2023-10-10 21:15:51 ET
Summary
- Japan is tied as the third-largest semiconductor market in the world, trailing behind the US and South Korea.
- We compared the two top Japanese chipmakers in terms of its market position, financials, and valuation.
- Overall, we believe both companies are strong but Rohm has better liquidity ratios and cash flow generation compared to Renesas.
In this analysis, we conducted a comparison between Renesas Electronics Corporation ( RNECF ) and ROHM Co., Ltd. ( ROHCF ) to determine the superior Japanese chipmaker. To begin, we delved into the Japanese semiconductor market, examining its position in the global semiconductor industry and examining Japan's presence in Logic, Memory as well as Discrete, Analog and Other ('DAO') market segments. Following that, we analyzed both companies in terms of their revenue, market share and profit margins. Furthermore, we assessed the companies' balance sheets, conducting an examination of their liquidity, debt levels, and creditworthiness. Finally, we evaluated the company’s valuation ratios.
Japanese Semiconductor Market Tied as Third Largest Worldwide
In the chart above, we first compiled the share of the semicon companies based on geographic region from SIA data. From the chart, Japan’s share of the global semicon market had remained relatively stable over the past 6 years and was tied as the third largest market with a share of 9% in 2022 along with the European Union. This highlights the significance of Japan in the semicon industry trailing behind the US and South Korea.
Semiconductor Sales Growth by Region | 5-year Average Growth |
United States | 8.5% |
South Korea | 6.6% |
Japan | 5.0% |
European Union | 7.2% |
Taiwan | 15.0% |
China | 17.9% |
Total Market | 7.8% |
Source: SIA, WSTS, Khaveen Investments
In terms of market growth, Japan has an average growth rate of 5% in the past 5 years. This contrasts with the performance of other regions, such as the US, South Korea, Europe and China which exhibited higher growth rates than Japan. We believe one of the reasons is due to Japan’s large exposure to the DAO market which has the lowest average growth (6%) compared to Logic (7.8%) and Memory (8.3%) according to SIA.
Japan’s semicon market is largely concentrated towards the DAO market segment with a 19% share of the global DAO market segment. This makes Japan the second-largest region within the market segment. In contrast, Japan only has a 4% share of the Logic market segment and a 7% share in Memory.
We calculated Japan’s semicon market breakdown with DAO accounting for 78% of the market. According to SIA , within the automotive end market, the largest semiconductor product category is DAO accounting for 59% of the total end market followed by Logic (35%) and Memory (6%). In our previous analysis of Infineon ( IFNNF ), we highlighted Japan as the second-largest region by vehicle sales share (22.4%), trailing behind Europe (25.3%). For example, Japanese automakers include Toyota ( TM ), Honda ( HMC ) and Nissan ( NSANY ) which are among the top 10 automakers by market share.
In our previous TSMC (TSM) analysis, we compiled government initiatives by different regions. In Japan, the government incentives are less than in other key regions such as the US, China, South Korea and the EU with initiatives including allocating $6.8 bln for the semiconductor industry. However, foreign companies also benefit from the subsidies in addition to domestic companies. Out of the $6.8 bln subsidies, we calculated at least $4.5 bln involves foreign companies such as TSMC, Micron ( MU ) and Western Digital ( WDC ). Thus, we believe this could increase the share of foreign competitors in the market, at the expense of local competitors.
Overall, trailing behind only the US and South Korea, Japan is tied with Europe as the third largest semicon market in the world. We believe this highlights the significance of the region in the industry. However, Japan’s semicon growth had underperformed other key regions due to its focus on the DAO market segment which had a lower growth rate compared to the Logic and Memory market segments. DAO represents the largest market segment in Japan accounting for 78% of its semicon market which includes both Renesas and Rohm. Thus, we compared these two companies in the following points.
Revenue and Profitability Metrics Comparison
In this section, we compared the companies in terms of their revenue and growth, market share and profitability margins to determine which company has superior revenue and margins.
Revenue Growth
Historical Revenue Growth | Revenue ($ mln) TTM Q2 2022 to Q2 2023 | TTM (Q3 2023) | 5-year Average | 10 -year Average |
Renesas | 10,439 | 9.3% | 11.46% | 4.88% |
Rohm | 3,486 | 1.5% | 0.73% | 0.47% |
Source: Company Data, Khaveen Investments
Renesas is a larger company compared to Rohm with its revenues 3x higher than Rohm. Additionally, Renesas has a higher growth rate with a TTM (Q2 2023) revenue growth rate of 9.3%, a 5-year average of 11.46% and a 10-year average of 4.88%. In contrast, Rohm had more modest growth rates in all TTM, 5-year and 10-year averages.
