Goldman Sachs: Tri Chem Q1 Earnings Beat Expectations, Raises Full-Year Profit Forecast

Overview

This report is Goldman Sachs' earnings commentary on Tri Chemical Laboratories Inc. (4369.T), a Japanese semiconductor materials company, for the first quarter of fiscal year 2027 (FY27/1Q1). The report highlights that the company's Q1 operating profit reached ¥2.07 billion, a 21% increase year-over-year, significantly beating market expectations. This strong performance was mainly driven by substantial inventory buildup by clients in mainland China to mitigate geopolitical risks and robust demand for advanced-process metal-based materials in Taiwan fueled by generative AI. Although the company maintained conservative full-year guidance, Goldman Sachs believes its actual growth potential is higher, leading to an upward revision of the full-year operating profit forecast and target price. However, considering the changing competitive landscape following high-k material patent expirations and uncertainties regarding the volume ramp-up of next-generation low-temperature etching materials, Goldman Sachs continues to maintain a 'Neutral' rating on the stock.

Core views

Regional business performance shows significant divergence, with China and Taiwan emerging as key growth engines. In the mainland China market, after a prolonged period of inventory adjustment, Q1 sales jumped 66% QoQ to ¥3.01 billion, primarily driven by memory manufacturers building up inventory in advance to hedge against geopolitical risks. While the company expects client utilization rates to remain high, an inevitable decline may occur in Q2, and price reductions for DRAM high-k materials in the second half of the year could dampen profitability. The Taiwan market also performed exceptionally well, with Q1 sales increasing 14% QoQ to ¥2.46 billion. Sales of metal-based materials grew 45% YoY to ¥1.68 billion, driven by demand for advanced process nodes such as 5nm, 4nm, and 3nm. Goldman Sachs forecasts the company's total sales in Taiwan for the full year will reach ¥10.9 billion, significantly higher than the company's guidance of ¥9.3 billion. Performance in Japan and South Korea has been relatively flat or volatile. Sales in Japan fell 14% YoY in Q1, primarily impacted by raw material shortages for germanium-based materials used in optical fibers, though sales of metal/CVD materials for 3D NAND remained stable. Sales in South Korea rose 20% YoY in Q1, partly due to early shipments related to the development of low-temperature etching applications for 3D NAND, with full-scale adoption expected only in 2027-2028. Regarding valuation and rating, while short-term momentum is strong, institutional investors are cautious about long-term competitive moats. With the expiration of high-k material patents, new entrants may intensify price wars. Furthermore, there is uncertainty regarding whether the company's next-generation low-temperature etching materials for 3D NAND can ramp up successfully. Therefore, despite raising the target price to ¥4,190 (based on the EV/GCI multiple method), the neutral rating is maintained.

Analysis framework

Goldman Sachs employed a typical bottom-up fundamental analysis combined with sum-of-the-parts valuation. First, by breaking down volume and price changes across regions (China, Taiwan, Japan, South Korea) and product lines (high-k, metal-based, etching, etc.), the core driver of the Q1 beat was identified as 'inventory restocking triggered by geopolitics' rather than a simple surge in end-user demand. Second, by comparing official company guidance with channel survey data, it was found that the company's sales assumptions for the Taiwan market were overly conservative, deriving room for upside in full-year earnings. Finally, at the valuation level, the industry-standard EV/GCI (Enterprise Value to Gross Capital Invested) multiple method was used. Combined with WACC estimation, the company was granted a 15% premium relative to the industry average to determine the target price. This analytical approach emphasizes the importance of distinguishing between 'one-off inventory behavior' and 'structural demand growth.'

Methodology notes

• Valuation MethodologyEV/EBITDA valuation

  EV/GCI (Enterprise Value to Gross Capital Invested)

  The report uses the EV/GCI multiple for valuation, which measures the relationship between enterprise value and gross capital invested. This indicator is commonly used in asset-heavy or capital-intensive industries to assess valuation premiums derived from capital efficiency.

• Industry/Industrial Analysis Framework

  Geopolitics-Driven Inventory Cycle Analysis

  The report specifically points out that the surge in procurement by customers in mainland China is not entirely driven by end-user demand but rather precautionary inventory accumulation in response to geopolitical risks. This approach helps investors distinguish between short-term pulse growth and long-term sustainable demand.

• Competition and Strategy FrameworkMoat / competitive advantage

  Impact of Patent Expiration on Competitive Landscape

  The report focuses on the potential price wars and margin compression caused by new competitors entering the market after high-k material patents expire. This is a critical dimension for assessing the long-term breadth of the moat for technology-driven materials companies.

Asset mapping & comparison

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

• Tri Chemical Laboratories Inc. (4369.T)

  Direct beneficiary; Q1 results beat expectations, full-year earnings forecast raised

  Strengths

  Strong competitiveness in advanced-process metal-based materials in Taiwan, benefiting from AI demand; short-term earnings elasticity driven by inventory restocking in the Chinese market.

  Weaknesses

  Increased competition risk due to high-k material patent expirations; uncertainty regarding the timing of low-temperature etching technology ramp-up; Japan domestic business constrained by raw materials.

  Comparison

  Relative to peers, it holds technological advantages in specific niche materials (e.g., high-k, metal-based), but overall valuation is constrained by expectations of deteriorating competitive dynamics.

  Risks

  High volatility in revenue from the Chinese market; raw material price fluctuations; slower-than-expected adoption of new technologies.

Key data

• Q1 Operating Profit¥2.07 billionUp 21% YoY, 54% QoQ, exceeding Bloomberg consensus estimate of ¥1.56 billion
• Mainland China Q1 Sales¥3.01 billionUp 66% QoQ, 4% YoY, driven by inventory accumulation
• Taiwan Q1 Metal-Based Material Sales¥1.68 billionUp 45% YoY, benefiting from demand for advanced process nodes related to AI
• FY27/1 Operating Profit Forecast (New)¥7.7 billionGoldman Sachs raised this from ¥6.5 billion prior; company guidance is ¥6.0 billion
• Target Price (New)¥4,190Raised from ¥3,680 previously, implying 10.6% upside

Impact & implications

For investors, this report highlights the need to be wary of the unsustainability of the 'inventory restocking' component in Q1 results, particularly the possibility of a correction in the mainland China market in Q2. Meanwhile, growth in the Taiwan market is more structural, closely tied to AI computing power construction, making it a more reliable long-term indicator. Although the company raised its internal expectations, official guidance remains conservative, suggesting potential for continued earnings surprises in future quarters. However, the competitive pressure arising from patent expirations is a long-term valuation suppressant, limiting the space for explosive stock price increases.

Risks

• Revenue volatility associated with exposure to the Chinese market (unsustainable inventory behavior due to geopolitical factors)
• Fluctuations in raw material prices
• Adoption speed of low-temperature etching technology (Cryo-etching) falling below expectations

What to watch

• Whether Q1 mainland China sales decline as expected
• Specific impact of DRAM high-k material price reductions in the second half on margins
• Sustainability of metal-based material demand in the Taiwan market
• Progress in full-scale adoption of 3D NAND low-temperature etching materials in 2027-2028