kulicke and soffa industries (klic – long)€¦ · • gold-to-copper transition o gold prices...
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M c I n t i r e I n v e s t m e n t I n s t i t u t e 1
MCINTIRE INVESTMENT INSTITUTE AT THE UNIVERSITY OF VIRGINIA
Prepared by Ryan Rechkemmer | 5 September 2013
Kulicke and Soffa Industries (KLIC – Long)
M c I n t i r e I n v e s t m e n t I n s t i t u t e
KLIC Supports the Global Semiconductor Supply Chain
2
End Product
Assembly Equipment
Intermediate Product
M c I n t i r e I n v e s t m e n t I n s t i t u t e
KLIC is the Established Leader in Wire Bonding
3
Dominant Market Position
History of Success
Low Cost Advantage
Complementary Product Offering
Global Presence
Technological Asymmetry
M c I n t i r e I n v e s t m e n t I n s t i t u t e
KLIC Has a History of Success
4
Fred Kulicke and Al Soffa form a partnership.
KLIC builds world’s first wire bonder.
KLIC makes first automatic wire bonder (K&S Model 1412).
KLIC introduces world's fastest, finest pitch wire bonders (K&S Models 8028S and 8028PPS).
KLIC is among the first companies to list its shares on the NASDAQ exchange.
KLIC launches the Power Series, a new generation of semiconductor
assembly equipment.
KLIC plans prototyping of a new advanced packaging bonder.
1951 1956
1971 1972
2000
2013 2008
M c I n t i r e I n v e s t m e n t I n s t i t u t e
KLIC Offers a Complete Array of Assembly Products
5
Ball Bonders
Wedge Bonders
Manual Wire Bonders
Wafer-Level Bonders
Capillaries
Dicing Blades
Service
Software
Approximately 90% of KLIC’s average revenue is attributable
to the sale of equipment; 10% to expendable tools.
M c I n t i r e I n v e s t m e n t I n s t i t u t e
KLIC Possesses an Asymmetrical Technological Advantage
6
KLIC brings highly-demanded assembly equipment to market faster than its competitors.
KLIC’s core competencies … enable best-in-class capabilities … and align with key customer considerations.
High Speed Motion Vision System Ultrasonics Packaging Development Material Handling Software
Package-on-Package Stacked Die
Ultra Low Loop Low-K Bonding
Throughput Accuracy
Process Robustness Customization
KLIC is developing an advanced packaging thermo-compression bonder.
100 KLIC engineers are working on the project. KLIC has now developed process modules that are working according to specifications.
KLIC will produce an alpha version around
December 2013.
New bonder may be compatible with
through-silicon vias and 2.5D interposers.
M c I n t i r e I n v e s t m e n t I n s t i t u t e
KLIC Extends a Global Reach
7
• KLIC is incorporated in Pennsylvania. • In 2010, KLIC relocated its corporate HQ to Singapore.
o The move co-locates KLIC’s major manufacturing, R&D, and operating functions with its supply chain and customers, since 88% of KLIC’s sales are made in Asia.
o At the same time, KLIC avoids paying US corporate income taxes on the vast majority of its earnings by retaining cash outside the US.
R&D Center Manufacturing Plant Corporate HQ
China ü ü
Israel ü ü
Singapore ü ü ü
Switzerland ü
US ü
M c I n t i r e I n v e s t m e n t I n s t i t u t e
KLIC Maintains a Low Cost, Lean Manufacturing Strategy
8
• KLIC manages cyclical demand for its equipment through a flexible labor force.
• KLIC uses an outsourcing model for much of its equipment subassembly. o Supplier deliveries are tied directly to
KLIC factories’ daily build rate. o KLIC therefore has low capital
expenditure requirements and retains less inventory.
“We built through customer order. From my perspective, I'd rather have a direct labor standing there doing nothing and not have that inventory in-house.”
– Alan Schindler, KLIC SVP of Global Operations (KLIC Analyst and Investor Day Conference, March 19, 2013)
198
166
136
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0 100 200
Shinkawa
BE Semiconductor
ASM Pacific
KLIC
*Source: Canaccord Genuity, March 5, 2013; FactSet Estimates
Days Sales Inventory* (CY2012)
M c I n t i r e I n v e s t m e n t I n s t i t u t e
KLIC Is the Automatic Wire Bonder Market Share Leader
9
KLIC has 90%+ market share specifically in copper-capable wire bonders.
