Reports on equipment makers- One is posted here and another report is also available at the site.
lehman.com
Headline: Semiconductor Equipment: Downgrading Sector As Asian Crisis Worsens Author: Edward C. White, Jr., CFA 1(212)526-4744 Company: AEIS, AMAT, EGLS, ETEC, FSII, KLAC, KLIC, LRCX, LTXX, NVLS, PRIA, SVGI, T ER, VAR Country: IND CUS Industry: SEMICO Today's Date : 12/19/97
* The potential impact of the Asian crisis on the semiconductor equipment industry is well known. Based on new developments we are changing our ratings to emphasize companies with the best prospects for 98 growth.
* Repercussions from Asian developments are appearing in a variety of technology companies, including Kulicke & Soffa. The market reaction to these events suggests that the crisis is not fully discounted in technology stocks.
* Our discussions suggest that semiconductor equipment mangements are now much less certain about their outlooks than they have been recently. And front-end equipment order and book-to-bill activity remains soft.
* We continue to believe that the acceleration in technology now underway in the chip industry (from 0.35 microns to 0.25 and 0.18 microns) will enable some companies to fare much better than others in the next few quarters.
* We have lowered our ratings on the shares of several companies. We reiterate our recommendation to purchase the shares of Applied Materials, KLA-Tencor and SpeedFam, Etec Systems and PRI Automation.
Ratings lowered from 1's and 2's to 1's and 3's. Our changes in investment rating are highlighted in the table below. We have also prepared separate morning meeting comments on each company, highlighting the potential earnings impact of the Asian financial crisis. The purpose of these changes is to achieve a better distinction between the companies that are well positioned, and those may not be as well positioned, for the uncertain climate that lies ahead.
New Old Company Rating Rating Other (Non-Asian) Factors AEIS ($13) 2 1 Data storage and FPD demand could slow. AMAT ($28 1/8) 1 1 Premier beneficiary of 0.25 micron push. EGLS ($16) 3 1 Test related areas may slow. ETEC ($38 3/4) 1 1 New product cycle to drive growth. FSII ($13 7/8) 3 2 Emphasis on productivity helps long-term. KLA-Tencor ($34 1/4) 1 2 Large beneficiary of 0.25 micron push. KLIC ($17 13/16) 3 2 Transition to 8000 hurts near-term. LRCX ($28 9/16) 3 2 Dealing with deep internal issues. LTXX ($4 7/8) 3 1 Could be hurt by slowdown in test. NVLS ($31 3/32 3 2 Needs a larger 0.25 micron revenue base. PRIA ($27 7/8) 1 1 Can benefit from fab upgrades. SVGI ($18 15/16) 3 2 Shortage of DUV steppers may help. SFMA ($23 7/8) 1 1 Major beneficiary of push to 0.25 microns. TER ($30 9/16) 3 1 Test has been strong for too long. VAR ($47 3/4) 3 3 Non semi. businesses mixed.
Semiconductor capital budgets to decline in 1998. According to our survey, the combination of a projected sharp decline in South Korean capital spending, combined with slow growth in Japan and a moderate pickup in the U.S., suggests that worldwide semiconductor capital spending could decline by 3% in 1998.
Difficult situation in South Korea. Lack of access to capital has had a serious, adverse impact on the capital spending plans of some of the companies there. Reportedly, access to cash is so tight that one cannot rely on South Korean capital budget numbers as being accurate indicators of how much is actually going to be spent. The following actions which have already been taken indicate the scope of the problem.
Samsung. Samsung has pushed out its line 9 facility in South Korea. It has also deferred orders for photolithography systems, gas delivery systems and plasma etchers. Hyundai. Hyundai has pushed out the equipping of its planned facility in Scotland, and will move some of the equipment destined for that facility to upgrade projects in South Korea. The company has also pushed out its South Korean assembly facility. LG Semiconductor. We understand that LG's plans to expand its facility in Wales are still intact, but this situation could change rapidly. Others. Anam and Dong Bu were planning large new wafer processing plant ventures, which would involve a meaningful amount of expenditure. In our view, the timing of those projects is now in question.
Potential areas of backlash from Asia. It has been clear that reduction in capital expenditures by Asian chip companies would have a direct impact on semiconductor equipment companies. While the direct impact is definitely being felt, this is not the primary source of concern. The real concern is the indirect impact -- the ripple effect. Unlike the direct impact, the ripple effect is hard to predict. Without knowing the timing, location or magnitude of impact of these effects, we think there is greater risk than before in the semiconductor production equipment sector.
South Korean exports. Under pressure to raise generate cash in the form of a stable currency, South Korean electronics manufacturers may choose to ramp up production and flood the world market with electronics (this appears to be happening already in 16 megabit DRAM chips). With constrained access to capital its ability to do this might be somewhat limited, but the potential from a damaging competitive impact is definitely there.
Potential slowdown in Japanese electronics consumption. While local electronics demand in the Pacific Rim is not a large part of total worldwide electronics demand, local electronics consumption in Japan is a very important element of global demand. If Japanese consumer and business sentiment were weak enough to slow purchases of electronic equipment, the adverse impact of the pace of growth of the world electronics market would be significant. This would further depress semiconductor capital investment. This is our single largest concern
Everyone may follow the crowd. It is possible that a number of global chip manufacturers may follow the South Korean lead on capital budgets. There is a precedent for this: in the 1996-1997 chip industry downturn, which started with weak memory prices, a number of U.S. logic chip manufacturers were among the first to reduce their capital budgets.
The good news -- technology acceleration. The acceleration to 0.25 micron and 0.18 micron linewidths on chips continues, driven by chip manufacturers' need to lower costs. This will drive a certain amount of investment in advanced generation, high priced semiconductor equipment. This will help selected companies outperform the industry in 1998. ------------------------------------------------------------------------------ Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities.] |
