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Lehman on ASML and DUV:
Headline: ASM LITHOGRAPHY: 2H EPS Strong, Demand For DUV Strong; Maintain Estimates
Author: Paul Brandeis 44-171-260-2535
Company: ASMLF
Country: EPS CNE
Industry: ELECTS
Ticker: ASMLF Rank (Prev.) : 1-Buy Rank (Cur.) : 1-Buy
Price : 139.50 (NLG) 52wk Range : 70-211
Todays Date : 01/23/98 Exchange Rate : 2.0641
Fiscal Year : DECEMBER ADR Ratio : 1 for 1
ADR Price : 71.22 52wk ADR Range : 35.16-105.55
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* 2H97 EPS above estimates lead by strong demand for DUV lithography.
* Maintaining estimates for 1998-99. Strong growth continues lead by DUV.
* 1H98 EPS at some timing risk due to scheduled shipments to Korea.
* ASML is working with the Koreans to secure financing for DUV.
* ASML now #2 in the market and will continue to take share in 1998.
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ASM Lithography reported strong 2H97 earnings of NLG 2.62 per share vs. NLG 1.70 per share, slightly above our estimate of NLG 2.60 per share. Revenues grew 41% year-over-year and 35% sequentially lead by strong demand for DUV lithography. The company shipped 53 DUV units in 2H compared with 23 units in 1H. Moreover, the company received orders for 139 units in 2H vs. 136 units in 1H. For the year, ASML received orders of 275 units vs. 125 for 1996.
Backlog at the end of the year was at 158 units vs. 135 at the end of 1H. DUV machines represent 60% of the backlog in units and 75% in dollars, while I-line machines represent the remaining. Moreover, DRAM manufacturers represent 44% of backlog, with foundary customers 21%, microprocessor and microcontroller customers 19% and logic customers the remaining 16%. Backlog by geography at the end of the year was 41% USA, Taiwan 31%, Korea 20%, Europe 7%, and ROW 1%. This compares to revenue breakdown in 1997 of USA 39%, Taiwan 28%, Korea 24%, Europe 7%, and ROW 2%.
The company shipped 211 machines in the year compared with 205 in 1996, including 76 DUV machines (versus 8 machines in 1996) and 135 I-line machines (versus 197 units). As a result of the mix shift toward DUV, total revenues for the year were up 35% compared with market growth of about 10% due to higher ASPs (approximately 35%) associated with DUV. The trend towards DUV will continue in 1998 and we estimate that the company will ship 150 DUV machines. Average ASP in 1998 is expected to up 20-30% compared to 1997.
Demand for DUV lithography tools continues to be very strong led by the industry-wide transition to equipment capable of producing 0.25 micron and below linewidths as semiconductor companies look to accrue the substantial cost and manufacturing benefits (lower costs and higher yields) associated with this transition.
Asia. Korea represented 24% of revenues and 20% of the company's backlog in 1997. The concern is that due to the liquidity and currency crisis in the Asian region that new orders will not exist in 1998 and that the company will not be able to ship the current backlog. Samsung, ASML's largest customer in 1997 representing 20% of total revenues, and Hyundai, a new customer in 1997, desperately need the company's DUV machines to transition their existing 16Mbit DRAM lines to 64Mbit lines in order to remain competitive in the industry over the next several years. But the concern is how will they be able to pay for them? Samsung currently has the funds to pay for the machines and ASML is currently working with Hyundai on alternative financing arrangements. We believe that the company will be able to come to terms with these customers, however, the near-term timing could be of some concern.
We are maintaining our earnings estimates of NLG 6.37 per share in 1998 and NLG 9.00 per share in 1999 but recognize that 1H98 EPS could be somewhat uncertain due timing of shipments to Korea. Demand from Taiwan continues to be strong and is expected to remain so as the main foundary customers move to .25 micron processing.
According to preliminary 1997 Dataquest estimates, ASML passed Canon and has become the second largest photolithography supplier in the world, with 25% market share compared with Nikon at 44% share and Canon with 22%. ASML continues to believe that it will take market share in 1998 with several new large customers.
Long-Term Positives For ASML And Photolithography Photolithography continues to be the single biggest enabler of the future of semiconductor development (Technology Roadmap) and the one area in which semiconductor companies must continue to invest in if they expect to remain competitive in the industry. In the recently upgraded Technology Roadmap published by the SIA (Semiconductor Industry Association) for the 1997-2012 timeframe, replacing its previous Roadmap introduced in 1994. The new Roadmap calls for linewidths to decrease from the current 0.25 micron to 0.18 micron in 1999, 0.15 micron in 2001 and eventually reach 0.05 micron by 2012. The Roadmap also states that die shrinks will continue to be the most important
single factor in reducing semiconductor manufacturing costs. Moreover,
feature sizes that have historically been reduced every 3 years, but beginning this year, they are projected to drop every 2 years through 2001.
Furthermore, DUV lithography is expected to be able to get down to 0.10 micron linewidths. We believe photolithography equipment and ASML will continue to outperform the rest of the semiconductor equipment industry over the next several years as industry moves to 0.25 micron and below linewidths. Despite the fact that the timing of some shipments to Korea could be delayed due to the economic and currency crisis, we are still estimating strong growth in 1998-1999 (significantly outpacing the industry).
We expect the shares to continue to be quite volatile in the near-term as additional news regarding the Asian crisis continues to materialize but expect ASML to continue to report very strong growth as the industry makes strategic investments in DUV lithography and as the company continues to take market share. Our one year price target remains NLG 225 per share. |
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