Semiconductor And Photonics Expansion Propels Growth As Advanced Packaging Drives Margins Higher

Key Takeaways

• Strong growth in semiconductor and photonics sectors is driving revenue diversification and tapping into high-growth markets.
  
• Strategic emphasis on advanced packaging and factory expansion is poised to enhance competitive advantages and future earnings growth.
  
• Low capital expenditure sentiment and potential revenue declines in key markets, coupled with debt and inventory challenges, may threaten Chroma ATE's financial stability.

Catalysts

Designs, assembles, manufactures, sells, repairs, and maintains software/hardware for computers and peripherals, computerized automatic test systems, electronic test instruments, signal generators, power supplies, and telecom power supplies in Taiwan, China, the United States, and internationally.

• Chroma's semiconductor and photonics sectors are seeing strong growth, with semiconductor sales expected to surpass power business sales for the first time. This shift is likely to drive revenue through diversification and tapping into high-growth markets like semiconductors.
  
• The introduction of metrology equipment, already qualified by a major foundry customer, suggests a new revenue stream. This new metrology business is expected to contribute high single-digit growth to revenue in 2023, with potential for accelerated earnings growth as orders continue to increase.
  
• Increased order volume from major HPC customers for system-level testers (SLT) indicates continued strong demand through the fourth quarter and into the next year, supporting consistent revenue streams and enhanced profitability.
  
• Chroma's strategy to capitalize on advanced packaging needs, such as for SLT and CoWoS markets, provides a competitive advantage, potentially improving net margins as these sectors typically offer higher margins due to technological differentiation.
  
• The company's capital investment in Phase 2 factory expansion, expected to complete by 2026, positions Chroma for long-term growth, enhancing total assets and potentially driving future earnings growth as production capacity scales with demand.

Chroma ATE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chroma ATE's revenue will grow by 17.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.3% today to 29.3% in 3 years time.
• Analysts expect earnings to reach NT$9.7 billion (and earnings per share of NT$23.71) by about December 2027, up from NT$4.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.9x on those 2027 earnings, down from 38.1x today. This future PE is lower than the current PE for the TW Electronic industry at 26.2x.
• Analysts expect the number of shares outstanding to decline by 1.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.34%, as per the Simply Wall St company report.

Chroma ATE Future Earnings Per Share Growth

Risks

• The low capital expenditure sentiment in the EV and ESS markets could negatively impact future revenue growth, as these segments have been traditionally significant contributors to Chroma's sales.
  
• A potential decline in power-related business revenue, with predictions of decreased sales in Q4 and a 22% year-over-year decline for the first three quarters, could affect overall profitability and market positioning.
  
• Increased long-term debt due to capital expenses for factory expansions raises concerns about the impact on net earnings and financial leverage.
  
• The company's high inventory turnover days, currently over six months, may lead to inefficiencies or potential write-downs, affecting both revenue and net margins.
  
• Heavy reliance on major customers (e.g., HPC) for semiconductor sector growth could pose risks if demand from these customers declines or shifts, impacting future earnings stability.

Valuation

• The analysts have a consensus price target of NT$451.83 for Chroma ATE based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$500.0, and the most bearish reporting a price target of just NT$322.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be NT$33.1 billion, earnings will come to NT$9.7 billion, and it would be trading on a PE ratio of 22.9x, assuming you use a discount rate of 6.3%.
• Given the current share price of NT$412.0, the analyst's price target of NT$451.83 is 8.8% higher. The relatively low difference between the current share price and the analyst consensus 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.