NSIG and Sumco Earnings: Dim Outlook To Persist Into 2024, but Expansions Firing on all Cylinders

We trim our fair value estimates for Sumco 3436 and National Silicon Industry Group to JPY 1,940 from JPY 2,220 and CNY 4.10 from CNY 5.50, respectively, after both firms indicated the second half will be tougher than we thought. Sumco remains fairly valued as although its long-term growth outlook trails the industry average, it has strong market share in high-end wafers to support expansion. We reiterate our view that NSIG is extremely overvalued as its market capitalization is on par with its larger peers despite only being 25% of the size in terms of revenue.

Sumco guides for third-quarter revenue to drop 8.8% to JPY 101 billion and operating margin to fall 7.9 percentage points from the prior quarter to 10.9%, citing prolonged weakness in memory and consumer-grade power management applications. While there are green shoots in logic wafer demand, we anticipate a reduction in memory supply will persist into 2024 and only rebound after pricing goes up. Hence, we trim our 2023 revenue and EPS forecasts by 10.5% and 45%, respectively, and our subsequent year revenue projections by 5%.

NSIG does not provide guidance but admitted the lack of recovery will pressure third-quarter performance. We also believe NSIG suffers from ailments of local memory players like Yangtze Memory. Moreover, we view the recent news of TSMC confirming a plant in Germany has proved western countries are successfully enticing less advanced capacity away from East Asia, increasingly confining NSIG to the Chinese market. As a result, we reduce NSIG post-2025 revenue and earnings forecasts by over 10%, and 2023 and 2024 EPS estimates by more than half.

Expansion plans of both firms are undaunted by near-term downturns, which we think exudes strong confidence beyond 2025. After Sumco ramps up capacity at two domestic sites by mid-2024, the company will invest JPY 225 billion in a new plant at Saga Prefecture, Japan, with the Japanese government pledging up to JPY 75 billion in support.