Taken from the AMAT thread.....names Lam as a prime beneficiary of continued spending.
INCREASED CONVICTION ON 2H BOOKINGS SURGE--REITERATING BUY ON GROUP
Novellus Sys Inc(NVLS)*
Rating: 2H
As of 06/10/2000
Last Changed 04/11/2000
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Salomon Smith Barney ~ June 9, 2000
--SUMMARY:----Semiconductor Equipment
--We have increased confidence in a 2H00 surge in bookings based on strong
Asian
spending patterns
--A combination of increasing capital budgets, initial 300mm orders,
expected stronger DRAM spending, and new 200mm fabs making next 12 month
bookings outlook very positive
--Based on increasing bookings momentum, we now expect semiconductor
equipment stocks to move back into up-cycle valuation mode sparked by
Semicon West, July 10th
--We point to Lam Research and KLA-Tencor as highlighted names
--OPINION:------------------------------------------------------------------
2H00 BOOKINGS SURGE TO SPARK EQUIPMENT PRICES. Post our recent trip to
Asia, we have increased conviction that 2H00 bookings momentum for
equipment companies will improve, following a 2Q00 deceleration
(momentum is calculated as 3-month moving average/12-month moving
average). WE CONSEQUENTLY REITERATE OUR BELIEF THAT A 2H00 RESURGENCE IN
SEMICONDUCTOR EQUIPMENT STOCK PRICES IS LIKELY, based on analysis that
demonstrates that stock price momentum correlates very well with bookings
momentum.
NEW FACILITIES PLUS INCREASED CAPITAL BUDGETS EQUAL 2H BOOKINGS
STRENGTH. Discussions with Asian chipmakers reveals aggressive spending
plans and capital budget increases, that we believe will translate to
2H00/1H01 order strength for equipment vendors. On the margin, we note
that NEC will raise its capital budget for 2000, creating yet another
source of strength for capital spending. In addition, we point to new
facilities from Hitachi, Matsushita, Seiko Epson, and Sony, shell
facilitization from Samsung and Hyundai, and capital budget increases
from Fujitsu, and Sony as evidence of this strength.
Company Action Estimated Order Timing
NEC Cap-ex increase to over $2B 2H00
Sony Doubled cap-ex to $1.2B, new fab 2H00
Hitachi New fab in Kofu 2H00
Seiko Epson New LCD driver fab 2H00
Matsushita 2 New fabs 2H00
Samsung Potential Fab 11 as 8" 2H00/1H01
Hyundai Potential Chongju 2H00/1H01
Promos Fab 2, 300mm 2H00/1H01
SOME ORDER PULL-INS TO BENEFIT 2Q00. We believe order pull-ins in Japan
and Korea (particularly at Seiko and Matushita) as well as orders pushed
from 1Q00 (particularly from NEC and Samsung) will add strength to 2Q00
orders. We expect upside to order guidance from Lam Research (now double
digit growth versus guidance of mid-single digit growth) and KLA-Tencor
(>15% order growth versus guidance of 10-15%).
300mm PLANS EVOLVING FOR 2H00/1H01 ORDERS. Hitachi/UMC (known as
Tricenti) continues to be the vanguard of 300mm production. They remain
confident about their initial 300mm production by 1Q01 (where they will
reach 7000 300mm wafer starts/month). We continue to view Tricenti's
success at its Ibaraki facility as a barometer of the rate of 300mm
adoption.
Beyond Hitachi, however, 300mm plans continue to progress for NEC (pilot
line at Samagihara, production to begin at Hiroshima in 2002), TSMC 4500
wafer starts/month at Fab 6B, ProMos (Fab 2). We believe that as lead
times for equipment stretch, orders for 300mm equipment for 2002
production could be pulled forward in 1H01 and view continued evolution
of 300mm plans as sources of order strength in 1H01.
DRAM TIGHTNESS TO RESULT IN ADDITIONAL SPENDING. Evidence of a tightness
in DRAM has already started. Spot prices have now moved into the high
$6, low $7 range. We believe the tightness in DRAM capacity as we head
into the strong seasonal 2H00 will increase spot prices from these
levels. We note that a net outflow of DRAM capacity to flash capacity
has exacerbated this tightness. We expect the tremendous profitability
at these price levels (fully loaded manufacturing cost for Samsung is now
well-below $4 for 64Mb DRAM), will spur additional spending from Samsung
(who will likely make Fab 11 to an 8 inch facility instead of a 12 inch
facility) and potentially from Hyundai at its Chongju facility.
