SAS and Globalwafers Earnings: Numbers Are in Line, but Next Six Months Will Be Tough

We maintain our fair value estimates for Globalwafers and its parent Sino-American Silicon Products 5483, or SAS, at TWD 590 and TWD 227 per share, respectively. Both names are undervalued and still our picks in the sector. We think the market is worried about pricing pressure amid the current downturn and has overly discounted the prospects of secular growth in semiconductors. We view the group’s expansion in silicon wafer operations more favorably as Globalwafers’ new plant is in the United States where competing expansions are scarce.

Silicon wafer operations were resilient in the second quarter, but we expect the second half to be marginally down, followed by a 2024 recovery. Globalwafers has most (but not all) of its orders backed by long-term agreements, but the rest is exposed to lower spot prices. We think the LTAs are enough to help Globalwafers through the downturn, as its prepayments were TWD 36 billion in June, or equivalent to six months of revenue. We anticipate the prepayments can last over a year as they work like reservation fees. Given inventory reduction is ending at chipmakers and fabless designers, our earnings forecasts presume Globalwafers should be able to adjust its own inventories with a two- to three-quarter cut in production and procurement.

Power semiconductor is a bright spot for the group. Management said float zone silicon and compound semiconductor wafer production is not enough to satisfy the market. These wafers are used on chips that regulate electricity, and many of them are installed on cars and factories, which we think suggest optimism in the electric vehicle sector.

Longer-term, Globalwafers says its expansion will center on 300mm silicon and compound semiconductor wafers, which we expect to be used on high performance computing systems, factories, and EVs. The company should fare well even when peers ramp up capacity from late 2024, as Globalwafers’ largest new site is uniquely in the U.S.