Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Equity Capital Markets


Below is the regulatory filing for the APTC Co Ltd (089970 KS) IPO.
Link: https://dart.fss.or.kr/dsaf001/main.do?rcpNo=20180802000306
For more details about the process of this IPO, please jump to the DETAIL section of this insight.
Valuation in IPO bookThe following 4 companies, Applied Materials (AMAT US), Lam Research (LRCX US), Tokyo Electron (8035 JP) and Orbotech (ORBK US), are the valuation peers. No local peer was chosen since APTC is virtually the only local manufacturer in its field. The avg. PER based on these 4 overseas valuation peers' last 12M earnings is 16.3x.



Peer valuation
Applied Materials (AMAT US)
Lam Research (LRCX US)
Tokyo Electron (8035 JP)
Orbotech (ORBK US)


Currency
USD
USD
JPY
USD


Shares outstanding
1,008,047,762
164,045,205
165,210,911
48,506,282


Reference share price
US$46.13
US$173.86
¥18,115
US$62.7


Last 12M earnings
US$3,171mil
US$1,886mil
¥204mil
US$148mil


Fiscal year
Oct
June
Mar
Dec


Last 12M earnings period
2017.05 ~ 2018.04
2017.04 ~ 2018.03
2017.04 ~ 2018.03
2017.04 ~ 2018.03


PER
14.7x
15.1x
14.6x
20.6x


Avg. PER
16.3x

Source: DART

Below shows how the banker arrived at ₩17,834 as APTC's intrinsic price per share. The banker simply annualizes FY1Q18 earnings by multiplying it by 4. This way, they get an EPS of ₩1,069 and apply the above 16.3x PER to arrive at ₩17,834.



APTC Co Ltd (089970 KS) valuation

FY1Q18 earnings
₩6,498mil
A


FY2018 projected full year earnings (simply annualized based on 1Q18 earnings)
₩25,944mil 
B = A × 4


Total shares (including stock options - 611,000 shares)
24,305,595
C


EPS
₩1,069
D = B / C


PER
16.3x
E


Price per share
₩17,834
F = D × E

Source: DART

The banker then comes up with a 25.22 - 33.85% discount. So, the indicative price band is set at ₩11,500 - 13,000.


Indicative price band

Target price per share
₩17,834


Discount
25.22 - 33.85%


Indicative price band
₩11,500 - 13,000

Source: DART

Valuation studyAPTC is a typical pure play tech company which you can easily find in the Korean tech industry scene. It develops an etch system. Currently, it supplies this etch system almost solely for SK Hynix Inc (000660 KS)'s memory chip production. What is an etch system? Its main role is to shape the thin film into a desired patterns using chemicals or gases. It is widely agreed that etching process is one the three most critical processes in semiconductor production. The other two are photolithography process and deposition process. ASML Holding NV (ASML NA) has a near monopoly status in photolithography. As for deposition, Applied Materials and Tokyo Electron have a powerful presence. As for etch, LAM Research and ASML have an unparalleled presence. Korea's two memory chip giants, Samsung Electronics (005930 KS) and SK Hynix, have long been making a lot of efforts to localize some of these critical processes. So far, they have achieved some successes. ASML still maintains a near monopoly status in the field of photolithography; however, as for deposition, Wonik Ips (240810 KS), Tes Co Ltd (095610 KS), Eugene Technology (084370 KS) and Jusung Engineering (036930 KS) have made some successes in localization. In the case of etch, APTC and SEMES (privately-held, Samsung Electronics' subsidiary) are the leading local players.

