Investidea: ACM Research, because semiconductors have to be washed

Инвестидея: ACM Research, потому что надо мыть полупроводники

Today we have a speculative idea: take stock of semiconductor equipment manufacturer ACM Research (NASDAQ: ACMR), in order to make money on their rebound.

Growth potential and duration: 16% for 12 months; 10% annual during 10 years.

Why stocks can go up: semiconductor boom affects all businesses, which are associated with their production, including cleaning - this is a necessary stage in the creation of semiconductors. In addition, stocks have fallen - it's time to pick them up..

How do we act: we take shares now by 78,60 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. Hopefully, you know, what to do.

No guarantees

Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what are we writing, Are forecasts and hypotheses, not a call to action. It is up to you to rely on our thoughts or not..

And what about the author's predictions

Research, for example this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would perform better than people, but alas, they work worse.

Therefore, we do not try to build complex models.. The profit forecast in the article is the author's expectations. We indicate this forecast as a guideline. As with the investment in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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Investment editorial office

What the company makes money on

In the production of microelectronic products, semiconductor wafers go through a complex technological route, which includes chemical cleaning from contamination. Wet cleaning is needed to improve the performance of integrated chips around the world. ACM is engaged in the development and production of machines for such cleaning..

ACM 2020 Annual Report, the company's revenue is distributed as follows:

  1. Equipment for wet cleaning of plates and equipment for processing - 87%.
  2. Plate Coating Equipment, other processing equipment, services and spare parts - 13%.

Инвестидея: ACM Research, потому что надо мыть полупроводники

The company is headquartered in the USA, but the main production and research resources are based in Shanghai, there are also engineering departments in South Korea.

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China is the main market for products: 99% products are sold in China, some of ACM's products are bought by Chinese subsidiaries of non-Chinese companies such as South Korean SK Hynix, and the rest of the world takes about a percent. This is important for our history.

The company plans further Asian expansion: output in korean, Thai and other Asian markets, - after which ACM is going to enter the wider international market.

Инвестидея: ACM Research, потому что надо мыть полупроводники

Arguments in favor of the company

Promotions are not at ease. Since October, the value of shares has fallen sharply - from 117 to 77,62 $. One side, last quarterly report is not outstanding, on the other hand, there is no particular reason for panic, because there is growth in the report. All this provides an excellent opportunity to pick up stocks in anticipation of a recovery in demand and the resolution of disputes.. To all other, the share price is greatly understated in relation to, how much should they cost, based on financial indicators, - after all, anyway, the company has growth.

Semiconductors are more relevant than ever. The crisis in this industry is still not over, and semiconductor manufacturers are trying to ramp up production, to meet the demand. And China is one of the main manufacturers and importers, from which chips are not abandoned even by the USA, despite all the sanctions and trade wars.

With the increase in the production of semiconductor wafers, the demand for their mass cleaning will increase.. This is where the ACM experience and their favorable geographic location come in handy.. Plus, the company continues to develop new installations for, to provide all manufacturers with the necessary equipment for less money.

Literally in December, the company received a large order in the USA, which the, among other things, speaks of demand not only in China. So we can count on, that the company's revenue will continue to grow.

Can pump up. The company has a capitalization of about $ 1.51 billion. This is very small and may contribute to the inflow of retail investors into the company's stock., who read on the internet, that "semiconductors are a hot topic now".

Can buy. Considering all of the above, the company may well be bought. In our opinion, very likely to be bought by one of the larger competitors: Lam Research или Applied Materials. ACM is not cheap, but it’s insanely expensive not to call her: P / S — 8,04 and P / E — 54,71. And in absolute numbers, the company is inexpensive - less than $ 2 billion.

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At the same time, the market for equipment for the production of semiconductors is actively growing., and the leaders in terms of growth are the countries of East Asia, where ACM has a strong position. So I believe, that ACM may well buy with an eye to "expansion in Asia".

Assessment of the market for equipment for the production of semiconductors by region, billion dollars

Position Region Market size CAGR 2016—2021
1 Korea 18,9 19,5%
2 China 16,8 20,7%
3 Taiwan 15,6 5,2%
4 Japan 7,9 11,2%
5 North America 6,1 6,6%
The rest of the world 6,5 2,3%

What can get in the way

You received a grant today, and tomorrow - a pro-Chinese collaborator. Recently, the US government has had a severe headache from China.. In this regard, sticking a spoke in the wheels of Chinese companies has become a popular initiative among American regulators., and US Securities Commission (SEC) issued amendments, which prohibit trading in the company's securities on the US stock exchange, if the company has a foreign audit firm, which cannot be audited by the public company accounting supervisory board for three consecutive years. But it is so, flowers.

Judging by the latest news, Americans seriously intend to kill the high-tech sector of the PRC. By the way, one of the major partners and clients of ACM, Chinese SMIC, is generally under US sanctions - and in order to do business with it, ACM has to obtain special permits from the US government, which may be discontinued.

Since ACM is an American company, who "lives" in China, the American government may have other questions for her. for example, ACM received over $ 7 million in grants from the PRC government for the period 2018-2020. Not that it was insanely much, but in the American justice system, as we remember from the scandal with "participation of Russian hackers in the US presidential elections", an unfriendly prosecutor may well promote this story to the level "in exchange for grants and comfortable conditions for doing business in the PRC, ACM sold its homeland". Such news will send ACM quotes straight to the underworld.

However, the director of ACM has already answered, that soon they will take all the necessary measures to, to keep the SEC happy, so that, can, this cup will pass ACM.

At the same time, there is a possibility, that the "Chinese discount" is already included in the cost of these shares and that is why the quotes are marking time. maybe, investors do not risk investing in ACM, because they are afraid of that, that the trade war between the US and the PRC will kill the company's business. Which means, our hopes, that the company will be bought or that at least the stock will be pumped up by retail investors, will not be justified.

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Concentration. In its presentation, the company mentions major customers and indicates, what percentage of the revenue falls on each of them:

  1. Shanghai Huali Microelectronics (HLMC) — 37%.
  2. Yangtze Memory Technologies — 27%.
  3. Semiconductor Manufacturing International Corporation (Minimum wage) — 12%.
  4. SK Hynix - less 10%.

Changes in the relationship with one of these clients, or simply troubles they have, can have an extremely negative impact on ACM reporting..

Accounting. ACM does not suffer from excess money: she has $ 65 million in accounts and about 97.9 million counterparties in arrears. The amount of debts she has is approximately $ 227 million., of which 195.2 million need to be repaid within a year.

The ratio is not the worst, but it should be understood, that high-tech production of the company requires large investments. It is quite logical to expect, that the company's debt burden will increase. This, given the growth in the cost of loans, will not be at all good - and can scare away investors from the company's shares. Moreover, taking into account the above risks, it will be difficult for a company to get the required amount at a reasonable percentage.

Very expensive. Company P / E above 50, and this in itself is not very good. So quotes can be very volatile..

What is the bottom line

Shares can be taken now by 78,60 $. And then there are two options for action.:

  1. wait for growth to 90 $ within 12 months. In the new year, for all the arguments, this is a rather modest goal.;
  2. keep shares next 10 years, because quantum computers are still a long way off, and the semiconductor wafers will need cleaning. The company is investing heavily in research and is likely to remain a leader in Asian markets..

But remember, that US-China relations are unpredictable and the company is highly dependent on the international environment, so, if you are not ready to endure shaking, better pass by.

And if you take these shares and then they fall, then seek comfort in the wisdom of Epictetus: in this world we cannot control anything, apart from your own actions.

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