USA FOLLOWING SUIT. While our most recent trip gives us immediate
evidence of Asian strength, we remind investors that US chipmakers remain
aggressive. On the margin, we believe that IBM will make the graphics
controllers for Nintendo's new game system. These chips will be made on
a copper process, and we believe, will require additional spending (NB.
beneficiaries are Novellus for ECD and PVD, Lam Research for CMP).
Moreover, we continue to believe that Intel will raise its capital budget
to reflect the addition of new flash memory capacity.
CONCLUSION: ORDER MOMENTUM IS BUILDING. The combination of increased
strength from Japan, Asia and the US, gives us increasing confidence in a
2H00 bookings surge. The continued evolution of 300mm plans should
provide additional strength into 1H01, particularly as long lead times
may cause order pull-ins. We believe this order strength will result in
a price increase to our names. In general, we look for large cap names
(>$3B) to move into the 33-38x 2001 p/e range, mid-caps ($1B-$3B) to move
into the 25-32x range, and small caps (<$1B) to move into the 20-25x
range as result. These ranges are consistent with historical trading
ranges in up-cycles.
CATALYST IS SEMICON WEST. As is typical, we believe Semicon West (July
10-14) will be a catalyst for the stocks. Semicon is the largest trade
show for the semiconductor capital equipment industry and is a forum for
new product announcements and other positive news flow during upcycles.
Semicon also coincides with earnings season which we believe will hold
upside surprises in bookings results, further supporting stock momentum
growth. Finally, July marks the beginning of the seasonally strong
period for semiconductor sales. We believe this positive environment
will support additional share appreciation.
WATCH LAM RESEARCH... While generally all equipment stocks should
benefit, we point to Lam Research and KLA-Tencor as particular
favorites. We believe Lam is well leveraged in the Japanese market, and
will benefit particularly from the pull-ins of the Matsushita and Seiko
Epson orders. The result will be double digit bookings growth in
4Q00(Jun) versus guidance of mid-single digit growth. We further believe
that buildouts of flash capacity at Intel and copper capacity at IBM will
benefit Lam.
...AND KLA-TENCOR. KLA-Tencor, we believe, is having a very strong
quarter derived particularly from Japan and Korea. We believe orders
from key Japanese and Korean customers are supporting a strong order book
for KLA's 4Q00(Jun). In addition to unexpectedly strong orders from the
US, we believe KLA is poised for a very strong 4Q00(Jun) bookings result
(>15% sequential).
A SUMMARY OF OUR TRIP NOTES FOLLOW:
JAPAN
OPTIMISTIC JAPANESE CHIPMAKERS SUPPORT INCREASING CAPITAL BUDGETS. The
tone from Japanese chipmakers during our recent visit was decidedly
positive, reflecting their optimism about improving chip fundamentals.
This optimism is manifested in increased capital budgets (up 50%
year/year), and will likely be further supported by additional cap-ex
increases taking regional cap-ex beyond 50% growth (Fujitsu and Sony have
already increased their capital budgets since April). We expect NEC to
raise its capital budget beyond their current level of $2.0B.
EMPHASIS ON FLASH MEMORY. Starting in the 1998 downturn, Japanese
chipmakers shifted their productive capacity away from the volatile DRAM
market, to consumer-oriented system LSI and flash memory production.
Based on our discussions, we conclude that the majority of capacity
additions in 2000 will be for high-density flash, with an emphasis on
NAND-type architectures. While Japanese chipmakers are striving to take
advantage of profitable flash production and to capitalize on a growing
demand for removable flash st orage, we recognize the risk that their
aggressive capacity plans could hasten supply imbalance in the flash
market and are mindful of flash spot pricing as a result.
SONY RAISES CAPEX. Post our visit to Japan, Sony increased its capital
budget to accomodate increased production of its Playstation 2 related
chips. Sony will spend 23 billion yen at its Fab 1 in Nagasaki, where
capacity will be increased to 12,000 200mm wafers/month. Sony will also
establish a 67.5 billion yen 200mm plant called Fab 2, to be located next
to Fab 1. Construction of Fab2 will start next month, and is expected to
be operational next April with an initial capacity of 6,000 200mm
wafers/month. Equipment orders are likely in 2H00.
TWO LARGE JAPANESE ORDERS ON THE HORIZON. Supporting our outlook for a
2H surge in bookings, two large orders are expected to be placed in 3Q/4Q
for fab capacity expansions (Seiko-Epson for LCD drivers, Matsushita for
ASICs). We believe the magnitude of these combined orders could reach
$1B. While difficult to pinpoint exact vendor beneficiaries, we believe
Lam Research will be a primary vendor, particularly given their renewed
focus on the Japanese market.
