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Precision Equipment Intel IDM 2.0 24 March 2021 EQUITY RESEARCH Japan | Precision Equipment Precision Equipment Intel IDM 2.0 24 March 2021 Key Takeaway New CEO Pat Gelsinger, who took office in Feb, held a briefing to discuss Intel’s basic strategy for the future. Intel announced its intention to maintain leadership in process technologies while pursuing a new business model (IDM 2.0), which strengthens the foundry model. CY21 capex is projected at $19.0bn-$20.0bn ($14.3bn in 2020). This news is positive for Japanese SPE firms. IDM 2.0: Intel (INTC: US analyst Mark Lipacis) held a briefing by Pat Gelsinger on 24 Mar. Intel will continue to maintain leadership in advanced process development, and implement IDM 2.0 as a business model with the following three pillars: 1) advanced process products will be based on in-house production, 2) strengthened cooperation with foundries, not only with TSMC but also with Samsung, GF, and UMC, in both the client and server fields; and 3) upgrade of its on foundry business. Regarding the third pillar, the foundry market is expected to reach $1.0trn in 2025, and with bases in Europe and the US, Intel aims to demonstrate superiority in the foundry business using its expansive IP portfolio, starting with x86. Regional diversification around the world is becoming important for the foundry business. Intel is establishing its own foundry organization. Prominent users including Amazon, CISCO, Google, and Microsoft are supporting this attempt. Microsoft CEO Satya Nadella also commented in the meeting. Intel will construct a new fab in Arizona in 2023 (investment: $2.0bn). Plans are to employ 3,000 engineers, with expansion to 15,000 over the med/long-term. US investment in FY19-FY21 will amount to $33.5bn, and plans are to invest $17.0bn in Ireland and Australia. 7nm development: Commented that 7nm development is progressing. Intel has thus far made limited use of new EUV technology, which has completed process development and delayed 10nm and 7nm process development. However, based on advances in EUV technology, EUV process adoption is increasing, and the 7nm process has been simplified. In 2023, plans are to launch 7nm process products for both the client and server fields. Tape in is planned for 2Q 2021. Also, in addition to advanced process development, Intel aims to achieve differentiation through superiority in packaging. 2011 earnings outlook: Intel announced 2021 earnings guidance, for sales of $76.5bn (-2% YoY) and $72.0bn excluding NAND. Capex guidance for $19.0bn- $20.0bn (+32% to +39%). Capex guidance: At the briefing, new CEO Gelsinger emphasized that Intel will continue to develop advanced processes, similar to comments at the results announcement in Jan, but the company has now adopted a stronger stance on investing resources in-house, including the foundry business. Capex guidance for CY21 includes buildings/structures, but equipment investment is expected to rise as Masahiro Nakanomyo * well. Following TSMC, Intel plans to increase capex by 30%+ YoY in FY21. Samsung Equity Analyst has yet to disclose full-year capex guidance, but according to SEMI’s World Fab +813 5251 6142 Forecast, equipment investment in 2021 will be +35% YoY. As such, the three majors [email protected] are significantly increasing capex. Hisako Furusumi * Equity Associate +813 5251 6158 [email protected] ^Prior trading day closing price unless otherwise noted. