Early Signs of Price Hikes in Semiconductor Equipment, Potentially Regaining Outperformance
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Early Signs of Price Hikes in Semiconductor Equipment, Potentially Regaining Outperformance
Bernstein notes that as commodity tech stocks rise and drive capital expenditure expansion, semiconductor equipment manufacturers are beginning to gain pricing power. Japanese firms like Tokyo Electron are boosting gross margins through expedited delivery fees, inflation surcharges, and premium pricing on new products, while ASML also benefits from price increases driven by EUV upgrades.
- Semiconductor equipment has recently underperformed commodity tech stocks such as memory, but with downstream capacity expansions, equipment makers now have a window to raise prices.
- A roughly 30% depreciation of the yen provides Japanese companies with room to adjust prices; Tokyo Electron aims to push its gross margin above 50%.
- Screen has already secured customer acceptance for inflation-related price hikes and is discussing value-added premiums on new products, targeting a long-term operating margin of 30%.
- ASML's next-generation EUV equipment is expected to deliver a 60% price increase, driving gross margins well over 60%.
- The report maintains an outperform rating for Tokyo Electron, Kokusai, ASML, Besi, Advantest, DISCO, and Lasertec.
Report interpretation
Overview
This report focuses on the semiconductor equipment industries in Japan and Europe, arguing that the sector is showing early signs of price hikes. Previously, equipment stocks lagged behind commodity tech stocks like memory and analog chips, which were primarily driven by the 'price hike theme.' However, as downstream manufacturers increase capital spending and expand capacity due to rising prices, demand for equipment is rebounding. In scenarios of strong demand or constrained capacity, equipment suppliers are gaining pricing power. The report analyzes in detail the pricing strategies and financial impacts of leading players such as Tokyo Electron, Screen, and ASML, while providing corresponding investment ratings and target prices.
Core views
Industry rotation and pricing logic: Semiconductor equipment companies have underperformed commodity tech stocks like memory, analog, wafers, and substrates, which have been largely propelled by the price hike narrative. Yet, the report contends this dynamic is shifting: first, the rebound in commodity tech inevitably leads to higher capital expenditures and capacity expansions, thereby boosting equipment demand; second, amid robust demand or limited supply, equipment firms can also exercise pricing power. Japanese companies' pricing strategies and financial goals: Most Japanese equipment makers price in yen, and the yen's approximately 30% depreciation against the U.S. dollar over the past three years has provided favorable conditions for price adjustments. Tokyo Electron (TEL) prioritizes improving profitability, planning a three-step pricing strategy: charging higher fees for expedited deliveries in the short term; negotiating additional surcharges related to inflation, material costs, and labor expenses; and ultimately securing higher prices for new models based on novel technologies, features, and materials. Through these measures, TEL aims to lift its gross margin (GM) above 50% and its operating margin (OPM) close to 35%, significantly surpassing the market consensus of 48% GM and 30% OPM. Screen employs a similar two-stage approach: first, securing customer acceptance for inflation-linked price hikes, then discussing value-added premiums for new models, targeting a long-term operating margin of 30% (compared to the market consensus of 27%). Kokusai is expected to follow suit, given its reliance on yen-based pricing. By contrast, DISCO, Lasertec, and Advantest use mixed USD-yen pricing and have already achieved notable margin expansion, so their potential for further price hikes may be more moderate—suggesting that front-end equipment stocks might currently outperform back-end ones. ASML and Besi's product upgrade dividends: ASML and Besi stand to benefit most from product upgrades. Specifically, ASML's next-generation EUV equipment is projected to deliver a 60% price increase, potentially pushing its EUV gross margin well beyond 60%. Despite significant existing product upgrade gains, under current supply constraints, ASML can—and should—further capitalize by raising prices or charging extra for faster delivery.
Analysis framework
The report adopts a combined top-down and bottom-up analytical framework. It begins with an industry rotation perspective, contrasting the relative performance of equipment stocks versus commodity tech stocks to identify the transmission lag of the common 'price hike' driver. Then, at the micro level, it examines how exchange rate fluctuations (yen depreciation) influence corporate pricing strategies, along with specific firms' pricing steps—such as expedited fees, inflation surcharges, and new-product premiums—to quantify their potential impact on gross and operating margins. Finally, using valuation models embedded in target prices and comparing them with market consensus, it assesses each stock's upside potential.
Methodology notes
Breaking down revenue growth into two dimensions: volume (driven by capital expenditure cycles) and price (shaped by supply-demand dynamics and product upgrades).
The report not only tracks downstream capacity expansions driving 'volume' growth but also emphasizes how equipment makers leverage expedited fees, inflation surcharges, and new-product premiums to boost 'price,' which is key to understanding this round of outperformance among equipment stocks.
