26 October 2016 Asia Pacific/Japan Equity Research Semiconductor Equipment (Semiconductor Equipment (Japan)) Lasertec (6920) Rating NEUTRAL Price (25 Oct 16, ¥) 2,015 INITIATION Target Price (¥) 1,710 Chg to TP (%) -15.1 10nm-related demand to drive upside in FY6/17, Market cap (¥ bn) 47.50 (US$ .45) Enterprise value (¥ bn) 41.08 followed by lull until EUV impact kicks in Number of shares (mn) 23.57 Free float (%) 80.0 ■ Initiating at NEUTRAL: We initiate coverage of Lasertec, a world-class maker of 52-week price range 2,091–1,095 semiconductor defect inspection equipment, with a NEUTRAL rating and ¥1,710 *Stock ratings are relative to the coverage universe in each target price (potential return −15%). Lasertec’s earnings have expanded as analyst's or each team's respective sector. ¹Target price is for 12 months. semiconductor miniaturization has increased demand for its products. The stock Research Analysts has risen since FY6/16 results, supported by Taiwan foundries' 10nm investment Yoshiyasu Takemura in FY6/17 and expectations for Lasertec’s extreme ultraviolet (EUV) mask blank 81 3 4550 7358 inspection system. We believe it is too early to price in prospects for the systems, [email protected] and we therefore view recent investor bullishness as excessive. Nevertheless, Hideyuki Maekawa investment in 10nm lines in 1H FY6/17 will likely support the share price. 81 3 4550 9723 [email protected] ■ Investment case: We expect 10nm investment to lift orders above targets in FY6/17. However, in FY6/18 we do not expect new demand for mask inspection equipment created by 7nm, which is likely to start mass production from end- 2017. Nonetheless, we forecast improvement in the sales mix to help gross margins. We think EUV mask blank inspection equipment will starting contributing to earnings in FY6/19 at the earliest. We also think the competitive environments in the Chinese semiconductor and 3D NAND markets bear monitoring. Considering these points, we forecast Lasertec’s OP will increase 2% YoY to ¥4.2bn in FY6/18 and then rise to ¥5.7bn in FY6/19. As we believe it is too soon to reflect EUV mask blank inspection equipment into the share price, we rate the stock NEUTRAL. ■ Catalysts/risks: Upside risks: (1) profit contribution from EUV mask blank inspection equipment earlier than our assumption, (2) the move to 7nm at foundries generating new demand for mask blank inspection equipment. Downside risks: (1) lower-than-expected 10nm investment in FY6/17 and (2) delay in orders for EUV mask blank inspection equipment. ■ Fair-value P/B of 1.62x: We base our ¥1,710 TP on FY6/17E BPS of ¥1,055.91 and a fair-value P/B of 1.62x—derived by multiplying the stock’s average P/B of 1.30x since April (when the market started pricing in a profit contribution from the shift to 10nm) by the current TOPIX multiple of 1.24x. Share price performance Financial and valuation metrics Pr ice (LH S) Reb ased Rel (RH S) Year 6/16A 6/17E 6/18E 6/19E Sales (¥ bn) 15.3 18.4 17.2 19.8 3 ,0 0 0 1 4 0 Operating profit (¥ bn) 4.4 4.1 4.2 5.7 Recurring profit (¥ bn) 4.6 4.1 4.2 5.7 2 ,0 0 0 1 1 5 Net income (¥ bn) 3.2 3.0 3.1 4.1 EPS (¥) 143.2 134.2 136.6 183.1 IBES Consensus EPS (¥) n.a. 