Dominant players in each of the three most critical processes
Global leaders
Local players


1. Photolithography
ASML (near monopoly) 
None


2. Deposition
Applied Materials, Tokyo Electron

Wonik Ips (240810 KS), Tes Co Ltd (095610 KS), Eugene Technology (084370 KS) and Jusung Engineering (036930 KS)



3. Etch
LAM Research, ASML

APTC Co Ltd (089970 KS) and SEMES (unlisted - Samsung Elec subsidiary)

Source: Sanghyun Park
In the field of etch, we Korea have two leading local players, APTC and SEMES. It's like this. Samsung Electronics has SEMES and SK Hynix has APTC although unlike SamE, SK Hynix has no equity investment. This means both good and bad for APTC. A good thing is APTC has a very reliable client of its main product. But this also means APTC's super heavy dependence on a single client (SK Hynix) may scare a lot of potential investors because it'd be hard to smooth out income fluctuations. In fact, this concern is very clearly shown in the company's sales fluctuation over the years. APTC developed a 200mm etch system many years ago for SK Hynix, but ever since SK Hynix moved onto 300mm, APTC was again pushed into a financially crunch mode to develop a 300mm etch system up until 2016 when it finally succeeded the development of a 300mm etch system. With its new 300mm etch system, APTC has been turning out a decent profit now. Its 1Q18 OPM reached 38.60% and its first quarter sales already reached nearly half of the last year sales.



(₩ mil)
2015

2016
2017
1Q18


Sales
4,400
37,851
41,122
20,289


OP
-1,753
9,390
12,690
7,832


OPM
-39.84%
24.81%
30.86%
38.60%


EBIT
-2,114
9,457
12,807
7,906


EBIT margin
-48.05%
24.98%
31.14%
38.97%

Source: DART

Then, how would this good and bad thing situation be translated into valuation? Well, this depends on two things. First is China's AMEC and second is 3D NAND. What am I talking about? Well, as long as APTC remains good enough (technologically and price wise) for Hynix, there won't be any reason for Hynix to ditch APTC. This is very simple. But in reality, things do not look that simple. It has been locally said and reported that Hynix is still feeling the need to use the etch system made and supplied by China's AMEC which is another low-cost but highly competitive (technologically) etch system producer. Hynix' initial plan was to use both APTC and AMEC. But the main reason why APTC got much more orders lately from Hynix was because Hynix began to worry about possible technology leakage to its memory chip competitors in China through AMEC. That is, trust issue is making Hynix stay away from AMEC for now. But the question is how long this trust issue will last with AMEC. This is where the second factor (3D NAND) comes in. APTC is still mainly about DRAM. As we all know, Hynix' strategic focus is being placed on 3D NAND, and Hynix has favored AMEC over APTC for 3D NAND. APTC recently began to supply an etch system for 3D NAND, but still Hynix is said to be favoring AMEC for 3D NAND. This implies that APTC has a little more work to do to catch up with AMEC technology wise. In other words? Its current situation may not be as good as what its current financial results show.So, many in the local market seem to be thinking that a 16-17x PER multiple is a bit too much. As for this year's earnings, thanks to Hynix' trust issue with AMEC, they seem to be having no problem with the banker's projected ₩25.9bil. But the company's still unstable positioning in Hynix' 3D NAND is a source of great concern which should serve as a valuation discount. So, somewhere around 10-11x seems to be an appropriate number in many local investors' mind. This means we shouldn't be surprised if the price is set at near the floor (₩11,500) or worse.


APTC valuation

FY2018 projected earnings
₩25.9bil




Target PER multiple
Market cap
Price per share


Valuation for each target PER multiple
10.0x
₩259.4bil
₩10,674


11.0x
₩285.4bil
₩11,741


12.0x
₩311.3bil
₩12,809

Source: Sanghyun Park



South Korea

Techwing Inc., manufactures parts for semiconductor testing equipment. The Company's product includes test handlers, Change of Kit (C.O.K) and test interface boards.  The company's main product, test handlers, is core  semiconductor testing equipment.

Jusung Engineering Co., Ltd. manufactures semiconductor, flat panel display, and solar cell production equipment.  The Company produces space divided CVD-ALD thin film machines for semiconductor manufacture; equipment for producing liquid crystal display panels; and equipment for manufacturing crystalline silicon and thin film silicon tandem solar cells.

Seojin System Co., Ltd. manufactures components for communication equipments, such as Remote Radio Head(RRH) and Digital Unit(DU).  The Company also produces semiconductor components and metal cases for hand-held devices.

Hana Micron Inc. designs, develops, manufactures, and sells semiconductor packages for memory and non-memory semiconductor products.  The Company also produces USB flash drive (UFD), a mobile storage devices which can substitute floppy disk drives.

