Tokyo Ohka Kogyo (4186): UBS upgrades Tokyo Ohka Kogyo to Buy as advanced-chip materials growth meets a less demanding valuation

Overview

UBS upgrades Tokyo Ohka Kogyo to Buy, arguing that strong demand for advanced-logic, memory and semiconductor back-end materials should sustain rapid earnings growth through FY12/28. The report pairs this operating thesis with a valuation case: the shares have weakened sharply even as UBS has raised medium-term EPS estimates.

Core views

UBS's central question is whether Tokyo Ohka Kogyo's photoresist sales can continue expanding by at least 20% annually during 2025-28. Its answer is yes, assuming investment in AI servers continues. TOK has no major production-capacity constraint, should be able to supply advanced photoresist grades as demand rises and is not expected to suffer a material decline in selling prices. UBS therefore forecasts a 26% CAGR in photoresist sales over 2025-28. Recent operating evidence supports that view. Sales of photoresists used in semiconductor front-end processes rose 20% year on year in January-June 2026. Combined EUV and ArF resist sales increased 25%, while KrF resist sales rose 20%. Semiconductor back-end materials grew even faster, with sales up 45% year on year. UBS estimates that TOK holds roughly 30% of the global photoresist market, has the leading worldwide share in KrF resists and holds either the largest or second-largest supply share in EUV resists. The demand mechanism spans both advanced logic and memory. Through 2027, UBS expects additional resist demand from South Korean and Chinese memory customers and higher shipments for advanced-logic applications in Taiwan, South Korea and China. Higher utilization at memory producers in Japan and overseas should support KrF demand, an area of particular strength for TOK. For FY12/26, UBS now expects sales of EUV, ArF and KrF resists to rise 54%, 25% and 33%, respectively, versus previous forecasts of 25%, 10% and 10%. Bump resists for back-end processes are expected to grow by just under 20% year on year. Advanced packaging provides a second growth leg. UBS expects CoWoS production capacity to rise by about 68% year on year in 2027, supporting demand for both advanced-logic resists and packaging materials. TOK's growth in bump resists has already been strong, and UBS expects the expansion of CoWoS capacity to remain supportive beyond 2027. In FY12/27, when shipments of EUV resists for the 2nm generation are expected to ramp in earnest, UBS forecasts EUV-resist sales growth of 30% following 54% growth in 2026. TOK, Shin-Etsu Chemical and JSR are identified as significant suppliers for the 2nm generation. These product trends underpin a steep earnings path. UBS forecasts revenue of ¥301.1bn in FY12/26, ¥351.4bn in FY12/27 and ¥391.7bn in FY12/28. Operating profit is forecast at ¥64.0bn, up 35% year on year, in FY12/26; ¥85.7bn, up 34%, in FY12/27; and ¥104.4bn, up 22%, in FY12/28. This amounts to approximately 30% annual operating-profit growth during FY12/25-FY12/28. In FY12/27, core semiconductor-material sales are forecast to increase 29%, mainly because of photoresists. The EBIT margin is projected to rise from 20.0% in FY12/25 to 21.3% in FY12/26, 24.4% in FY12/27 and 26.7% in FY12/28, while ROIC is forecast to increase from 34.6% to 40.2%, 47.3% and 52.4%, respectively. UBS made only a minimal change to FY12/26 basic EPS, from ¥373.3 to ¥373.7, but raised FY12/27 EPS by 5% from ¥452.7 to ¥476.4 and FY12/28 EPS by 9% from ¥533.1 to ¥583.7. The report argues that this growth is not fully reflected in the share price. TOK fell 26% over the preceding three months, underperformed TOPIX by 5% over six months and traded at about 18 times 12-month forward moving-average EPS. UBS believes the market is underestimating the growth contribution from advanced semiconductor materials and expects the shares to strengthen gradually as solid shipment trends are confirmed. The ¥11,200 price target, reduced from ¥11,500, applies a fair-value P/E of 25 times to 12-month moving-average EPS of ¥443. The prior assumptions were 28 times and ¥405. Thus, higher earnings are partly offset by a lower valuation multiple, reflecting UBS's view that the market risk premium for semiconductor-related stocks has risen. The target represents 35.6% forecast price appreciation from ¥8,262; adding a 1.0% dividend yield produces a 36.5% forecast stock return, compared with an 8.1% market-return assumption and a 28.4% forecast excess return. UBS also provides a driver-based valuation range. Its ¥14,000 upside case assumes FY25-FY28E sales growth of 45% for EUV resists, 30% for ArF resists and 30% for bump resists. The ¥11,200 base case assumes 35%, 20% and 20%, respectively, while the ¥7,500 downside case assumes 20%, 10% and 10%. The key positive deviations are faster-than-expected EUV-market expansion and TOK gaining ArF share; the downside hinges on a memory-semiconductor correction, sluggish EUV-photoresist growth, loss of EUV share or weak KrF demand.

