, Toshiba, etc., but could pick-up for NAND flash in the 2H of 2013. TEL projects -10% YoY capex for CY2013 as both memory and logic-related capex remains sluggish. This appears slightly conservative with more upside potential than downside risk. Other upside catalysts for FY3/14 are NEXX systems, a recent high growth acquisition into back-end equipment (packaging), and the improvement in price competitiveness as the yen weakens. TEL is arguably the overall winner versus foreign and domestic rivals given its recent FOREX advantage against AMAT and Lam Research, large size and deep pockets against DNS, Hitachi, etc., which will be tested on the 450 mm wafer platform.

SPE orders: About 2/3 of Q3 orders were from Taiwan and USA, mainly from TSMC, Intel, and Samsung Texas plant in the USA (memory and logic). Korea and Japan are very sluggish owing to weak memory capex. Samsung is building a China NAND flash plant for 2014 production. The China project will cost about $7 billion, and Samsung will invest $2.3bn initially in the Xi’an plant, Suwon. The Chinese plant, where 10-nano class NAND flash memory chips are planned to be manufactured, would be able to produce 100,000 wafers of 12-inch size per month. 

450 mm outlook/impact on TEL:

TEL believes it could gain market share to Intel in various tools including thermal processing, etch, and clean tools. This excludes the coater/developer, which they already have 100% market share. Intel is driving the 450 mm research along with Samsung and TSMC. Prices could rise 30-50% for 450 mm tools, as they did when wafer size shifted to 300 mm from 200 mm. In 1997-2003, during the last shift to 300 mm, TEL’s profits improved significantly, although there were various positive external factors absent today. However, profitability was actually better in 2005-2008 versus 1998-2001 despite the lack of wafer size change in 2005-2008. We believe it will be at an advantage given its large size versus rivals DNS, Hitachi Kokusai, Tokyo Seimitsu, ASMI (atomic layer deposition), etc. AMAT and Lam are also large though. All tools on a 450 mm line must be redesigned for 450 mm wafer size.

TEL’s OP and OP margin history

1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
2.8	9.8	21.6	60.2	54.1	56.5	6.4	35.8	121.1	(18.3)	1.1	22.3	64.0	75.7	144.0	168.5	14.7	(2.2)	97.9	60.4
1.8%	5.2%	8.6%	15.0%	12.5%	12.4%	2.0%	8.1%	16.7%	-4.4%	0.2%	4.2%	10.1%	11.2%	16.9%	18.6%	2.8%	-0.5%	14.6%	9.5%

2 years have gone by

On the 2 year anniversary of the Tohoku earthquake, we bring greetings from the ground in Tokyo. On this sunny spring Monday, stock markets continue to be frothy particularly in Japan and the US, hitting all-time highs in the US and 5-year highs in Tokyo. We deem it appropriate to pass on the following comparison, with thanks to David Rosenberg:

THEN AND NOW...

Lots of things have changed since the last Dow Jones peak in 2007:

Dow Jones Industrial Average: Then 14164.5; Now 14,304
GDP Growth: Then +2.5%; Now +1.6%
Unemployed: Then 6.7 million; Now 13.2 million
Food Stamp users: Then 26.9 million; Now 47.69 million
Fed’s Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
Debt as a Percentage of GDP: Then ~38%; Now 74.2%
Total US Debt: Then $9.008 trillion; Now $16.43 trillion
Consumer Confidence: Then 99.5; Now 69.6
VIX: Then 17.5%; Now 14%
10 Year Treasury Yield: Then 4.64%; Now 1.89%
Gold: Then $748; Now $1583
NYSE Average daily volume: Then 1.3 billion shares; Now 545 million shares

Back to chips and dips in Tokyo, we visited 3 companies last week (Nikon, TEL, Docomo), and will see Sharp, Horiba, and Omron this week. Below is our full line-up for this month.

Nikon: neutral impression

Tokyo Electron: positive impression

NTT Docomo: neutral impression

Sharp (6753)

Horiba (6856)

Omron (6645)

Nihon Kohden (6849)

Miraca (4544)

Ushio (6925)

As you can see, we've added some medical-related names this time around, given their strong performance and the favorable demographics for medical industry in Japan. Omron/Horiba have large indus. equip. biz's, 

but medical equip biz is attractive and gaining importance. We'll give more color on all the visits later this month.

For those interested, another super day was had at the Tokyo marathon:

http://davidmotozo.blogspot.jp/

Pedal to the metal, mid-January update

Happy new year to all! Wow, since our November launch the LDP has really pushed the pedal to the metal, announcing huge money printing and fiscal stimulation in the form of repair for those bridges and tunnels to nowhere. All good for the equity markets in Japan. But what is different this time around, we ask sardonically. Will these infrastructure projects actually return a decent investment to the government? What will happen to JGBs when domestic demand dries up? How many years before Japan defaults? These are dark questions, but for the time being Japan outperforms primarily on the weak currency.

Needless to say, the currency sensitivity for Japan exporters is a large swing factor for corporates, particularly automobile and technology exporters. When we wrote our last blog update on November 29, the yen had started to creep up from the Y78-80 range, but obviously not to the extent of Y89 to $1USD where it is today. Canon and Nikon are 2 of the most currency-sensitive tech names given their camera and other precision exports. Canon's OP moves about 3% of total OP for every Y1 move against the dollar and euro. Nikon's OP sensitivity is 2.4%. Thus, if the yen holds at Y89 for 2013 from Y79 in 2012, Canon's OP would rise about 30% YoY solely on the currency. Today's Nikkei mentioned that Canon's OP could rise 20% this year. We think this is on the low-end.

The current rally should last until the fiscal end year reporting season. Our rational: "buy on the mystery, sell on the history". Investors should be enticed by the sharp swing in profits for CY 2013, and bid up stocks in anticipation of strong forecasts for FY3/14, which will be released in April-May 2013. Until than, markets should be frothy assuming there aren't any other negative macro events. We suspect that investors will take profits in April-May or slightly before once the "news" of strong YoY earnings growth comes to fruition.

Just to update our views, we recommended buying Sharp, Nikon, and Tokyo Electron last year November 29. We did a round of tech visits in November and came away with warm fuzzy thoughts on these 3 names. See our note from Nov. 29 for more details.

http://motozotech.blogspot.jp/2012/11/the-virgin-tour-around-tokyo.html

	Sharp	Nikon	Tokyo Elec.	TOPIX	NIKKEI
29-Nov	169	2,186	3,375	779	9,400
18-Jan	344	2,655	3,815	911	10,913
return	104%	21%	13%	17%	16%

Sharp in particular seemed oversold and over-hated.


Since November 29, Sharp has doubled while the TOPIX is up 16%. Nikon is up 21%. TEL is up only 13%, and thus the laggard in the bunch. Intel's capex forecast announcement of $13bn for 2013 versus $11bn in 2012 is positive for TEL, Advantest, etc. Look for TEL and Nikon to continue to be bid up going into the end of year earnings (April-May).






Happy hunting and all the best in 2013!


For more thoughts, color, etc. feel free to contact me at motozo@yahoo.com or +81-90-7715-1777