Why did Pacific Securities, AMS, which is in the same line as Asma, collapse?

Listed on the Hong Kong Stock Exchange, ASM Pacific and ASML in the Netherlands are closely related brothers in the semiconductor industry, with both backed by the influential figure Arthur del Prado.

Both ASM Pacific and ASML specialize in selling semiconductor equipment, but there is a significant gap between them in terms of market value and competitiveness. ASML is the only company in the world that can produce extreme ultraviolet lithography machines, holding a monopoly on global market share. However, ASM Pacific lacks strong customer dependency.

However, with the AI wave sweeping through, the sentiment of "the risk of underinvestment is far greater than the risk of overinvestment" has spread throughout the entire semiconductor industry chain, leading to panic buying of related equipment becoming the market mainstream. As a major equipment supplier, it is not difficult to understand the earlier rise in ASM Pacific's stock price.

However, the market immediately dealt ASM Pacific a blow as its performance failed to meet expectations, leading to a 34% plunge within two days after the 2Q24 earnings conference.

Behind the sharp rise and fall lies the fact that ASM Pacific has never truly grasped competitiveness, specifically in optimizing its product revenue structure.

1. Beneficiaries of Advanced Packaging

Unlike ASML, which mainly sells one type of equipment - lithography machines, Arthur del Prado has shaped ASM Pacific to be too comprehensive.

In 1974, Arthur acquired a controlling stake in Fico Toolings and renamed it ASM Fico, the predecessor of ASM Pacific today. After years of business accumulation, ASM Pacific has grown into the world's largest supplier of back-end equipment.

With Moore's Law gradually slowing down, advanced packaging has become the new main force in creating additional value, taking over from advanced processes. Among them, wire bonding machines are one of the most crucial and core devices in the semiconductor backend packaging process.

As a global leader in semiconductor solutions, ASM Pacific offers a comprehensive range of wire bonding machines, including wire bonders, flip chip bonders (FC), thermo compression bonders (TCB), and hybrid bonders (HB), meeting the needs of downstream customers for both traditional and advanced packaging.

TCB and HB are both advanced packaging equipment, with TCB being the most favored by the market, seen as a long-term growth driver for the company.

TCB is a bonding technology that combines two metal layers through heating and pressure. Currently, the company has supplied 350 TCB machines to major semiconductor manufacturers worldwide and aims to maintain TCB shipments from 2022 to 2024 equal to the guidance from 2012 to 2021 From the perspective of industry demand, TCB is favored because of the explosive demand for HBM (High Bandwidth Memory) in data centers. HBM is the strongest auxiliary for GPUs, enabling high bandwidth and capacity while saving chip area and power consumption. However, the packaging difficulty of HBM is much higher than traditional DRAM, requiring advanced packaging, especially TCB devices, to complete.

The technical advantage of TCB in packaging thinner and more chips has made it a dominant player in the packaging market for the past few decades. This interconnection technology is already very mature and still evolving.

The reason for this development is that major chip manufacturers such as TSMC, Intel, Samsung, SK Hynix, Micron, and UMC are actively preparing for the generative AI boom, expanding capital expenditures. ASM Pacific, as an equipment supplier, naturally benefits from this trend.

More importantly, the current HBM is in extreme shortage. SK Hynix has stated that most of its HBM for 2024 and 2025 has already been booked; Micron made similar comments in March of this year. SK Hynix currently controls about 46%-49% of the HBM market share, while Micron's share is between 4%-6%. This means that over 50% of the total supply of HBM3/HBM3E in the next few quarters has already been sold out.

Benefiting from ASM Pacific's TCB equipment entering mass production over a decade ago, the company's greatest competitive advantage in the market's urgent demand is the ability to provide a stable supply and respond to sudden surges in demand.

This logic has also led to the earlier surge in ASM Pacific's stock price. However, the latest performance immediately dealt a heavy blow to the market. In the first half of this year, ASM Pacific's performance was very bleak, with both revenue and profits declining, leading to a sharp drop in stock price

Under the demand for AI and high computing power, semiconductor equipment benefits from the logic of rising stock prices due to downstream expansion. However, blame falls on ASM Pacific being too comprehensive in its business. Despite having growth potential in the advanced packaging market, the drag from another traditional business is too significant, leading to the company's revenue structure not being optimized to date.

II. Structural Issues with Revenue

ASM Pacific has two major businesses, semiconductor solutions and surface mount technology (SMT). One is still in the growth stage, while the other has entered the mature stage.

The SMT business, which accounts for 57% of ASM Pacific's revenue, has entered a period of meager profits as the profit from electronic product assembly declines. This part of the business is struggling to drive high-speed growth for the company. In Q2 of this year, driven by advanced packaging solutions, semiconductor business orders increased by 12% month-on-month; however, dragged down by SMT, overall orders decreased by 2.4%.