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 3 to 9 of this report. * Jefferies (Japan) Limited EQUITY RESEARCH Japan | Precision Equipment Investment is in anticipation of increased semiconductor demand over the next 2-3 years. Although a pullback is possible in the medium-term, investment should remain high for at least 2021-2022. We expect fundamentals for Japanese SPE firms, especially Tokyo Electron (8035 JP, Buy) to remain strong through 2021. Also, regarding Nikon (7731 JP, Hold), we expected exposure equipment sales to rise in FY3/23, but with limited growth in FY3/22. However, based on Intel’s most recent capex guidance, Nikon’s sales could also rise YoY in FY3/22. Table 1 - Intel, TSMC, Samsung CF Trends ($mn) Intel TSMC Samsung A B C A-B-C A B C A-B-C A B C A-B-C Sales Operating CF Capex Dividend Capex/Sales Sales Operating CF Capex Dividend Capex/Sales Sales Operating CF Capex Dividend Capex/Sales 2011 53,999 20,963 10,764 4,127 6,072 19.9% 14,531 8,424 7,280 2,644 -1,500 50.1% 149,080 20,705 19,846 790 69 13.3% 2012 53,341 18,884 11,842 4,350 2,692 22.2% 17,120 9,636 8,323 2,629 -1,316 48.6% 178,621 18,884 20,397 1,123 -2,636 11.4% 2013 52,708 20,776 10,747 4,479 5,550 20.4% 20,109 11,701 9,687 2,619 -605 48.2% 209,026 33,727 21,166 1,142 11,419 10.1% 2014 55,810 20,418 10,197 4,409 5,812 18.3% 25,165 13,906 9,519 2,566 1,821 37.8% 185,918 42,690 20,943 2,122 19,625 11.3% 2015 55,355 19,017 7,446 4,556 7,015 13.5% 26,575 16,691 8,117 3,675 4,899 30.5% 177,404 35,419 22,881 2,766 9,772 12.9% 2016 59,387 21,808 9,625 4,925 7,258 16.2% 29,415 16,768 10,190 4,832 1,746 34.6% 174,075 40,862 20,841 2,685 17,336 12.0% 2017 62,761 22,110 11,778 5,072 5,260 18.8% 32,136 19,586 11,043 5,967 2,576 34.4% 211,987 55,003 37,864 6,020 11,119 17.9% 2018 70,848 29,432 15,181 5,541 8,710 21.4% 34,196 19,028 10,463 6,885 1,680 30.6% 219,400 53,000 26,500 9,267 17,233 12.1% 2019 71,965 33,145 16,100 5,800 11,245 22.4% 34,632 19,911 14,903 8,392 -3,384 43.0% 197,776 48,931 21,692 8,274 18,965 11.0% 2020 77,867 35,384 14,259 5,568 15,557 18.3% 45,510 27,952 17,274 8,810 3,600 38.0% 201,062 55,500 32,700 9,000 13,800 16.3% 2021CoE 76,500 19,500 25.5% 52,400 26,500 50.6% 2019/1Q 16,061 4,959 3,321 1,414 224 20.7% 7,094 5,062 2,463 0 2,599 34.7% 46,551 4,600 3,617 0 983 7.8% 2019/2Q 16,505 7,587 3,554 1,414 2,619 21.5% 7,748 3,800 3,750 0 50 48.4% 49,394 5,861 5,206 4,127 -3,472 10.5% 2019/3Q 19,190 10,750 4,300 1,386 5,064 22.4% 9,396 4,410 3,140 6,653 -5,383 33.4% 53,784 11,997 5,196 2,109 4,692 9.7% 2019/4Q 20,209 9,849 4,925 1,362 3,562 24.4% 10,394 6,600 5,500 1,701 -601 52.9% 48,047 26,473 8,543 2,038 15,892 17.8% 2020/1Q 19,828 6,158 3,268 1,408 1,482 16.5% 10,313 6,813 6,393 2,152 -1,732 62.0% 46,403 9,922 7,183 5 2,734 15.5% 2020/2Q 19,728 11,157 3,408 1,403 6,346 17.3% 10,391 5,804 4,237 2,168 -601 40.8% 43,433 12,135 8,100 3,944 91 18.6% 2020/3Q 18,333 8,179 3,716 1,404 3,059 20.3% 12,130 6,616 3,454 2,206 956 28.5% 56,374 11,908 7,187 2,024 2,697 12.7% . 2020/4Q 19,978 9,890 3,867 1,353 4,670 19.4% 12,676 8,719 3,190 2,284 3,245 25.2% 54,852 21,535 10,230 3,027 8,278 18.7% Source: Jefferies, Company data 24 March 2021 2 Please see important disclosure information on pages 3 - 9 of this report. EQUITY RESEARCH Japan | Precision Equipment Company Valuation/Risks Intel Corporation Our $57 PT assumes an 11x multiple on our 2022 non-GAAP EPS forecast of $5.15, which falls towards the lower end of INTC's 5 yr PE range of 9x-15x as INTC falls behind TSMC. We believe a low multiple is justified as INTC divests the profit-making portion of its Memory business and retains the loss-making portion and lower probability of INTC streamlining SG&A costs. Risks: prolonged demand destruction due to COVID-19, decline in PCs; mis-execution on 10nm; and greater competition in servers and PCs. Nikon Price target at ¥900, based on a ¥853 fair estimate that applies 0.58x P/B, which is obtained from our 3.5% FY3/23 ROE estimate and 6.0% COE, to our ¥1,472 FY3/20 BPS. Risks：Faster SLR market contraction; accelerating competition in the ILC market, including mirrorless; sharp market decline due to COVID and lagging recovery after; investment trends at major SPE customers, FPD lithography market contraction. Tokyo Electron Price Target of ¥48,000 based on P/E of 25x applied to FY3/22E EPS of ¥1945.9.
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