7 November 2016 Asia Pacific/Japan Equity Research Telecommunications Equipment (Semiconductor Equipment (Japan))
Tokyo Seimitsu (7729) Rating NEUTRAL Price (04 Nov 16, ¥) 2,763 INITIATION Target Price (¥) 2,740 Chg to TP (%) -0.8 Market cap (¥ bn) 114.49 (US$ 1.11) SPE solid but machine tools sales weak Enterprise value (¥ bn) 82.63 Number of shares (mn) 41.44 ■ Initiating coverage: We initiate coverage of Tokyo Seimitsu with a ¥2,740 target Free float (%) 75.0 price (potential return −0.8%) and NEUTRAL rating. The company holds around 52-week price range 2,904–1,972 60% of the global market for probers used for examining the electrical *Stock ratings are relative to the coverage universe in each characteristics of semiconductors. Its share price has been firm, buoyed by analyst's or each team's respective sector. ¹Target price is for 12 months. expected demand growth for probers, due mainly to investment in DRAM process Research Analysts migration at the SPE segment, which generates 55% of OP. We think SPE Yoshiyasu Takemura demand will remain firm, especially for memory, but that machine tool orders will 81 3 4550 7358 likely be low at the metrology business. We expect FY3/17 results to beat [email protected] guidance but fall slightly behind the I/B/E/S consensus. The stock is fairly valued Hideyuki Maekawa in our view. 81 3 4550 9723 ■ Investment case: We forecast FY3/17 OP of ¥12.5bn (−5% YoY, guidance [email protected] ¥11.5bn), with ¥12.6bn in FY3/18 and ¥14.5bn in FY3/19. We think FY3/17 OP will slightly miss the I/B/E/S consensus but beat guidance. We find the stock to be fairly valued. At the SPE segment, we think demand growth arising from investment in memory, which should account for around 40% of FY3/17 sales, will drive sales growth, but that profits will decline due to the stronger yen and higher R&D costs. We believe profits will return to growth from FY3/18, due to higher volume of semiconductor shipments and capex. At the metrology business, we expect profits to continue their fall through FY3/18 due to sluggish machine tool orders stemming from the risk of a slowdown in automotive capex. ■ Catalysts/risks: Upside catalysts: (1) fresh demand for probers due to growth in production of LP DDR4 DRAM, (2) fresh demand arising from investment related to fan-out wafer-level packaging, and (3) machine tool orders rebounding to YoY growth. Downside risks: (1) lower capex due to deterioration in semiconductor prices and (2) loss of share to OSATs. ■ Valuation: We base our target price on a P/B of 1.33x applied to our FY3/17E BPS of ¥2,058. The P/B valuation is equal to the stock’s average TOPIX-relative P/B of 1.04x since the I/B/E/S consensus shifted from red ink to profits on 20 May 2010 multiplied by the current TOPIX P/B of 1.28x. Share price performance Financial and valuation metrics Pr ice (LH S) Reb ased Rel (RH S) Year 3/16A 3/17E 3/18E 3/19E Sales (¥ bn) 70.3 69.5 69.6 73.7 3 ,5 0 0 1 3 0 Operating profit (¥ bn) 13.2 12.5 12.6 14.5 Recurring profit (¥ bn) 13.2 12.4 12.5 14.4 2 ,5 0 0 1 0 5 Net income (¥ bn) 9.7 9.2 9.3 10.6 EPS (¥) 234.6 223.4 224.7 257.2 IBES Consensus EPS (¥) n.a. 223.1 245.6 261.9 1 ,5 0 0 8 0 EPS growth (%) 7.6 (4.8) 0.6 14.4 Jan - 1 5 Ju l- 1 5 Jan - 1 6 Ju l- 1 6 P/E (x) 9.4 12.4 12.3 10.7 The price relative chart measures performance against the Dividend yield (%) 2.7 2.4 2.4 2.8 TOPIX which closed at 1,347.04 on 04-Nov-2016 EV/EBITDA (x) 4.2 5.4 5.1 4.3 On 04-Nov-2016 the spot exchange rate was P/B (x) 1.2 1.3 1.2 1.2 ¥103.12/US$1 ROE(%) 12.7 11.3 10.5 11.2 Performance 1M 3M 12M Net debt/equity (%) Net cash Net cash Net cash Net cash
Absolute (%) -0.8 18.9 0.4 Source: Company data, Thomson Reuters, Credit Suisse estimates Relative (%) -0.7 13.7 13.7
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 7 November 2016
Tokyo Seimitsu (7729) Price (04 Nov 2016): ¥2763.0 (upside: -0.83%); Rating: NEUTRAL; Target Price: ¥2,740; Analyst: Yoshiyasu Takemura Income statement (¥ bn) 3/16A 3/17E 3/18E 3/19E Key ratios 3/16A 3/17E 3/18E 3/19E Sales 70.3 69.5 69.6 73.7 Growth (%) EBITDA 15.5 15.2 15.3 17.2 Sales 5.8 (1.1) 0.2 5.8 Operating profit 13.2 12.5 12.6 14.5 Operating profit 9.1 (5.4) 0.6 14.9 Recurring profit 13.2 12.4 12.5 14.4 EPS 7.6 (4.8) 0.6 14.4 Extraordinary gain & loss 0.0 0.0 0.0 0.0 Margins (%) Profit before tax 13.2 12.4 12.5 14.4 Gross margin 40.0 41.0 41.0 41.5 Net income 9.7 9.2 9.3 10.6 EBITDA margin 22.1 21.9 22.0 23.3 Cash flow (¥ bn) 3/16A 3/17E 3/18E 3/19E OP margin 18.8 18.0 18.1 19.6 Operating cash flow 7.2 13.9 12.0 11.3 DuPont analysis Depreciation & Amortization 2.3 2.7 2.7 2.7 ROE (%) 12.7 11.3 10.5 11.2 Financing cash flow 0.0 0.0 0.0 0.0 Net profit margin (%) 13.8 13.3 13.4 14.4 Issuance (retirement) of stock - - - - Sales/Assets 0.7 0.6 0.6 0.6 Dividends paid 0.0 0.0 0.0 0.0 Assets/Equity 1.3 1.3 1.2 1.2 Investing cash flow (3.8) (4.8) (4.6) (4.6) Credit ratios (%) Capex (3.8) (4.8) (4.6) (4.6) Equity ratio 77.3 79.0 80.2 80.9 Free cash flow 3.4 9.1 7.4 6.7 Net D/E ratio Net cash Net cash Net cash Net cash Net change in cash 3.4 9.1 7.4 6.7 Per share data (¥) Number of shares (mn) 41.4 41.4 41.4 41.4 Balance sheet (¥ bn) 3/16A 3/17E 3/18E 3/19E EPS 234.6 223.4 224.7 257.2 Cash & cash equivalents 27.4 33.5 37.9 41.5 BPS 1904.2 2057.6 2214.9 2394.9 Current receivable 26.0 26.3 26.7 28.7 DPS 59.0 67.0 67.4 77.2 Inventories 16.1 16.2 16.8 18.2 Dividend payout ratio (%) 25.2 30.0 30.0 30.0 Other current assets 3.2 2.3 2.3 2.3 Current assets 72.7 78.2 83.7 90.7 Valuation (x) 3/16A 3/17E 3/18E 3/19E Property, plant & equipment 22.0 23.3 24.4 25.5 P/E 9.4 12.4 12.3 10.7 Investments - - - - P/B 1.2 1.3 1.2 1.2 Intangibles 0.9 0.0 0.0 0.0 EV/EBITDA 4.2 5.4 5.1 4.3 Other non-current assets 6.3 6.3 6.3 6.3 Dividend yield (%) 2.7 2.4 2.4 2.8 Total assets 101.9 107.8 114.4 122.5 FCF yield (%) 3.7 7.9 6.5 5.8 Payables 6.1 4.4 4.4 5.1 Short term debt 1.6 1.6 1.6 1.6 Other current liabilities 13.7 15.2 15.2 15.2 Current liabilities 21.4 21.2 21.2 21.9 Long term debt 0.0 0.0 0.0 0.0 Other non-current liabilities 1.1 0.7 0.7 0.7 Total liabilities 22.5 22.0 22.0 22.7 Shareholders' equity 78.8 85.2 91.7 99.1 Minority interests 0.2 0.3 0.3 0.3 Source: Company data, Thomson Reuters, Credit Suisse estimates
Tokyo Seimitsu (7729)2 7 November 2016
Table of contents
Key charts 4
Investment view 5 Initiating coverage at NEUTRAL with ¥2,740 TP ...... 5
Earnings forecasts 7 Shareholder returns ...... 11
Earnings trends 12
SPE segment 14 (1) Probers ...... 14 (2) Dicers...... 20 (3) Polish grinders ...... 22
Metrology 26
Medium-term plan 29
Valuation 30 Risks ...... 34
Financial position 35
Financial analysis 37
Tokyo Seimitsu (7729)3 7 November 2016
Key charts
Figure 2: Japan machine-tool orders and Tokyo Figure 1: OP forecasts by segment Seimitsu’s metrology orders
20,000 14,000
15,000 12,000
5,657 10,000 10,000 5,160 5,883 5,427 5,265 Y Y P 5,995 4,407 J P 4,745 8,000 J n 5,000 2,850 4,673 o 8,802 n i l
7,339 7,323 o l 6,963 7,085 i i 5,297 l l
4,454 3,828 i m 3,463 2,832 3,720 6,000 0 900 m -2,467 -5,930 4,000 (5,000) 2,000 (10,000) 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 0 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q CSE CSE CSE 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 17/3 18/3 SPE Measurement CSE CSE
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 3: Japan machine-tool orders and Tokyo Figure 4: Japan machine-tool orders YoY and Tokyo Seimitsu’s metrology orders Seimitsu’s metrology orders YoY
450,000 9,000 80.0% 80.0%
400,000 8,000 60.0% 60.0% 350,000 7,000 40.0% 40.0% 300,000 6,000 Y Y Y 250,000 5,000 o 20.0% 20.0% o P Y Y J
n 200,000 4,000 b 0.0% 0.0% 150,000 3,000 -20.0% -20.0% 100,000 2,000
50,000 1,000 -40.0% -40.0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 0 0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 11/3 12/3 13/3 14/3 15/3 16/3 17/317/3 18/3 19/3 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 CSE CSE CSE 03/3 04/3 05/3 06/3 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/317/3 Japan machine order YoY Measurement order YoY (right axis) Japan machine order Measurement order (right axis)
Source: Japan Machine Tools Builders' Association, Company data Source: Japan Machine Tools Builders' Association, Company data, Credit Suisse estimates
Figure 5: Tokyo Seimitsu – Prober sales structure
CY2008 CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 E CY2017 E WFE YoY -32.0% -47.5% 144.1% 14.0% -10.4% -0.4% 14.7% -3.7% 0.3% 9.1% Logic YoY -24.8% -65.0% 188.4% 47.9% -27.3% -16.3% 5.6% -10.5% 31.7% -3.2% OSAT capex YoY 0.9% -35.1% 161.4% -13.6% 31.8% -16.5% 18.6% -30.5% 22.6% - Process migration ○ ○ ○ ○ ○‐ ○‐ Bit shipment YoY × × ○ × ○ ○ ○ × DRAM bit shipment YoY × × ○ ○ × ○ ○ × ○ × NAND bit shipment YoY × × ○ ○ ○ × ○ ○ ○ ○ Positive/Negative (CY base) × × ○ ○ × × ○ ○ ○ ○
Note: Circle = positive triangle = neutral; cross = negative Source: Company data, Credit Suisse estimates
Tokyo Seimitsu (7729)4 7 November 2016
Investment view Initiating coverage at NEUTRAL with ¥2,740 TP
Figure 6: Tokyo Seimitsu – Earnings forecasts summary 11/4 price (¥) Est. Sales Operating profit Recurring Profit Net profit EPS P/E ¥2,763 as of; ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) (x) Consolidated Mar-15 Actual 66,445 20.2 12,124 43.2 12,791 41.7 8,993 53.5 218.0 53.4 Mar-16 Actual 70,274 5.8 13,222 9.1 13,232 3.4 9,704 7.9 234.6 7.6 Mar-17 1Q 16,323 -11.1 2,863 -26.5 2,588 -34.4 1,875 -31.8 45.3 -32.0 2Q CoE 5/10 20,177 2.9 3,537 -5.7 3,812 2.1 2,825 4.1 68.2 4.0 1H CoE 5/10 36,500 -3.9 6,400 -16.3 6,400 -16.6 4,700 -14.0 113.6 -14.1 Mar-17 CS E (new) 11/7 69,506 -1.1 12,511 -5.4 12,415 -6.2 9,245 -4.7 223.4 -4.8 12.4 CoE 5/10 69,000 -1.8 11,500 -13.0 11,500 -13.1 8,400 -13.4 203.0 -13.5 13.6 IBES E 71,309 1.5 12,990 -1.8 12,888 -2.6 8,995 -7.3 223.1 -4.9 12.4 Mar-18 CS E (new) 11/7 69,630 0.2 12,588 0.6 12,498 0.7 9,302 0.6 224.7 0.6 12.3 IBES E 75,442 5.8 14,365 10.6 14,304 11.0 10,135 12.7 245.6 10.1 11.2 Mar-19 CS E (new) 11/7 73,702 5.8 14,459 14.9 14,369 15.0 10,646 14.4 257.2 14.4 10.7 IBES E 78,280 3.8 15,304 6.5 15,257 6.7 11,270 11.2 261.9 6.6 10.6
Source: Company data, Credit Suisse estimates, I/B/E/S SPE sales solid, but metrology sales weak; rating NEUTRAL Tokyo Seimitsu has about a 60% global market share for probers used to test the electrical properties of chips during the wafer inspection stage of the semiconductor manufacturing process. We see chipmakers' investment in DRAM process migration and 3D NAND as the prime drivers of earnings growth at the company’s semiconductor production equipment (SPE) business, which accounts for about 55% of companywide OP. We also expect investment in memory chip facilities and bit growth to drive growth in demand for Tokyo Seimitsu’s products. At the metrology business (precision measuring instruments), we think weak orders for machine tools will keep segment profits in a downtrend through FY3/18. However, we expect profits to rebound from FY3/19 as machine tool replacement demand ahead of the tightening of auto exhaust emissions standards and a rebound in automotive capex leads to machine tool orders coming out of a trough. Our FY3/17 forecast is slightly below the I/B/E/S consensus figure because we think metrology segment profits will fall short of expectations. However, our forecasts are higher than guidance, and we think the stock is currently fairly valued. We therefore initiate coverage with a NEUTRAL rating. WFE/OSAT capex, expanding semiconductor shipment volumes driving earnings growth at SPE segment The SPE segment accounts for about 60% of Tokyo Seimitsu’s sales and around 55% of its profits. However, SPE business results are dependent on investment in wafer fabrication equipment (WFE), including that by OSAT (outsourced assembly and test) companies, growth in semiconductor shipment volumes, and technology advances. In FY3/17, we expect SPE segment sales of polish grinders used in fan-out wafer level packaging to snap back from the unusually high level seen in FY3/16. However, we expect to see an overall growth in sales supported by investment by OSATs, which account for about 50% of SPE segment sales, and capex by DRAM makers. Nonetheless, we look for segment profit to decline owing to increasing R&D expenditure. We expect Tokyo Seimitsu to swing to profit growth in FY3/18 due to growth in capex and semiconductor shipment volume while R&D costs remain flat. Metrology business should swing to profit growth in FY3/19 We think profits at the metrology business, which accounts for around 45% of OP, will likely continue to decline through FY3/18 due to sluggish machine tool orders resulting from risk of a slowdown in automotive capex. However, we think profits will return to a growth track from FY3/19, when machine tool orders should come out of their trough ahead of the strengthening of exhaust emissions standards and an auto industry rebound.
