Shin-Etsu Chemical Leveraging Its Excellence Through The Pandemic

Oct. 01, 2020 8:43 PM ETShin-Etsu Chemical Co., Ltd. (SHECY)COHR
Stephen Simpson profile picture
Stephen Simpson


  • Shin-Etsu's PVC business is well-leveraged to a recent surge in PVC pricing, and the new ethane cracker will make the business even more profitable.
  • Customers built up their silicon semiconductor wafer inventories earlier this year, and that could create some near-term turbulence for this very profitable segment.
  • Shin-Etsu has licensed technology that will allow it to use its existing 200mm wafer capacity to produce GaN wafers.
  • Trading close to an all-time high, it's hard to argue that Shin-Etsu's qualities are being ignored, but the prospective return isn't bad for one of the best-run companies I follow.

Regular readers of my articles know that I’m not a “valuation doesn’t matter” sort of investor, but for every rule, there are exceptions, and Japan’s Shin-Etsu Chemical (OTCPK:SHECY) is one where I’m often tempted to relax my approach to valuation. Not only does Shin-Etsu have a strong track record where operational factors are concerned (margins, returns on capital, etc.), the shares have comfortably beat its sector peers and come close to beating the S&P 500 over the past 15 years, while handily beating the index over the last 20 years. What’s more, this is a company that continually reinvests in itself; it’s never the first to pursue the hot new thing, but it generally ends up being one of the best operators where it chooses to compete.

The PVC market is starting to look quite a bit stronger, and that should help offset some potential turbulence in the semiconductor silicon business. Longer term, I think Shin-Etsu will continue to grow revenue at around 3% to 4%, with healthy double-digit FCF margins driving mid-single-digit FCF growth. Shin-Etsu shares aren’t inarguably cheap here, but it’s a borderline “buy” call and definitely one to watch as meaningful pullbacks do occur from time to time.

PVC Heating Up

Between a strong U.S. housing market and supply issues at two major U.S. producers, the U.S. PVC market is looking quite a bit better. PVC sales volume has been accelerating, rising 5% yoy in June, 8% in July, and 9% in August, while both Formosa Plastics and Westlake Chemical (WLK), representing about 44% of the U.S. market, have recently had significant production issues with their facilities.

As you might imagine, this is good for prices. Export prices have almost doubled from their March lows to around $1,000/t, and contract prices were already back to pre-COVID-19 levels in August, before going up

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

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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