Pricing dynamics within the semiconductor equipment industry are undergoing a subtle shift. Driven by a combination of the sustained depreciation of the Japanese yen, accumulating cost pressures, and robust downstream demand, leading Japanese equipment makers, notably Tokyo Electron and Screen, have clearly signaled their intention to raise prices. This trend is expected to significantly boost the gross and operating profit margins of related companies and reshape the investment thesis for the sector.
According to a recent research report from Bernstein, Tokyo Electron has prioritized improving pricing as its foremost strategic goal. The company plans to achieve a gross margin above 50% and move its operating margin toward a 35% target through a three-step approach. Screen is also advancing a two-stage price increase strategy, with a long-term operating margin target set at 30%. Concurrently, reports indicate that SK Hynix has received price hike requests of 3% to 4% from equipment suppliers, signaling that price negotiations have moved from intention to concrete action.
Bernstein believes this shift will drive a reversal in the performance of semiconductor equipment stocks, which have recently underperformed the broader market. Over the past two months, semiconductor equipment stocks have averaged gains of about 30%, while bulk technology segments like analog chips (Renesas, +83%), copper-clad laminates (Ibiden, +126%), and silicon wafers (Sumco, +95%) have significantly outpaced the equipment sector.
Yen Weakness Opens Window for Price Increases as Manufacturer Sentiment Shifts
The confidence of Japanese equipment makers to raise prices is largely underpinned by structural support from currency exchange rates.
Bernstein notes that major Japanese equipment suppliers like Tokyo Electron, Screen, and Kokusai all price their products in yen, while the yen has depreciated by approximately 30% against the US dollar over the past three years. This context provides ample justification for manufacturers to pass on costs and renegotiate prices with customers.
However, despite the long-standing pressure from exchange rates, manufacturers previously generally lacked the willingness to proactively raise prices.
Bernstein observes that this attitude has recently shifted noticeably, with public statements from Tokyo Electron and Screen clearly indicating an intent to adjust pricing strategies. Meanwhile, reports that SK Hynix has received 3% to 4% price increase requests suggest price negotiations have entered a substantive phase.
Tokyo Electron's Three-Step Plan Aims for 50% Gross Margin
Tokyo Electron has identified enhancing pricing power as its top strategic priority, outlining a clear three-phase path.
The first phase involves charging premiums for customers' expedited delivery requests. Bernstein points out that such requests have historically not incurred extra charges, but the current strong demand provides room for negotiation. The second phase involves negotiating surcharges with customers to cover inflation, and rising raw material and labor costs. The third phase focuses on securing higher product pricing for new product releases by leveraging advantages like technological upgrades, added features, and new material applications.
Bernstein states that if Tokyo Electron can achieve these goals, it would create significant upside for earnings revisions. Current market consensus estimates for its FY2029/3 are a 48% gross margin and a 30% operating margin, both below the company's own targets. The firm maintains an "Outperform" rating on Tokyo Electron with a target price of 59,200 yen.
Screen Follows with Two-Stage Increases, Kokusai Expected to Follow Suit
Screen's price increase strategy is highly similar to Tokyo Electron's, also proceeding in two steps.
The first step involves price adjustments for inflation-related cost increases, which Bernstein notes have already been accepted by customers. The second step centers on negotiations regarding the added value from new product introductions, with the goal of raising the long-term operating margin to 30%, above the current market consensus of 27% for its FY2028/3.
Bernstein expects Kokusai, which also prices in yen, to follow a similar price increase strategy.
In contrast, companies like DISCO, Lasertec, and Advantest use a mix of US dollar and yen pricing and have already achieved significant margin expansion previously, making the marginal benefit from additional price increases relatively limited. Bernstein therefore judges that Japanese front-end equipment makers are likely to outperform back-end equipment makers within the sector in the near term.
Product Upgrades as a Stronger Profit Driver for ASML and Besi
For European equipment leaders ASML Holding NV and Besi, Bernstein believes the potential for price increases driven by product upgrades is more significant.
For ASML Holding NV, the average selling price of its next-generation EUV equipment is estimated to have an upside potential of around 60%. According to Bernstein's calculations, this could drive the gross margin for its EUV products significantly above 60%.
Bernstein also notes that this does not mean ASML Holding NV lacks the ability or rationale to raise prices on existing products, especially in the current tight supply environment, where charging higher premiums for expedited deliveries is also feasible. The firm maintains "Outperform" ratings on both ASML Holding NV and Besi, with target prices of 1,700 euros and 280 euros, respectively.
Comments