Top 10 Semiconductor Equipment Companies Grew 14.1% In 2016 - Will They Repeat In 2017?

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Includes: ACLS, AMAT, ASML, CAJ, KLAC, LRCX, MU, SSNLF
by: Robert Castellano

Summary

Revenues of the Top 10 semiconductor companies increased 14.1% in 2016 while revenues for the remaining 40 or so companies dropped 20.3%.

The strong Japanese Yen was responsible for 3.4% of the growth.

Strong drivers for 2017 are China, 3D devices and memory, but there are caveats to what revenue growth will be in 2017.

According to our recent report entitled "Global Semiconductor Equipment: Markets, Market Shares, Market Forecasts," the Top 10 equipment suppliers grew 14.1% as shown in Table 1.

The remaining 50 or more equipment suppliers shrank 20.3% as total equipment revenues grew 8.1%.

Top ranked Applied Materials (NASDAQ:AMAT) grew 26.2%, helped by the growth in 3D NAND and 3D logic devices, as well as multiple patterning processes used to extend immersion lithography to 10nm dimensions. The company gained market share in ion implantation against Axcelis (NASDAQ:ACLS) but lost share to Korean ALD suppliers Jusung and Wonik IPS, which I discussed in a February 23, 2017, Seeking Alpha article entitled "New Technologies Are Eroding Applied Materials' NAND And Display Revenues."

Table 1 - Top 10 Semiconductor Equipment Suppliers (Equipment Only)

Rank 2016

Vendor

2015

Revenue

2016

Revenue

'15-'16 Growth

(%)

In Dollars

1

Applied Materials

6,420.20

8,102.0

26.2%

2

Lam Research

4,808.30

5,170.2

7.5%

3

ASML

4,701.60

5,061.1

7.6%

4

Tokyo Electron

4,325.00

4,975.2

15.0%

5

KLA-Tencor

2,043.20

2,180.5

6.7%

6

Screen Semiconductor Solutions

971.5

1,303.3

34.2%

7

Hitachi High-Technologies

788.3

969.5

23.0%

8

Nikon

724.2

822.7

13.6%

9

ASM International

582.5

544.3

-6.6%

10

Hitachi Kokusai

633.8

530.5

-16.3%

Total Top 10

25,998.6

29,659.4

14.1%

Others

5,484.5

4,373.8

-20.3%

Total Market

31,483.1

34,033.2

8.1%

Source: The Information Network

Lam Research (NASDAQ:LRCX) was next, growing 7.5%, but maintaining market share lead in etch and gaining share against AMAT in deposition, as its NAND shipments grew more than 80%. The company's market share in deposition reached 40% for the first time since the company acquired Novellus in 2011, primarily due to strong growth in ALD.

ASML (NASDAQ:ASML) was in third place growing 7.6%. When EUV technology enters the market at the 7nm node it will eliminate the need for multiple patterning processes, changing the dynamics of the deposition-etch utilization and impacting revenues of AMAT and LRCX. Of course EUV will be positive for ASML.

Tokyo Electron was fourth, gaining 15%, primarily in CVD deposition processes.

KLA-Tencor (NASDAQ:KLAC) was fifth, growing 6.7% in 2016. The dynamics of this industry changes depending on whether semiconductor manufacturers are making technology purchases to a smaller node (requiring more inspection measurements for a new process) or making capacity purchases. Also the sector is dependent on whether in-chamber or out-of-chamber inspection is being utilized.

Screen Semiconductor Solutions was sixth, increasing its share of the wafer clean market. Revenue growth of 34.2% topped all equipment suppliers in the Top 10.

Hitachi High Technologies was in seventh place, as the company maintained market share in etch but gained share in wafer inspection against AMAT.

Nikon was in eighth place as revenues grew 13.6% as the company continues to emphasize its immersion DUV lithography in the face of upcoming EUV from ASML and the introduction of imprint lithography from competitor Canon (NYSE:CAJ).

ASM International saw revenues drop 6.6% in 2016 as its single wafer ALD market experienced a double-digit decline in 2016. ASM is the market leader in ALD.

Hitachi-Kokusai dropped to tenth place as its revenues decreased 16.3% in 2016 as the company lost market share to main deposition competitor Tokyo Electron. I suggested in an October 19, 2016, Seeking Alpha article entitled "Lam Research's Next Acquisition Opportunity" that since Hitachi was putting up Hitachi Kokusai for sale, it would make a good acquisition target for LRCX.

Impact of Strong Yen

I discussed in an April 14, 2016, Seeking Alpha article entitled "The Semiconductor Equipment Market Is Quite Healthy, And No, Revenues Didn't Fall" that:

"For the second time in three years, a strong U.S. dollar has distorted the actual growth in semiconductor equipment, reflected in shifted market shares and impressions that the semiconductor equipment market shrank when in fact it grew."

In 2016 we saw the reverse, a stronger Yen compared to 2015, so that the semiconductor equipment market was actually weaker than what is show in Table 1 as data was artificially converted to U.S. Dollars.