Tokyo Seimitsu (7729)5 7 November 2016
Key assumptions behind our earnings forecasts We forecast Tokyo Seimitsu's product orders will total ¥71.0bn (+3% YoY) in FY3/17, with SPE accounting for ¥43.7bn (+6%) and metrology ¥27.3bn (−3%). We forecast that the company will post sales of ¥69.5bn (−1% YoY, guidance ¥69.0bn) and OP of ¥12.5bn (−5%, guidance ¥11.5bn). At the segment level, we expect the SPE segment to post sales of ¥42.4bn (+2%, guidance ¥40.8bn) and OP of ¥7.1bn (−4%) while the metrology segment contributes ¥27.1bn (−5%, guidance ¥28.2bn) to sales and ¥5.4bn (−8%) to OP. We expect SPE segment sales will sustain a positive growth trend as investment by OSATs and Taiwanese DRAM makers offsets a ¥1bn decline in sales of grinders used in fan-out wafer level packaging, which enjoyed particularly strong demand in FY3/16. However, we expect higher R&D spending to result in lower segment OP in FY3/17. Meanwhile, at the metrology segment, we expect orders for machine tools to come off their lows and segment profits to return to the growth track in FY3/19. In FY3/18, we expect companywide orders to total ¥70.1bn (−1% YoY), with SPE orders down 1% at ¥43.4bn and metrology orders down 2% to ¥26.7bn. We forecast that overall sales will reach ¥69.6bn (flat) and OP ¥12.6bn (+1%), with SPE contributing ¥42.9bn (+1%) to sales and ¥7.3bn (+3%) to OP, while the metrology segment adds ¥26.7bn (−1%) to sales and ¥5.3bn (−3%) to OP. Reasoning behind our ¥2,740 target price and NEUTRAL rating We expect continued strong demand for SPE, especially for equipment used in memory chip production. On the other hand, we think orders for the metrology segment’s machine tools will linger at low levels. We expect FY3/17 results to fall a bit short of the consensus forecast but exceed targets. We also think the stock is currently fairly valued. We set our initial target price for Tokyo Seimitsu at ¥2,740 (potential return −0.8%) and assign the stock a NEUTRAL rating. Our target price is based on a P/B of 1.33x applied to our FY3/17E BPS of ¥2,058. The P/B valuation is equal to a TOPIX-relative P/B of 1.04x (the average since the consensus forecast shifted from loss to profit on 20 May 2010) multiplied by the current TOPIX P/B of 1.28x. We use a P/B valuation even though we expect that SPE earnings will grow supported by demand generated by chipmakers' capex and bit growth. This is because we also expect metrology segment profits to remain on a downward slope until FY3/18 owing to weak machine tool orders.
Tokyo Seimitsu (7729)6 7 November 2016
Earnings forecasts The SPE business, which accounts for about 55% of Tokyo Seimitsu’s OP, has enjoyed demand for its probers and other core products generated by chipmakers’ capex, production capacity expansion, and increasing shipment volumes of semiconductors. On the other hand, the metrology segment, which accounts for about 45% of OP, is highly dependent on orders for its machine tools. We expect Tokyo Seimitsu's product orders to total ¥71.0bn (+3% YoY) in FY3/17, with SPE accounting for ¥43.7bn (+6%) and metrology ¥27.3bn (−3%). We forecast sales of ¥69.5bn (−1% YoY, guidance ¥69.0bn) and OP of ¥12.5bn (−5%, guidance ¥11.5bn), with the SPE segment contributing ¥42.4bn (+2%, ¥40.8bn) to sales and ¥7.1bn (−4%) to OP while the metrology segment contributes ¥27.1bn (−5%, ¥28.2bn) and ¥5.4bn (−8%), respectively. We expect the SPE segment to sustain sales as growth in demand fueled by capex at memory device makers, which account for about 40% of segment orders, compensates for grinders used in fan-out wafer level packaging, where we expect sales to pull back after being particularly strong in FY3/16. Nonetheless, we expect segment profits to fall owing to a strong yen and higher R&D spending. We expect metrology segment profits will also fall, owing to low orders for machine tools. In FY3/18, we forecast total orders will slip 1% YoY to ¥70.1bn, with SPE orders -1% at ¥43.4bn and metrology orders down 2% to ¥26.7bn. We forecast overall sales of ¥69.6bn (flat) and OP ¥12.6bn (+1%), with SPE contributing ¥42.9bn (+1%) to sales and ¥7.3bn (+3%) to OP, while the metrology segment adds ¥26.7bn (−1%) to sales and ¥5.3bn (−3%) to OP. The SPE business is likely to see a dropoff in investment by DRAM makers in FY3/18, but investment in 3D NAND should support growth in OP. Meanwhile, we think the metrology segment will continue to show the negative impact of low orders for machine tools. In FY3/19, we forecast total orders will increase 6% YoY to ¥74.5bn, with SPE orders +8% at ¥46.7bn and metrology orders up 4% to ¥27.8bn. We forecast sales of ¥73.7bn (+6% YoY) and OP of ¥14.5bn (+15%), with the SPE segment contributing ¥46.1bn (+8%) to sales and ¥8.8bn (+20%) to OP and the metrology segment contributing ¥27.6bn (+3%) and ¥5.7bn (+8%), respectively. We assume capex and bit growth will remain the growth drivers at the SPE business. Meanwhile, we forecast metrology segment profits will return to a growth track on a rebound in machine tool order volume.
Figure 7: Tokyo Seimitsu – Earnings forecasts summary 11/4 price (¥) Est. Sales Operating profit Recurring Profit Net profit EPS P/E ¥2,763 as of; ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) (x) Consolidated Mar-15 Actual 66,445 20.2 12,124 43.2 12,791 41.7 8,993 53.5 218.0 53.4 Mar-16 Actual 70,274 5.8 13,222 9.1 13,232 3.4 9,704 7.9 234.6 7.6 Mar-17 1Q 16,323 -11.1 2,863 -26.5 2,588 -34.4 1,875 -31.8 45.3 -32.0 2Q CoE 5/10 20,177 2.9 3,537 -5.7 3,812 2.1 2,825 4.1 68.2 4.0 1H CoE 5/10 36,500 -3.9 6,400 -16.3 6,400 -16.6 4,700 -14.0 113.6 -14.1 Mar-17 CS E (new) 11/7 69,506 -1.1 12,511 -5.4 12,415 -6.2 9,245 -4.7 223.4 -4.8 12.4 CoE 5/10 69,000 -1.8 11,500 -13.0 11,500 -13.1 8,400 -13.4 203.0 -13.5 13.6 IBES E 71,309 1.5 12,990 -1.8 12,888 -2.6 8,995 -7.3 223.1 -4.9 12.4 Mar-18 CS E (new) 11/7 69,630 0.2 12,588 0.6 12,498 0.7 9,302 0.6 224.7 0.6 12.3 IBES E 75,442 5.8 14,365 10.6 14,304 11.0 10,135 12.7 245.6 10.1 11.2 Mar-19 CS E (new) 11/7 73,702 5.8 14,459 14.9 14,369 15.0 10,646 14.4 257.2 14.4 10.7 IBES E 78,280 3.8 15,304 6.5 15,257 6.7 11,270 11.2 261.9 6.6 10.6
Note: Sales to overseas customers are normally denominated in yen, but sales in the US and certain other regions are denominated for the user in US dollars. Source: Company data, Credit Suisse estimates, I/B/E/S
Tokyo Seimitsu (7729)7 7 November 2016
Figure 8: Tokyo Seimitsu ‒ Factor analysis of changes in OP (FY3/17-FY3/19)
15,000 121 14,500
14,000 1,993 13,500 390 Y P J
13,000 1,101 n 4 m 80 14,459 12,500
12,000 13,222 12,511 12,588 11,500
11,000 t t t s s s i i i P A A A f f f e e e t t t o o o & & & O r r r
a a a G G G 3 P P P /
m m m S S S i i i
s s s 6 t t t s s s e e e 1 s s s s s s o o o e e e r r r
a a a P P P e e e G G G
r r r O O O c c c e e e
s s s n n n 3 3 3 i i i / / / a a a 7 8 9 e e e r r r 1 1 1 c c c n n n i i i
Source: Company data, Credit Suisse estimates
Orders We forecast Tokyo Seimitsu's product orders will total ¥71.0bn (+3% YoY) in FY3/17, ¥70.1bn (−1% YoY) in FY3/18 and ¥74.5bn (+6% YoY) in FY3/19. SPE We forecast Tokyo Seimitsu's SPE orders will ¥43.7bn (+6% YoY) in FY3/17, ¥43.4bn (−1%) in FY3/18 and ¥46.7bn (+8%) in FY3/19. We expect orders in 2Q FY3/17 will be ¥9.7bn (-24% QoQ), with 3Q orders at ¥10.8bn (+12%) and 4Q orders at ¥10.4bn (-4%), In FY3/17, we expect investment by DRAM makers and OSATs, especially in probers, to drive demand for Tokyo Seimitsu’s products and make up for a ¥1.0bn decline in sales of grinders used in fan-out wafer level packaging, which enjoyed particularly strong demand in FY3/16. In FY3/18, Taiwan DRAM makers’ investment in process migration is expected to fall back after expanding in FY3/17, but we assume an increase in other capex and bit growth will become the main growth drivers.
