Kokusai Electric demand and advanced packaging process adoption exceed expectations; Nomura maintains Buy

Overview

After incorporating stronger company-specific growth factors, Nomura significantly raised its earnings forecasts for Kokusai Electric and maintained its Buy rating. The report believes demand in global NAND, Chinese DRAM, and advanced packaging is exceeding previous expectations, and sales growth from the fiscal year ending March 2028 is likely to surpass the average WFE market growth rate.

Core views

Growth in the fiscal year ending March 2027 will be driven mainly by demand in the company's advantaged areas and new advanced packaging PORs, while additional upside versus company guidance is limited given current equipment lead times.From the fiscal year ending March 2028 onward, improving market demand, higher Tonami capacity utilization, and product-mix upgrades will support sales growth.A higher mix of high-value-added products, including mini-batch ALD, equipment for certain GAA applications, and single-wafer processing systems, is expected to deliver continued gross-margin and operating-margin improvement.Nomura raised its WFE market assumptions and used higher EPS forecasts to offset the impact of lower benchmark-index valuations, thereby raising the target price to JPY 11,800.

Analysis framework

The report combines top-down WFE market assumptions with bottom-up analysis of company capacity, order lead times, product mix, and advanced packaging PORs, and values the company using adjusted EPS multiplied by a target P/E multiple.

Methodology notes

• Valuation methodsP/E valuation method

  The target price is calculated using adjusted EPS for the fiscal year ending March 2029 multiplied by a P/E ratio of 23–24x.

  The JPY 11,800 target price is based on adjusted EPS of JPY 503.9 for the fiscal year ending March 2029. This valuation represents a premium of approximately 10%–20% over the fair P/E of 20–21x for Japan's semiconductor equipment sector, reflecting expected adjusted operating profit CAGR slightly above the sector average.

• Operating analysisCapacity utilization and product-mix analysis

  Growth and margins are assessed through Tonami plant utilization, cleanroom expansion, and penetration of high-value-added equipment.

  Nomura expects theoretical capacity utilization at the Tonami plant to be slightly above 80% in the second half of the fiscal year ending March 2027, and believes the new cleanrooms can increase capacity in the fiscal year ending March 2029 to at least 1.2 times the current level.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Kokusai Electric（6525.T）

  Japanese semiconductor manufacturing equipment equity

  Strengths

  Has strengths in equipment related to NAND, DRAM, and advanced packaging; new PORs, rising Tonami capacity utilization, and a high-value-added product mix support growth and margins.

  Weaknesses

  Given current equipment lead times, immediate sales upside versus company guidance is limited in the fiscal year ending March 2027; growth is sensitive to the semiconductor capital-expenditure cycle.

  Comparison

  Nomura expects sales growth from the fiscal year ending March 2028 to exceed the WFE market, and expects two-year adjusted operating profit CAGR from the fiscal year ending March 2029 of around 12%, slightly above the sector's approximately 11.5%.

  Risks

  Cuts in semiconductor manufacturers' capital expenditure, loss of transactions with specific customers, escalation of U.S.-China trade friction, and intensifying competition in vertical furnaces, including batch ALD.

Key data

• Target priceJPY 11,800Based on adjusted EPS of JPY 503.9 for the fiscal year ending March 2029 and a P/E ratio of 23–24x.
• Closing priceJPY 9,306August 17, 2026.
• Implied upside+26.8%Relative to the closing price stated in the report.
• Sales forecast for fiscal year ending March 2027JPY 343,000mnRaised from the prior forecast of JPY 309,200mn.
• Sales forecast for fiscal year ending March 2028JPY 425,300mnRaised from the prior forecast of JPY 385,500mn.
• Sales forecast for fiscal year ending March 2029JPY 511,100mnRaised from the prior forecast of JPY 462,500mn.
• Adjusted EPS for fiscal year ending March 2029JPY 503.9Used to calculate the target price.
• Advanced packaging sales guidanceJPY 15.0bnRaised from JPY 6.0bn, reflecting new PORs.

Impact & implications

If capital expenditure in memory and advanced packaging continues to grow, Kokusai Electric could achieve simultaneous revenue growth and margin improvement through greater volumes of high-value-added equipment, price increases, and capacity ramp-up. The report's core investment thesis is that the company's growth and adjusted operating profit growth can slightly outperform Japanese semiconductor equipment peers, supporting a valuation premium.

Risks

• Changes in semiconductor demand leading to cuts in wafer-fab capital expenditure.
• Loss of orders or business relationships with specific customers.
• Further escalation of U.S.-China trade friction.
• Intensifying competition in vertical furnaces and batch ALD systems.
• Margin improvement failing to reach the level guided by the company in the second quarter.
• Capacity expansion, equipment utilization, or advanced packaging process adoption falling short of expectations.

What to watch

• Whether second-quarter margin improvement in the fiscal year ending March 2027 meets company guidance.
• The sustainability of global NAND and Chinese DRAM demand and capital expenditure.
• Progress in converting new advanced packaging PORs into equipment orders and revenue.
• The ramp-up schedule for Tonami plant utilization, cleanroom expansion, and new land projects.
• Changes in the sales mix of mini-batch ALD and single-wafer processing systems.
• Changes in WFE market forecasts and U.S.-China trade policy.