Goldman Sachs maintains a bullish stance on Japan's semiconductor utilities subsector

Overview

This is an industry update report by Goldman Sachs on the semiconductor utilities subsector within Japan's machinery sector. The report adjusts earnings forecasts for covered companies based on the latest capex plans of major semiconductor companies, but aside from Nomura Micro Science's FY3/27 forecast and Japan Material's FY3/28 forecast, overall earnings forecasts were not materially revised. The report believes the subsector will continue to benefit from strong semiconductor investment over the medium to long term.

Core views

The core view is to maintain a bullish stance on the subsector. Japan Material benefits from strength in the memory market and expectations for Kioxia capex, but project timing remains uncertain, so the rating stays Neutral. For Nomura Micro Science, profit growth from large U.S. projects has already been incorporated into FY3/27 guidance, and valuation remains low relative to the historical range, so Buy is maintained. Organo, as a global supplier of ultrapure water facilities for TSMC, is expected to continue delivering high profit growth over the next several years, so Buy is maintained. Kurita Water Industries still has a strong future project pipeline, and expanding shareholder returns could push its valuation center higher, so Buy is maintained.

Analysis framework

The report uses bottom-up company earnings forecast updates and makes judgments in combination with the semiconductor capex cycle, order timing, project execution progress, regional project opportunities, margin changes, and valuation multiples. The valuation method mainly uses relative EV/EBITDA valuation, while applying premiums or discounts relative to industry averages for different companies.

Methodology notes

• Valuation frameworkRelative EV/EBITDA valuation

  Uses the industry average EV/EBITDA multiple as the benchmark and applies relative premiums based on a company's cycle position, growth, and historical premium.

  Japan Material's target price uses FY3/27E EBITDA and applies a +20% premium to the industry average 10X EV/EBITDA; Nomura Micro Science uses average FY3/27E to FY3/28E EBITDA and applies a +40% premium; Kurita Water Industries uses FY3/27E EBITDA and applies a +10% premium.

• Valuation frameworkDiscounted valuation

  Discounts forward theoretical value back to the target valuation year.

  Organo's target price is based on the industry average 10X EV/EBITDA with a +60% premium, and discounts the theoretical value derived from FY3/29 forecasts back to FY3/27 using a 6.5% WACC.

• Factor frameworkGS Factor Profile

  Compares individual stocks with the market and peers across four dimensions: Growth, Financial Returns, Multiple, and Integrated.

  The report discloses that Goldman Sachs' factor framework is based on analyst forecasts and uses metrics such as sales growth, EBITDA growth, EPS growth, ROE, ROCE, and valuation multiples to calculate percentile rankings.

Asset mapping & comparison

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

• Japan Material

  A semiconductor utility company affected by Kioxia capex and the strong cycle in the memory market.

  Strengths

  Over the past five years, Kioxia contributed 35%-52% of Japan Material's sales; if initial project sales rise significantly in early FY3/28, year-on-year profit growth could exceed 40%.

  Weaknesses

  It has already undergone significant rerating year-to-date, and the volume of new projects will affect margins, while project scheduling is still changing frequently.

  Comparison

  Compared with other covered companies, Japan Material has a more cautious rating, maintaining Neutral while its target price is slightly raised.

  Risks

  Acceleration or delay of initial projects, margin fluctuations caused by changes in material and labor costs, and uncertainty in expanding overseas initial projects.

• Nomura Micro Science

  A semiconductor utility company driven by large North American projects and demand for ultrapure water.

  Strengths

  Large U.S. projects are driving FY3/27 profit growth, market recognition of the growth story is expanding rapidly, and FY3/27E and FY3/28E P/E remain below the normal range.

  Weaknesses

  The earnings upgrade depends on securing large orders in 1H and recognizing revenue relatively early in 2H.

  Comparison

  Among covered companies, Nomura Micro Science's target price is raised and Buy is maintained, with valuation still considered attractive relative to its historical range.

  Risks

  Delayed timing of large North American project orders, higher-than-expected interest expenses, and localization of ultrapure water production in Korea.

