SUMCO: Overvalued as Expectations Run Ahead, Downgrade to UW

Research evidence excerpt

SUMCO: Overvalued as Expectations Run Ahead, Downgrade to UW

chemicals coverage. Expectations for significant earnings EPS, basic (¥)* (33.6) (77.2) 37.2 85.8

improvement have been building on the back of anticipated mid-term S/D shortages Prior EPS, basic (¥)* - (71.5) 28.6 80.1

EPS (¥)** (33.6) (77.2) 37.2 85.8

for wafers driven by semiconductor market growth. We expect steady 300mm Prior EPS (¥)** - (71.5) 28.6 80.1

wafer S/D improvement, but not a shortage (i.e., a sharp rise in ASP), and expect P/E, basic* NM NM 94.7 41.1

P/BV, basic 0.9 2.3 2.2 2.2

earnings to improve only to a normalized run-rate. Valuation on our F12/27e is ROE (%)* (2.0) (4.7) 2.4 5.4

demanding (P/B ~2.2x (ROE 2.4%), P/E 95x (41x on F12/28e), hence we cut to UW. EV/EBITDA, basic 7.7 12.7 11.4 10.0

We expect market expectations to moderate with each quarterly earnings release. Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare

framework

* = GAAP or approximated based on GAAP

Our F12/26-28 OP forecasts edge higher: 1Q F12/26 OP came in ¥0.8bn below our ** = Based on consensus methodology

e = Morgan Stanley Research estimates

estimate. While depreciation was lower than expected (positive for profits), results

missed due to a worsening mix and a sharper-than-expected decline in spot prices

for 300mm wafers. We narrow our F12/26 operating loss forecast from ¥22bn to

¥16bn. Due to uncertainty over the timing of selling a partial stake (5.2%, to be sold

in stages) in FORMOSA SUMCO TECHNOLOGY (FST; a JV with Formosa Plastics

Group), the group's Taiwan wafer subsidiary, we remove the previously assumed Morgan Stanley does and seeks to do business with

deconsolidation impact as noted, resulting in a milder loss outlook that previously companies covered in Morgan Stanley Research.