What's the idea?
- The global semiconductor wafer cleaning equipment market is expected to show a high growth rate in the coming years.
- Analysts believe that the highest growth rate will be observed in the Asian region — the key market for ACM Research.
- ACM Research announced the launch of two new product categories expected to allow the company to double its target market.
- Over the years, ACM Research has shown impressive growth rates. The company is expected to double its revenue in the next two years.
- The stock trades at a discount to the industry average. According to the Wall Street consensus, there is more than 63.79% upside potential.
ACM Research (ACMR) is a supplier of innovative equipment for the global semiconductor industry. The company develops, manufactures, and sells single-wafer wet cleaning equipment that removes random defects from the wafer surface without damaging it.
Why do we like ACM Research Inc Registered Shs -A?
Reason 1. Industry opportunities
Mainland China is ACM Research's main market, accounting for almost all of the company's sales. Some of the products are purchased by subsidiaries of Chinese companies in Korea, Japan, Singapore, and Taiwan. In 2020, China accounted for about 15% of global semiconductor production. The U.S. Semiconductor Industry Association predicts that China's share will increase to 24% by 2030, followed by Taiwan (21%) and South Korea (19%).
The semiconductor industry can be roughly divided into three highly specialized niches: packaging and testing, chip design, and wafer manufacturing. Companies from the latter niche are the main client base of ACM Research.
According to Research and Markets, the global wafer cleaning equipment market was valued at $8.14 billion in 2022 and is expected to reach $12.47 billion by 2027, implying a compound annual growth rate (CAGR) of 8.9% over the forecast period. Analysts at Verified Market Research expect the highest growth rate to be observed in the Asian region in the coming years.
Expected dynamics of the global wafer cleaning equipment market
ACM Research’s management also estimates the target market value at $8 billion. In January, the company reaffirmed its full-year revenue forecast of $365 million - $385 million. Thus, ACMR's market share is about 4.7%. It is worth noting that in 2021, management estimated the figure at around 3%. The fact that ACM Research is taking share from competitors proves the company’s strong competitive positioning and indicates its ability to grow at least in line with the market in the long term.
Reason 2. Active expansion of operations
ACM Research is actively expanding its operations through investments in new facilities. The company is building a research and development center in Lingang, which is expected to be operational in mid-2023. ACMR is close to buying a new headquarter in Zhangjiang, Shanghai, which is also a smart move given the company’s focus on the Chinese market. In addition, the firm is selecting a site to expand its R&D and manufacturing center in South Korea, which is likely to help attract local semiconductor players.
Global semiconductor capital equipment supplier
The company recently announced the launch of two new product categories: the plasma-enhanced chemical vapor deposition (PECVD) tool and Ultra Fn A furnace tool. They are expected to allow ACM Research to reach a part of the semiconductor market not previously served by the company. Management estimates that the new products will double the firm's target market. They are expected to provide a new revenue stream as early as 2023/2024.
Launching new products will double the target market
According to management, the company made progress in terms of geographic diversification as it has entered into cooperation with “a major US semiconductor manufacturer”. In addition, ACM Research is considering cooperation with potential new clients in Europe and other regions.
ACM Research reported the following performance results for the last 12 months (TTM):
- TTM revenue stood at $375.5 million, an increase of 44.5% over 2021.
- Gross profit increased from $114.9 million to $175.3 million. Gross margin rose from 44.23% to 46.68%.
- Operating profit increased from $38.7 million to $61.5 million. Operating margin was 16.38% compared to 14.90% for the year.
- Net income was $43.1 million compared to $37.8 million for the year. Net margin decreased from 14.55% to 11.48%, due to an increase in the effective income tax rate.
Dynamics of the company's financial results
Company margin dynamics
The market is relatively pessimistic about ACM Research’s expected revenue, due to the general performance of the semiconductor industry and stagnant sales of consumer electronics. However, the company’s management's latest guidance suggests that growth is likely to continue. The company's 2022 revenue is forecast at $365 million - $385 million, implying a 44.3% growth in the middle of the forecast range. The 2023 expectations are also positive, with revenue forecasted at $515 million - $585 million, well above the consensus forecast of $425.5 million.
Since 2018, ACM Research has doubled its operating margin. We expect this momentum to continue as the sales and marketing costs, as well as the general and administrative expenses as a percentage of revenue decline steadily. The company becomes more and more efficient.
Operating expenses as a percentage of revenue
ACM Research performance results in Q3 2022 are as follows:
- Revenue rose 99.6% year-over-year, from $67.0 million to $133.7 million.
- Gross profit increased 122.2% YoY: from $29.7 million to $66.0 million. Gross margin was 49.36% compared to 44.33% a year earlier.
- Operating income was $31.6 million compared to $11.8 million a year earlier. Operating margin increased from 17.61% to 23.64%.
- Net income was $21.0 million compared to $10.2 million a year earlier. Net margin increased from 15.22% to 15.71%.
Trends in the company's financial results
Cash from operations (TTM) amounted to -$99.8 million in the latest reporting period, compared to -$40.1 million for the full year. Free cash flow decreased from -$49.8 million to $123.5 million. The deep negative figures are due to the growth of net working capital: ACM Research is forced to quickly increase the balance of inventories and receivables to maintain a high growth rate.
Company cash flow
The company has a strong balance sheet: its total debt stands at $71.8 million, cash equivalents and short-term investments account for $417.0 million, and net debt is negative at -$345.2 million.
Despite high growth rates, ACM Research trades at a discount to the industry average: EV/Sales — 1.42x, EV/EBITDA — 8.05x, P/E — 19.50x, FWD P/E — 14.72x.
The minimum price target set by Jefferies is $7 per share. In turn, The Benchmark Company estimates ACMR at $32 per share. The wide range of estimates is most likely explained by different views of analysts on the US semiconductor exports restrictions. In our opinion, this risk has been more than enough reflected in the current stock price. According to the consensus estimate, the stock’s fair market value is $19 per share, which implies a 63.79% upside potential.
Price targets of investment banks
In October, the US Commerce Department’s Bureau of Industry and Security introduced new restrictions on trade with China, that in particular limit the sales of semiconductor equipment and parts. According to ACM Research, some of its supplies are going to be affected, as the company's solutions currently contain 5% to 10% US components.
ACM Research is notable for its significant revenue concentration. The top three customers account for more than 50% of the company's total sales. The potential loss of a core customer would impact the firm's results and its stock price.
ACM Research operates in a highly competitive market with major players such as Applied Materials, Lam Research, and KLA Corporation. This factor may affect the company's ability to grow organically in the long term.
Although ACM Research is currently experiencing high demand for its solutions, there is a risk of lower demand due to the deteriorating global macroeconomic environment.