Valuation: The market rewards high earnings growth; discounted P/E the best way to
value China semis
Our regression analysis of China semis shows that the market values stocks based on
earnings growth; i.e. those stocks with stronger earnings growth enjoy a higher P/E
multiple. We therefore derive our target P/E multiples based on each company’s future
earnings growth. Our investment framework applies a top-down (TAM, SAM) and
bottom-up approach (pricing, units, customers, competitors, products) across six
sub-sectors within China semis.
Discounted P/E captures long-term opportunities: Given China semiconductors are
at an early stage of development — with upside in technology migration, market share
gains, and expanded product lines — we use a discounted P/E as our primary valuation
methodology to better capture their long-term opportunities.
We forecast six years of earnings with growth in the first three years (2020-22E)
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mainly driven by expanding market share within core existing products and growth
in the later three years (2023-25E) mainly driven by technology migration, improved
product mix, additional product lines and increased end market applications.
Our target P/E multiples are derived from each subsector’s correlation (including
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global peers) between earnings growth and P/E. To derive our target prices we apply
this target P/E multiple to 2025E EPS and discount it back to 2022E at the
company’s cost of equity, which differs according to each company’s beta.
For Wingtech, we also add a SOTP using different target P/E multiple for its
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semiconductor and ODM business to reflect its different business structure and
earnings growth.
Ultimately, we believe the market will reward China semis with higher valuation given
their strong earnings growth. The 11 stocks we initiate are currently trading at 0.4x - 4.3x
PEG based on 2021E P/E and 2022-23E average EPS YoY.
Our 11 Buy-rated names that we initiate coverage on in this report:
Have an average target P/E multiple on 2025E EPS of 34x (ranging from
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14-80x). ACMR has the lowest target multiple in the group (14x) as its shares are
domiciled in the US (all other stocks are A-shares). NSIG has the highest target P/E
multiple (80x) as it has the strongest earnings growth (117% YoY in 2025E) as we
expect it to enjoy significant market share gains off a low base and improve its
product mix from technology migration (from 8-inch to 12-inch wafers).
Have an average implied P/E multiple on 2022E EPS of 82x (excluding outlier
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NSIG) ranging from 36-475x, or an implied average 2022E PEG of 1.6x (excluding
NSIG) ranging from 0.7x-5.4x. ACMR has the lowest implied P/E multiple (36x) as
its shares are domiciled in the US (all other stocks are A-shares). NSIG has the
highest implied 2022E P/E (475x) for the reasons described above.
Currently trade at an average 57x 2022E EPS (excluding NSIG) ranging from
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21-381x, or an average 2022E PEG of 1.0x (excluding NSIG), ranging from
0.4x-4.3x. ACMR currently trades at the lowest P/E in the group (21x) as its shares
13 July 2020
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Goldman Sachs