Legacy Chemicals Will Drag Semiconductor Prospects With Limited Upside

Key Takeaways

• Dependence on legacy chemicals and carbon-intensive products exposes Resonac to declining demand, margin erosion, and heightened regulatory and environmental pressures.
  
• Competitive threats, portfolio transformation challenges, and global supply chain risks threaten revenue growth, margin stability, and the ability to pivot toward higher-growth segments.
  
• Focus on advanced materials and semiconductors, along with restructuring and cost management, positions Resonac for strong long-term growth despite potential legacy segment challenges.

Catalysts

Operates as a chemical company in Japan, China, rest of Asia, and internationally.

• Despite the strong recent performance of the Semiconductor and Electronic Materials segment, Resonac's significant exposure to traditional chemicals and graphite electrodes leaves it vulnerable to rapidly declining global demand for legacy petrochemicals and carbon-intensive products, exacerbated by accelerating decarbonization policies and stricter environmental regulations; this is likely to lead to persistent revenue decline and margin erosion in these older business lines over the long term.
  
• Growing geopolitical tensions and mounting global supply chain fragmentation pose major risks to Resonac's cross-border semiconductor and battery material sales, particularly if technology transfer restrictions or tariffs intensify between leading economies; this could create substantial earnings volatility and undermine revenue growth from key international markets.
  
• The slow pace and execution risk of business portfolio transformation, highlighted by divestitures and partial spin-offs amid underperformance in the Chemicals segment, suggest that Resonac may struggle to sustainably shift away from commoditized, low-growth operations, trapping the company in structurally lower margins and limiting long-term earnings growth.
  
• Fierce innovation and investment by global competitors, especially in South Korea, China, and the US, threatens Resonac's ability to maintain its competitive advantage in advanced materials; failure to keep up in R&D or adapt quickly enough could result in lost market share and compression of net profit margins in the company's most promising segments.
  
• Elevated leverage, recently increased by large debt repayments and restructuring costs, raises the risk that higher interest rates or tightening credit conditions will constrain Resonac's ability to reinvest for future growth, ultimately depressing net income and undermining shareholder returns in the coming years.

Resonac Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Resonac Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Resonac Holdings's revenue will decrease by 5.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.6% today to 5.8% in 3 years time.
• The bearish analysts expect earnings to reach ¥66.8 billion (and earnings per share of ¥369.61) by about June 2028, up from ¥35.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, down from 17.0x today. This future PE is greater than the current PE for the JP Chemicals industry at 11.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.75%, as per the Simply Wall St company report.

Resonac Holdings Future Earnings Per Share Growth

Risks

• Strong year-on-year growth in the Semiconductor and Electronic Materials segment, driven by structural demand from data centers, AI, and advanced computing, could support sustained revenue and profit expansion even if legacy segments struggle.
  
• Expansion of EBITDA margin, especially in Semiconductor and Electronic Materials (rising from 18.9 percent to 27.1 percent), suggests significant improvement in operating efficiency and potential for higher long-term earnings growth.
  
• Ongoing restructuring and effective cost management, such as segment consolidation and the potential spin-off of low-margin businesses like Crasus Chemical, may streamline the business and boost return on invested capital, aiding future net profit margins.
  
• Positive secular demand trends for advanced materials, used in EV batteries and high-performance electronics, align with Resonac's strategic focus areas and could drive robust topline revenue growth over the next decade.
  
• Recovery and increased sales volumes in core specialty areas, combined with operational improvements and global expansion initiatives, present long-term upside potential for both revenue and overall earnings.

Valuation

• The assumed bearish price target for Resonac Holdings is ¥3300.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Resonac Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥5760.0, and the most bearish reporting a price target of just ¥3300.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥1161.2 billion, earnings will come to ¥66.8 billion, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of ¥3349.0, the bearish analyst price target of ¥3300.0 is 1.5% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.