ACMR - ACM Research: Benefiting From China Sanctions

2023-10-23 14:06:00 ET

Summary

• ACM Research will release its preliminary revenue range for Q3 2023 on Oct. 27.
• The company's revenue comes mainly from China, but it's expanding efforts to address customers in other regions.
• Top domestic Chinese equipment companies reported a mean of 48.8% year-on-year growth for the first half of 2023.
• The Top 6 non-domestic equipment companies reported a mean of 3.3% year-on-year growth for the first half of 2023.

ACM Research (ACMR) announced on Oct. 19, 2023, that it will release its preliminary revenue range for the third quarter of 2023 before the U.S. market opens on Friday, Oct. 27, 2023.

ACMR was founded in 1998 with corporate headquarters in Fremont, Calif. In September 2006, ACM expanded its operations into Asia and formed the subsidiary, ACM Research (Shanghai), Inc. ACM now has complete R&D, engineering and manufacturing operations at its Zhangjiang High-Tech Park facility in Shanghai, China.

ACM Research's revenue comes nearly entirely from China. The company reported that $378 million of its $388 million total sales in 2022 went to China. So far in 2023, $207 million of its $219 million total coming from customers in China in the first half of this year. However, ACMR has begun to add to efforts to further address customers in North America, Western Europe and Southeast Asia by expanding direct sales and services teams and increasing our global marketing activities.

ACMR Taking Advantage of China Sanctions

The tightening of U.S. restrictions on China's semiconductor industry has led to a notable shift in market dynamics, with Chinese manufacturers of chip-making equipment experiencing increased demand. Recent research indicates that domestic equipment manufacturers are securing a significantly higher proportion of tenders from Chinese foundries compared to previous years.

Between January and August 2023, approximately 47.3% of machinery equipment tenders by Chinese foundries were awarded to local manufacturers, as revealed in an analysis of 182 tenders conducted by Huatai Securities. Notably, the trend intensified from July to August 2023, with 62% of tenders going to Chinese suppliers, up from 36.3% in the March to April period, signaling a growing preference for domestically produced alternatives as chipmakers rush to replace foreign-made equipment.

As shown in Chart 1, four of the top domestic Chinese equipment companies reported a mean of 48.8% year-on-year growth for the first half of 2023, according to a report at The Information Network. In contrast, the mean growth for the Top 6 non-Chinese companies was just 3.3%.

Chinese companies have been stockpiling foreign-made lithography equipment from ASML (ASML) , which registered a HoH growth of 69.8%. China has no domestic lithography equipment vendors. ASML has so far been able to ship products to China. In fact, in the company's recent Q3 2023 earnings presentation , revenue from China was 46% of ASML's total systems revenue versus 24% in 2Q23.

Chart 1

ACMR reported earnings results for the half year ended June 30, 2023. For the half year, the company reported sales was CNY 1,538.35 million compared to CNY 1,068.14 million a year ago. Revenue was CNY 1,609.81 million compared to CNY 1,095.53 million a year ago. Net income was CNY 439.44 million compared to CNY 236.59 million a year ago.

Chart 2 shows a breakdown of ACMR's 1H 2023 revenues by equipment type compared to 1H 2022. Growth is shown in US dollars vs. my analysis in Chart 1 in Chinese yuan renminbi ( CNY ), hence the difference in HoH data.

Chart 2

According to a report at The Information Network, ACMR had a 5.5% share of the spray cleaning market in 2022, well behind market leaders Lam Research ( LRCX ), Tokyo Electron ( OTCPK:TOELY ), and Screen, as shown in Chart 3.

Chart 3

Valuation and Risks

Chart 4 shows year-to-date share price performance and moving averages. Both the 50-day (blue line) and 200-day (orange line) moving averages are in an uptrend.

Chart 4

ACMR's Factor Grades are shown in Chart 5.

Chart 5

Valuation is rated B-. In its Q2 2023 earnings call, the company reported earnings of $0.48/share, an incredible 380% over the $0.10/share consensus estimate. Earnings grew 118% YoY, 210.26% above consensus. ACMR is good value based on its PE Ratio (16.1x) compared to the peer average (56.1x) and the US Semiconductor industry average (24.1x). ACM Research's EPS rose from US$0.55 to US$1.02, over the last 1-year period, achieving YoY growth of 85%.

Growth is rated an A, as ACMR reported Q2, 2023 revenue of $144.6 million, up 38.5% YoY. The company has delivered impressive revenue growth, with a 3-Year Revenue Growth Rate per Share of 47% and a 5-Year Revenue Growth Rate per Share of 31.10%, surpassing 93.9% of industry peers. Moreover, the company anticipates maintaining strong growth in the next three to five years, with a projected total revenue growth rate estimate of 26.79%.

Profitability is rated a D+. Gross margin was 47.5%, up from 42.3%, which exceeded the range of 40% to 45% reflected in the company's long-term business model. Its operating margin of 19% is better than 80.19% of 944 companies in the Semiconductors industry.

Momentum is rated an A+, up from a B+ 3-months ago. Chart 6 shows ACMR's price return of 180.56% compared to the S&P 500's 15.77%.

Revisions achieved an A up from a C+ just three months ago. For the current fiscal year, analysts have increased earnings estimates by 36.26% in the past 60 days. Several analysts have provided updated perspectives on ACM Research and its prospects. The Goldman Sachs Group increased its target price for the stock from $14.20 to $16.20 and assigned it a "neutral" rating. Benchmark reiterated a "buy" rating with a target price of $32.00. Jefferies Financial Group raised their outlook from "underperform" to "buy," along with raising the price target from $9.00 to $23.40. Needham & Company LLC also reaffirmed their "buy" rating on ACM Research and set the price objective at $18.00.

Chart 6

On debt, ACM Research had short-term liabilities of US$456.3 million due within 12 months and long-term liabilities of US$27.2 million due beyond 12 months. However, it held US$269.8 million in cash and had US$235.2 million in receivables due within 12 months. As a result, the company actually had US$21.5 million more in liquid assets than its total liabilities. This indicates a positive liquidity position, where the company's liquid assets can cover its short-term and long-term obligations, providing a financial buffer.

The company has a cash-to-debt ratio of 3.33 , which is better than 58.22% of 900 companies in the Semiconductors industry.

Based on this analysis, I rate ACMR Research a Buy.

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