Tokyo Seimitsu (7729)8 7 November 2016
Figure 9: Tokyo Seimitsu—Quarterly orders at SPE business
14,000
12,000
10,000
Y 8,000 P J
n o i l l i 6,000 m
4,000
2,000
0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 17/3 18/3 CSE CSE
Source: Company data, Credit Suisse estimates
Metrology We forecast Tokyo Seimitsu's metrology orders will ¥27.3bn (-3% YoY) in FY3/17, ¥26.7bn (−2%) in FY3/18 and ¥27.8bn (+4%). Orders for Tokyo Seimitsu’s metrology products show a strong correlation with order volume at Japan’s industrial machinery makers. Our machinery sector analyst Shinji Kuroda sees machine tool orders continuing on a downtrend. For FY3/17, he expects capex by Chinese smartphone makers to support orders to some extent but sees orders falling owing to an overall trend toward curtailing capex. He also thinks FY3/18 orders will be suppressed owing a downturn in global automobile sales and the risk that automakers will forgo certain capital spending. However, Mr. Kuroda expects machine tool orders to recover in FY3/19 as a rebound in automakers’ capex increases their demand for machine tools needed to meet tougher emission regulations. Given the correlation we have noted between Tokyo Seimitsu’s metrology orders and machine tool orders, we assume metrology segment orders will follow the same trend.
Tokyo Seimitsu (7729)9 7 November 2016
Figure 10: Tokyo Seimitsu ‒ Quarterly orders at Figure 11: Japan machine tool vs. Tokyo Seimitsu’s metrology segment measuring equipment orders (quarterly)
10,000 450,000 9,000 400,000 8,000 8,000 350,000 7,000 300,000 6,000 Y 6,000 Y
P 250,000 5,000 P J J
n n 200,000 4,000 o b i l l i 4,000
m 150,000 3,000 100,000 2,000 2,000 50,000 1,000 0 0 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 03/3 04/3 05/3 06/3 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/1371/37/318/3 19/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/317/3 18/3 CSECSECSE CSE CSE Japan machine order Measurement order (right axis)
Source: Company data, Credit Suisse estimates Source: Japan Machine Tools Builders' Association , Company data, Credit Suisse estimates Sales and OP forecasts We forecast sales of ¥69.5bn (−1% YoY, guidance ¥69.0bn) and OP of ¥12.5bn (−5%, guidance ¥11.5bn), with the SPE segment contributing ¥42.4bn (+2%, ¥40.8bn) to sales and ¥7.1bn (−4%) to OP while the metrology segment contributes ¥27.1bn (−5%, ¥28.2bn) and ¥5.4bn (−8%), respectively. SPE profit growth is being sustained by Taiwan DRAM makers' investment in process migration and increasing shipment volumes, but we expect metrology segment profits to fall owing to low orders for machine tools. Other factors weighing on profits in FY3/17 are the yen’s appreciation from FY3/16 levels, increased spending on R&D, and higher depreciation expenses. We assume USD/JPY of ¥104.3/$ for FY3/17, compared with the average rate of ¥115/$ in FY3/16, and estimate that Tokyo Seimitsu’s OP gets a ¥70mn boost for every ¥1 depreciation of the yen against the US dollar. For FY3/18, we forecast overall sales of ¥69.6bn (flat) and OP ¥12.6bn (+1%), with SPE contributing ¥42.9bn (+1%) to sales and ¥7.3bn (+3%) to OP, while the metrology segment contributions are ¥26.7bn (−1%) to sales and ¥5.3bn (−3%) to OP. As noted earlier, lower demand from Taiwan’s DRAM makers will be negative for the SPE business in FY3/18, but we expect that will be offset the positive impact of capex and bit growth. Meanwhile, we expect metrology segment profits will continue to be weighed down by low orders for machine tools. Looking out to FY3/19, we forecast sales of ¥73.7bn (+6% YoY) and OP of ¥14.5bn (+15%), with the SPE segment contributing ¥46.1bn (+8%) to sales and ¥8.8bn (+20%) to OP and the metrology segment contributing ¥27.6bn (+3%) and ¥5.7bn (+8%), respectively. We assume capex and bit growth will remain the growth drivers for probers. Meanwhile, we forecast metrology segment profits will return to a growth track on a rebound in machine tool order volume.
Tokyo Seimitsu (7729) 10 7 November 2016
Figure 12: Earnings forecasts by segment 7729 Tokyo Seimitsu CoE CoE CoE CoE CSE CSE CSE
1Q 2Q 1H 2H (¥mn) 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 17/3 17/3 17/3 17/3 17/3 18/3 19/3
Semiconductor mfg. machine-related business Sales 20,462 34,627 37,463 29,454 31,360 40,179 41,773 11,011 11,489 22,500 18,300 40,800 42,407 42,891 46,091 YoY -17.3% 69.2% 8.2% -21.4% 6.5% 28.1% 4.0% -10.3% -1.1% -5.8% 2.3% -2.3% 1.5% 1.1% 7.5% (2,467) 3,828 5,297 2,832 3,720 6,963 7,339 2,236 7,085 7,323 8,802 YoY -58.4% -255.2% 38.4% -46.5% 31.4% 87.2% 5.4% -22.6% -3.5% 3.4% 20.2% Margin -12.1% 11.1% 14.1% 9.6% 11.9% 17.3% 17.6% 20.3% 16.7% 17.1% 19.1% Measuring systems-related business Sales 10,273 15,048 20,263 21,559 23,908 26,266 28,500 5,312 8,688 14,000 14,200 28,200 27,099 26,739 27,612 YoY -51.1% 46.5% 34.7% 6.4% 10.9% 9.9% 8.5% -12.9% 8.7% -0.6% -1.5% -1.1% -4.9% -1.3% 3.3% Operating profit 900 2,850 4,407 4,673 4,745 5,160 5,883 626 5,427 5,265 5,657 YoY 216.7% 54.6% 6.0% 1.5% 8.7% 14.0% -37.7% -7.8% -3.0% 7.5% Margin 18.9% 21.7% 21.7% 19.8% 19.6% 20.6% 11.8% 20.0% 19.7% 20.5%
Source: Company data, Credit Suisse estimates Shareholder returns Tokyo Seimitsu sees as its most important management issues increasing enterprise value by leveraging the latest technologies to supply the world’s No. 1 products in a growth field, and endeavoring to continuously return capital to shareholders. The company’s basic policy is to pay dividends (i.e., surplus capital) twice a year, in the form of an interim dividend and an end-of-period dividend, and to allocate profits to shareholders in proportion to earnings. The company aims for a consolidated dividend payout ratio of around 30%. Note that, with a view toward paying dividends in a stable and consistent manner, the company intends to maintain a ¥20 dividend irrespective of consolidated earnings (however, it may revise this policy if it incurs losses for two consecutive fiscal years). Our dividend forecasts are as follows: FY3/17 ¥67 (payout ratio: 30%; target: ¥60), FY3/18 ¥67 (payout ratio: 30%), and FY3/19 ¥77 (payout ratio: 30%).
Figure 13: Dividend forecasts
90 30.0% 30.0% 30.0% 32.0%
80 28.0% 25.2% 25.2% 70 24.0% 60 20.0% 50 16.5% 16.2% Y
P 16.0% J 40 12.0% 30 7.7% 77 6.8% 55 59 67 20 67 8.0% 23 10 16 16 4.0% 10 0 0.0% 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 CSE CSE CSE
DPS Payout ratio
Source: Company data, Credit Suisse estimates
Tokyo Seimitsu (7729) 11 7 November 2016
Earnings trends Tokyo Seimitsu’s business is divided into two broad-based segments. The semiconductor production equipment (SPE) segment accounts for about 55% of Tokyo Seimitsu’s OP while the metrology segment (precision measuring instruments) accounts for the other 45%. SPE segment sales reached ¥78.0bn in FY3/07 but plunged in the latter half of FY3/08 during the global financial crisis. In FY3/09, SPE segment sales were just ¥24.7bn, and the segment reported an operating loss of ¥5.9bn. Tokyo Seimitsu had been expanding sales by supplying a diverse array of products, including visual inspection systems, exposure systems, and wafer surface inspection systems. However, poor profitability prompted it to narrow its focus following the global financial crisis and consolidate the SPE business around three core products: wafer probers, dicers, and polish grinders. Thereafter, in FY3/11 segment sales rebounded to ¥34.6bn and OP bounced back into the black at ¥3.8bn.
Figure 14: Tokyo Seimitsu—Segment OP trend
20,000
15,000
5,657 10,000 5,160 5,883 5,427 5,265 Y
P 5,995 4,407 J 4,745 n 5,000 2,850 4,673 o 8,802 i
l 7,339 7,323 l 6,963 7,085 i 4,454 3,828 5,297 3,720 m 3,463 2,832 0 900 -2,467 -5,930 (5,000)
(10,000) 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 CSE CSE CSE
SPE Measurement
Source: Company data, Credit Suisse estimates
The SPE segment then hit a rough patch in FY3/13–3/14 when semiconductor device makers' capex receded and semiconductor shipment volumes weakened. Since then, however, the segment has enjoyed relatively steady growth in demand, driven by growth in device makers’ capex and shipment volumes. The metrology segment's earnings have generally moved in unison with orders for its machine tools, which are primarily dependent on capex trends in the automobile industry. In FY3/16, Tokyo Seimitsu recorded companywide sales of ¥70.3bn (+6% YoY), with the SPE segment providing ¥41.8bn (+4% YoY and 59% of total sales) while the metrology segment chipped in ¥28.5bn (+9%). Companywide OP came to ¥13.2bn (+9%), with the SPE segment generating ¥7.3bn (+5% YoY, 55% of the total) and the metrology segment ¥5.9bn (+14%, 45%). The key drivers for each segment are device makers’ capex and shipment volume trends for the SPE segment and the machine tool orders trend for the metrology segment. In FY3/17, we expect increases in device makers’ capex and shipment volumes to support 2% YoY growth in SPE segment sales, to ¥42.4bn (guidance ¥40.8bn), while OP falls 4% YoY to ¥7.1bn. In FY3/18, we look for segment sales to expand to ¥42.9bn (+1%) and OP to rebound to ¥7.3bn (+3%).
Tokyo Seimitsu (7729) 12 7 November 2016
Meanwhile, at the metrology segment, we expect machine tool orders to remain weak through FY3/18. Based on that assumption, we forecast declines in segment sales and profits in FY3/17–3/18. We forecast sales of ¥27.1bn (−5%, guidance ¥28.2bn) and OP of ¥5.4bn (−8%) in FY3/17, followed by sales of ¥26.7bn (−1%) and OP of ¥5.3bn (−3%) in FY3/18.
Figure 15: Tokyo Seimitsu ‒ Segment earnings trends and main drivers 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 CoE Consolidated sales Sales (bn Yen) 100.3 91.8 45.7 30.7 49.7 57.7 51.0 55.3 66.4 70.3 69.0 YoY +8.1% -8.5% -50.2% -32.8% +61.6% +16.2% -11.6% +8.3% +20.2% +5.8% -1.8% SPE business Sales (bn Yen) 78.1 67.5 24.7 20.5 34.6 37.5 29.5 31.4 40.2 41.8 40.8 YoY +8.7% -13.6% -63.3% -17.3% +69.2% +8.2% -21.4% +6.5% +28.1% +4.0% -2.3% % of sales 78% 74% 54% 67% 70% 65% 58% 57% 61% 59% 59% Metrology Sales (bn Yen) 22.2 24.4 21.0 10.3 15.0 20.3 21.6 23.9 26.3 28.5 28.2 YoY +5.8% +9.6% -13.8% -51.1% +46.5% +34.7% +6.4% +10.9% +9.9% +8.5% -1.1% % of sales 22% 27% 46% 34% 30% 35% 42% 43% 40% 41% 41%
Consolidated Order Order 105.5 81.9 33.1 31.9 57.7 53.5 52.1 57.7 70.2 69.2 YoY +5.9% -22.3% -59.6% -3.7% +81.1% -7.3% -2.6% +10.7% +21.8% -1.5%
SPE business Order (bn Yen) 82.5 57.1 15.9 21.5 40.5 32.7 30.0 33.4 43.3 41.0 YoY +5.9% -30.8% -72.1% +35.1% +88.5% -19.5% -8.2% +11.6% +29.5% -5.2% % of orders 78% 70% 48% 67% 70% 61% 58% 58% 62% 59% Metrology Order (bn Yen) 23.0 24.8 17.2 10.4 17.2 20.9 22.2 24.3 26.9 28.1 YoY +6.0% +7.9% -30.9% -39.7% +65.7% +21.6% +6.4% +9.4% +11.1% +4.4% % of orders 22% 30% 52% 33% 30% 39% 43% 42% 38% 41%
Main order driver
recovery of Semi curbing capex curbing auto semi capex S capex P E Ele New Others components packaging
firm yen appreciation impact to firm demand from M Domestic domestic auto industry domestic market e t Auto r south-eastern firm demand from China and other o driven by overseas manufacturing capability Overseas asia markets l Asian developing nations o g firm domestic firm demand from China and Europe/ China driven by overseas market, subsidy for y Machine tools Economic slow down demand調 other Asian developing nations economy slow down domestic small companies
Source: Company data, Credit Suisse estimates
Tokyo Seimitsu (7729) 13 7 November 2016
SPE segment In the SPE segment (55% of total company OP), we look for FY3/17 orders of ¥43.7bn (−6% YoY), sales of ¥42.4bn (+2%; ¥40.8bn), and OP of ¥7.1bn (−4%). We expect a ¥1.0bn reduction due to the winding down of investment in grinders for fan-out wafer level packaging, which was prevalent in FY3/16. Still, we expect DRAM and OSAT investment, mainly for probers, to drive SPE segment order demand. We look for FY3/18 orders of ¥43.4bn (−1%), sales of ¥42.9bn (+1%), and OP of ¥7.3bn (+3%). We expect that after expanding in FY3/17, demand related to Taiwanese DRAM investment in process migration will decrease. However, we expect higher capex and bit growth to drive order flow. Customers The SPE segment centers on probers, dicers, and polishing grinders. Its main customers are OSATs (outsourced assembly and test companies) and IDMs (integrated device manufacturers).
