Memory Capex Drives Above-Expectation Orders; Resilient China Demand Supports Growth, but Valuation Limits Upside

Overview

Goldman Sachs hosted a Kokusai Electric investor conference call after the market close on August 17, focusing on April-June quarter orders, the reasons for the FY3/27 guidance increase, and capacity and procurement outlooks for FY3/27 through FY3/28. The report believes that active memory customer capex is driving near-term order growth, while demand from Chinese customers may remain resilient over the coming years.

Core views

First-quarter sales were broadly in line with initial guidance and approximately ¥5bn higher, while orders were materially above expectations. Demand related to NAND, DRAM, and logic/foundry improved, with Chinese DRAM customer orders and NAND application orders particularly strong. The company is increasing capacity flexibility by improving utilization of existing cleanrooms, expanding shifts, and utilizing convertible space at its Tonami plant; the supply chain currently has no critical constraints that would cause production bottlenecks. Goldman Sachs expects FY3/27-FY3/28 earnings growth to be modestly better than market consensus, but maintains a Neutral view because the valuation is not meaningfully below that of global semiconductor equipment peers.

Analysis framework

Fundamental assessment based on order, regional and application sales outlooks, as well as capacity and procurement information disclosed during the management conference call, with a 12-month target price set using an FY3/28E EV/EBITDA valuation method.

Methodology notes

• Valuation methodsEV/EBITDA Relative Valuation

  Estimate the target price using the average valuation multiple of the global semiconductor equipment industry

  The target price is based on FY3/28E and applies an 18x EV/EBITDA multiple, equivalent to the global semiconductor equipment industry average; this implies an FY3/28E P/E of 27x and P/B of 7.1x.

• FundamentalsOrder and Capex Tracking

  Assess revenue and earnings trends through customer capex, order mix, and regional demand

  Key areas of focus include NAND, DRAM, and logic/foundry equipment orders, customer installation progress, regional demand, and supply-chain capacity constraints.

Asset mapping & comparison

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

• Kokusai Electric (6525.T)

  Covered Company

  Strengths

  Strong memory capex is driving order growth; sales outlooks for Chinese customers have been raised; the company has flexibility to increase capacity through shift adjustments and space at the Tonami plant; services and parts offer potential upside.

  Weaknesses

  Its valuation is not meaningfully discounted relative to other semiconductor equipment makers; second-half equipment sales are constrained by delivery lead times.

  Comparison

  The target valuation uses the global semiconductor equipment industry average of 18x EV/EBITDA; Goldman Sachs believes the company lacks a clear valuation discount relative to peers.

  Risks

  Changes in core customer investment plans, further export-control adjustments, and shifts in competitor strategies that alter the competitive landscape.

Key data

• First-Quarter OrdersApproximately ¥140bnEquipment approximately ¥116bn, services approximately ¥22bn, and foreign-exchange impact approximately ¥1bn; significantly above company expectations.
• First-Quarter Equipment Order MixNAND ¥36bn; DRAM ¥58bn; logic/foundry ¥19bn; other ¥4bnOrders from NAND and Chinese DRAM customers exceeded guidance.
• Revised Regional Sales OutlookNAND ¥46bn; DRAM ¥82bn; logic/foundry ¥49bn; other ¥7bnRevised from prior levels of ¥34bn, ¥80bn, ¥40bn, and ¥7bn, respectively.
• Sales Outlook for Chinese Domestic CustomersNAND ¥18bn; DRAM ¥35bn; logic/foundry ¥34bn; other ¥9bnRaised from prior levels of ¥11bn, ¥20bn, ¥30bn, and ¥7bn, respectively.
• Target Price and Valuation¥10,000; 18x FY3/28E EV/EBITDAImplies approximately 7.5% upside relative to the current price of ¥9,306.

Impact & implications

The recovery in memory capex and accelerated equipment installations by Chinese customers support near-term orders and mid-term revenue growth for Kokusai Electric. Services and parts sales may exceed expectations in the second half of FY3/27, but upside in equipment sales may be limited in the near term by delivery lead times. Growth momentum could continue if Chinese customer capacity expansion persists and investment in advanced packaging and mature nodes remains strong; however, the valuation already reflects part of the positive factors, leaving the risk-reward profile relatively balanced.

Risks

• Core customers may reduce capex or equipment investment plans.
• Further changes in export-control policies could affect customer demand, deliveries, or regional sales.
• Strategic adjustments by competitors could alter the industry's competitive landscape and pricing environment.
• Higher material costs and weaker-than-expected cost pass-through could compress margins.
• Customer order timing close to shipment dates could cause quarter-to-quarter order volatility.

What to watch

• Whether second-quarter orders can remain close to first-quarter levels.
• Installation progress at major Chinese NAND makers and capacity-expansion plans for a major DRAM maker's new Shanghai plant.
• Memory, advanced-packaging, and logic/foundry capex by customers in South Korea, Singapore, and Taiwan.
• Whether services and parts sales outperform expectations in the second half of FY3/27.
• Progress on Tonami plant capacity conversion, supplier capacity expansion, and material-cost pass-through.