Table 2 below is the 2016 version of the table that appeared in last year's article. When converted to U.S. Dollars, the Top 10 companies grew 14.1%. However, if revenue growth was calculated in the currency of the country of origin, revenue growth would have been 10.7%.

Table 2 - Top 10 Semiconductor Equipment Suppliers (Based on Currency)

Rank 2016

Vendor

2015

Revenue

2016

Revenue

'15-'16 Growth

(%)

In Dollars

'15-'16

Growth

(%)

In Currency of Country

1

Applied Materials

6,420.20

8,102.0

26.2%

26.2%

2

Lam Research

4,808.30

5,170.2

7.5%

7.5%

3

ASML

4,701.60

5,061.1

7.6%

7.9%

4

Tokyo Electron

4,325.00

4,975.2

15.0%

3.3%

5

KLA-Tencor

2,043.20

2,180.5

6.7%

6.7%

6

Screen Semiconductor Solutions

971.5

1,303.3

34.2%

20.4%

7

Hitachi High-Technologies

788.3

969.5

23.0%

10.4%

8

Nikon

724.2

822.7

13.6%

1.9%

9

ASM International

582.5

544.3

-6.6%

-7.1%

10

Hitachi Kokusai

633.8

530.5

-16.3%

-24.9%

Total Top 10

25,998.6

29,659.4

14.1%

10.7%

Others

5,484.5

4,373.8

-20.3%

Total Market

31,483.1

34,033.2

8.1%

Source: The Information Network

Outlook for 2017

To forecast the semiconductor industry we need to look at the dynamics of the industry and what is driving market growth. These include growth in

  • China
  • 3D structures (memory and logic)
  • Memory

I wrote in a February 21, 2017, Seeking Alpha article entitled "China's Semiconductor Surge: What Investors Need To Know" that the growth in China, although monumental, merely means that semiconductors that would have been made in Taiwan or elsewhere will be made in China.

I noted that:

Massive investments in Mainland China are finally showing benefits as the ratio of integrated circuits made in China versus those imported into China increased from 27.0% in 2015 to 29.1% in 2016, according to our annual update of the report entitled "Mainland China's Semiconductor and Equipment Markets: A Complete Analysis of the Technical, Economic, and Political Issues."

China produced 130.3 billion ICs in 2016, up from 113.2 billion ICs in 2015, up from 102.0 billion in 2014. China's imported ICs were 317.7 billion ICs in 2016, up from 305.5 billion ICs in 2015, up from 285.7 billion pieces in 2014.

Nevertheless, the equipment purchased in China will be for capacity expansion and that expansion could have occurred in Taiwan, Korea or elsewhere. We will see a bump in equipment growth as a whole fab needs to be outfitted rather than merely adding additional equipment on existing production lines, which could add 2% to 2017 equipment growth.

In 3D, I see a strong migration from 2D planar NAND to 3D planar. I discussed in the above mentioned "New Technologies Are Eroding Applied Materials' NAND And Display Revenues," the dynamics of the deposition-etch processing sequence and how new technologies such as ALD are being implemented to replace AMAT's dominating PECVD process. Market share is being gained by LRCX, Jusung and Wonik IPS.

The memory market can be a head fake in terms of investors thinking it will drive growth in equipment sales from customers such as Micron Technology (NASDAQ:MU), SK Hynix and Samsung Electronics (OTC:SSNLF). Stocks in these companies have been on a tear due to increases in average selling prices of memory devices, which are stimulating revenue growth in these memory manufacturers. For example, NAND revenues grew 18% in Q4 2016 due to a shortage in NAND, which I gave an early preview in my May 16, 2016, Seeking Alpha article entitled "A Shortage Of NAND Flash Memory Is Coming Soon - What Caused It And What Will Be Its Impact."

DRAM also remains in short supply as MoM revenues increased 33% in January 2017. One of the drivers is mobile DRAM because content in smartphones is increasing - 3-4 Gb smartphones are increasing share and 8 Gb smartphones are now shipping.

My main concern is that device makers are stocking up on DRAMs, which remain in short supply. While the market is strong, stockpiling of DRAM drives up ASPs and decreases inventory at manufacturers. Meanwhile, DRAM manufacturers are only modestly increasing supply.

If we go way back to 1999, a similar thing happened. Erroneous forecasts by Gartner that demand was high and inventory dropping raised concern from PC manufacturers. Instead of purchasing the correct number of DRAMs through their just-in-time purchasing programs, PC manufacturers bought multiple numbers of chips fearing they would get on allocation and not meet customer demand. The result was a rapid increase in chips sold and made as well as equipment to make the chips. This was followed in 2000 by realization it was a bubble, resulting in a crash in the equipment market and $10 billion of excess chips on the market that were sold for cents on the dollar in subsequent years.

My sources tell me that Chinese smartphone makers have double booking mobile DRAM orders to secure sufficient inventories.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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