300MM PLANS CONGEALING. Hitachi's 300mm JV with UMC (known as
Tricente) is on track for initial pilot production in 4Q00 ramping to
7000 wafer starts by April 2001. Orders for equipment have already been
placed. Managed by Hitachi, 50% of Tricente's capacity will be used to
manufacture SRAM by Hitachi, with the remaining 50% used as foundry
capacity by UMC. We continue to view this facility as a vanguard in the
move to 300mm whose success will determine timing of future 300mm plans.
HITACHI TO BUILD KOFU. Hitachi announced that it will begin construction
of a 200mm wafer plant in Kofu, Yamanashi prefecture, next month, with
operations slated to begin in January 2001.
Initial production capacity is expected to be 3,000 wafers/month. The
company will manufacture microprocessors and system LSIs.
The plant has been named K6, and once completed will have a total of
18,000 square meters of cleanroom space.
KOREA
KOREAN CHIPMAKERS CAUTIOUSLY OPTIMISTIC. We visited both major Korean
chipmakers, where the tone was cautiously optimistic. Both Samsung and
Hyundai were not yet committed to more aggressive spending patterns for
2H00, awaiting additional confirmation of a DRAM supply shortfall at that
time. However, when pressed about their opinions on the supply situation
post mid-year, both Companies believed a significant shortall was likely
and could extend as far as 2002.
SAMSUNG PLANS COULD CHANGE. Samsung is considering the fate of Fab 11.
Originally expected to be a 300mm facility, the Company is considering
equipping the facility with 200mm equipment to more immediately satsify
the expected shortfall in DRAM spending. While no commitment has been
made by Samsung, given our belief that DRAM undersupply is looming, we
believe conversion to 200mm is likely.
HYUNDAI UNAFFECTED BY GROUP DIFFICULTIES. Hyundai Microelectronics
stated that its cross guarantees with other Hyundai Group members are
zero except for a 82B won (book value) cross-holding with HITC. Hyundai
maintains that it is able to access capital through existing cashflow but
clearly has the goal of debt reduction in mind. The Company will not
sell its Oregon facility as we originally thought could happen. This
facility is key to avoiding anti-dumping taxation in the US. We expect
Hyundai to make a decision on its Chongju facility later this year.
Long-lead time equipment has already been ordered.
INTEL TO CONTINUE TO INVEST IN R-DRAM. Hyundai expects a $200M capital
injection from Intel for R-DRAM production. While volumes have been
disappointing (Samsung produced less than expected in 1Q), this
investment is an indication of Intel's continued support of the device.
TAIWAN
TAIWAN'S FOUNDRY STRENGTH CONTINUES UNABATED. Foundry capacity remains
tight and is forecast to remain tight through 2001. TSMC forecasts
demand is for 5.0M 8" equivalent wafers, compared to 3.4M capacity in
2000. In 2001, demand is forecast at 5.9M wafers, compared to capacity
of only 4.7M wafers. This tightness, combined with a mix shift to
increasingly finer geometries, is expected to keep pricing on an upwards
trajectory.
300mm FAB PLANS ON TRACK. TSMC is on track with its plan for 4.5K
wafers/month in Fab 6B (a sub-section of Fab 6 in Tainan) by the end of
2001. TSMC is expecting initial deliveries in 3Q00. ProMos, a captive
manufacturer for Infineon, is also planning a 300mm facility in its Fab
2. Notably, given increasingly long lead times for equipment, equipment
decisions are expected to made for ProMos over the next quarter for 2002
production. By virtue of their co-relationship, ProMos's decisions are
an important indicator of the tools that could be chosen by Infineon.
TARGETING LEADING EDGE IDM BUSINESS. To ensure against the threat of a
pull-back of orders from IDM's, the foundries are striving to produce
more leading edge designs for IDM's. Producing these critical designs
increases the dependency IDM's have on foundries not only for capacity,
but for leading-edge (and hence more economical) production. Initial
success of this strategy is evidenced by expected production of AMD
Athlon processors by TSMC in 3Q00.
TEST CAPACITY TO INCREASE. ASE Test noted that it would increase its
orders for testers in CY00 from its previous planned orders for 150
systems. Based on specific requirements from a particular order, ASE
will order Teradyne Catalyst's and Credence Quartets. According the
ASE, test capicty remains tight in its facilities. The Company is
accordingly adding capacity in Malaysia and Taiwan.
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