However, Renesas’ TTM revenue growth had slowed down compared to its 5-year average. Additionally, based on its latest quarterly earnings report , Renesas guided its Q3 2023 revenues to decline moderately by 4.5% YoY. In the past 2 quarters, its non-automotive revenue contributed to its growth slow down with a decline of -3.7% YoY, which is still impressive compared to the total semicon industry performance in H1 2023 of -20.3% YoY according to SIA . Notwithstanding, management highlighted a potential recovery in the PC and consumer end markets in Q3 2023 and could support a better growth outlook. In contrast, Rohm’s TTM growth improved compared to its 5-year average, but management guided its Q2 revenue to decline by 3.6% YoY, which is slightly better compared to Renesas. Though, management expects its full-year growth to be positive at 6.3% YoY.
Overall, we still believe Renesas beats out Rohm as the larger company in terms of revenue and better revenue growth track record despite near-term market headwinds amid the slowdown in the semicon industry in 2023.
Market Share
Based on our market share chart of the Japanese semicon market, Renesas’ market share had increased over the past 6 years and overtook Kioxia as the market leader while Rohm saw its share decrease during the same period. Renesas’ share is 3x larger than Rohm's in 2022, which highlights its superior competitive positioning to Rohm.
Analog Market Share | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
Renesas | 13.6% | 11.2% | 13.0% | 11.7% | 12.3% | 12.5% | 11.7% | 12.8% |
Rohm | 6.9% | 6.6% | 7.0% | 6.1% | 6.3% | 5.8% | 5.0% | 4.3% |
Source: IC Insights, Company Data, Khaveen Investments
Based on the worldwide analog market share, Renesas consistently held a higher market share, ranging from 11.2% to 13.6% during this period, with a slight fluctuation but overall maintaining a strong presence. In contrast, Rohm's market share showed a declining trend, decreasing from 6.9% in 2015 to 4.3% in 2022, which shows its diminishing share of the worldwide analog market for the company over the period. Thus, we believe Renesas edges out Rohm in market share.
Revenue Breakdown by End Markets
Revenue Breakdown by End Market (2022) | Renesas | Rohm | Market Forecast CAGR |
Automotive | 42.9% | 41.9% | 11.8% |
Others | 57.1% | 58.1% | 6.21% |
Source: Company Data, Allied Market Research , Khaveen Investments
Based on the companies’ revenue breakdown based on their annual reports for 2022, both Renesas and Rohm derive a significant portion of their revenues from the automotive end market. Renesas’ share of revenues from this end market is only slightly higher compared to Rohm. We believe this highlights an advantage for Renesas as the market forecast CAGR for the automotive semicon market is higher at 11.8% according to Allied Market Research compared to the total semicon market forecast CAGR of 6.21%.
Profitability Margins
Profitability (10-year Average) | Renesas | Rohm |
Gross Margin | 45.53% | 34.45% |
EBIT Margin | 13.31% | 11.75% |
Net Margin | 8.28% | 10.57% |
Free Cash Flow Margin | -3.95% | 6.85% |
ROA | 6.7% | 4.7% |
ROCE | 12.1% | 5.9% |
ROE (Total) | 16.6% | 5.5% |
Source: Company Data, Khaveen Investments
In terms of profitability, Renesas has a higher 10-year average gross margin, EBIT margin and ROE. While Rohm has a higher 10-year average net margin, Renesas’ net margin had improved significantly in the past 2 years to 17.1% in 2022 and more recently, 24.6% in Q2 2023. Rohm’s net margin had also improved but is lower than Renesas at 16.7% in Q2 2023. Based on analyst consensus, Renesas’ net margin is forecasted to increase to 21.7% for the full year whereas Rohm's net margins are forecasted to decline to 12.8%.
Furthermore, Renesas’ FCF margin had also improved and was positive in 2022 compared to its 10-year average at 25.3%, higher compared to Rohm's (2.13%). Renesas also surpasses Rohm in terms of ROA and ROCE at a 10-year average compared to Rohm.
Therefore, we believe Renesas edges out Rohm with better profitability margins for all metrics with significant improvements in net and FCF margins over the past 10 years.
Summary
Factor | Outperformer |
Market Share | Renesas |
Revenue and Growth | Renesas |
Revenue Breakdown | Renesas |
Profitability Margins | Renesas |
Source: Khaveen Investments
In summary, we believe Renesas is superior to Rohm in terms of revenue and growth, revenue breakdown as well as profitability margins with larger revenues, higher growth, higher exposure to end markets and mostly better profitability margins.
Balance Sheet Metrics Comparison
In this section, we compared the companies in terms of their net debt, liquidity and credit to determine which company has a superior balance sheet.
Liquidity Analysis
Liquidity (10-year Average) | Renesas | Rohm |
Cash Ratio | 1.08x | 4.22x |
Quick Ratio | 1.44x | 5.36x |
Current Ratio | 1.99x | 7.10x |
Debt-to-Assets | 0.55x | 0.15x |
Debt-to-Equity | 1.13x | 0.15x |
Financial Leverage (Assets/Liabilities) | 2.34x | 1.17x |
Source: Company Data, Khaveen Investments
Based on the table comparing the liquidity ratios, Rohm has a stronger liquidity position with a significantly higher 10-year average cash ratio, quick ratio, and current ratio compared to Renesas. On the other hand, Renesas has a higher debt-to-assets ratio and debt-to-equity ratio. Renesas also has a higher financial leverage ratio compared to Rohm. Therefore, we believe that Rohm edges out Renesas in terms of liquidity with higher liquidity ratios in terms of cash, quick and current ratios as well as having less leverage.