0%
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30%
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50%
60%
70%
80%
KLIC
ASM Pacific
BE Semiconductor
Shinkawa
Other
*Source: VLSI Research, December 2012
M c I n t i r e I n v e s t m e n t I n s t i t u t e
KLIC is a Compelling Long
10
Perceived technological maturity Lack of investor recognition Fear of capital misallocation
KLIC is severely undervalued due to
Upside catalysts for KLIC include Sustained free cash flow generation Shareholder-friendly corporate actions
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Wire Bonding Market Trends Remain Favorable
11
KLIC’s customers buy new equipment due to: • Typical 8-12 year replacement cycle • Significant cost savings
o Upgrade to latest-generation wire bonder can increase gross margins by 0.5-1.0 percentage points.
• Gold-to-copper transition o Gold prices above $1000/oz.
provide significant motivation to convert to copper-capable wire bonders.
o Only 35% of all wire bonders are copper-capable, which is half of 70% market potential.
• Technological factors o Package-on-Package o Stacked Die o Ultra Low Loop o Low-K Bonding o Node Shrink
The wire bonder equipment market is forecast to represent an average size of $970M over the next 5 years.*
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KLIC M
arket S
hare
Market S
ize ($M)
KLIC Other KLIC Market Share
*Source: VLSI Research, June 2013
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Wire Bonding Is Still Competitive with Flip Chip
12
Cost is only one factor. Each technology is best suited for
particular applications.
1,046 1,200
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2012 2016E
Market S
ize* ($
M)
Wire Bonding Flip Chip
*Source: VLSI Research, June 2013
Wire Bonding Flip Chip
Description
Connects wires between bond pads on die and substrate
pads on package
Attaches die to package via
conductive bumps on die surface
More economical ü
Robust process flow ü
Easier to inspect product ü
Shorter electrical connections ü
Smaller surface area and package ü
M c I n t i r e I n v e s t m e n t I n s t i t u t e
KLIC Lacks Recognition Among Investors
13
KLIC’s trading volume is too illiquid.
KLIC’s low market capitalization precludes most funds from owning its shares.
Only 3 analysts cover KLIC.
KLIC has only 337 shareholders of record (as of November 9, 2012).
The technology sector is dominated by growth investors.
KLIC’s business is obscure and complicated.
KLIC is the only publicly-traded domestic semiconductor assembly equipment company.
M c I n t i r e I n v e s t m e n t I n s t i t u t e
KLIC is Attractively Valued Relative to Earnings and Cash
14
KLIC sports low valuation multiples: • 0.59 EV/Sales (CY 2013) • 4.63 EV/EBITDA (CY 2013)
o Compares to an average estimated EV/EBITDA of 9.79 for KLIC’s peer group (ASMPT, BESI, Disco Corp, Mühlbauer, Shinkawa, Süss MicroTec, and Tokyo Seimitsu)
Sources: KLIC Revenue and EBITDA results and projections based on analyst estimates (Yahoo! Finance, August 14, 2013) and KLIC management’s suggested income statement model (recent investor conference call). Peer group metric is estimate by Reuters and Morgan Stanley (BESI Analyst Presentation, June 13, 2013)
KLIC has a substantial net cash position: • $508.5M in cash
o Represents 61.1% of KLIC’s $832.6M market capitalization
o $359.6M in cash net of working capital (A/R + Inv. – A/P)
• no debt
M c I n t i r e I n v e s t m e n t I n s t i t u t e
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EV/EBITDA
P/E P/B EV/Sales
KLIC is Priced for Secular Decline
15
Company EV/EBITDA P/E P/B EV/Sales
Kulicke and Soffa Industries (KLIC) 2.70 8.67 1.24 0.52
Dell (DELL) 6.18 17.95 2.24 0.34
Hewle]-‐Packard (HPQ) 4.04 n.m. 1.77 0.48
Lexmark Interna`onal (LXK) 3.69 17.27 1.67 0.60
Qlogic (QLGC) 7.19 18.81 1.35 1.18
Western Digital (WDC) 3.96 15.58 1.82 0.94
Xerox (XRX) 6.52 10.95 1.06 0.88
Median (excluding KLIC) 5.11 17.27 1.72 0.74
RaDo (Low / KLIC) 1.37 1.26 0.85 0.65
RaDo (High / KLIC) 2.66 2.17 1.81 2.27
RaDo (Median / KLIC) 1.89 1.99 1.39 1.42
Implied KLIC Share Price (Low) $ 15.12 $ 13.97 $ 9.45 $ 7.23
Average $ 11.44
Implied KLIC Share Price (High) $ 29.45 $ 24.00 $ 19.98 $ 25.10
Average $ 24.63
Implied KLIC Share Price (Median) $ 20.93 $ 22.03 $ 15.34 $ 15.74
Average $ 18.51
*EBITDA, earnings, and sales are TTM figures; book value is MRQ.
$11.06
$18.51
LXK
QLGC
XRX
XRX
QLGC
DELL
QLGC
DELL
KLIC ($11.06) is trading below the lowest price ($11.44) implied by secularly declining IT hardware peers. The median implied price ($18.51) represents 67.4% upside potential.
