Japan’s Semiconductor Revival: Can You Profit? Top 3 Investment Picks! – The Smart Investor
When we think of semiconductors in Asia, our focus typically shifts to three countries – Taiwan, China, and South Korea.
After all, some of the biggest global players are from these countries, notably Taiwan Semiconductor Manufacturing Company (TSMC) (NYSE: TSM), and Samsung Electronics (KRX: 005930).
While China may not boast reputable semiconductor names, it remains one of the most active players in the market, frequently making headlines regarding the ongoing chip wars with the US.
As of March 2024, China accounts for close to 31% of global semiconductor sales.
Additionally, news occasionally surfaces regarding China’s investment in state-backed investment funds to boost its domestic chip sector.
With many headlines focusing on China and Taiwan, it’s easy for investors to miss out on Japan when it comes to the semiconductor sector.
Back in the 1980s, Japan was one of the leaders of the semiconductor industry, a fact which may not be well-known.
In 1986, Japan overtook the US to become the world’s biggest semiconductor supplier, with the top three producers being Japanese companies.
However, during Japan’s “Lost Decade” in the 1990s, which saw a bout of economic stagnation, the US retook leadership in market share.
At the same time, South Korean and Taiwanese manufacturers also entered the market, further reducing Japan’s dominance.
However, Japan is actively staging a comeback in the semiconductor industry.
Firstly, Japan is attracting Taiwanese firms seeking alternatives to China, as firms seek to reduce dependency on China.
At least nine Taiwanese chip firms have set up in Japan or expanded their operations in the country over the past two years.
Most notably, TSMC inaugurated its first plant in Japan, which is set to start operations by the end of 2024.
TSMC also plans to open a second plant, scheduled to commence construction by the end of 2024 and begin operations by the end of 2027.
Japan offers a more stable option for companies seeking to diversify their operations away from China as the chip war between China and the US intensifies.
Secondly, Japan remains actively involved in the sales of semiconductor equipment.
While not as active in chip sales, Japan commands a 30% share of the semiconductor equipment market, just behind the US.
Equipment sales also reached a historical high for the first quarter of fiscal year 2024 (1Q 2024).
Investment opportunities in Japan’s semiconductor sector
For those interested in investing in Japan, here is an investment guide and article you can refer to.
Here are three Japanese companies involved in the semiconductor ecosystem, spread across different segments.
Tokyo Electron (TYO: 8035) is a leading manufacturer of semiconductor production equipment.
It ranks as the fifth largest company in Japan by market capitalisation with its market cap approaching US$100 billion.
Tokyo Electron is renowned for its comprehensive range of wafer processing tools specialising in etching, deposition, cleaning, and lithography.
It is the only manufacturer offering system solutions for all four sequential patterning processes, with almost 100% market share in a specific lithography technology.
Customers include global chipmakers such as TSMC and Intel (NASDAQ: INTC).
Looking at its earnings for fiscal year 2024 (FY2024), ending on 31 March 2024, Tokyo Electron reported ¥1,830.5 billion in revenue, a 17.1% year on year drop.
However, this decline was expected following a global slowdown in the industry last year.
Alongside a drop in sales, net profit also fell by 22.8% year on year, from ¥471.5 billion to ¥363.9 billion.
On a positive note, gross profit margin improved from 44.6% to 45.4%.
Despite the challenges in FY2024, Tokyo Electron performed well for the last quarter of FY2024 (4Q FY2024), as the industry rebounded this calendar year.
Revenue increased by 18% quarter on quarter, while net profit saw a more impressive growth of 23.1% over the same period.
Tokyo Electron generated a positive free cash flow of ¥319.6 billion for FY2024.
Looking ahead, the company has issued strong guidance for FY2025, projecting a 20.2% year on year growth in sales, as well as record high gross profit and margins.
The optimistic outlook is fuelled by the continuous growth of artificial intelligence (AI) servers and a recovery in consumer electronics.
Tokyo Electron plans to sustain its industry lead with substantial capital expenditure, estimated at ¥170 billion for FY2025.
With three new factories in development to accelerate chip-making, the company is maintaining its monopoly as the only manufacturer offering system solutions for all four sequential patterning processes.
However, investors should be cautious as around 44% of Tokyo Electron’s sales come from China, which poses country risk amid the uncertain geopolitical climate.
Initially a chemical company, Shin-Etsu Chemical (TYO: 4063) has a sufficiently diversified business model.
Shin-Etsu Group began its expansion into electronics in the 1960s, producing its first silicon wafer in 2001.
Today, Shin-Etsu possesses the largest market share in silicon wafers, a crucial ingredient for the production of semiconductors.
Apart from silicon wafers, the company also offers other essential materials like raw materials and encapsulation materials that protect semiconductors.
For FY2024, the company recorded revenue of ¥2,414.9 billion, a 14% year on year decline.
Net profit also fell to ¥520.1 billion, down by 27% year on year.
This reduction in top and bottom-line performance was due to weaker export demand from China for its products and a global slowdown in semiconductor sales.
Shin-Etsu is projecting ¥585.5 billion for sales in the first quarter of fiscal year 2025 (1Q FY2025), and ¥190.0 billion in net profit, a 11% increase quarter on quarter.
The company anticipates a recovery in wafer sales starting from April to June, continuing through the end of the fiscal year.
Commitment to the semiconductor industry remains strong, with a planned acquisition of Mimasu Semiconductor (TYO: 8155) for ¥68.0 billion which should be finalised by August 2024.
Renesas Electronics (TYO: 6723) creates innovative semiconductor designs that power a wide array of intelligent devices across automotive, consumer electronics, and information communication technology sectors.
Apart from developing and designing semiconductors, Renesas Electronics has its own manufacturing plant, creating an integrated supply chain within its operations.
Some products you might have that are powered by Renesas chips are your smart G-Shock watches and smart house locks.
For the first quarter of 2024 (1Q 2024), Renesas reported a revenue decline of 2.2% year on year to ¥351.8 billion.
Net profit came in at ¥105.9 billion for a slight 1.6% year on year decrease.
While the Internet of Things (IoT), industrial, and infrastructure segments lagged, the automotive business grew significantly.
Renesas anticipates that the current downturn will bottom out in either the first or second quarter of this year.
The company is expecting steady growth in its data centre and infrastructure side throughout the year, spurred by advances in AI and technology.
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Disclosure: Aw Kai Rui does not own any of the stocks mentioned in this article.
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