Figure 16: SPE business: Customers
OSAT (40-50%) SPE
IDM (50-60%)
Source: Credit Suisse estimates (1) Probers Probers account for around 60% of SPE segment sales by our estimate. They are used to inspect wafers as the final step of the front-end manufacturing process. The approximate breakdown of the company’s orders for probers (wafer probing machines) by customer is: memory 30–40%, logic 30%, and OSAT and others: 20–30%. We believe there is required demand for these machines in the OSAT field for the acceptance inspection of wafers procured from IDMs (integrated device makers). About these products Wafer inspection systems combine three functions into a single unit: tester, probing machines (also known as “probers”), and probe cards. Probers and testers perform electrical tests of each chip or transistor on a wafer to sort for rejects. The prober serves as the interface between the test head/probe card and the wafer, accurately aligning the contact pad (electrode) of the chips on the wafer with the tips of the probes. Probers convey the chips and position them so that accurate registration is ensured between the tips of the probes and the contact pads on the wafer for all of the chips within a designated wafer space.
Tokyo Seimitsu (7729) 14 7 November 2016
Figure 17: Wafer inspection equipment (simple diagram)
Tester Test head Tester head Spring contact pin
Probe card Wafer
Wafer chuck
Cable Measurement unit and Wafer transport unit Stage driving unit
Wafer prober
Source: Credit Suisse
Figure 18: Semiconductor manufacturing process Front end
1.Oxide and Nitride film 2.Pattern formation deposition Photoresist Developm Etching Ashing/Cleaning coating Exposure ent
3.Isolation formation 4.Gate formation 5.Contact formation 6.Interconnect formation
7.Prove testing Prober connect the signal node formed tin the LSI chip and the electrical testing machine. Then the failed LSI chips are rejected
Back end
1.Dicing 2.Chip mounting 3.Wire bond 4.Mold Dicing wafer Adapt to mount dies directly Chip pads are individually To protect from external on the substrate connected to the lead flame environment with resin with wires
8.Marking 5.Trim & Form 6.Burn in 7.Final test Putting idenfication, traceability Individual leads of the leadframe Thermal and electrical stress for Electrical tests to and distinguishing marks on the are separated from the leadframe the purposes of inducing the failure determine if they package of an IC strip of devices function properly
Source: Credit Suisse
Tokyo Seimitsu (7729) 15 7 November 2016
Factors affecting sales The three main factors affecting prober sales (the company’s main product) are: (1) WFE/OSAT capex, (2) semiconductor shipment volume, and (3) market share and competitors. Earnings in the prober business are affected not only by WFE/OSAT capex trends but also by growth in semiconductor shipment volume. ■ 2008–09: Company’s prober sales declined due to decline in WFE/OSAT investment. ■ 2010–11: Company’s prober sales rose due to increased WFE and accelerating semiconductor shipments. ■ 2012–13: Company’s prober sales declined due to decline in WFE/OSAT investment. ■ 2014–15: Company’s prober sales rose due to increase in WFE/OSAT investment and accelerating semiconductor shipments. Based on where we think the market environment is headed, we expect prober sales to trend as follows. ■ The prober market should see a tailwind from 2016 from increases in WFE and OSAT investment. However, Tokyo Seimitsu could be shut out of supplying the leading Korean NAND maker on which the stock market tends to focus, and therefore it may only reap limited benefits from the 3D NAND investment we expect will get under way from the end of 2016.
Figure 19: Tokyo Seimitsu ‒ Factors affecting prober sales
CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 E CY2017 E WFE YoY 10.8% -32.0% -47.5% 144.1% 14.0% -10.4% -0.4% 14.7% -3.7% 0.3% 9.1% Logic YoY -18.6% -24.8% -65.0% 188.4% 47.9% -27.3% -16.3% 5.6% -10.5% 31.7% -3.2% OSAT capex YoY -4.4% 0.9% -35.1% 161.4% -13.6% 31.8% -16.5% 18.6% -30.5% 22.6% - Process migration ○ ○ ○ ○ ○‐ ○‐ Bit shipment YoY ○ × × ○ × ○ ○ ○ × DRAM bit shipment YoY ○ × ○ ○ × ○ × NAND bit shipment YoY ○ ○ × ○ ○ ○ ○ Positive/Negative (CY base) × × ○ ○ × × ○ ○ ○ ○
Source: Company data, Credit Suisse estimates Prober market During 2007–15, the prober market was well correlated with (1) WFE capex and OSAT investment on the one hand and (2) semiconductor shipment volume on the other hand. We attribute this to prober demand being driven by increased tester demand amid rising capex and semiconductor shipment volumes. (1) Capex Examination of WFE/OSAT capex and the prober market during 2007–15 indicates higher demand for testers due to increased production capacity and a shift to larger diameters and more probe card pins due to an increase in the number of simultaneous measurements amid investment in process migration. While these increased prober requirements have created new demand, capex is not necessarily the only driver. In 2016, Taiwanese DRAM investment in process migration does appear to be a driver, but we also expect prober market demand.to be boosted by higher semiconductor shipment volume, a rebound in logic investment by major chipmakers, and higher NAND capex (focused on 3D NAND) .
Tokyo Seimitsu (7729) 16 7 November 2016
However, even with process migration as in 2013, if WFE/OSAT capex drops sharply, we do not see any demand from other sources sufficient to offset the drop in investment. ■ In 2007–09, the prober market contracted to $122mn (−69% YoY) in 2009, hurt significantly by lower WFE/OSAT capex during the financial crisis. ■ In 2011, the market increased to $602mn (+71% YoY) owing to higher WFE capex. ■ The market subsequently reverted to $432mn in 2015 (−8% YoY), basically moving in line with WFE/OSAT capex.
Figure 21: Prober market and WFE capex (2007–08 Figure 20: Prober market and WFE capex ‒ actuals and 2010–15) ‒ correlations
700.0 $35.0 700.0 624.8 601.5 600.0 $30.0 600.0 y = 18.005x - 51.371 R² = 0.3705 489.1 ) 470.5 n
500.0 $25.0 o 500.0 i l l
431.5 i m
394.5 $ n 368.4 ( 400.0 $20.0 n 400.0
o 351.9 t i o l i l l e i l i k r b m
a $
$ 300.0 $15.0 300.0 m
r e b o
200.0 $10.0 r 200.0 122.4 P 100.0 $5.0 100.0
0.0 $0.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 $15.0 $17.0 $19.0 $21.0 $23.0 $25.0 $27.0 $29.0 $31.0 $33.0 WFE ($bn) Contact Probers Market WFE (right axis)
Source: Gartner, Credit Suisse Source: Gartner, Company data
Figure 23: Prober market and OSAT capex ‒ Figure 22: Prober market and OSAT capex ‒ actuals correlation
700.0 $2,800.0 700.0 624.8 601.5 y = 0.0931x + 257.6 600.0 $2,400.0 600.0 R² = 0.1319
489.1 ) 500.0 470.5 $2,000.0 n o 500.0 i l l
431.5 i
394.5 m
n $
368.4 n 400.0 $1,600.0 ( 400.0 o 351.9 o i t i l l l l e i i k r m m
a $ $ 300.0 $1,200.0 300.0 m
r e b
200.0 $800.0 o r 200.0
122.4 P
100.0 $400.0 100.0
0.0 $0.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 $0.0 $500.0 $1,000.0 $1,500.0 $2,000.0 $2,500.0 $3,000.0 Contact Probers Market OSAT capex (right axis) OSAt capex ($million)
Source: Gartner, Credit Suisse Source: Gartner, Credit Suisse
Tokyo Seimitsu (7729) 17 7 November 2016
Figure 24: WFE capex forecast
$40.0
$35.0
$30.0 6.5 5.7 7.4 8.3 5.1 6.7 $25.0 6.1 5.4 9.1 5.6
n 3.3 o i l
l 13.0 i $20.0 11.7 b 5.6 14.3 $ 12.0 5.1 6.3 9.3 12.2 $15.0 13.1 3.6 14.4 6.3 $10.0 3.9 2.0 4.9 6.3 10.0 5.8 8.0 14.5 3.9 7.1 5.3 $5.0 4.7 8.0 8.4 2.0 7.7 6.0 7.5 3.4 3.8 3.0 3.9 4.0 4.0 $0.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E
DRAM NAND Foundry Logic/Other
Source: Company data, Credit Suisse estimates
Figure 25: DRAM ‒ Process migration trends 2012 2013 2014 2015 2016 2017 Company 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Samsung 25nm 23nm 20nm 1x (18) nm 1ynm
Sk Hynix 25nm 21nm
Micron 25nm 20nm 1x (16)nm
(MMJ)Elpida 25nm 20nm
Nanya 30nm 2xnm
Powerchip 30nm 25nm25nm
Winbond 46nm
Source: Credit Suisse estimates (2) Semiconductor shipment volume The prober market and semiconductor shipment volume growth basically moved in tandem from 2007 through 2015, but with some deviation in 2011–13. The prober market is influenced by WFE/OSAT capex, but fluctuations in semiconductor shipment volume (up/down) appears to be a factor in generating new prober demand. ■ 2010: Market expands along with growth in DRAM/NAND shipment volume.
Tokyo Seimitsu (7729) 18 7 November 2016
■ 2011: Market undergoes significant growth due to higher WFE capex, even with a slower pace of growth in semiconductor shipment volume. ■ 2012: Market declines due to lower WFE capex, even with faster growth in semiconductor shipment volume. ■ 2013: Market declines mainly because of lower WFE/OSAT capex, even with faster growth in semiconductor shipment volume. ■ 2014: Market expands due to higher semiconductor shipment volume coupled with increased WFE/OSAT capex. ■ 2015: Market declines due to lower WFE/OSAT capex and lower DRAM shipment volume, even with higher NAND shipment volume. Higher production volume associated with increased semiconductor shipment volume appears to boost prober demand.
Figure 26: Prober market and semiconductor Figure 27: Prober market and DRAM and NAND shipment volume growth shipment volume growth
700.0 30.0% 700.0 105% 624.8 624.8 601.5 601.5 600.0 25.0% 600.0 90%
489.1 20.0% 489.1 470.5 500.0 470.5 500.0 431.5 75% 431.5 394.5 15.0% 394.5
n 400.0 368.4 n 400.0 60%
o 351.9 o 351.9 i i 368.4 l l l l i 10.0% i m m
$ 300.0 $ 300.0 45% 5.0% 200.0 200.0 30% 122.4 0.0% 122.4
100.0 -5.0% 100.0 15%
0.0 -10.0% 0.0 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015
Contact Probers markets (right axis) Total semi shipment YoY Contact Probers markets (right axis) DRAM bit growth NAND bit growth
Source: WSTS, Gartner Source: WSTS, Gartner (3) Market share and competitors Tokyo Seimitsu has roughly 40–60% of the prober market, but is battling for market share with its largest competitor, Tokyo Electron (8035). Tokyo Seimitsu focuses more on sales to OSATs than IDMs. As a result, it has not had great success in selling probers to major logic chip and NAND makers. When MPU and NAND shipment volume slows, major logic chip and NAND makers reduce investment in probers, so the company’s market share tends to rise under these conditions.
