We Like GlobalWafers and SAS the Most Among Silicon Wafer Producers, National Silicon the Least

We initiate coverage of semiconductor silicon wafer producers Sumco 3436, GlobalWafers 6488, Sino-American Silicon Products 5483, and National Silicon Industry Group 688126 with fair value estimates of JPY 2,220, TWD 590, TWD 227, and CNY 5.50 per share, respectively. GlobalWafers and SAS are the most undervalued relative to our fair value estimates, and hence our picks in the sector. We think the market is worried about pricing pressure amid the current downturn and has discounted the prospects of secular growth in semiconductors. Conversely, NSIG is grossly overvalued to our fair value estimate, with a market cap larger than GlobalWafers today despite only having one fourth of GlobalWafers’ market share. We think the market assumes NSIG will unseat GlobalWafers as the third-largest wafer producer in 10 years’ time despite being technologically behind.

GlobalWafers and its parent SAS are rated narrow-moat due to our confidence in their ability to generate excess returns on invested capital by leveraging intangible assets including deep customer relationships and manufacturing know-how. Chipmakers like TSMC, Intel, and Micron buy wafers from producers often after years of collaboration before mass production. The collaboration ensures upcoming wafers have the required specifications fit for each chipmakers’ manufacturing processes. We believe cost advantage is an additional supplementary moat source for GlobalWafers and SAS as they have sites near customers in Europe, North America, and East Asia, which leads to a 5% advantage in cost of sales as wafers are frequently shipped by air.

NSIG is barricaded by the intangible assets of its larger competitors and it is doubtful if it can gain meaningful market share outside of China. Sumco has over 50% market share in cutting-edge wafers, but its ROIC is not consistently above weighted average cost of capital to give us the confidence to award a narrow moat rating.