Goldman Sachs Maintains Sell Rating on SCREEN Holdings, Target Price 9,500 JPY

Overview

Goldman Sachs released meeting minutes after SCREEN Holdings conference call, maintaining 'Sell' rating and 9,500 JPY target price. The report points out that while benefiting from strong global semiconductor equipment market demand, especially active capacity expansion by wafer fabs in mainland China and Taiwan, the company's second-half sales guidance has upside potential, but margin improvement prospects are dim. Due to the declining weight of new customer sales with higher gross margins, and increased R&D and capital expenditure for future growth, FY3/27 operating profit margin is not expected to rise significantly. In addition, regarding uncertainty in Chinese business, Goldman Sachs applied a 50% industry relative discount in valuation.

Core views

Demand side shows characteristics of structural divergence and overall strength. Mainland China: Although initial guidance predicted flat YoY SPE sales to China and decreasing share, investment intensity by major and new wafer fabs exceeded expectations, making FY3/27 sales to China likely to achieve YoY growth. Especially China plans to invest approx. 2 trillion RMB to build AI data centers in the coming years, which will drive investment in more advanced process semiconductors, benefiting SCREEN to increase market share. Taiwan: Wafer fab demand is firmer than initial guidance. US Market: Sales to US storage customers and North American IDM customers expected to increase compared to FY3/26, and SCREEN's delivery share in cleaning equipment for US storage customers is higher than its global average, will significantly benefit from expansion investments in Taiwan and US. Profitability and earnings quality face short-term pressure. Although orders are at historic highs, the company explicitly states FY3/27 OPM will not rise significantly compared to FY3/26. Main reasons include: first, declining weight of new customer sales relatively higher gross margin to China; second, to respond to future growth, the company significantly increased R&D and capital expenditure such as growth investments. Although the company admits the need to pass on costs to improve margins in environment of rising labor and material costs, specific policies have not been formulated. Starting from FY3/28, the company plans to further improve margins through increasing product value-added and expanding sales. Regarding the delayed Chinese DRAM large customer project deferred to FY3/27 revenue recognition (involving approx. 20 billion JPY sales), the company is negotiating to recognize revenue based on shipment rather than installation basis, but this requires partial refund to Chinese customers, currently waiting for Chinese government approval, guidance assumes this revenue recognized in first half. Regarding new products, although Panel Level Packaging (PLP) has limited benefit for cleaning equipment, the company's Direct Imaging System and Slot-type Coater (including coating equipment for 300mm square CoPoS) has layout, FY3/26 these two products combined sales reached several hundred million yen mid-range level. Terafab related inquiries also in progress, may confirm revenue in FY3/28.

Analysis framework

Goldman Sachs analysis logic follows the dialectical framework of 'volume increase, profit stable'. First, by breaking down order sources and customer structure (Chinese wafer fabs, Taiwan foundry, US storage/IDM), confirming certainty of revenue growth and potential upside space, this is bullish factor. Second, deeply analyze profit drivers, pointing out revenue growth did not accompany margin expansion, instead pressure on margins due to product mix changes (low margin share increase) and front-loaded investment (R&D/Capex), this is sell core. Finally, at valuation level, using EV/EBITDA multiple method, specifically introducing 'Chinese business uncertainty' as risk factor, giving 50% industry relative discount, thus reaching target price below current market price. This analysis method emphasizes the importance of distinguishing 'revenue scale' and 'earnings quality' in cyclically growing industries.

Methodology notes

• Valuation MethodEV/EBITDA valuation

  Valuation based on average forecasted earnings and EV/EBITDA multiple

  The research report uses Enterprise Value to EBITDA ratio as valuation anchor, combined with industry average and specific risk discount to determine target price. This method is often used for capital intensive or depreciation heavy manufacturing, can better reflect company core operating profitability.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Analyze transmission of downstream wafer fab CapEx and equipment vendor orders

  Research report predicts upstream equipment vendor revenue trend by tracking downstream clients' CapEx plans and order visibility. This is the core logic of semiconductor equipment industry analysis, i.e., demand side driven by downstream capacity expansion.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Analyze profit margin structure behind revenue growth and cost pass-through ability

  Research report not only focuses on revenue growth, but deeper analyzes reasons for gross margin changes (e.g. high gross margin customer share decline) and expense end growth (R&D and CapEx), pointing out revenue growth did not convert to proportional profit growth, reflecting prudent assessment of earnings quality.

Asset mapping & comparison

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

• SCREEN Holdings (7735.T)

  Covered target, benefits from global wafer fab expansion, but constrained by margin pressure and valuation discount

  Strengths

  Strong demand in mainland China and Taiwan wafer fabs, high share in US storage customers, high order visibility

  Weaknesses

  High gross margin new customer sales ratio declining, R&D and CapEx increase suppress margins, China business exists uncertainty

  Comparison

  Compared to global SPE sector, enjoys revenue growth but valuation gives 50% discount

  Risks

  Margin improvement misses expectation, China policy risk, cost pass-through failure

Key data

• Target Price9,500 JPYBased on FY3/27E-FY3/28E average earnings estimate and 18x EV/EBITDA multiple, applying 50% industry relative discount
• China DRAM Project SalesApprox. 20 Billion JPYOriginally scheduled for FY3/26 recognition, deferred to FY3/27, negotiating to recognize revenue based on shipment
• FY3/27 SPE Sales GuidanceFlat QoQ (vs 2H3/26)But recent orders at historic highs, having upside potential, mainly benefiting from strong China and Taiwan wafer fab demand
• Valuation Multiple18x EV/EBITDADerived from global SPE sector average, then applying 50% discount
• Implied ValuationFY3/27E P/E 16x, P/B 3.2xExpected PE and PB corresponding to target price

Impact & implications

For investors, although SCREEN Holdings is in the high-cycle semiconductor equipment track and order visibility is high, its earnings release is suppressed by product structure changes and strategic investment. Goldman Sachs believes the market may overly optimistically price its revenue growth, while ignoring margin stagnation and China business geopolitical/policy risks. Therefore, even if second-half performance may be revised up, stock upside is limited by valuation discount and margin bottleneck. For the industry, this indicates equipment vendors face earning challenges brought by cost rise and customer structure changes while enjoying downstream expansion dividends.

Risks

• SPE business margin higher than expected
• Gain market share due to company specific factors
• Shareholder return enhancement
• Market style shift to value stocks

What to watch

• Whether FY3/27 second-half sales guidance officially revised up
• Progress of China DRAM customer 20 billion JPY project revenue recognition and government approval status
• Execution effect of margin improvement strategy starting FY3/28 and product value-added improvement situation
• Terafab and related new products sales confirmation point (expected FY3/28)