Tokyo Seimitsu (7729) 19 7 November 2016
Figure 29: Prober market share and DRAM and Figure 28: Prober – Market share NAND shipment volume growth
100% 100% 100%
90% 90% 90% 80% 80% 39% 33% 80% 41% 37% 28% 39% 33% 70% 38% 42% 35% 70% 41% 37% 28% 39% 70% 42% 35% 38% 39% 60% 60% 60% 50% 50% 50% 40% 40% 30% 30% 40% 50% 51% 55% 59% 55% 40% 53% 48% 50% 20% 20% 30% 51% 59% 50% 53% 55% 55% 10% 10% 40% 48% 50% 20% 0% 0% 10% 2007 2008 2009 2010 2011 2012 2013 2014 2015
0% Tokyo Seimitsu Tokyo Electron 2007 2008 2009 2010 2011 2012 2013 2014 2015 SEMES Others Tokyo Seimitsu Tokyo Electron SEMES Others DRAM bit shipment YoY (right axis) NAND bit shipment YoY (right axis)
Source: Gartner Source: Gartner (2) Dicers We estimate that the company’s dicer order weighting is roughly 50% IDM and 50% OSAT, giving it a broad customer base that includes semiconductors and electronic components. In addition to semiconductor production capacity upgrades, growth in semiconductor shipment volume creates the need for more dicing, which in turn boosts demand for dicers. Dicer sales: Historical and future Tokyo Seimitsu’s dicer sales have tended to fluctuate in tandem with WFE, semiconductor shipments, and market share. ■ 2007–09: Dicer market contracted and the company’s dicer sales fell due to a decline in WFE/OSAT investment and slowdown in semiconductor shipments. ■ 2010–11: Dicer market expanded and company’s dicer sales rose due to an increase in WFE/OSAT investment. ■ 2012–13: Dicer market contracted and company’s dicer sales fell due to a decline in WFE/OSAT investment. ■ 2014–15: Company’s sales increased due to higher NAND shipment volume and higher demand for electronic components. Based on the above, we make the following assumption about the future market environment for dicers. ■ 2015–16: Expect impact from lower demand for demand driver electronic components.
Figure 30: Dicer sales structure
CY2008 CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 E CY2017 E WFE YoY -32.0% -47.5% 144.1% 14.0% -10.4% -0.4% 14.7% -3.7% 0.3% 9.1% Logic YoY -24.8% -65.0% 188.4% 47.9% -27.3% -16.3% 5.6% -10.5% 31.7% -3.2% OSAT capex YoY 0.9% -35.1% 161.4% -13.6% 31.8% -16.5% 18.6% -30.5% 2‐2.6% -‐ Total semi Bit shipment YoY × × ○ × ○ ○ ○ × DRAM bit shipment YoY × × ○ ○ × ○ ○ × ○ × NAND bit shipment YoY × × ○ ○ ○ × ○ ○ ○ ○ Electronic components × × × × × × ○ ○ ○ × Positive/Negative (CY base) × × ○ ○ × × ○ ○ ○ ×
Source: Company data, Credit Suisse estimates
Tokyo Seimitsu (7729) 20 7 November 2016
Dicer market The dicer market moved broadly in tandem with growth in WFE/OSAT capex and semiconductor shipment volume.
Figure 31: Wafer dicing saw market Figure 32: Wafer dicing saw market share
500.0 140.0% 100% 440.3126% 450.0 419.2 120.0% 90% 17% 18% 16% 16% 403.3 25% 400.0 80% 20% 100.0% 24% 350.0 70% 80.0% 300.0 274.1 283.7 60% n
o 60.0% i l Y l
i 230.4 250.0 o 50% Y m 194.5 40.0% $ 200.0 40% 81% 82% 83% 84% 73% 20.0% 62% 150.0 30% 64% 0.0% 100.0 -5% -4% 20% -16% -16% 50.0 -20.0% 10% -30% 0.0 -40.0% 0% 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013
Wafer-Dicing Saws market YoY Disco Tokyo Seimitsu Others
Source: Company data, Credit Suisse Source: Company data, Credit Suisse (1) Capex Growth in semiconductor production capacity appears to boost demand for dicing. From 2007 through 2013, the dicer market moved broadly in tandem with WFE/OSAT investment. It first contracted from 2007 through 2009 as a weak economy weighed heavily on WFE and also depressed OSAT investment, declining to just $195mn (−16% YoY) in 2009. It recovered to $440mn (+126% YoY) in 2010 as WFE/OSAT investment rebounded. It then continued broadly tracking WFE/OSAT investment and was $284mn (−30% YoY) in 2013. Tokyo Seimitsu also sells dicer blades, a business it bought from Mitsubishi Material (5711) in 2012. Annual sales at the time were around ¥1bn by our estimate, but they subsequently expanded on the back of synergies with the company's dicers and are now several hundred million yen higher. This is an area Tokyo Seimitsu intends to focus on going forward including by adding capacity with its Thai plant, and we will be keeping close watch.
Figure 33: Dicer market and WFE Figure 34: Dicer market and OSAT investment
500.0 $40.0 500.0 $4,000.0 440.3 440.3 450.0 419.2 $36.0 450.0 419.2 $3,600.0 403.3 403.3 400.0 $32.0 400.0 $3,200.0
350.0 $28.0 350.0 $2,800.0
300.0 274.1 283.7 $24.0 300.0 274.1 283.7 $2,400.0 n n n n o o o i i i o l l l i l l l l i i i
230.4 l 230.4
250.0 $20.0 i 250.0 $2,000.0 b m m m
194.5 $ 194.5 $ 200.0 $16.0 $ 200.0 $1,600.0 $
150.0 $12.0 150.0 $1,200.0
100.0 $8.0 100.0 $800.0
50.0 $4.0 50.0 $400.0
0.0 $0.0 0.0 $0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015
Wafer-Dicing Saws market WFE Wafer-Dicing Saws market OSAT capex (right axis)
Source: Gartner, Credit Suisse Source: Gartner, Credit Suisse (2) Semiconductor shipment volume The dicer market basically moved in tandem with semiconductor shipment volume growth from 2007 through 2013, with some deviation in 2011–13.
Tokyo Seimitsu (7729) 21 7 November 2016
While WFE/OSAT capex does affect shipments, the need for chip dicing basically increases in line with higher semiconductor shipment volume. We believe this lies behind growth in dicer demand. ■ 2011: Market contracts due to lower OSAT capex, despite higher WFE capex and higher NAND/DRAM shipment volume. ■ 2012: Market contracts due to lower DRAM/NAND shipment volume and slightly lower WFE capex, despite higher semiconductor shipment volume. ■ 2013: Market declines due to lower NAND shipment volume and lower WFE capex, despite higher semiconductor shipment volume.
Figure 35: Dicer market and semiconductor Figure 36: Dicer market and DRAM/NAND shipment shipment volume growth volume growth
500.0 30.0% 500.0 200%
450.0 450.0 180% 25.0% 400.0 400.0 160% 20.0% 350.0 350.0 140% 15.0% 300.0 300.0 120% n n o o i i l l l l i 250.0 10.0% i 250.0 100% m m 440.3 440.3 $ 200.0 419.2 403.3 $ 200.0 419.2 403.3 80% 5.0% 150.0 150.0 60% 274.1 283.7 274.1 283.7 230.4 0.0% 230.4 100.0 194.5 100.0 194.5 40% -5.0% 50.0 50.0 20%
0.0 -10.0% 0.0 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015
Wafer-Dicing Saws market Total semi shipment YoY Wafer-Dicing Saws market DRAM bit growth NAND bit growth
Source: WSTS, Gartner Source: WSTS, Gartner (3) Market share and competitors Tokyo Seimitsu has around 20% of the dicer market, while its largest competitor Disco (6146) has 80%, so there is a vast gap between the two firms.
Figure 37: Dicer market share Figure 38: Dicer sales by Tokyo Seimitsu and Disco
100% 15,000
90% 16.6% 17.5% 16.1% 16.1% 25.3% 20.3% 80% 12,000 23.7% 70%
Y 9,000 P J
60% n o i l l
50% i 6,000 m 40% 81.2% 81.9% 83.4% 83.6% 62.0% 72.9% 64.0% 30% 3,000 20%
10% 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 0% 12/3 13/3 14/3 15/3 16/3 17/3 2007 2008 2009 2010 2011 2012 2013 Tokyo Seimitsu Dicing machine sales Disco Dicer sales Disco Tokyo Seimitsu Others
Source: Gartner Source: Credit Suisse estimates (3) Polish grinders About these products Polish grinders account for approximately 10% of sales in the company’s SPE business. These products remove damage caused by the grinding process and thin wafers to specifications required by 3D mounting technology and for various IC card and SIP (system in package) applications, all in a single system.
Tokyo Seimitsu (7729) 22 7 November 2016
The company’s approximate PG order weighting by customer is IDM 20–30% and OSAT/others 70–80%. Factors affecting sales The four main factors affecting sales of Tokyo Seimitsu’s dicers (a major product for the company) are: (1) capex and wafer dicing demand, (2) semiconductor shipment volume, (3) fan-out wafer level packaging, and (4) market share and competitors. The company’s dicer sales naturally correlate with the overall market trend, so we are omitting the market factor. Dicer sales: Past and future Examination of the company’s historical grinder sales indicates a need to focus on WFE/OSAT capex, semiconductor shipment volume, and market share. Based on the outlook for the market environment, we anticipate benefits form higher WFE/OSAT capex plus faster growth in NAND shipment volume. Also, we expect demand for application in the fan-out wafer level package process to boost orders/sales by roughly ¥1.0bn in FY3/16.
Figure 39: Tokyo Seimitsu ‒ Factors affecting grinder sales CY2008 CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2016 E CY2017 E WFE YoY -32.0% -47.5% 144.1% 14.0% -10.4% -0.4% 14.7% -3.7% 0.3% 9.1% Logic YoY -24.8% -65.0% 188.4% 47.9% -27.3% -16.3% 5.6% -10.5% 31.7% -3.2% ‐ ‐ OSAT capex YoY 0.9% -35.1% 161.4% -13.6% 31.8% -16.5% 18.6% -30.5% 22.6% - Total semi Bit shipment YoY × × ○ × ○ ○ ○ × DRAM bit shipment YoY × × ○ ○ × ○ ○ × ○ × NAND bit shipment YoY × × ○ ○ ○ × ○ ○ ○ ○ Fan-Out Wafer Level × × × × × × × ○ × × Positive/Negative (CY base) × × ○ ○ × × ○ ○ ○ ○
Source: Company data, Credit Suisse estimates
Figure 40: Grinder market and WFE Figure 41: Grinder market and OSAT investment
300.0 $36.0 300.0 $3,000.0
250.0 $30.0 250.0 $2,500.0
200.0 $24.0 200.0 $2,000.0 n n n n o o o o i i i i l l l l l l l l i i i 150.0 $18.0 i 150.0 $1,500.0 b m m m
$ $ $ $
100.0 $12.0 100.0 $1,000.0
50.0 $6.0 50.0 $500.0
0.0 $0.0 0.0 $0.0 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015
Grinder sales WFE (right axis) Grinder sales OSAT capex (right axis)
Source: Global net, Credit Suisse Source: Global net, Credit Suisse
Tokyo Seimitsu (7729) 23 7 November 2016
Figure 42: Grinder market and semiconductor Figure 43: Grinder market and DRAM/NAND shipment volume growth shipment volume growth
300.0 20.0% 300.0 180%
160% 15.0% 250.0 250.0 140% 10.0% 200.0 200.0 120% n
5.0% n o i o 100% l i l l l i 150.0 i 150.0 m m
$ 0.0% 80% $
100.0 100.0 60% -5.0% 40% 50.0 -10.0% 50.0 20%
0.0 -15.0% 0.0 0% CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015
Grinder sales Total semi bit shipment YoY Grinder sales DRAM bit shipment YoY NAND bit shipment YoY
Source: Global net, WSTS Source: Global net, WSTS (3) Fan-out wafer level packaging The main obstacles to the widespread adoption of fan out packaging have been technical obstacles and high costs. To lower costs, companies have been using larger substrates. Increasing package substrate size then allows many chips to be sealed simultaneously, thereby boosting backend process productivity. In fact, equipment makers are eyeing developments in panel level packaging. We expect TSMC’s InFO process to sustain generation 1.5 capex in 2017, as there are no structural changes involved, requiring no new capex. However, new demand could arise with generation 2, which is slated for development in 2018. For Tokyo Seimitsu, we infer that orders and sales were boosted to approximately ¥1.0bn in FY3/16. We also believe that fan-out wafer level packaging could create new demand in the future. However, we have not factored this into our estimates at this point.
