Coverage Initiation: Siltronic AG

We are excited to initiate coverage for Siltronic. Siltronic covers the second major step in the electronics value chain as it produces semiconductor silicon wafers, which is the step after silicon production prior to the production of the semiconductors themselves. The company is among the five leading producers with a 13% share of the €13bn market (2022). The top five cover ~90% of the market across all diameters. The company supplies all of the top 20 semiconductor silicon wafer consumers such as Samsung, Intel, SK Hynix, Micron Technology, Qualcom and TSMC.

In terms of global coverage, the semiconductor industry is unevenly distributed especially when it comes to production. Asia including China accounts for >70% of global chip production as 73% of fabs (not necessarily capacity) are located in the region. Interestingly, c.23% of fabs are in China, but only 16% of chips are sourced there. While Chinese competition is mounting, Chinese companies have yet to close the quality gap which existed for many years. Since they are now being forced by US export restrictions to produce their own high-end chips and other semi-conductors, the Sino high-tech companies may not be able to keep up in terms of innovation-driven applications (autonomous driving, virtual reality, artificial intelligence).

The business

Since the creation of Siltronic’s predecessor company (1968), innovation has been key for market success. The company holds the No. 4 position in an oligopolistic €13bn market in which the Top 5 hold a ~90% share. The largest diameter (300mm) has been produced since 2004 and stands for ~65% of the company’s portfolio. By volume, the 300mm wafer market grew by +6.8% per annum in 2010-21 and is anticipated to report a CAGR 2022-25 of +6.0%. The main drivers are data creation and increasing storage in smartphones (cameras, memory), PCs and servers (substitution of HDD by SDD; new server applications) as well as automotive and industrial applications. These different applications demand diversified silicon wafers (e.g. new materials, design rules) for the top 20 silicon wafer consumers.
Besides the highly complex value chain and the strong focus on innovation, production sites and fabs are quite costly. Siltronic’s new one, FabNext in Singapore, will cost ~€2bn for a state-of-the-art and highly cost-efficient factory. The first wafers to customers will leave in early 2024.

In the cross hairs of market consolidation

Siltronic became public in 2015 and Global Wafers (No. 3) finally made a €4.35bn offer in 2021, which was strongly supported by the majority shareholder. In the end, the deal failed due to some inactivity by the German Federal Ministry of Economics. Consequently, Siltronic now has two major investors: Wacker Chemie (30.8%) and Sino-American Silicon Products / Global Wafers (13.8%). We do not see them as stable anchor investors. Still, they will remain as the EU Commission has strong plans to make the EU more independent of semiconductor production in other regions.

Strong preliminary figures

Siltronic recently released preliminary figures reporting +28% sales to €1,805m and EBITDA of €672m (€466m), which included €50m of the Global Wafer break-up fee.
No guidance was given at this point in time, but the company flagged that it had a good start to the year with high demand for 200mm and 300mm wafers, but some customers have become more cautious. Cost inflation should be cushioned by higher sales prices. Capex will remain at the high previous year’s level.

Recommendation

We initiate coverage of Siltronic with an Add recommendation, despite a more challenging 2023, when it comes to higher costs. Global digitalisation will be the driver in the coming years and wafer prices should cover more than production costs as long as not too many new capacities come on stream. We believe the company will be in a position to remain a strong innovator and attract the top 20 customers.

Analyst - Martin Schnee