ASM International: Orders Growth Continues To Come Through Nicely

seekingalpha07-26

ASMIY remains a buy despite a negative reaction to 2Q24 earnings.The business continues to see strong order growth driven by 2nm GAA and HBM applications.Potential for ASMIY to beat FY25 guidance ...

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Monty Rakusen Summary Following my coverage of ASM International NV (OTCQX:ASMIY) in Apr’23, which I recommended a buy rating as there was new supporting evidence from the 1Q24 results that an upcycle is materializing, this post is to provide an update on my thoughts on the business and stock. While the share price has reacted negatively to the 2Q24 earnings, I remain confident in my buy rating for the stock as ASMIY continues to see strong order growth and the demand outlook has not changed. Investment thesis On 23-07-2024, ASMIY released its 2Q24 earnings, which were absolutely fantastic and supported my bullish view. Although the share price reacted very negatively to it, I remain buy-rated as the fundamental outlook has gotten a lot more positive than in April.   Own calculation The key operating metric to track if ASMIY is in an upcycle is order intake, and 2Q24 order growth came through very nicely, growing 56% y/y on a constant currency basis, driving total order to EUR755 million. This marks the 3rd consecutive quarter of order growth and is driven by 2nm GAA orders and High Bandwidth Memory [HBM] applications, both of which are key growth drivers for ASMIY, as I have noted previously:  Notably, ASMIY has noted that it is seeing a lot of interest from customers regarding the 2nm GAA transition, especially for AI applications. Additionally, several key manufacturers (those that I am aware of: TSMC, Samsung, and Intel. While we do not know the exact split, ASMIY revenue concentrated to 5 big customers (49% as of 1Q24), have reiterated their intentions to start preparing for high-volume production using GAA in 2025. I believe this development is a very encouraging leading indicator for order growth ahead, and ASMIY could continue to see massive order ramp-up in the coming quarters and into FY25” I touched briefly on the impact of growing demand for AI on the ASMIY memory chip business (the High Bandwidth Memory [HBM]), but I now see the logic chip segment to have very favorable tailwinds as well. Since most AI GPU chips are now being made on 4/5nm nodes, I would anticipate that 2nm Logic orders will benefit from the eventual migration to smaller node sizes, which will further improve chip performance and efficiency. According to TSMC, there is strong demand for 2nm chips due to AI (TSMC 1Q24 earnings call), which supports my view. Jay Capital  I don’t really see a strong reason why this migration will slow down, especially when the economy continues to be strong (US GDP growth was solid) and the Fed is indicating that it will cut rates soon. Notably, the fact that orders so far are only for pilot lines vs. high-volume manufacturing suggests that there is still a lot of room for orders to grow. As such, given the current momentum and year-to-date order intake trend, I expect 2H24 numbers to be strong as well. The comments from TSMC about their N2 node during the earnings call last week were also very encouraging from a demand perspective:  Brett, you are right. All the people want to move into kind of a power-efficient mode, and so they are looking for the more advanced technology so they can save power consumption. And so, a lot of my customers want to move into N2, N2P, A16 quickly. We are working very hard to build the capacity to support them. Today is a little bit tight. Not a little bit, actually, today is very tight. I hope in the next year or the next two years we can build enough capacity to support this kind of a demand. The growth in wafer fab equipment in 2025 is expected to be stronger than the slight increase that's forecast for 2024, driven by a further recovery in the memory market and increased investments in 2-nanometers. TSMC 2Q24 earnings  Regarding HBM-related tools, the demand for high-k metal gate tools remains very strong, in line with what other large players (like Applied Materials, SK Hynix, and Samsung) are experiencing. With the expectation for HBM demand to double in 2025, I see a very strong case for ASMIY to see accelerating orders for the rest of the year. Management already noted that they are expecting further HBM orders in the coming quarters, of which most will be scheduled for 2025 delivery. Another potential driver for further acceleration in order growth is faster AI innovation and adoption that drives higher atomic layer deposition [ALD] and epitaxy layer intensity. As adoption of high-performance and high-power-efficiency devices continues to ramp up, the demand for the latest 2nm node will grow accordingly, as GAA can reduce power consumption. In order for such devices to work, they need to be well supplemented by advanced memory chips, which will drive additional ALD layer intensity growth, and this will be a growth driver for the ASMIY Si Epi business.  Yes. Thank you very much for the question. And it's nice that you saw my presentation in SEMICON. I think that's for Epi. As I mentioned right now, 2-nanometer is the first technology node for gate-all-around. And the second generation is going to be 1.6, 1.4. And the third generation would be 1.0, which most likely is going to be a CFET. So as you go to next generation gate-all-around, two things will happen. Shrink is going to happen. So from that point of view, you need -- more Epi is happening there because especially in the contact area, when you have a very small width, having better contact would be the best. And Epi has a very intimate contact. Instead of having contact with CVD layer and so on, actually Epi will have more and more intensity just, I think, from the contact point of view. We see that. And also, you're going to have -- for some customer, you're going to have like more superlattice layer. Instead of having four layers, you might go to six and so on. Company 2Q24 earnings   Valuation   ASMIY  Own calculation At the current pace of order growth, ASMIY should have no issues achieving its FY25 targets. Year-to-date orders total around EUR1.4 billion, and y/y growth is ~28%. Assuming this growth accelerates to mid-30%, which is not hard to imagine as high manufacturing orders have not come in and ASMIY is still at the start of this upcycle, ASMIY could potentially generate ~EUR4.2 billion of orders and ~EUR4 billion of revenue in FY25 (beating FY25 estimates). If so, I think ASMIY achieving the high end of FY25 operating margin estimate (31%) is not implausible, and that translates to a net margin of around ~25% (31% operating margin -21% tax rate), which means ASMIY could generate ~EUR1 billion of net income, or an EPS of EUR20.31.   Own calculation I am sticking to my original view that ASMIY valuation will trade at a premium to history given the strong growth outlook. The problem is how much of a of a premium is justifiable. This is hard to quantify; hence, I think a scenario approach will give a better view of the potential upside. The past 3-year average is 29x. Using this as a starting point, the up/downside ranges from -10% to 40%. Risk Weak demand from China is something to watch for that could impact near-term order growth numbers. Management noted that sales in China have likely peaked in 1Q24, and sales in 2H24 are expected to fall. Depending on how big this decline is, it might cause the market to panic as it drags down overall performance. Conclusion In conclusion, my rating for ASMIY is a buy rating as it continues to see robust order growth. 2Q24 results showed more evidence that ASMIY is in an upcycle, driven by 2nm GAA and HBM applications. The near-term risk to watch for is the potential weakness in the Chinese market.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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