Figure 44: Fan-out wafer level packaging ‒ Major participates and start-up timing Company Name timing of ramp up
TSMC InFO ramp up Gen2 in 2H 2017 ASE - from 2017 Amkor SWIFT、SLIT plan to ramp up in 2017 SPIL SLIT earnings growth from 2017 Samsung - -
Source: Credit Suisse make charts from Company data
Tokyo Seimitsu (7729) 24 7 November 2016
Figure 45: Tokyo Seimitsu ‒ Polish grinder sales
2,500
2,000
1,500 Y P J
n m 1,000
500
0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 12/3 13/3 14/3 15/3 16/3 17/3
Source: Credit Suisse estimates (4) Competitors and market share Tokyo Seimitsu has roughly 20–40% of the grinder market, lagging competitor Disco—the same situation as in the dicer business. Several years ago, Tokyo Seimitsu got a late start in the development of systems needed for thinner/faster grinding, putting it behind competitors in polish grinder performance and evidently hurting its market share.
Figure 47: Tokyo Seimitsu and Disco ‒ Grinder Figure 46: Grinder market share sales
100% 7,000 12% 90% 18% 20% 26% 6,000 34% 31% 32% 80% 41% 26% 5,000 70% Y
37% 35% P 4,000 26% J 60% 20% 22% n o
25% i l l 50% 22% i 3,000 m 40% 2,000 30% 62% 1,000 45% 45% 48% 49% 46% 20% 42% 37% 10% 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 0% 12/3 13/3 14/3 15/3 16/3 17/3 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 Tokyo Seimitsu Polish Grinder sales Disco Grinder sales Disco Tokyo Seimitsu Others
Source: Global net Source: Credit Suisse estimates
Tokyo Seimitsu (7729) 25 7 November 2016
Metrology The metrology segment accounts for roughly 45% of the company’s, and 60% of sales are to the automotive industry. Orders tend to correlate with machine tool orders in Japan. We look for FY3/17 orders of ¥27.3bn (−3% YoY), sales of ¥27.1bn (−5%; −¥28.2bn), and OP of ¥5.4bn (−8%). For FY3/18, we expect orders of ¥26.7bn (−2%), sales of ¥26.7bn (−1%), and OP of ¥5.3bn (−3%). We expect FY3/17 orders to rise on higher capex by local Chinese smartphone makers. We look for machine tool orders to continue declining through FY3/18 due to weakness in global automobile sales and the risk of slowing automobile capex. However, we expect a gradual rebound in machine tool orders in FY3/19, underpinned by a recovery in automobile capex and higher replacement demand for machine tools to meet tightened regulations on automobile exhaust emissions The company’s metrology orders generally correlate with machine tool orders, so we assume the same trend.
Figure 48: Japan machine tool orders and Tokyo Figure 49: Japan machine tool orders (YoY) and Seimitsu’s metrology orders Tokyo Seimitsu’s metrology orders (YoY)
450,000 9,000 150.0% s r
400,000 8,000 e y = 0.5584x + 0.016 d r R² = 0.7845 o
350,000 7,000 100.0% y g o
300,000 6,000 l o r t Y 50.0%
250,000 5,000 e P J Y
m
o n
200,000 4,000 s b ' Y u
s 0.0% 150,000 3,000 t i m 100,000 2,000 i e S -50.0%
50,000 1,000 o y k
0 0 o T Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 -100.0% 03/3 04/3 05/3 06/3 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/317/3 -150.0%-100.0%-50.0% 0.0% 50.0% 100.0%150.0%200.0%250.0% Japan machine tools orders YoY Japan machine order Measurement order (right axis)
Source: Japan Machine Tool Builders' Association, Company data, Credit Suisse Source: Japan Machine Tool Builders' Association, Company data estimates
Figure 50: Japan machine tool orders (YoY) and Tokyo Seimitsu’s metrology orders (YoY)
80.0% 80.0%
60.0% 60.0%
40.0% 40.0% Y Y
o 20.0% 20.0% o Y Y
0.0% 0.0%
-20.0% -20.0%
-40.0% -40.0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 11/3 12/3 13/3 14/3 15/3 16/3 17/317/3 18/3 19/3 CSE CSE CSE
Japan machine order YoY Measurement order YoY (right axis)
Source: Japan Machine Tool Builders' Association, Company data, Credit Suisse estimates
Tokyo Seimitsu (7729) 26 7 November 2016
Figure 51: Japan machine tool orders (auto related) Figure 52: Japan machine tool orders (auto related) and Tokyo Seimitsu’s metrology orders and Tokyo Seimitsu’s metrology orders
60,000 9,000 8,000 ) Y
P 7,500 J
50,000 7,500 n m
( 7,000
r e
d 6,500 40,000 6,000 r o
t Y Y n 6,000 e P P y = 0.073x + 3468.7 J J
30,000 4,500 m n n e R² = 0.7535
r 5,500 m m u s
a 5,000 20,000 3,000 e m
u 4,500 s t 10,000 1,500 i m
i 4,000 e S
o 3,500
0 0 y k 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q o 3,000 T 13/3 14/3 15/3 16/3 17/3 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000 Auto related machinery order (mn JPY) Auto ralated manichery order Measurement order (right axis)
Source: Japan Machine Tool Builders' Association, Company data Source: Japan Machine Tool Builders' Association, Company data Overview of product categories The mainstay products of the precision measuring instrument segment are (1) coordinate measuring machines, (2) surface texture and contour measuring instruments, and (3) roundness measuring instruments. (1) Coordinate measuring machines These machines read the positional relationship of an object and a probe as X, Y, and X coordinates and evaluate such factors as dimension, position, shape, and geometric deviation. These machines are widely used in the manufacture of engines and transmissions. Tokyo Seimitsu has a roughly 40% share of the domestic market and a 20–30% share of the overseas market. (2) Surface texture and contour measuring instruments These machines quantify the irregularities on the surface of a processed object that make the object feel either smooth or textured and evaluate such irregularities according to roughness parameters. They are mainly used in the manufacture of engines and cylinders. Tokyo Seimitsu has a nearly 60% share of the domestic market and a 30–40% share of the overseas market. (3) Roundness measuring instruments These machines evaluate circular cross-sections of cylinders, balls, and the like for their degree of error when compared to an ideal circle. The instruments are used mainly in the in-line sensors of factory automation (FA) equipment. Tokyo Seimitsu has a just-over 50% share of the domestic market, but its overseas market share is unclear. Customer trends Looking at Tokyo Seimitsu’s customers by industry, we find that 60–70% of customers are in the auto industry, around 20% are in the machine tools and general machinery industries, and around 10% are in aviation-related industries.
Tokyo Seimitsu (7729) 27 7 November 2016
Figure 53: Metrology segment ‒ Customers Figure 54: Metrology segment ‒ Sales channels
Auto related Auto/ auto parts Tokyo Domestic sales (60-70%) makers Seimitsu
Machine tools and Machine tools Metrology business Metrology business CarlZeiss Europe industry makers (20%)
Air carrier Tokyo related Heavy industry Seimitsu Rest of overseas (10%)
Source: Credit Suisse Source: Credit Suisse
Demand drivers include capex in the auto industry and demand at machine tool manufacturers. The company also sells sensors to machine tool manufacturers, which these companies then incorporate into their products. Orders at the metrology segment have been outperforming capex in the Japanese auto industry. We think this is in part because Tokyo Seimitsu is harnessing demand in overseas automotive industries, but mainly because investment in measuring equipment is a growing component of auto industry investments.
Figure 55: Japanese auto industry capex and Figure 56: Japanese auto industry capex and metrology orders metrology orders
3,000,000 30,000 30,000
n
m y = 0.0008x + 20004 (
2,500,000 25,000 r 25,000 R² = 0.0025 e d r o
t n
2,000,000 20,000 e 20,000 m e r Y Y ) u P P s Y J J
1,500,000 15,000 a 15,000 P n n e J m m m
u s t 1,000,000 10,000 i 10,000 m i e S
500,000 5,000 o 5,000 y k o T 0 0 0 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/3 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 Auto industry capex (mn JPY) Auto industry capex Measurement order (right axis)
Source: Development Bank of Japan Source: Development Bank of Japan
Tokyo Seimitsu (7729) 28 7 November 2016
Medium-term plan Tokyo Seimitsu has two objectives for the medium term (through FY3/19): (1) OP of at least ¥15bn and (2) as a long-term objective maintain a company structure capable of at least 10% ROE (FY3/16 ROE: 12.7%). Although the company does not disclose its quantitative sales targets, it intends to maintain ROE of at least 10% by generating stable profits in spite of being involved in the highly volatile SPE business. We believe the company can achieve this through a combining profits from both the normally stable metrology segment with those from the volatile SPE segment. Tokyo Seimitsu’s strategies for its individual segments are as follows. SPE segment Based on a policy of developing products that match market requirements and bundling systems and applications, the strategy for this segment is as follows. Probers: Pursue an omnidirectional, departmentalized strategy that enables the company to supply products and optional functions that match customer requirements in a wide variety of applications Dicers: Recognize the importance of supplying comprehensive solutions and pursue a vision for expanding sales of electronic components Polish grinders, CMP systems, and high-rigidity grinders: Realize high-precision processing technologies, create new demand, and pursue standardization of technology amid the evolution in new devices and new packaging technologies,. Metrology segment The company’s policy for this segment involves increasing overseas sales by bolstering the segment’s global business structure and focusing on sales in target fields, as well as increasing sales generally by developing products for growth industries. To these ends, the strategy for this segment is as follows. Overseas sales: Amid globalization and aggressive capex in the auto industry, conduct next-generation product development and establish bases in the major production regions. Growth industries (aviation industry sales): The company expects demand for aviation- related measuring equipment to grow as global demand for aircraft expands (mainly in small- and mid-sized aircraft); aircraft components require ultra-high precision, and demand for large coordinate measuring machines is likely to grow. Internet of Things (IoT): In what is becoming widely known as “Industry 4.0,” manufacturing equipment is being linked more and more to global networks, and demand for sensors and measuring equipment is likely to grow. The company’s policy is to meet demand by developing network-ready measuring machines as well as measuring machines that operate in tandem with robots. Optical measuring instruments: The need to measure the 3D roughness of surfaces is growing, but length has become the bottleneck for making such measurements.. Because optical measuring instruments are able to evaluate objects quickly and without contact, inquiries for such instruments as a product that fulfills customers’ needs are strong, leading to expansion in both the product lineup and sales.
Tokyo Seimitsu (7729) 29 7 November 2016
Valuation Our target price is ¥2,740 (potential return: −0.8%) and our rating is NEUTRAL. We base our ¥2,740 target price on a target P/B of 1.33, applied to our FY3/17E BPS of ¥2,058. We derive the P/B multiple by applying the TOPIX-relative P/B since 20 May 2010 of 1.04 (when the I/B/E/S consensus moved from loss to profit) to the current TOPIX P/B of 1.28x. We expect growth in demand resulting from capex and bit growth in the memory business. At the metrology business, we think profits will decline through FY3/18 due to low machine tool orders. However, we expect a swing to profit growth from FY3/19, when machine tool orders should come off their lows due to a rebound in capex and the auto industry. We think FY3/17 OP will slightly miss the I/B/E/S consensus, primarily as a result of an earnings miss at the metrology segment, but still beat guidance. We believe the stock is fairly valued at present. The stock looks fairly valued with an implied P/E of 12.4x, on par with the current I/B/E/S consensus P/E forecast. We adopt a P/B model even though we expect earnings growth in the semiconductor business due to higher demand from capex and bit growth. This is because we think earnings from the metrology business will continue to decline due to sluggish machine tool orders through FY3/18. The following could substantially affect Tokyo Seimitsu's valuation, in our view: ■ Upside catalysts including (1) fresh demand arising from investment in fan-out wafer- level packaging, (2) fresh demand for probers driven by growth in mass-production of LP DDR4 DRAM, and (3) machine tool orders coming out of a trough in FY3/17 (we expect YoY growth in orders to resume in FY3/19). ■ Downside risks including (1) lower capex due to deterioration in semiconductor prices and (2) loss of sales share to OSATs.
