After speaking with a reporter from Bloomberg who indicated V-Technology’s stock rose over 180% last year, I was curious about how all the equipment stocks did in 2016. So, I put together Table 1 below, which shows the end of the month stock price throughout 2016 relative to 12/30/15. As shown, V-Technology did indeed have the best stock performance in 2016, up 185%. Second, was TES, up 156%, AP Systems up 130%, Coherent up 107% and Applied Materials up 70%. The average equipment stock rose 58%, impressive indeed. Most of the growth occurred from May when supply got tight and prices started rising. Tight supply/demand in most display markets and demand for capital intensive flexible OLED fabs boosted the capital spending outlook for 2017, 2018 and 2019. A rising tide floats all boats explains the 58% growth, but why are some companies outperforming and some companies underperforming. First, let’s look at the winners.
The winners should be companies who are seeing increased adoption for their process step, are gaining significant share or are expected to in the near future.
V-Technology’s trailing 4-quarter revenues are up 93% vs. the prior 4-quarter period. It has found a successful niche as the photo tool of choice for the photo alignment process. It also developed a high resolution (2um) system for the TFT backplane market for 6G LTPS fabs using its micro lens array approach which likely has shorter lead times and is less costly than more expensive systems from Nikon and Canon. It also continues to produce color filter exposure systems and inspection, repair and measurement systems. However, it has also developed products for the OLED and LTPS/oxide markets that could further accelerate its growth. According to the recent Bloomberg interview, V-Tech spent 5 years developing fine hybrid masks for use in vertical evaporation systems. The V-Tech. President, Shigeto Sugimoto, claims that if adopted these masks could bring in sales of as much as $441M, larger than its previous year’s revenues. The benefits of the mask include being thinner, lighter, less sag, ability to achieve smaller patterns (~5um vs. ~20um) and pattern pitch (2um vs. 5um) and higher pixels per inch (~700 vs. 570) than conventional masks. The resolution benefits will be important for VR/AR and as mobile phones continue to go higher in resolution. However, today’s evaporation systems use horizontal masks for mobile applications and it will require an equipment maker to develop a new system. There are rumors of certain companies working on this, and given the mask availability, it is even more likely now. V-Technology has also developed a partial laser annealing silicon (PLAS) system which offers oxide-like mobility’s of around 30cm2/Vs, but should be lower in cost and higher in yield than oxide TFTs. Multiple lasers are exposed through a mask over the targeted regions, selectively annealing the channel region giving better performance. The improved performance can be achieved without changing the TFT process flow, does not require an etch stop process like most oxide processes, keeps the mask count at 4-5 and does not have issues with photo stability like current oxide processes. By changing the number of laser shots or exposures, it can control the energy density and electron mobility. It can also be used in LTPS TFTs, which must often adopt more masks through a top gate TFT design with a lightly doped drain to reduce off leakage current. If this method is employed, V-Technology claims it can minimize off leakage concerns and enable bottom gate LTPS TFT devices with fewer masks. Bloomberg pointed out that a US hedge fund, Renaissance Technologies, took a $28M stake in the company and V-Tech now has a market cap of $690M. If either the Fine Hybrid Masks or Partial Laser Annealing Silicon system gains acceptance, its market cap is likely to continue to surge producing an excellent return for Renaissance and other investors.
Also enjoying rapid growth was Korea’s TES. TES saw its revenues bottom out in Q4’15 at just $8M. However, it has rebounded since, averaging $35M per quarter in 2016. It produces an atomic layer deposition tool for OLED thin film encapsulation, but the majority of its revenues are from its semiconductor deposition and etch tools.
AP Systems and Coherent are big beneficiaries of the rapid growth in LTPS TFTs and OLEDs and its stock prices are up 130% and 107% respectively. Coherent produces the laser and optical subsystems found in excimer laser annealing (ELA) systems produced by AP Systems and others that are used to convert a-Si backplanes to LTPS backplanes for use in LTPS LCDs and LTPS OLEDs. LTPS backplanes dominate the smartphone market and are moving to tablets and notebooks as well. With LTPS capacity rapidly growing as panel suppliers replace their LCD capacity with OLEDs, these two companies are major beneficiaries. In addition, for flexible OLEDs, a laser lift off step is required and these two companies have developed products for that step as well. AP Systems also produces glass encapsulation equipment for OLEDs and one drop fill equipment for LCDs. In addition, it produces rapid thermal process and bump sputter packaging equipment for semiconductor fabs. Its revenues are only up 3% over the past 4 quarters vs. the previous 4 quarters, but investors are expecting to see rapid growth in revenues and profits in 2017 on ELA installations in Korea. Coherent has enjoyed 7% growth in revenues over the past 4 quarters to $857M vs. the previous 4 quarters of $802M, but its backlog has more than doubled over this period to $890M indicative of strong revenue growth to come. Its FPD backlog alone is up 282% to $382M. Coherent supplies lasers to numerous different verticals with microelectronics only accounting for 58% of revenues.
