20140910-Maybank_KERPL-Vanguard_Int_l_Semiconductor_Growth___yield,_best_of_both_worlds_20页_668kb

Vanguard International Semiconductor (5347 TT) Summary

Core Information

• Share Price: TWD41.20
• Target Price: TWD68.00 (+65%)
• Market Cap (USD): 2.3B
• Average Daily Trading Volume (USD): 10M
• Location: Taiwan
• Industry: Technology
• Investment Rating: BUY
• New Issue: Yes

Investment Thesis

• Sustainable Profit Growth: VIS is expected to achieve a 20% YoY earnings growth from FY14 to FY16F, driven by new capacity expansion.
• Capacity Expansion: The recent acquisition of Nanya Technology and Sumpro's 200mm fab will increase capacity by 25–30% in FY14–15F and 20–25% in FY16F and beyond.
• ROIC/WACC Valuation: The fair valuation of the core business is TWD55 per share, with net cash per share at TWD13, leading to a target price of TWD68.
• Dividend Yield and FCF: Attractive dividend yield (6–8%) and strong FCF (10%+ FCF yield) are key factors.
• Capital Return: VIS has the potential to return excess cash (up to TWD6–7 per share) to shareholders through capital reduction plans.

Key Drivers of Growth

• Demand for 200mm Capacity: Despite the industry's focus on 300mm wafer expansion, the demand for 200mm capacity remains strong due to the growth in consumer electronics, IOT, and automotive applications.
• Product Mix Optimization: VIS has shifted its product mix towards higher-margin areas such as power management ICs and large panel driver ICs, which are expected to drive profitability.
• Capacity Utilization: VIS has maintained tight capacity utilization (100%) since early 2013, supported by limited 200mm supply and strong end-market demand.
• Stable Industry Dynamics: Favourable demand-supply conditions imply firmer wafer ASP and richer product mix.

Financial Highlights

• Revenue Growth: Revenue is projected to increase from TWD17,163m in FY12A to TWD31,092m in FY16E.
• Profit Growth: Core net profit is expected to grow from TWD2,330m in FY12A to TWD7,824m in FY16E.
• EPS Growth: Core EPS is forecasted to rise from TWD1.43 in FY12A to TWD4.78 in FY16E.
• ROE and ROIC: ROE is expected to expand to 20% from FY14–16F, while ROIC is estimated at 23–25%.
• Dividend Yield: Net dividend yield is projected to increase from 2.3% in FY12A to 8.6% in FY16E.
• Cash Position: Net cash per share is expected to grow from TWD6.91 in FY13 to TWD16.10 in FY16E, representing 40% of market cap by FY16F.

Competitive Position

• Market Share: VIS operates three 200mm fabs with a combined capacity of 140,000 wafers per month, and is expected to increase to 220,000 wafers per month by FY16F.
• Ownership: Majority owned by TSMC (33.3%) and the National Development Fund of Taiwan (16.7%).
• Industry Comparison: VIS stands out with higher returns, dividend yield, and potential growth compared to peers like TSMC, UMC, and SMIC.
• ROIC/WACC Valuation: Core business is valued at 2.6x ROIC/WACC, with a fair price of TWD55 per share.

Risks

• Capacity Conversion: Short-term dip in profitability due to the conversion of Sumpro's capacity from memory to logic.
• End-Market Demand: Weaker-than-expected demand in key sectors could impact growth.
• New Competition: Increased competition in the foundry industry may affect margins and market share.

Valuation and Returns

• Target Price: TWD68.00, based on SOTP and ROIC/WACC.
• Potential Returns: Investors could gain 66% from core business and 43% from cash, totaling 76% upside.
• Fair Valuation: Core business is worth TWD55 per share, with cash valued at TWD13, leading to a total fair price of TWD68.
• P/E and P/BV: Core P/E is expected to decrease from 29.4x in FY12A to 8.8x in FY16E, while P/BV is projected to fall from 3.3x to 1.8x.

Product-Mix Analysis

• Power Management ICs: Accounted for 36% of sales in 2Q14, with a 62% YoY growth. This segment is expected to drive profitability due to "stickiness" and higher margins.
• Display Drivers: Represented 56% of sales in 2Q14, down from 65–70% in 2010/11. The demand for large panel driver ICs is expected to grow significantly due to the popularity of 4K2K TVs.
• General Logic: Offers growth potential due to the rise of IOT, with applications in sensing and communications.
• Smaller Panel Drivers: Less profitable due to higher integration and price erosion, leading to reduced exposure.

Cash Flow Analysis

• Capex: Maintenance capex for current 200mm capacity is around TWD1b annually, while total capex in FY14 is estimated at TWD3.0–3.5b.
• FCF Yield: Expected to be double-digit due to low capex and high margins.
• Capital Return: VIS may return excess cash to shareholders through capital reduction plans, with potential returns of TWD6–7 per share.

Conclusion

VIS is positioned to benefit from the limited supply of 200mm capacity and the rising demand for mainstream technology applications. With strong cash flow, high dividend yield, and the potential for capital return, VIS is a compelling investment. The company's focus on high-margin products and its strategic acquisitions are key to achieving sustainable growth and re-rating.