As for the advanced packaging business that can help the company achieve high-speed growth, it is not without issues. In 2023, the advanced packaging solutions accounted for 22% of ASM Pacific's revenue, approximately USD 410 million (HKD 3.1 billion), with a global market share of 24% in advanced packaging equipment. The company expects the addressable market size for advanced packaging equipment to gradually expand from approximately USD 1.7 billion in 2024 to USD 3.3 billion in 2028, with a compound annual growth rate of about 18%.

The biggest issue with this promising business is that it is consuming too much of the company's funds.

In 2023, the company incurred a total of HKD 2.05 billion in research and development expenses, of which 61% was spent on the semiconductor business that contributed only 43% of revenue. It is further speculated that most of this R&D expense was allocated to advanced packaging, meaning about half of the R&D expenses were spent on a business contributing only 24% of revenue.

Main business dragging behind, with high growth expenses, which largely hinders ASM Pacific from releasing profits.

Historical data shows that the company's profit peak occurs roughly every five years, but with the surge in AI and high computational power demand in recent years, this interval has shortened. However, currently ASM Pacific's profits are clearly declining, mainly due to the semiconductor market's slower recovery than expected, while the company also needs to increase R&D investment to upgrade technology to meet market demands.

Of course, for any semiconductor company to gain competitiveness, increasing R&D investment is necessary. However, if R&D expenses increase but products fail to penetrate the market, it is still not enough.

III. Unknown Product Strength

ASML's lithography machines have achieved unparalleled success, while ASM Pacific's TCB has not.

For the vast majority of investors in the market, very few have actually come into contact with semiconductor equipment. We can only use a very simplistic results-oriented approach to judge the quality of a semiconductor company. For example, TSMC manufactures for NVIDIA and Apple, so TSMC is awesome. Whoever can provide equipment to TSMC is also awesome, it's almost the same logic.

In July this year, ASM Pacific provided Micron with a TC bonder dedicated to HBM production, while Samsung Electronics also extended an olive branch by ordering ASM Pacific's next-generation Fluxless TCB equipment. The company's HB equipment also received two orders for 3D packaging in 2023.

ASM Pacific's existing customers are quite prestigious, but still pale in comparison to TSMC. TSMC's CoWoS packaging has several options for bonding equipment in the front and back ends, not necessarily limited to ASM Pacific's TCB. Moreover, as of now, ASM Pacific's TCB is still undergoing validation in TSMC's C2W.

Given TSMC's market position in chip manufacturing, if the product does not pass validation, it will directly indicate that ASM Pacific lacks significant technological advantages in the advanced packaging market.

Furthermore, ASM Pacific's TCB product reputation has never been good. Previously, due to the poor stability of the product, it forced Intel to introduce K&S as a secondary supplier When Micron reached a cooperation agreement, they also did not sign an exclusive agreement. It seems that ASM Pacific's lack of product competitiveness has become an industry consensus.

Furthermore, from the industry trend perspective, Hybrid Bonding (HB) is a more advanced future technology than TCB. Currently, only TSMC provides the required HB technology, while Intel is also pursuing similar functionality, and competitors K&S and Besi are also developing and producing HB. This means that ASM Pacific needs to increase investment to improve the competitiveness of TCB products while also requiring a large amount of funds to accelerate its presence in the HB market.

If the stock price catalyst continues to revolve around the growth in HBM demand and the expansion expectations of related manufacturers, but because the company's product competitiveness is not recognized, leading to the advanced packaging business always failing to optimize the entire revenue structure, then when it comes to disclosure, performance may once again fail to meet expectations, and a sharp decline may begin.

In the long term, if ASM Pacific fails to achieve a market-leading position in its products, earning one year and losing another may become the norm.

IV. Conclusion

In May of this year, global semiconductor industry sales increased by 19.3% year-on-year, achieving year-on-year positive growth for 7 consecutive months. Looking at a month-on-month basis, there was also a 4.1% increase, which was 3 percentage points higher than in April, indicating a slight acceleration in the recovery trend of the semiconductor industry. The market has also begun to consider the allocation value of related sectors such as semiconductor materials, equipment, and testing.

However, in the long term, ASM Pacific's compound annual revenue growth rate over the past decade has been only 3.19%, and advanced packaging currently struggles to help the company break free from the cycle and achieve excess benefits. Compared to ASML's stock price increase of five times in five years, investors in ASM Pacific often experience a roller coaster market.

Now, many experts predict that the semiconductor industry will recover in 2024, coupled with the continued high demand for computing power in the AI field, which may drive the industry's next multi-year upturn. However, even in an upward cycle, the global chip market is still lagging behind, with a 12% decline in 2023, and the future chip industry remains a sector with not very impressive annual growth rates (7-8%). Companies that are more targeted in the high computing power field and have stronger technological advantages are more likely to break through valuation limits.

In the end, the extensive business portfolio that management is most proud of is currently the biggest constraint on ASM Pacific's valuation