Veeco Instruments Inc (VECO)
The China Weed-Out Process Continues; Cutting Estimates Again
October 2011 ¦ 8 pages
citigroupgeo.com
China cracking down — Checks this week in China indicate the government is now
requiring a long list of criteria including verification of facility/personnel readiness before
Chinese LED makers can exchange local currency (RMB) to USD/EUR for MOCVD
tools. This is the next step in the gov’t’s desire to ensure funds are being appropriated
to suppliers who can realistically ramp the tools, limiting risk of a potential grey-market
of brand-new tools that were bought w/gov’t money. Together with some recent project
cancellations in China (including large projects from Zhongke and GCL (~100 tools for
AIXG)), this helps to further explain the shipment delays that MOCVD companies are
currently facing as well as the rapid scale-back of new orders. This further argues that
a significant piece of China order backlog could be at risk regardless of deposits.
Pricing is (really) ugly — Customers indicate to us that AIXG has now cut reactor
prices to the $1.3MM range (or down ~50% from just 6-9mos ago) to limit share loss.
CQ4 looks even worse than we thought — While it continues to gain a lot of share,
our customer checks make it hard to see VECO shipping more than 40-45 reactors in
CQ4 vs. our prior ~60-65 model (and likely <40 in CQ1:12). While the impact to the
P&L could be somewhat mitigated by recognition of some prior deferrals of MaxBright
revenue, CQ4 revenue now looks more like ~$160MM versus our prior $180MM. Thus,
we are cutting our CQ4 EPS from $0.47 to $0.37 (the Street is still way above us at
$1.17) which implies VECO will earn <$4.00 in C2011 versus current guidance of
>$5.00. We are also tweaking 2012 EPS down from $2.28 to $2.02 but VECO could
lose money in CQ1:12. Owing to this, we cut our tgt again to $27 from $40. While
VECO seems close to discounting this news and is gaining share, it’s hard for us to see
VECO working yet with consensus so high; thus, we maintain our Hold rating.
Competitive update — Checks indicate more VECO share gains at Samsung and we
can find very few orders out there for AIXG as its cluster-tool answer to MaxBright is
still several Qs away, giving potential customers that much more reason to wait.
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Aixtron SE (AIXGn.DE)
China Cracking Down; Aixtron Apt To Lose Money in 2012
3 October 2011 ¦ 9 pages
citigroupgeo.com
China cracking down
[same as above]
Pricing is (really) ugly
[same as above]
Cutting 2011 revenue below guidance — Checks indicate more VECO share gains
at Samsung and very few new orders for AIXG as its cluster-tool answer to MaxBright
is several Qs away, giving customers an incentive to wait. We're cutting 2011
rev/EBIT/EPS from €652M/28%/€1.29 to €580M/26%/€1.07. Our new rev est. is below
guidance €600-650M while EBIT at the low end 25%-30%.
AIXG is about to start losing money — With China likely to take <200 tools in 2012,
Taiwan/Korea still moribund and AIXG losing a lot of share, it's hard to see the
company shipping more than 150-160 reactors in 2012. This translates to what is now
likely to be a loss as we believe breakeven is ~175 reactors/yr. Our new revs/EPS of
€249MM/(€0.24) are light years below the Street €627MM/€1.17 and the only estimates
in negative territory. Based on investor conversations, negative earnings could serve as
a wake-up call for income/value investors who seem to be nibbling at the stock
recently. Given our negative outlook and estimates, we lower our TBV multiple from
~2x to 1.5x and cut our target again from €10 to €8. Reiterate Sell (3S) rating.
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