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Investors Fear that KLIC will Misallocate Capital
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KLIC is prioritizing diversification and revenue growth, but repurchasing shares represents a far more attractive ROIC at KLIC’s current share price than virtually any potential acquisition.
KLIC’s management team perceives that demand for wire bonding equipment will plateau within the next several years.
KLIC’s management team believes that flip chip and 2.5D/3D wafer-level packaging represent the direction of the future.
KLIC is targeting 30% market share in the advanced packaging market, which is forecast to comprise $400M of equipment TAM in 2016.
KLIC is retaining large amounts of excess cash in order to fund possible technology acquisitions.
“It’s not like we are holding cash in our coffers for like years. So which is why at this time we know that we want to take the company to the next level and we want to keep the flexibility. Nonetheless, we are always looking at the possibility of buying shares back and that is the discussion at almost every board meeting. And the question is at what price point.”
– Bruno Guilmart, KLIC President and CEO (KLIC FY2012Q4 Earnings Call, November 8, 2012)
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Shareholder Activism Can Unlock KLIC’s Value
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Shareholders “have forgotten also that they are owners of a business and not merely owners of a quotation on the stock ticket.”
– Benjamin Graham (1932) The goal of shareholder activism is to fix a principal-agent problem and thereby unlock shareholder value.
Leverage KLIC’s Capital Structure
Pay Dividend and Repurchase Stock
Shop KLIC to Possible Acquirers
• Issue debt to fund dividends and buybacks
• Avoid paying repatriation tax on cash earned and held overseas
• Capitalize on low interest rates for corporate debt
• Commit to returning capital to shareholders
• Match dividend and share repurchase policies of ASMPT and BESI
• Allay fears of capital misallocation
• Front-end equipment makers are the most viable strategic buyers
• KLIC’s free cash flow generation and severe undervaluation may also attract financial buyers
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Antecedents to Shareholder Activism Parallel OfficeMax
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OfficeMax (June 18, 2012) KLIC
Industry / Competition Mature industry, escalating online competition (e.g. Amazon)
Mature industry, marginal shift to advanced packaging technologies
Market Capitalization $398.9M $832.6M
Net Cash Position $231.9M $508.5M
Dividend / Repurchases None None
M&A Strategy Possible “transformative” acquisition
Possible adjacent technology acquisition
Shareholders of Record 11,875 (Feb. 10, 2012) 337 (Nov. 9, 2012)
Controlling Shareholder None None
CEO Tenure 19 months (Since Nov. 2010) 32 months (Since Oct. 2010)
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Risks Could Derail Investment Theses
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Customer Risk Competitive Risk
• 37.3% of net revenue is attributable to 10%+ customers (FY2012)
• Geographic risk: 88% of KLIC’s sales are made in Asia
• 92% of bonders were sold to OSATs (FY2013Q3)
• Consolidation risk
• ASMPT, BESI, and Shinkawa represent major competitors
• Integration of back-end with front-end semiconductor fabrication processes (e.g. wafer-level packaging)
• Possible disruptive new technologies
M c I n t i r e I n v e s t m e n t I n s t i t u t e 20
MII Should Initiate a Long Position in KLIC
Sustained free cash flow generation Shareholder-friendly corporate actions
Undervalued due to Upside catalysts include MII should initiate a 5%
position in KLIC Perceived technological maturity Lack of investor recognition Fear of capital misallocation
Disclosure: I currently own KLIC shares.
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Appendix: KLIC’s Top 10 Customers*
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* Represent KLIC’s top 10 customers in FY2012 excluding distributors
M c I n t i r e I n v e s t m e n t I n s t i t u t e
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KLIC ASM Pacific BE Semiconductor Shinkawa
Appendix: KLIC Has Delivered Strong Gross Margins
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KLIC’s gross margins have almost consistently beat those of its competitors. Gross margins at KLIC’s competitors have generally remained languid.
*ASM Pacific gross margin data is not available before 1Q10.
*
*Source: Deutsche Bank, March 6, 2013; FactSet Estimates
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Appendix: KLIC Has Delivered Strong EBIT Margins
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KLIC’s EBIT margins have typically exceeded the company’s target of 18%. EBIT margins at KLIC’s competitors have either declined or remained negative after 2009.
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KLIC ASM Pacific BE Semiconductor Shinkawa*
* Shinkawa EBIT margin data is not available for 2009 and 2012.
KLIC Target EBIT Margin
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Appendix: KLIC R&D, CapEx, and FCF
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*Demand for semiconductor assembly equipment is highly seasonal. KLIC on average earns 60% of its total fiscal year revenue and 61% of its pre-‐tax opera`ng income in the 2nd and 3rd calendar quarters.
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