Net Debt
Debt and Cash ($ mln) (Q2 2023) | Renesas | Rohm |
Debt | 6,929 | 1,221 |
Cash & Cash Equivalents | 3,215 | 2,133 |
Net Debt (Net Cash) | 3,714 | -912 |
Cash to Debt Ratio | 0.46x | 1.75x |
Source: Company Data, Khaveen Investments
In Q2 2023, Renesas had a 5x higher debt compared to Rohm. Renesas also has higher cash than Rohm but only 1.5x higher than Rohm. Consequently, Renesas has a net debt of $3.7 bln. In contrast, Rohm has a net cash of $912 mln. Also, Rohm has a higher cash-to-debt ratio compared to Renesas.
Thus, we believe Rohm edges out Renesas with positive net cash, highlighting its stronger financial position and ability to pursue more M&A activities compared to Renesas, which has a net debt. For example, in 2023, Rohm acquired Solar Frontier for SiC power device expansion and materials company Functional Forms .
Credit Analysis
Credit Analysis (10-year Average) | Renesas | Rohm |
EBIT interest coverage | 45.26x | -15.61x |
EBITDA interest coverage | 81.76x | -29.02x |
CFO interest coverage | 79.99x | -24.63x |
FCF interest coverage | 5.55 | -8.30x |
EBITDA/Total Debt | 0.28x | 0.68x |
EBITDA/Net Debt | -1.83x | -0.47x |
Source: Company Data, Khaveen Investments
In terms of credit analysis based on their 10-year averages, Renesas has strong financial health with robust interest coverage ratios, indicating it comfortably covers interest expenses. However, its debt levels relative to earnings and net debt are less favorable. In contrast, Rohm has better debt servicing capacity and a more favorable net debt position but has negative interest coverage ratios. Overall, we believe Renesas beats out Rohm in terms of our credit analysis.
Summary
Factor | Outperformer |
Liquidity Analysis | Rohm |
Net Debt | Rohm |
Credit Analysis | Renesas |
Source: Khaveen Investments
In summary, we believe Rohm is superior to Renesas in terms of liquidity analysis and net debt with higher liquidity ratios and lower leverage as well as having positive net cash.
Risk: Superior Growth of China
As mentioned above, Japan is tied with Europe in third place in the semicon industry and China trails behind Japan. However, China’s semicon market growth (17.9%) in the past 5 years has been 3x higher than Japan’s growth (5%). Furthermore, the Chinese semicon market is also focused on the DAO market segment as it is the market segment in which China has the most share. According to SEMI , China’s capacity of 300mm wafers is expected to increase by 3% and is expected to account for 25% of capacity by 2026 while Japan’s share of capacity is expected to decrease by 1% to 12% by 2026. Thus, we believe China's high growth could threaten the market share of Japanese chipmakers such as Renesas and Rohm.
Verdict
Financial Ratios (Current) | Renesas | Rohm |
P/E | 12.35x | 15.54x |
P/B | 2.17x | 1.17x |
P/S | 2.75x | 2.23x |
EV/EBITDA | 8.23x | 5.84x |
EV/Sales | 2.98x | 1.71x |
Source: Seeking Alpha, Khaveen Investments
Additionally, in terms of financial valuation ratios, Rohm generally beats out Renesas with lower P/B, P/S, EV/EBITDA and EV/Sales ratios. Whereas Renesas has a lower P/E ratio than Rohm but it also has lower net margins as discussed above. Thus, we believe Rohm has superior valuation ratios than Renesas.
Factor | Outperformer |
Income Statement | Renesas |
Balance Sheet | Rohm |
Valuation Ratios | Rohm |
Source: Khaveen Investments
In summary, we believe that Renesas surpasses Rohm in terms of our Income Statement factor with larger revenues, higher growth rates despite short-term market headwinds, greater exposure to the high-growth automotive semicon market, and generally stronger and improving profitability margins.
However, when it comes to Balance Sheet and Valuation Ratios, we find that Rohm holds the advantage, with higher liquidity ratios, lower leverage, and a positive net cash position as well as more attractive financial valuation ratios such as P/S, P/B, EV/Sales and EV/EBITDA.
Overall, we believe Rohm edges out Renesas. Notwithstanding, we believe both Rohm and Renesas are solid companies as the two of the top chipmakers in Japan. Based on analysts’ consensus, we note that both companies have attractive upsides. Renesas has a price target of JPY2,998 and Rohm has a price target of JPY3,677 , an upside of 36% and 33% respectively. Thus, we rate both companies as a Strong Buy.
For further details see:
Renesas Vs. Rohm: Best Japanese Chipmaker?