• Organo Corp. (6368.T)

  A beneficiary target related to TSMC's global ultrapure water facilities.

  Strengths

  TSMC's latest results indicate capex will remain active over the next several years, and Organo is expected to continue benefiting from global demand for ultrapure water facilities.

  Weaknesses

  Recently, rising risk-free rates have increased the discount rate, leading to a slight cut in the target price.

  Comparison

  Despite cutting FY3/27-FY3/28 operating profit forecasts by 1%-3%, Goldman Sachs still maintains Buy, indicating the long-term growth thesis remains unchanged.

  Risks

  Project delays, a deep or prolonged decline in semiconductor investment demand, margin deterioration from North American business expansion, lost opportunities due to supply shortages, and longer construction periods caused by revisions to labor standards laws.

• Kurita Water Industries (6370.T)

  A company benefiting from large projects serving multiple major semiconductor manufacturers.

  Strengths

  It is expected to undertake multiple large projects in FY3/27, with no clear signs of weakening profit growth after FY3/28, and expanding shareholder returns could push its valuation center higher.

  Weaknesses

  Earnings forecasts are affected by shifts in project timing, and the impact of securing strategic projects on margins requires continued monitoring.

  Comparison

  The target price remains ¥10,000 and the rating remains Buy; compared with historical valuation, the report believes a higher valuation level may become the norm in the future.

  Risks

  Further margin erosion due to securing strategic projects, a long-term decline in semiconductor demand, deterioration in electronics business margins, and longer construction periods caused by revisions to labor standards laws.

Key data

• Japan Material target price¥2,300Raised 5% from ¥2,200, with the Neutral rating maintained.
• Nomura Micro Science target price¥5,500Raised 4% from ¥5,300, with the Buy rating maintained.
• Organo target price¥19,200Lowered 2% from ¥19,500, with the Buy rating maintained.
• Kurita Water Industries target price¥10,000Target price unchanged, with the Buy rating maintained.
• Nomura Micro Science FY3/27 operating profit forecast revision+33%The report raises its FY3/27 operating profit forecast from ¥12.3bn to ¥16.4bn.
• Japan Material FY3/28 operating profit forecast revision+17%The report raises its FY3/28 operating profit forecast from ¥19.4bn to ¥22.7bn to reflect improved profitability and new domestic projects in Japan.
• Organo FY3/27-FY3/28 operating profit forecast revision-1% to -3%Mainly reflects the latest project progress and incorporates some construction delay risk.
• Kurita Water Industries FY3/27-FY3/29 operating profit forecast revisionabout -1% to +3%Mainly fine-tuned due to shifts in project timing.

Impact & implications

The report's investment implications for Japan's semiconductor utilities chain are positive overall: medium- to long-term semiconductor investment, TSMC-related projects, large North American projects, and memory capex may continue to support order and profit growth. However, companies differ in sensitivity. For Japan Material, significant short-term rerating has already occurred; for Organo and Kurita, project execution and margin stability, and for Nomura Micro Science, the timing of large project orders, will be key to subsequent share price performance.

Risks

• A deep or prolonged decline in semiconductor investment demand would weaken order and profit growth for the subsector.
• If the timing of securing large project orders, recognizing sales, and construction progress is delayed, it could affect earnings delivery from FY3/27 to FY3/29.
• Material costs, labor costs, supply shortages, and North American business expansion could compress margins.
• Rising interest rates or risk-free rates would increase discount rates and pressure valuations.
• Some companies have disclosure matters related to investment banking services or shareholdings, and investors should assess research opinions in conjunction with conflict-of-interest disclosures.

What to watch

• Whether major semiconductor companies continue to raise capex plans or maintain them at high levels.
• TSMC's capex over the next several years and the progress of global ultrapure water projects.
• The timing of large North American project orders and revenue recognition pace for Nomura Micro Science.
• Japan Material's Kioxia-related demand, new domestic projects, and FY3/28 initial project sales.
• The order intake progress of multiple large semiconductor projects and shareholder return policy at Kurita Water Industries.
• The impact of materials, labor, chemical supply, and construction cycles on margins.