Figure 57: ¥2,740 target price based on P/B EPS 223.35 BPS 2,057.58 PER 12.26 PBR 1.33 TP 2,738
Source: Credit Suisse estimates, Thomson Reuters Datastream
Figure 58: Comparison of SPE maker valuations EV/Sales (x) EV/EBITDA (x) P/E (x) P/B (x) ROE (%) Absolute performance (%) Company Ticker FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 12M 3M 1M Advantest 6857 1.1 1.1 9.2 8.8 24.6 23.4 2.1 2.0 8.6 8.6 51.7 4.1 2.9 Disco 6146 2.9 2.8 10.5 9.5 21.7 19.4 2.5 2.3 11.5 11.9 11.7 16.8 -0.2 TOWA 6315 - - - - 11.8 12.2 1.2 1.1 10.4 9.2 80.0 3.2 -12.4 Micronics Japan 6871 1.7 1.5 13.0 7.3 92.5 19.2 2.1 1.9 2.2 9.8 -4.7 10.0 -14.6 Tokyo Seimitsu 7729 1.3 1.2 5.8 5.2 12.4 11.2 1.3 1.2 10.8 11.0 1.0 18.7 0.0 Shinkawa 6274 0.0 0.0 - - 51.1 9.5 - - - - 0.6 38.5 0.4 Apic Yamada 6300 - - - - 58.0 54.0 44.4 29.8 76.5 55.2 75.7 11.5 -9.6
KLA-Tencor KLAC 3.6 3.4 9.5 8.9 13.9 12.9 10.6 7.1 76.5 55.2 11.5 -3.0 6.0 Teradyne TER 2.2 2.1 9.1 8.3 16.2 14.9 2.6 2.3 16.1 15.7 14.2 16.1 7.3 ASM Pacific Technology 0522.HK 2.0 1.8 11.2 9.7 22.5 18.4 3.5 3.2 15.4 17.2 4.0 12.7 3.2 As of 2016/11/4
Source: Thomson Reuters Datastream Dividing swings in share price into phases Tokyo Seimitsu’s share price tends to move in response to events that bear on earnings trends, such as capex by chipmakers, revisions to company targets, and Nikkei articles.
Tokyo Seimitsu (7729) 30 7 November 2016
After examining the swings in Tokyo Seimitsu’s share price since 2003, we can divide them into the following three phases. ■ Phase 1: The economy begins to recover from the slump following the collapse of the IT bubble, and operations begin to grow ■ Phase 2: The economy enters a severe fall and orders drop, resulting in an operating loss in FY3/09 ■ Phase 3: The company takes on structural reforms (involving the exercise of selectivity and focus in the business portfolio) following a turn to unprofitability, which sparks recoveries in orders and earnings. (However, the exercise of selectivity and focus in operations have not brought about a meaningful increase in earnings in this phase.)
Figure 59: Share price phases
Phase 1 Phase 2 Phase 3 9,000
8,000
7,000
6,000
5,000 Y P J 4,000
3,000
2,000
1,000
0 3 4 5 6 7 8 9 0 1 2 3 4 5 6 0 0 0 0 0 0 0 1 1 1 1 1 1 1 ------n n n n n n n n n n n n n n a a a a a a a a a a a a a a J J J J J J J J J J J J J J
Source: Company data, Thomson Reuters Datastream, Credit Suisse
Figure 60: Relative P/E (FY1) and phase
Phase 1 Phase 2 Phase 3 3.0
2.5
2.0
1.5 )
x 1.0 (
0.5
0.0
-0.5
-1.0 3 4 5 6 7 8 9 0 1 2 3 4 5 6 0 0 0 0 0 0 0 1 1 1 1 1 1 1 ------n n n n n n n n n n n n n n a a a a a a a a a a a a a a J J J J J J J J J J J J J J
Source: Company data, Thomson Reuters Datastream, Credit Suisse
Tokyo Seimitsu (7729) 31 7 November 2016
Figure 61: Relative P/B (FY1) and phase
Phase 1 Phase 2 Phase 3
3.0
2.5
2.0 )
x 1.5 (
1.0
0.5
0.0 3 4 5 6 7 8 9 0 1 2 3 4 5 6 0 0 0 0 0 0 0 1 1 1 1 1 1 1 ------n n n n n n n n n n n n n n a a a a a a a a a a a a a a J J J J J J J J J J J J J J
Source: Company data, Thomson Reuters Datastream, Credit Suisse
Figure 62: Absolute P/E Figure 63: Absolute P/B
30.0 5.0
4.5
20.0 4.0
3.5 10.0 3.0 )
x 2.5 ( )
x 0.0 (
3 4 5 6 7 8 9 0 1 2 3 4 5 6 2.0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 ------n n n n n n n n n n n n n n a a a a a a a a a a a a a a J J J J J J J J J J J J J J 1.5 -10.0 1.0
0.5 -20.0 0.0 3 4 5 6 7 8 9 0 1 2 3 4 5 6 0 0 0 0 0 0 0 1 1 1 1 1 1 1 ------n n n n n n n n n n n n n n
-30.0 a a a a a a a a a a a a a a J J J J J J J J J J J J J J
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
We now look in detail at the share price trends in each phase. ■ Phase 1: Confirmation of earnings growth, driven largely by sales of new products amid the slump that followed the collapse of the IT bubble. ■ Phase 2: A series of downward revisions in conjunction with the deterioration in market conditions—starting with a guidance cut on 10 March 2006 (owing to the recording of extraordinary losses on the disposition of unsold inventory in FY3/06), which resulted in a projected profit decline). ■ Phase 3: Share price begins trending higher following the 20 February 2009 announcement of a headcount reduction of around 800 (about 40% of the workforce) by the end of March 2009. Stock price swings down on 12 November 2012 (owing to an FY3/13 guidance cut) and then up on 11 November 2014 (owing to raising of FY3/15 guidance and the dividend). Share price begins trending downward in April 2015 in response to a cut in TSMC’s capex plan, but heads into a share repurchase conducted on account of sustained solid earnings.
Tokyo Seimitsu (7729) 32 7 November 2016
Figure 64: Share price movement, Phase 1 Figure 65: Share price movement, Phase 2
9,000 9,000
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0 0 3 4 5 6 7 8 3 4 5 6 6 7 8 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ------l l l l l l n n n n n n n n u u u u u u a a a a a a a a J J J J J J J J J J J J J J
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
Figure 67: Share price indicators, Tokyo Seimitsu Figure 66: Share price movement, Phase 3 and Disco
600 3,500 500 3,000 400 2,500
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J 200 1,500
1,000 100
500 0 9 0 1 2 3 4 5 6 9 0 1 2 3 4 5 6 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 ------g g g g g g g g b b b b b b b b e e e e e e e e 0 u u u u u u u u F F F F F F F F A A A A A A A A 9 0 1 2 3 4 5 6 9 0 1 2 3 4 5 6 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 ------b b b b b b b b g g g g g g g g e e e e e e e e u u u u u u u u TOKYO SEIMITSU DISCO F F F F F F F F A A A A A A A A
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
Figure 68: SPE manufacturer share price indicators: Share price solid compared with other SPE makers
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0 5 6 4 5 4 5 6 5 6 1 1 1 1 1 1 1 1 1 ------r r c c p p p n n a a e e u u e e e J J M M D D S S S
LASERTEC NUFLARE TECHNOLOGY TOWA TOKYO SEIMITSU MICRONICS JAPAN JEOL SHINKAWA APIC YAMADA
Source: Thomson Reuters Datastream
Tokyo Seimitsu (7729) 33 7 November 2016
Risks Upside risks include (1) fresh demand arising from investment in fan-out wafer-level packaging, (2) fresh demand for probers driven by growth in mass-production of LP DDR4 DRAM, and (3) machine tool orders coming out of their trough. Downside risks include (1) lower capex due to deterioration in semiconductor prices and (2) loss of share of sales to OSATs.
Tokyo Seimitsu (7729) 34 7 November 2016
Financial position
Figure 69: Profit and loss statement 7729 Tokyo Seimitsu CoE CoE CoE CoE CSE CSE CSE
1Q 2Q 1H 2H ¥mn 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 17/3 17/3 17/3 17/3 17/3 18/3 19/3 PL Sales 30,735 49,676 57,727 51,013 55,268 66,445 70,274 16,323 20,177 36,500 32,500 69,000 69,506 69,630 73,702 YoY% -32.8% 61.6% 16.2% -11.6% 8.3% 20.2% 5.8% -11.1% 2.9% -3.9% 0.6% -1.8% -1.1% 0.2% 5.8% Cost of goods sold 26,540 34,207 39,152 33,041 34,845 40,275 42,185 9,553 41,027 41,071 43,151 Gross Profit 4,194 15,468 18,575 17,971 20,422 26,169 28,089 6,769 28,479 28,559 30,551 YoY% -47.8% 268.8% 20.1% -3.3% 13.6% 28.1% 7.3% -9.9% 1.4% 0.3% 7.0% Gross margin% 13.6% 31.1% 32.2% 35.2% 37.0% 39.4% 40.0% 41.5% 41.0% 41.0% 41.5% SG&A 5,761 8,789 8,870 10,466 11,956 14,044 14,867 3,906 15,968 15,971 16,092
Operating profit (1,567) 6,000 9,704 7,505 8,466 12,124 13,222 2,863 3,537 6,400 5,100 11,500 12,511 12,588 14,459 YoY% -36.5% -482.9% 61.7% -22.7% 12.8% 43.2% 9.1% -26.5% -5.7% -16.3% -8.6% -13.0% -5.4% 0.6% 14.9% OP margin% -5.1% 12.1% 16.8% 14.7% 15.3% 18.2% 18.8% 17.5% 17.5% 17.5% 15.7% 16.7% 18.0% 18.1% 19.6% Non-operating income and expenditure (307) 30 (403) 387 558 667 10 (275) (90) (90) (90) Non-operating income 614 262 503 519 626 726 243 97 340 340 340 Interest income/dividend 139 54 77 64 74 91 133 52 140 140 140 Investment gain on equity method Others 475 208 426 455 552 635 110 45 200 200 200 Non-operating expenses 921 910 906 132 68 59 232 371 430 430 430 Interest expense 500 543 357 97 42 33 31 9 30 30 30 Equity in losses of affiliates 0 Others 421 367 549 35 26 26 201 362 400 400 400 Recurring profit (1,874) 6,030 9,301 7,892 9,024 12,791 13,232 2,588 3,812 6,400 5,100 11,500 12,421 12,498 14,369 YoY% -34.0% -421.8% 54.2% -15.1% 14.3% 41.7% 3.4% -34.4% 2.1% -16.6% -8.2% -13.1% -6.1% 0.6% 15.0% Recurring margin% -6.1% 12.1% 16.1% 15.5% 16.3% 19.3% 18.8% 15.9% 18.9% 17.5% 15.7% 16.7% 17.9% 17.9% 19.5% Extraordinary profit 411 948 289 13 79 9 8 0 0 0 0 Extraordinary losses 158 415 45 2,098 12 4 0 6 6 0 0 Pretax profit (1,621) 6,564 9,544 5,807 9,090 12,796 13,240 2,582 12,415 12,498 14,369 Corporate taxes 487 580 532 828 1,539 3,190 3,358 750 3,121 3,146 3,673 Income taxes-deferred 1,402 (119) 403 984 1,662 576 126 (51) Effective tax rates -116.5% 7.0% 9.8% 31.2% 35.2% 29.4% 26.3% 27.1% 25.1% 25.2% 25.6% Minority interests 0 30 35 52 6 50 50 50 Net profit (4,300) 6,103 8,607 3,995 5,858 8,993 9,704 1,875 2,825 4,700 3,700 8,400 9,245 9,302 10,646 YoY% -61.6% -241.9% 41.0% -53.6% 46.6% 53.5% 7.9% -31.9% 4.1% -14.0% -12.7% -13.4% -4.7% 0.6% 14.4% Net margin% -14.0% 12.3% 14.9% 7.8% 10.6% 13.5% 13.8% 11.5% 14.0% 12.9% 11.4% 12.2% 13.3% 13.4% 14.4% EPS (¥) (106.01) 148.10 208.83 96.93 142.06 217.97 234.58 45.32 68.23 113.55 89.40 202.95 223.35 224.74 257.21 YoY% -61.9% -239.7% 41.0% -53.6% 46.6% 53.4% 7.6% -32.0% 4.0% -14.1% -12.7% -13.5% -4.8% 0.6% 14.4% R&D 1,800 3,200 3,500 4,300 5,000 5,700 6,300 1,600 7,000 7,000 7,000 7,000 Capex 200 1,100 2,800 2,800 1,800 3,200 3,800 1,900 4,500 4,500 3,800 3,800 Depreciation 2,400 2,100 2,300 2,300 2,300 2,300 2,300 600 2,700 2,700 2,700 2,700
Source: Company data, Credit Suisse estimates
■ We expect growth in capex in FY3/17 due to machine tool replacement, but look for a decline in FY3/18 as replacement drops out of comparisons. ■ We expect a decrease in the corporate income tax starting in FY3/17 as a lower statutory effective tax rate takes effect.