Applied Materials also beat the average, up 70%. It is seeing strong growth in both semiconductors, where it is the leading equipment supplier, and in displays. In its fiscal Q4’16 ending on October 30th, its semiconductor revenues were up 42% Y/Y while its display revenues were up 92% Y/Y. Its backlog stood at over $4.5B with over $1.5B in displays. On the display side, AMAT is benefitting from the trend toward flexible OLEDs, which expand AMAT’s TAM due to additional CVD steps in the backplane and in the OLED frontplane for thin film encapsulation. It has also introduced a new eBeam review tool, which has gained rapid acceptance. AMAT is benefitting from strong investment in both semiconductors and displays and earned record operating income and margins in fiscal Q4’16. We discuss the outlook for its fiscal Q1’17 earnings in the latest issue of The Display Supply Chain Monitor.
The biggest loser was Canon whose stock price fell 10% in 2016 and Nikon and ULVAC whose stock prices rose just 12% and 4% respectively. These companies are more diversified and less able to reflect the rapid growth in displays on their overall growth. Canon has benefited from its subsidiary Tokki who is the leader in OLED evaporation systems. Canon has reported that its Industrial Equipment Group, which includes Tokki, is expected to see 62% growth in revenues to $1.27B in 2016. However, Canon’s FPD litho business is losing share, only growing from 34 systems in 2015 to 38 systems in 2016. Nikon’s FPD litho business, on the other hand, is expected to double from 46 units in fiscal 2016 ending in March 2016 to 92 units in fiscal 2017 ending in March 2017. Nikon’s systems have been better suited to the higher resolution (1.5um) requirements for smaller substrate LTPS systems at 5.5G and 6G. In fact, Nikon’s 6G and smaller tool shipments from Q1’16 – Q3’16 are outpacing its 7G+ shipments by nearly a 6:1 margin. However, Canon has recently developed a new higher resolution lithography system for smaller substrates and is rumored to have won significant business with Samsung due to bundling the litho tools with the Tokki evaporation systems. With Tokki having limited capacity for its evaporation tools, Canon has a lot of leverage which should result in more exposure tool sales to Samsung. So, 2017 should be a very good year for Canon’s FPD equipment business. However, it still does not have a 10.5G litho system and will be missing a big opportunity if it doesn’t quickly come to market with a 10.5G litho tool. Its bigger problem is that office products and imaging systems account for 85% of its revenues and declined 20% and 18% in yen Y/Y last quarter. It recently reduced its 2016 outlook by 4.5%, implying a 12% Y/Y decline. Nikon is also having some challenges despite rapid growth in lithography. It recently lowered its revenue outlook from 820B to 800B yen. It also lowered its net income forecast by 6% or 12B yen to 18.2B yen. FPD litho equipment are now expected to account for 92% of its operating income despite account for less than 25% of its revenues. Like Canon, it is suffering from weakness in digital camera sales and is also losing money in semiconductor lithography due to high R&D costs and disappointing sales of its ArF immersion scanner business. It has undergone a significant company restructuring effort to improve growth.
ULVAC only experienced 4% stock price growth in 2016. Its trailing 4-quarter revenues were up 8% over the previous period. However, it is only forecasting 1% revenue and operating income growth for the fiscal year ending June 2017, making it less interesting to investors. FPD equipment accounts for 40% - 45% of ULVAC’s revenues with semiconductor equipment, components, industrial equipment and materials accounting for the remainder. FPD equipment is its largest category and returned to Q/Q growth in $US in Q3’16 after being down in Q1’16 and Q2’16. ULVAC leads the PVD category but has a strong competitor in Applied Materials. In addition, the PVD market does not benefit to the extent of other markets from the rapid growth in LTPS and OLEDs.
With FPD equipment spending expected to generate new records in 2017 and 2018, we expect to see equipment supplier stock prices continue to outperform.
For more data and insight on all FPD equipment producers as well as publicly traded companies in the display supply chain including analysis and comparisons across all financials parameters, please see our Quarterly Display Supply Chain Financial Health Report.
Table 1: 2016 FPD Equipment Stock Price Growth
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