Analyzing how companies with high fixed-cost structures experience accelerated profit margin expansion when revenues or prices rise.
The report highlights how TEL and Screen directly improve gross and operating margins through price hikes, with target margins significantly exceeding market consensus, illustrating the operating leverage effect typical of equipment firms during economic upturns.
Examining how exchange rate movements affect multinational manufacturing firms' pricing capabilities and competitiveness.
The report points out that the yen's roughly 30% depreciation against the U.S. dollar over the past three years has provided Japanese equipment makers with natural cushioning for price adjustments and opportunities to enhance profits—critical macro context for assessing Japanese firms' willingness and ability to raise prices.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Tokyo Electron (8035.JP)Benefiting from a three-step pricing strategy—expedited fees, inflation surcharges, and new-product premiums—to boost margins
- Strengths
- Strong supply chain management flexibility to meet urgent demands; clear goal of achieving a gross margin above 50%
- Weaknesses
- -
- Comparison
- Compared to Screen and Kokusai, TEL's pricing steps are clearer and its targets higher
- Risks
- -
- ASML Holding NV (ASML.US)Benefiting from a 60% price increase driven by next-generation EUV equipment, with additional premium pricing under supply constraints
- Strengths
- Technological monopoly position; EUV gross margin expected to far exceed 60%
- Weaknesses
- -
- Comparison
- Unlike Japanese firms, ASML relies more on product upgrades than simple cost pass-through
- Risks
- -
- Screen Holdings (7735.JP)Benefiting from already approved inflation-linked price hikes and discussions on value-added premiums for new products
- Strengths
- Long-term operating margin target of 30%
- Weaknesses
- -
- Comparison
- Slightly slower pricing progress than TEL, but aligned direction
- Risks
- -
- Kokusai Electric (6525.JP)Following TEL and Screen's pricing strategies, also priced in yen
- Strengths
- -
- Weaknesses
- -
- Comparison
- Expected to emulate peers, though specific targets remain unclear
- Risks
- -
- BE Semiconductor Industries NV (BESI.NA)Benefiting from product upgrades
- Strengths
- -
- Weaknesses
- -
- Comparison
- Similar to ASML, benefiting from back-end equipment upgrades
- Risks
- -
- Advantest (6857.JP)Neutral-positive: Already achieved significant margin expansion, with modest additional pricing benefits
- Strengths
- Mixed-currency pricing, resilient to exchange rate volatility
- Weaknesses
- Relatively limited room for further price hikes
- Comparison
- Back-end test equipment shows less pricing elasticity compared to front-end devices
- Risks
- -
- DISCO (6146.JP)Neutral-positive: Already achieved significant margin expansion, with modest additional pricing benefits
- Strengths
- -
- Weaknesses
- Relatively limited room for further price hikes
- Comparison
- -
- Risks
- -
- Lasertec (6920.JP)Neutral-positive: Already achieved significant margin expansion, with modest additional pricing benefits
- Strengths
- -
- Weaknesses
- Relatively limited room for further price hikes
- Comparison
- -
- Risks
- -
Key data
- Yen-to-dollar depreciation rate~30%Cumulative depreciation over the past three years, providing room for Japanese companies to raise prices
- SK Hynix's received price hike requests3-4%Reports indicate negotiations are ongoing
- Tokyo Electron's (GM) target50%+Market consensus for FY29/3 is 48%
- Tokyo Electron's (OPM) target~35%Market consensus for FY29/3 is 30%
- Screen's (OPM) long-term target30%Market consensus for FY28/3 is 27%
- ASML's EUV ASP upside potential60%Derived from the next-generation EUV equipment upgrade
- ASML's EUV gross margin expectation>60%Based on estimates of price increases for new equipment
Impact & implications
The report believes the semiconductor equipment sector could once again outperform the broader market. For Japanese front-end equipment makers like TEL and Kokusai, the release of pricing power will lead to significantly higher-than-expected profit margins, supporting stronger stock performance. As for ASML, although product upgrades have already delivered substantial benefits, its pricing flexibility under tight supply conditions remains undervalued. Overall, investors should pay attention to the strategic shift of equipment firms—from passively accepting orders to actively managing prices and profit margins.
What to watch
- Price negotiation outcomes when Tokyo Electron and Screen launch new models
- Final acceptance levels of 3-4% price hike requests from major downstream customers like SK Hynix
- Actual delivery prices and gross margin performance of ASML's next-generation EUV equipment
- Ongoing trends in the yen exchange rate and their continued impact on Japanese companies' pricing strategies