134.7 174.1 261.9 1 ,0 0 0 9 0 EPS growth (%) 9.3 (6.3) 1.8 34.0 Jan - 1 5 Ju l- 1 5 Jan - 1 6 Ju l- 1 6 P/E (x) 8.7 15.0 14.8 11.0 The price relative chart measures performance against the Dividend yield (%) 4.1 2.3 2.4 3.2 TOPIX which closed at 1,377.32 on 25-Oct-2016 EV/EBITDA (x) 4.2 8.5 7.9 5.9 On 25-Oct-2016 the spot exchange rate was P/B (x) 1.3 1.9 1.8 1.6 ¥104.42/US$1 ROE(%) 15.5 13.3 12.4 15.2 Performance 1M 3M 12M Net debt/equity (%) Net cash Net cash Net cash Net cash Absolute (%) 5.9 37.5 52.5 Source: Company data, Thomson Reuters, Credit Suisse estimates Relative (%) 3.9 33.3 64.2 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. 26 October 2016 Lasertec (6920) Price (25 Oct 2016): ¥2015.0 (upside: -15.14%); Rating: NEUTRAL; Target Price: ¥1,710; Analyst: Yoshiyasu Takemura Income statement (¥ bn) 6/16A 6/17E 6/18E 6/19E Key ratios 6/16A 6/17E 6/18E 6/19E Sales 15.3 18.4 17.2 19.8 Growth (%) EBITDA 4.7 4.6 4.7 6.2 Sales 0.7 20.3 (6.5) 15.0 Operating profit 4.4 4.1 4.2 5.7 Operating profit (6.2) (6.9) 1.6 35.9 Recurring profit 4.6 4.1 4.2 5.7 EPS 9.3 (6.3) 1.8 34.0 Extraordinary gain & loss 0.0 0.0 0.0 0.0 Margins (%) Profit before tax 4.6 4.1 4.2 5.7 Gross margin 58.1 50.0 52.5 53.3 Net income 3.2 3.0 3.1 4.1 EBITDA margin 30.7 25.0 27.3 31.3 Cash flow (¥ bn) 6/16A 6/17E 6/18E 6/19E OP margin 29.0 22.4 24.4 28.8 Operating cash flow 3.1 0.3 3.9 2.7 DuPont analysis Depreciation & Amortization 0.3 0.5 0.5 0.5 ROE (%) 15.5 13.3 12.4 15.2 Financing cash flow (1.0) (1.1) (1.1) (1.4) Net profit margin (%) 21.1 16.4 17.9 20.9 Issuance (retirement) of stock - - - - Sales/Assets 0.6 0.7 0.6 0.6 Dividends paid (1.0) (1.1) (1.1) (1.4) Assets/Equity 1.2 1.2 1.2 1.2 Investing cash flow (0.4) (0.9) (0.8) (0.8) Credit ratios (%) Capex (0.4) (0.9) (0.8) (0.8) Equity ratio 84.2 84.4 85.5 86.1 Free cash flow 2.7 (0.6) 3.1 1.9 Net D/E ratio Net cash Net cash Net cash Net cash Net change in cash 1.4 (1.6) 2.0 0.4 Per share data (¥) Number of shares (mn) 22.5 22.5 22.5 22.5 Balance sheet (¥ bn) 6/16A 6/17E 6/18E 6/19E EPS 143.2 134.2 136.6 183.1 Cash & cash equivalents 8.0 6.4 8.4 8.8 BPS 966.4 1055.9 1144.7 1263.7 Current receivable 3.6 5.0 4.9 5.8 DPS 51.0 47.0 47.8 64.1 Inventories 5.6 7.1 6.9 8.1 Dividend payout ratio (%) 35.6 35.0 35.0 35.0 Other current assets 1.5 2.2 2.2 2.2 Current assets 18.8 20.7 22.4 25.0 Valuation (x) 6/16A 6/17E 6/18E 6/19E Property, plant & equipment 6.5 6.9 7.2 7.5 P/E 8.7 15.0 14.8 11.0 Investments - - - - P/B 1.3 1.9 1.8 1.6 Intangibles 0.0 0.0 0.0 0.0 EV/EBITDA 4.2 8.5 7.9 5.9 Other non-current assets 0.5 0.5 0.5 0.5 Dividend yield (%) 4.1 2.3 2.4 3.2 Total assets 25.9 28.2 30.2 33.1 FCF yield (%) 9.7 (1.2) 6.7 4.1 Payables 0.9 1.3 1.2 1.4 Short term debt 0.0 0.0 0.0 0.0 Other current liabilities 2.9 2.9 2.9 2.9 Current liabilities 3.8 4.1 4.0 4.2 Long term debt 0.0 0.0 0.0 0.0 Other non-current liabilities 0.2 0.3 0.3 0.4 Total liabilities 4.1 4.4 4.4 4.6 Shareholders' equity 21.8 23.8 25.8 28.5 Minority interests 0.0 0.0 0.0 0.0 Source: Company data, Thomson Reuters, Credit Suisse estimates Lasertec (6920)2 26 October 2016 Table of contents Key charts 4 Investment thesis 5 Initiating at NEUTRAL with a ¥1,710 TP ..................................................................5 Earnings forecasts 7 Dividend forecasts..................................................................................................12 Mask and mask blank inspection equipment 13 Mask inspection/review market ..............................................................................14 Mask inspection equipment market........................................................................17 Mask blank inspection equipment ..........................................................................19 Four factors determining mask defect inspection equipment sales 24 (1) Number of mask layers.....................................................................................24 (2) Investment timing by leading-edge logic foundries...........................................26 (3) Investment by mask shops ...............................................................................29 (4) Competitive landscape .....................................................................................29 FPD mask inspection equipment 30 Medium-term plans 33 New businesses 34 Valuation 35 Valuations ..............................................................................................................42 Risks ......................................................................................................................42 Financial statements 43 Financial analysis 46 Lasertec (6920)3 26 October 2016 Key charts Figure 1: OP forecasts Figure 2: Order forecasts by segment 7,000 25,000 6,000 20,000 2,800 3,000 5,000 2,900 2,041 3,200 4,000 2,900 Y 1,816 15,000 1,900 P 1,297 4,269 2,456 円 J 2,487 n 868 3,000 万 o 5,694 i 2,027 l 1,137 百 l i 4,723 4,428 10,000 m 2,000 4,123 4,190 2,630 3,089 3,097 1,028 1,597 16,360 2,441 724 14,080 13,600 1,000 2,149 3,230 12,364 11,887 12,094 5,000 936 10,826 747 8,365 0 1,761 6,444 (657) 4,821 2,638 (1,000) 0 09/6 10/6 11/6 12/6 13/6 14/6 15/6 16/6 17/6 18/6 19/6 09/6 10/6 11/6 12/6 13/6 14/6 15/6 16/6 17/6 18/6 19/6 CSE CSE CSE CSE CSE CSE SPE Others Service Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 3: Masks used in logic production, by Figure 4: Share of mask inspection equipment sold process to TSMC 90 100% 0% 0% 0% 80 90% 80 80% 70 50% 60 70% 60 60% s r e y 50 50% 100% 100% 100% a L 40 k 40% s 40 35 a M 30% 30 50% 20% 20 10% 10 0% 28nm 20nm 10nm 7nm 0 45nm 28nm 14nm 10nm Lasertec Others Source: Credit Suisse (based on Photronics) Source: Credit Suisse estimates Figure 5: Factors behind our order forecast— expecting lull at Taiwan foundries after 10nm Figure 6: Lasertec’s TOPIX-relative P/B and device investment process timeline 17/6 18/6 19/6 1.8 20nm 10nm Taiwanese Foundry 10nm ○ × × 1.6 △ △ △ Taiwanese Foundry 7nm × × × 1.4 △ △ △ 3D NAND ) x 1.2 ( China Semiconductor 1.0 EUV related ○ ○ ○ 0.8 0.6 2 3 4 5 6 2 3 4 5 6 1 1 1 1 1 1 1 1 1 1 - - - - - - - - - - r r r r r p p p p p a a a a a e e e e e M M M M M S S S S S Source: Company data, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse estimates Lasertec (6920)4 26 October 2016 Investment thesis Initiating at NEUTRAL with a ¥1,710 TP Figure 7: Earnings forecast summary 10/25 price (¥) Est.