Tokyo Seimitsu (7729) 35 7 November 2016
Figure 70: Balance sheet CoE CoE CoE CSE CSE CSE 1Q 2Q 1H 2H ¥mn 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 17/3 17/3 17/3 17/3 17/3 18/3 19/3 BS Current assets 41,703 50,820 52,427 51,809 55,865 67,873 72,710 71,791 78,240 83,672 90,693 Cash and cash equivalents 12,055 16,222 16,480 18,251 20,439 26,864 27,389 28,725 33,454 37,857 41,527 Notes and accounts receivable 15,511 18,796 20,205 16,346 20,841 22,399 23,484 19,742 22,279 22,707 24,673 Electronic recording receivables 914 2,522 3,717 4,000 4,000 4,000 Total inventories 12,663 14,076 13,182 14,206 12,689 15,173 16,082 17,633 16,186 16,787 18,173 Deferred tax asset 763 1,056 2,188 2,017 1,114 782 Other current assets 1,474 1,726 2,560 3,006 1,896 3,437 5,755 5,691 6,320 6,320 6,320
Fixed assets 27,782 26,218 25,417 26,052 26,699 30,584 29,223 30,699 29,605 30,705 31,805 Tangible fixed assets 17,466 16,981 17,758 18,234 18,769 20,359 22,005 24,172 23,305 24,405 25,505 Intangible fixed assets 2,420 1,925 1,394 1,804 1,426 1,125 884 899 Investments and other assets 7,894 7,311 6,265 6,014 6,503 9,098 6,334 5,626 6,300 6,300 6,300 Investment securities 3,513 3,031 2,776 3,076 3,870 5,544 4,079 4,000 4,000 4,000 Long-term loans 48 97 113 30 10 56 4 Net defined benefit asset 2,187 2,886 1,727 1,800 1,800 1,800 Deferred tax asset 3,955 3,860 2,345 1,452 155 29 Others 162 (910) 441 1,625 440 460 498 5,626 500 500 500 Allowance for doubtful accounts (652) (16) (123) (31) (5) (4) (5) (5) (5) (5) (5) Total assets 69,485 77,038 77,845 77,862 82,565 98,457 101,933 102,490 107,845 114,377 122,498
Current liabilities 15,709 21,192 19,047 17,403 15,571 21,718 21,416 22,139 21,226 21,246 21,915 Trade notes and accounts payable 8,185 11,568 9,668 9,328 9,124 6,131 6,094 6,778 4,426 4,446 5,115 Electronic record debt 5,789 5,724 6,718 7,000 7,000 7,000 Short-term borrowings 1,300 1,300 1,300 1,300 1,300 1,300 1,200 1,200 1,200 1,200 1,200 Current portion of long-term debt 3,888 3,484 3,200 2,500 400 400 400 400 400 400 Deferred tax asset 1 Income taxes payable 75 521 353 399 1,156 2,312 1,898 795 2,000 2,000 2,000 Provision for bonuses 245 660 737 806 849 990 1,002 1,000 1,000 1,000 Others 3,284 3,615 2,952 2,736 4,784 5,079 6,139 6,200 6,200 6,200
Long-term liabilities 14,725 10,916 6,008 3,154 2,324 2,367 1,099 943 740 740 740 Long-term loans 8,384 4,900 3,700 1,200 800 400 Net difined benefit liability 1,111 816 646 597 600 600 600 Provision for directors' retirement benefits 114 88 101 113 120 117 133 137 140 140 140 Other long-term liabilities 3,341 3,016 2,308 1,954 1,524 1,967 1,099 943 1,000 1,000 1,000 Total liabilities 30,435 32,109 25,056 20,557 17,896 24,085 22,515 23,083 21,966 21,986 22,655 Minority interests 0 0 Shareholders' equity 39,294 45,134 53,212 56,951 62,158 69,820 77,282 77,701 83,763 90,275 97,727 Common stock 10,198 10,209 10,215 10,216 10,238 10,295 10,374 10,380 10,380 10,380 10,380 Capital surplus 21,216 21,227 21,233 21,234 21,255 21,312 21,392 21,397 21,397 21,397 21,397 Retained earnings 7,987 13,805 11,871 25,609 30,776 38,325 45,630 46,039 52,101 58,613 66,065 Treasury stock (107) (108) (108) (108) (111) (113) (115) (115) (115) (115) (115) Valuation gain/loss, translation gain/loss (390) (332) (596) 117 2,071 3,995 1,491 993 1,400 1,400 1,400 Net unrealized holding gains on securities (194) (17) (149) 109 714 1,574 759 450 800 800 800 Foreign currency translation adjustments (195) (315) (447) 7 672 1,347 650 444 500 500 500 Remeasurements of defined benefit plans 683 1,073 80 98 100 100 100 Stock acquisition right 174 234 320 385 436 436 436 436 436 Minority interests 118 169 208 276 280 280 280 Total assets 39,050 44,928 52,789 57,304 64,668 74,371 79,418 79,407 85,879 92,391 99,843 Total liabilities and net assets 69,485 77,038 77,845 77,862 82,565 98,457 101,933 102,490 107,845 114,377 122,498
Source: Company data, Credit Suisse estimates
Figure 71: Cash flow statement CSE CSE CSE
¥mn FY3/10 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 Free cash flow statement Income before income taxes and minority interest (1,621) 6,564 9,544 5,807 9,090 12,796 13,240 12,415 12,498 14,369 Depreciation and amortization 2,088 1,789 1,985 1,873 1,830 1,837 2,012 2,500 2,500 2,500 Increase/decrease in receivables, trade (3,690) (3,819) (1,471) 4,246 (4,182) (1,616) (3,214) (273) (428) (1,966) Increase/decrease in inventories 5,459 3,457 625 (1,092) 1,329 (2,763) (1,203) (104) (601) (1,386) Increase in payables, trade 2,932 1,851 (1,837) (858) (691) 2,349 268 (392) 20 669 Others (3,093) (2,273) 68 (1,639) (942) (1,783) (3,893) (80) (1,786) (2,717) (1) Cash flows from operating activities 2,075 7,569 8,914 8,337 6,434 10,820 7,210 13,865 12,002 11,270
Purchase of tangible assets (181) (174) (3,124) (1,922) (1,607) (1,525) (3,162) (3,800) (3,600) (3,600) sales of tangible assets 382 986 16 6 0 17 6 0 0 0 Purchase of securities (470) (3) (3) 0 0 0 Sales of securities 702 0 Others 1,036 217 (190) (1,103) 1 (1,447) (664) (1,000) (1,000) (1,000) (2) Cash flows from investing activities 1,237 1,029 (3,298) (3,019) (1,374) (2,958) (3,823) (4,800) (4,600) (4,600)
(3) Cash flows from financing activities (8,867) (4,399) (5,327) (4,322) (3,244) (1,762) (2,851) (3,000) (3,000) (3,000) Free cash flows: (1) + (2) 3,312 8,598 5,616 5,318 5,060 7,862 3,387 9,065 7,402 6,670
Effect of exchange rate change on cash and cash equivalents (5) (145) (79) 364 292 265 (273) Net increase (decrease) in cash and cash equivalents (5,559) 4,054 209 1,360 2,107 6,363 261 6,065 4,402 3,670 Cash and cash equivalents at beginning of period 17,586 12,027 16,194 16,452 18,147 20,411 26,775 27,389 33,454 37,857 Cash and cash equivalents at end of period 12,027 16,194 16,452 18,147 20,411 26,775 27,308 33,454 37,857 41,527
Source: Company data, Credit Suisse estimates
Tokyo Seimitsu (7729) 36 7 November 2016
Financial analysis
Figure 72: CCC: Cash recoupment period broadly the same YoY due to restructuring
250
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0 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 CSE CSE CSE
CCC Receivable turnover period Days sales in inventory Days accounts payables
Source: Company data, Credit Suisse estimates
Figure 73: DuPont system analysis 05/3 06/3 12/3 13/3 14/3 15/3 16/3 17/3 CSE 18/3 CSE 19/3 CSE ROE 14.3% 7.8% 17.6% 7.3% 9.6% 13.0% 12.7% 11.3% 10.5% 11.2% Net profit margin 5.3% 3.4% 14.9% 7.8% 10.6% 13.5% 13.8% 13.3% 13.4% 14.4% Total asset turnover 0.8 0.8 0.7 0.7 0.7 0.7 0.7 0.6 0.6 0.6 Financial Leverage 3.1 2.4 1.5 1.4 1.3 1.3 1.3 1.3 1.2 1.2
Source: Company data, Credit Suisse estimates
Tokyo Seimitsu (7729) 37 7 November 2016
Figure 74: ROE, ROA
20.0% 17% 18% 15% 15.0% 13% 13% 11% 11% 11% 10% 11% 10.0% 8% 9% 7% 10% 10% 9% 5.0% 8% 7% 9% 8% 5% 0.0% 4% -6% -5.0% -10.0% -12% -11% -15.0% -20.0% -25.0% -23% -30.0% 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 CSE CSE CSE
ROA ROE
Source: Company data, Credit Suisse estimates
Figure 75: D/E and net D/E ratios Figure 76: Equity ratio
80.0% 90.0% 65% 79.0% 80.9% 60.0% 80.0% 77.8% 77.3% 73.3% 80.2% 45% 43% 40% 70.0% 67.6% 40.0% 75.0% 28% 58.3% 21% 60.0% 56.2% 14% 16% 20.0% 12% 9% 51.5% 4% 3% 2% 50.0% 11% 2% 2% 2% 0.0% 49.9% -16% 40.0% 47.3% -8% -20.0% -23%-28% -34% 30.0% -33% -37% -40%-40% -40.0% 20.0%
-60.0% 10.0% 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 CSE CSE CSE 0.0% 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 18/3 19/3 DE Ratio Net DE ratio CSE CSE CSE
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Tokyo Seimitsu (7729) 38 7 November 2016
Companies Mentioned (Price as of 04-Nov-2016) Advanced Semicon. Engr. (2311.TW, NT$36.55) Advantest (6857.T, ¥1,461) Amkor Technology Inc. (AMKR.OQ, $10.43) Apic Yamada (6300.T, ¥311) Carl Zeiss (Unlisted) DISCO (6146.T, ¥12,380) Elpida Memory (Unlisted) JEOL (6951.T, ¥420) Lasertec (6920.T, ¥1,836) Micron Technology Inc. (MU.OQ, $16.68) Micronics Japan (6871.T, ¥1,167) Mitsubishi Materials Corporation (Unlisted) Nanya Technology (2408.TW, NT$39.95) NuFlare Technology (6256.T, ¥5,650) Powerchip (5346yq.L, $0.0) SEMES (Unlisted) SK Hynix Inc. (000660.KS, W41,200) Samsung Electronics (005930.KS, W1,627,000) Siliconware Precision (2325.TW, NT$47.0) TOWA (6315.T, ¥1,145) Taiwan Semiconductor Manufacturing (2330.TW, NT$184.5) Tokyo Electron (8035.T, ¥9,575) Tokyo Seimitsu (7729.T, ¥2,763, NEUTRAL, TP ¥2,740) Winbond (2344.TW, NT$9.83)
Disclosure Appendix Analyst Certification Yoshiyasu Takemura and Hideyuki Maekawa each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Tokyo Seimitsu (7729) 39 7 November 2016
Credit Suisse's distribution of stock ratings (and banking clients) is:
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Tokyo Seimitsu (7729.T) Method: We base our ¥2,740 target price for Tokyo Seimitsu on a P/B of 1.33x applied to our FY3/17E BPS of ¥2,058. The P/B valuation is equal to the stock’s average TOPIX-relative P/B of 1.04x since the I/B/E/S consensus shifted from red ink to profits on 20 May 2010 multiplied by the current TOPIX P/B of 1.28x. Our FY3/17 forecast is slightly below the I/B/E/S consensus figure because we think metrology segment profits will fall short of expectations. However, our forecasts are higher than guidance, and we think the stock is currently fairly valued. We rate the stock NEUTRAL based on a comparison of its 12-month forward estimated total returns and that for the coverage universe. Risk: Risks to our ¥2,740 target price and NEUTRAL rating for Tokyo Seimitsu include Upside risks: (1) fresh demand for probers due to growth in production of LP DDR4 DRAM, (2) fresh demand arising from investment related to fan-out wafer-level packaging, and (3) machine tool orders rebounding to YoY growth. Downside risks: (1) lower capex due to deterioration in semiconductor prices and (2) loss of share to OSATs.
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Tokyo Seimitsu (7729) 40 7 November 2016
NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited...... Yoshiyasu Takemura ; Hideyuki Maekawa For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.
Tokyo Seimitsu (7729) 41 7 November 2016
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