Tokyo Electron (TYO:8035) - Fundamental Investment Case

The 1Q 3/20 earnings decline was driven by memory industry weakness, with continued low prices resulting in adjustments & limited investment at memory manufacturers.

In contrast Intel’s 10nm capex, AMD’s investment in leading edge process adoption & initial 5G smartphones are resulting in robust logic/foundry demand. We note TEL estimates a 2H YoY sales recovery, albeit in context of an overall FY earnings decline.

TEL expects logic/foundry investment to be broadly flat YoY in FY 3/20 given high FY 3/19 levels, although we contend the company risks underestimating 5nm process demand. Conversely it anticipates a recovery in memory due to both 5G smartphones & the requisite data centre preparations.

The extent to which the above has been discounted in TEL’s stock, which is currently trading at an all time high relative to Topix, is an interesting question. The market has certainly bought into the idea of a shallow downturn, hence the +79% rebound since its Dec 2018 low.

We intend to monitor developments. On 17x 3/21 consensus earnings we leave Tokyo Electron unrated. Amongst semiconductor related names we continue to prefer leading semiconductor mask & mask blank inspection system developer Lasertec (6920, Positive).