Pricing In PE Multiple De-rating Due To Chip War And Tech Leaders’ PE De-rating
Since the US imposed new restrictions on semiconductor exports to China on 7 Oct 22, industry leaders including AMAT, ASML, Intel and TSMC have started indicating a more challenging outlook. Semiconductor stocks under our coverage (AEM, UMS and Frencken) may not be immediately impacted, but we are reducing our valuation multiple peg to -1SD from mean to price in the valuation de-rating of their major customers and weaker sentiment. Our top picks are Venture and Nanofilm for low semicon exposures.
• The US imposed new restrictions on semiconductor and semiconductor equipment exports to China. On 7 Oct 22, the US Department of Commerce published a draft highlighting: a) further restrictions on chip equipment that is used to produce logic chip circuits using a non-planar architecture or with production technology note of 14nm/16nm or less, NAND memory integrated circuits with 128 layers or more and DRAM integrated circuits using production technology node of 18nm half-pitch or less, b) restrictions on the export of certain advanced computing chips that are primarily used in supercomputers, c) any items that are used in the development and production of chip equipment will also be restricted, and d) all US persons (anyone with a US passport) that support the development or production of certain ICs in China will have to obtain a licence from the US government.
• Industry leaders have started reducing financial guidance or scaling down operations. In response to the new restriction, industry leaders who are also the major customers of semiconductor stocks under our coverage have recently indicated a more challenging outlook: a) Applied Materials (AMAT) cut its 4Q22 revenue and earnings forecasts by around 6% and 24% respectively, b) ASML’s US management team has directed its US employees to refrain from servicing, shipping or providing support to any customers in China until further notice, c) Intel had slashed its financial guidance for 2022 in Jul 22. It is also planning to cut thousands of jobs, and could make the announcement around its 3Q22 earnings report on 27 Oct 22, and d) TSMC is slashing its 2022 capital spending target by 10% and highlighted that the weaker demand will likely impact TSMC the most in 1H23.
• Heeding the cautionary outlook of major customers for the stocks under our coverage and trimming target prices. Since the new export restrictions came into effect, share prices of the major customers of the stocks under our coverage have fallen by 9-14% wow. Also, the PE multiples of the industry leaders have also fallen to around 11x 2023F PE, with the exception of ASML which is trading at 21x 2023F PE. To account for the more cautious outlook of major customers and valuation de-rating of industry leaders, we are reducing our valuation multiple peg of semiconductor-related stocks under our coverage from mean to – 1SD of long-term mean PE: a) Maintain HOLD on AEM, with target price reduced by 30% to S$3.50, pegged to 8x 2023F PE, down from 10.5x, b) downgrade UMS to HOLD, with target price reduced by 24% to S$1.07, pegged to 8.5x 2023F PE, down from 11.1x, and c) maintain BUY on Frencken, and reduce target price by 27% to S$1.14, pegged to 7.4x 2023F PE, down from 10.4x.