Slowed Chinese Demand And Rising Costs Will Erode Valuation

Key Takeaways

• Overdependence on Chinese orders and geopolitical risks threaten future revenue stability and visibility.
  
• Rising costs and slowdowns in core semiconductor markets could lead to margin pressure and hinder long-term growth.
  
• Industry leadership in advanced semiconductor equipment and ongoing innovation position SCREEN Holdings for resilient growth, high margins, and diversified revenue amid global digital and AI advances.

Catalysts

Develops, manufactures, sells, and maintains semiconductor production equipment in Japan.

• SCREEN Holdings' heavy reliance on accelerated orders from Chinese customers-driven by fears of future US export controls-has pulled forward demand, risking a sharp slowdown in equipment sales to China and a potential decline in overall revenue growth in the coming years.
  
• The company's outsized exposure to China, where approximately 47% of recent sales originated, makes it highly vulnerable to heightened geopolitical risk, trade barriers, or tightening of export restrictions, threatening both revenue stability and order visibility for future periods.
  
• As the rate of investment in traditional consumer electronics and general-purpose semiconductors slows due to demographic headwinds and market saturation in core end-markets, secular demand drivers for SCREEN Holdings' equipment may weaken, impairing the company's long-term ability to sustain top-line revenue growth.
  
• Rising fixed costs-driven by aggressive R&D spending and capacity expansion to chase near-term opportunity-may not be recoverable if the semiconductor cycle turns or if global wafer fab equipment investment moderates, potentially leading to margin contraction and lower net profitability.
  
• Increasing regulatory scrutiny and environmental requirements in SCREEN Holdings' key manufacturing bases may necessitate costly process upgrades, which could push up operating expenses and further pressure net margins at a time when industry competition is intensifying and product life cycles are shortening.

SCREEN Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on SCREEN Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SCREEN Holdings's revenue will decrease by 0.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 15.6% today to 14.5% in 3 years time.
• The bearish analysts expect earnings to reach ¥91.1 billion (and earnings per share of ¥954.11) by about August 2028, down from ¥97.9 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 13.5x on those 2028 earnings, up from 10.8x today. This future PE is lower than the current PE for the JP Semiconductor industry at 16.1x.
• Analysts expect the number of shares outstanding to decline by 3.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.49%, as per the Simply Wall St company report.

SCREEN Holdings Future Earnings Per Share Growth

Risks

• SCREEN Holdings is benefiting from long-term secular tailwinds including the global acceleration of digital transformation and AI-related investments, which are expected to support strong secular demand for advanced semiconductor equipment and could drive continued revenue growth.
  
• The company's industry-leading position in wafer cleaning equipment-particularly for single wafer and advanced packaging-gives it pricing power and high margins, which could help sustain strong operating profits and net income even during periods of increased competition or cyclical downturns.
  
• Ongoing and increasing investments in global semiconductor fab capacity, especially in China and Taiwan, continue to drive record revenue and profit levels; this underlying industry upcycle could support further upside to SCREEN's top line and operating margin in the coming years.
  
• SCREEN's commitment to ongoing R&D and innovation-especially in advanced packaging, new business areas within SPE, and hydrogen-related manufacturing-positions it to capture market share in emerging applications, potentially leading to diversified revenue streams and more resilient earnings.
  
• The company's strong financial position, characterized by a high equity ratio above 60% and robust operating cash flow, enables SCREEN to invest flexibly in growth initiatives and shareholder returns (such as stable dividends and potential share buybacks), which supports long-term earnings per share and share price appreciation.

Valuation

• The assumed bearish price target for SCREEN Holdings is ¥11300.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of SCREEN 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 ¥17800.0, and the most bearish reporting a price target of just ¥11300.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥628.9 billion, earnings will come to ¥91.1 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 8.5%.
• Given the current share price of ¥11190.0, the bearish analyst price target of ¥11300.0 is 1.0% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts 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.