EO Technics Co., Ltd. is a laser-based equipment supplier. The Company develops laser technology and applications used for marking, drilling, trimming and cutting.

ISC Co., Ltd. manufactures semiconductor testing equipments such as test sockets, burn-in sockets, and interposers. Testing equipments are used in the final testing process of semiconductors including DRAM, NAND/NOR Flash Memory, and Graphic Processing Unit(GPU) and are supplied to semiconductor manufacturers  abroad.

Psk Holdings Inc specializes in manufacturing semiconductor fabrication and liquid crystal display (LCD) manufacturing equipment.  The Company's products include dual chamber ashers and microwave ashers used in photo resist stripping and etching and multi-etchers used in LCD processes.

DB Hitek Co., Ltd. manufactures system semiconductor and provides foundry services. The Company's products inculde fabricated wafer and integrated circuits for mobile handsets and flat panel LCDs.

Tokai Carbon Korea Co., Ltd. produces purified graphite products used in semiconductor equipment, and silicon single crystal puller parts.  The Company also produces carbon products used in rubber parts for machineries.

LX Semicon Co., Ltd. designs, develops, and markets mixed-signal semiconductors. The Company utilizes its own algorithm and technologies to enhance the features and capabilities of flat panel displays that are used in electronic devices and mobile handsets. LX Semicon markets its products worldwide.

Taiwan Surface Mounting Technology Corp assembles printed circuit boards (PCBs).

Taiwan Surface Mounting Tech Corp. (6278 TT)

Everlight Electronics Co., Ltd. manufactures and markets optoelectronic components.  The Company's main products are surface mount devices light emitting diodes (LEDs), super bright LED lamps, special purpose LEDs, dot matrix displays, photo transistors, and infrared LEDs.

Himax Technologies, Inc. designs and manufactures integrated circuits.  The Company produces liquid crystal displays (LCD).

Grinm Advanced Materials Co Ltd. develops and manufactures semiconductor materia ls. The Company's products include monocrystalline silicon, germanium,  compound  semiconductor materials, and other related electronic materials. Grinm Advanced Materials also invests in technology development and provides technical  and processing services.

Macronix International Co., Ltd. designs, manufactures, and markets integrated circuits (ICs) as well as memory products.  The Company's products include nonvolatile memory integrated circuits, mask ROM (Read Only Memory), EPROM (Erasable Programmable ROM), and flash memory products.  Macronix also produces logic ICs for audio, clock generators, and graphic application devices.

CHIPBOND Technology Corporation provides chip packaging service for the IC (Integrated Circuit) industry.  The Company manufactures Gold Bump, TCP (Tape Carrier Packaging), Solder Bump, and COG (Chip on Glass), which are applied to the process of packaging.

Shanghai Sinyang Semiconductor Materials Co. Ltd. develops, produces, and provides services for the electronic chemicals used in the semiconductor industry. The company also provides electronic cleaning and electronic plating core technologies. They develops specialized equipment, such as: chemical materials, equipment, and application process etc.

Shanghai Sinyang Smcndctr Mtls (300236 CH)

Sanken Electric Co., Ltd. manufactures and sells discrete semiconductors such as diodes and transistors, and analog integrated circuits.  The Company also manufactures various kinds of adapters and surge/transient protectors.

Silicon Integrated Systems Corp. manufactures and markets chipsets for computers and multimedia products.

Unisem (M) Berhad manufactures semiconductor devices.  The Company provides turnkey solutions to its customers in wafer grinding, packaging and testing of integrated circuits, tape and reel, and dropship services. Unisem also provides packaging and testing wide range of leadframe packages.

Wonik IPS Co., Ltd. manufactures and sells semiconductor processing equipments.  The Company's main businesses include Semiconductor, Display and Solar industries.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Wonik Ips (240810 KS)

APTC (089970): IPO Valuation Study

Below is the regulatory filing for the APTC Co Ltd (089970 KS) IPO. Link: https://dart.fss.or.kr/dsaf001/main.do?rcpNo=20180802000306 For more...

Sanghyun Park

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)