Taking advantage of the boom in artificial intelligence, the stock prices of global semiconductor equipment giants have also swayed over the past year. However, among semiconductor equipment stocks, Japanese semiconductor equipment giants$Tokyo Electron (8035.JP)$The rise was particularly remarkable.

Although Tokyo Electronics is only the fourth largest semiconductor equipment stock in the world in terms of market capitalization in US dollars, the company's recent stock price increase is much higher than that of the top three equipment giants — Asmack, Applied Electronics, and Fanlin Group.

In the past six months, shares of Asmack, Applied Materials, and Fanlin Group rose 65.57%, 49.53%, and 55.77%, respectively, while Tokyo Electronics rose 93.59%; in the past year, the shares of the top three companies rose 43.92%, 69.35%, and 85.24%, respectively, while Tokyo Electronics rose 146.70%.

Tokyo Electronics' products cover almost all processes in the semiconductor manufacturing process. Its main products include coating/imaging equipment, heat treatment film forming equipment, dry etching equipment, CVD, wet cleaning equipment and testing equipment.

What makes Tokyo Electronics' stock price far outperform its peers? In fact, the rise in Tokyo Electronics' stock price is inseparable from “time and time,” “location,” and “people and peace.”

Tianshi: The dispute between China and the US will benefit Japanese companies?

The so-called “Tianshi” means that in the context of trade frictions between China and the US, Tokyo Electronics took the opportunity to expand sales to China, thereby gaining additional growth impetus.

In recent years, under geopolitical influence, both the US and Dutch governments have pressured local semiconductor equipment giants such as Applied Materials and Asmack to restrict them from selling advanced process semiconductor equipment to China.

However, the sandpipers fought, and the fisherman benefited. Although the Japanese government followed the US and introduced similar advanced equipment export control policies, Tokyo Electronics and other Japanese semiconductor manufacturers took advantage of the opportunity to sell a large number of mature semiconductor devices to Chinese customers. Their sales to China did not decline but increased, and the company's profits also gained momentum for growth.

Judging from Tokyo Electronics' published financial reports, the company's sales rose steadily in the first three fiscal quarters of fiscal year 2024 (up to the end of December last year), and the key driving force behind this was the increase in sales to China:

Tokyo Electronics' sales to China increased from 153.9 billion yen (approximately RMB 7.346 billion) to 217.2 billion yen (approximately RMB 10.368 billion) in the first three fiscal quarters, accounting for 39.3%, 42.8%, and 46.9% of corporate revenue, respectively. At the end of 2022, that figure was just 24%.

Tokyo Electronics executives said that by expanding sales of mature process products to the Chinese chip industry, the company has largely offset the impact of the Japanese government's export control policy.

“Of course, [Japan and US export controls] had some impact on us, but the impact was much smaller than we expected,” said Junko Takagi, head of investor relations at the company, at the end of last year. China's demand for mature semiconductor equipment is “very large.”

In February of this year, Tokyo Electronics raised its comprehensive net profit estimate for the full year of fiscal year 2024 to 340 billion yen (about 16.2 billion yuan), an increase of 33 billion yen (about 1,575 billion yuan) over the same period last year. The company specifically pointed out that the reason for the increase in profit expectations was boosted by strong sales in the Chinese market.

Hiroshi Kawamoto, senior vice president of Tokyo Electronics, said at the briefing: “The self-sufficiency rate of the Chinese semiconductor industry is still very low, and we will continue to actively invest in the future... We expect strong demand in China (for mature semiconductor equipment) to continue or increase further, and this trend is expected to remain the same until 2025.”

Geographic advantage: AI darling popular with foreign investors

The so-called “geographical advantage” means that under Japan's unique semiconductor industry structure, Tokyo Electronics has become the “AI concept stock” most favored by foreign investors.

In the mid-1980s, Japan occupied 50% of the world market share in the semiconductor sector. However, later, due to US suppression and its own strategic mistakes, Japan's position in the semiconductor manufacturing field plummeted, and its share of the global market fell sharply to less than 10% in 2019. The only remaining local semiconductor equipment and materials companies still have international competitiveness.

Last year, under the leadership of “stock god” Buffett, foreign investors flooded into the Japanese stock market. However, when these hot money were looking for artificial intelligence-related concept stocks in the Japanese market, it was discovered that there were neither AI technology giants like Microsoft or Google, nor chip giants like Nvidia.

As a result, chip equipment giants such as Tokyo Electronics became their common choice. In other words, compared to semiconductor equipment stocks in other countries, Japanese chip equipment stocks such as Tokyo Electronics have a special advantage: there are no chip manufacturing giants in Japan.

Tomohiro Katayama, senior analyst at Sumitomo Mitsui Trust Asset Management, said, “Unlike the US, which has Nvidia and other tech giants, capital for generative artificial intelligence-related fields often flows into Japanese semiconductor equipment stocks.”

Goldman Sachs also pointed out that since last fall, foreign capital has continued to pour into the Japanese stock market at an accelerated pace, becoming the main driving force for the rise in Japanese stocks. However, the concentration of foreign capital in large-cap stocks and semiconductor stocks is particularly high, making Tokyo Electronics the first choice for foreign investors.

Humanity: A major breakthrough in our own technology

The so-called “human peace” is Tokyo Electronics Corporation's own technological breakthrough. In June of last year, Tokyo Electronics announced that it had successfully achieved a technological breakthrough and developed a new etching device capable of producing 400-layer 3D NAND flash memory. The device can complete high aspect ratio etching at a depth of 10 microns in as little as 33 minutes, which is much shorter than previous technology.

Previously, the 3D NAND flash etching equipment market was mainly controlled by the American Fanlin Group, but Tokyo Electronics' technological breakthrough may reverse the share of the two companies in the 3D NAND etching equipment market.

Kazuyoshi Saito, analyst at iWaicosmo Securities, said: “The new technology will significantly improve customer efficiency. Tokyo Electronics is likely to occupy the entire market for NAND through-hole etching equipment in the future.”

Tokyo Electronics estimates that this technology could bring the company an additional 300 billion yen (about 14.3 billion yuan) of revenue in 2027. In February of this year, the company revealed that the device is expected to be shipped next year.

Thanks to a combination of these three factors, Tokyo Electronics' stock price far outperformed its peers in the past year, and now the company's market capitalization has surpassed Sony to become the third-largest company in Japan.

Although the company's price-earnings ratio has now risen more than 50 times to the highest level in ten years, Jefferies Japan analyst Masahiro Nakanomyo still said that compared to his peers in the industry, “we still can't say that it is seriously overvalued.”

Editor/Somer