Analysis framework

UBS begins with the demand outlook for advanced logic, DRAM, NAND and advanced packaging, then checks whether TOK has the capacity, product position and pricing stability to meet that demand. It links product-level growth assumptions to revenue, margins, operating profit and EPS forecasts, compares those forecasts with consensus and prior UBS estimates, and finally applies a TOPIX-33 Chemicals-relative P/E framework. A three-case sensitivity range varies EUV, ArF and bump-resist growth assumptions to show how the target could change.

Methodology notes

• Valuation methodsP/E and PEG Valuation

  TOPIX-33 Chemicals-relative P/E valuation

  UBS values the shares using a relative price-to-earnings approach. The ¥11,200 target applies a 25 times fair-value P/E to ¥443 of 12-month moving-average EPS, compared with the previous assumptions of 28 times and ¥405.

• Industry AnalysisSupply-demand framework

  Product-level semiconductor-material supply and demand analysis

  The report assesses demand from advanced logic, DRAM, NAND and CoWoS packaging against TOK's production capacity, market shares and pricing outlook to determine whether photoresist growth can be sustained.

• Industry AnalysisVolume-price decomposition

  Shipment growth and selling-price assumptions

  UBS attributes growth mainly to higher shipments of EUV, ArF, KrF and bump resists while assuming no material decline in selling prices, allowing volume trends to flow into sales and profit forecasts.

• Other

  Upside, base and downside value-driver sensitivity

  UBS tests ¥14,000, ¥11,200 and ¥7,500 valuation outcomes using different FY25-FY28E growth assumptions for EUV, ArF and bump resists.

Asset mapping & comparison

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

• Tokyo Ohka Kogyo (4186.T)

  Primary covered company; UBS upgrades the shares to Buy based on advanced-logic, memory and packaging-material growth.

  Strengths

  Approximately 30% estimated global photoresist share, worldwide leadership in KrF resists, a leading EUV position, meaningful 2nm supply share, strong bump-resist growth and no major expected capacity constraint.

  Weaknesses

  Earnings remain exposed to memory-semiconductor conditions, EUV-market growth, photoresist market-share changes and demand for KrF products.

  Comparison

  TOK, Shin-Etsu Chemical and JSR have secured significant supply share for the 2nm generation; TOK has the top worldwide KrF share and the largest or second-largest EUV share.

  Risks

  A memory correction, sluggish EUV growth, loss of EUV share or weak KrF demand could undermine UBS's forecasts and target.

Key data

• RatingBuyUpgraded from Neutral on a 12-month horizon
• Price target¥11,200Reduced from ¥11,500
• Reference price¥8,262As of 29 September 2026
• Forecast price appreciation35.6%Based on the report's target and reference price
• Forecast stock return36.5%Includes a 1.0% forecast dividend yield
• Global photoresist market shareAround 30%UBS estimate for TOK
• Photoresist sales growth26% CAGRUBS forecast for 2025-28
• Front-end photoresist sales+20% year on yearJanuary-June 2026
• Back-end material sales+45% year on yearJanuary-June 2026
• CoWoS capacity growthAround 68% year on yearUBS expectation for 2027
• FY12/26 operating profit¥64.0bnForecast to rise 35% year on year
• FY12/27 operating profit¥85.7bnForecast to rise 34% year on year
• FY12/28 operating profit¥104.4bnForecast to rise 22% year on year
• FY12/27 basic EPS¥476.4Raised 5% from ¥452.7
• FY12/28 basic EPS¥583.7Raised 9% from ¥533.1
• Forward valuationAround 18x P/EBased on 12-month forward moving-average EPS
• Target valuation25x P/E on ¥443 EPSPreviously 28x on ¥405 EPS
• Scenario valuation range¥7,500-¥14,000Downside-to-upside range around the ¥11,200 base case

Impact & implications

UBS expects TOK's earnings mix to benefit from simultaneous growth in leading-edge front-end lithography materials and back-end packaging materials. If the forecast shipment path is confirmed, operating leverage should lift margins, profit and returns on capital, while the current valuation could rerate toward UBS's 25 times fair-value P/E. The lower multiple versus the previous target framework nevertheless recognizes a higher semiconductor-sector risk premium.

Risks

• A correction in the memory-semiconductor market could weaken photoresist demand.
• Sluggish growth in the EUV-photoresist market could reduce the expected earnings expansion.
• TOK could lose share in the EUV-resist market.
• Weak KrF-photoresist demand could pressure sales and the valuation case.

What to watch

• Track whether continued AI-server investment supports at least 20% annual photoresist growth during 2025-28.
• Watch EUV-resist shipments for the 2nm generation as they begin ramping more meaningfully in FY12/27.
• Monitor resist demand from South Korean and Chinese memory customers through 2027.
• Watch CoWoS capacity expansion and its effect on advanced-logic resists and packaging materials.
• Monitor whether TOK gains ArF market share or the EUV market expands faster than UBS expects.
• Look for confirmation of solid semiconductor-material shipments; the quantitative review identifies no specific catalyst over the next three months.