ASML: The Crown Jewel that is not immune to the cyclical curse
ASML released its third-quarter earnings report for 2023 before the US stock market opened on October 18, 2023 (as of September 2023). The key points are as follows:
Core data: Basically in line with expectations. ASML achieved a revenue of 6.673 billion euros in the third quarter of 2023, slightly lower than market expectations (6.734 billion euros). Despite a significant increase in shipments from customers in mainland China this quarter, it was not enough to offset the weakening demand from customers in other regions. The company's net profit in the third quarter of 2023 was 1.893 billion euros, a year-on-year increase of 11.2%, slightly exceeding market expectations (1.825 billion euros). The better-than-expected rebound in gross margin supported the profit for this quarter.
Business performance: ArF is the main driving force. System sales revenue remains the company's main source of income, accounting for 80% of the company's revenue. The year-on-year growth in revenue this quarter mainly came from downstream customers' increased demand for ArF. In particular, the revenue share of ArFi has reached 40% in the past two quarters.
Regional revenue performance: Mainland China becomes the largest customer. Under the influence of the semiconductor cycle, demand from customers in other regions around the world has weakened. However, customers in mainland China have expanded production against the trend and achieved strong shipments, reaching a historical high of 46% of revenue share this quarter.
ASML's performance guidance: The expected revenue for the fourth quarter of 2023 is 6.7-7.1 billion US dollars (market expectation: 6.91 billion US dollars) and the gross margin is 50-51% (market expectation: 51.2%). The revenue is expected to rebound slightly, mainly due to the impact of seasonal shipments at the end of the year. The gross margin is expected to decline slightly, but it is basically in line with market expectations.
Overall, ASML's revenue is slightly lower than market expectations, but the better-than-expected performance of gross margin ultimately brings a slight exceedance in profit. From the data perspective, ASML's performance this quarter is basically in line with expectations.
However, after a detailed analysis of the company's financial report, Dolphin Research believes that ASML's performance is not as stable as it appears in the data. The biggest factor that supported the company's performance this quarter was the significant increase in shipments from mainland China. Previously, the sales share from mainland China mostly remained below 25%. However, this quarter it surged to 46%, mainly due to the increased demand for shipments brought about by the expansion of production capacity in mainland China.Dolphin Research believes that ASML benefited mainly from the strong demand for DUV products in mainland China this quarter, but its sustainability remains to be seen. If we exclude the significant impact of the strong demand in mainland China, ASML's revenue and profit will both show a significant decline this quarter. Even the "pearl on the crown" cannot escape the influence of the semiconductor cycle.
Looking at ASML's guidance for the next quarter, both revenue and gross margin are lukewarm. Although the company's PE ratio of 30 times is not high compared to other leading tech companies, the lack of growth highlights or positive outlook in this earnings report makes it difficult to provide upward momentum for the stock price.
Here is Dolphin Research's specific analysis of ASML:
1.Core Data: Basically Meets Expectations
1.1 Revenue: ASML achieved revenue of 6.673 billion euros in Q3 2023, slightly lower than market expectations (6.734 billion euros), with a QoQ decline in quarterly revenue. Despite the strong demand from customers in mainland China this quarter, it was not enough to offset the weakening demand from other regions.
1.2 Gross Profit and Gross Margin: ASML achieved a gross profit of 3.462 billion euros in Q3 2023, a YoY increase of 15.6%. Specifically, the gross margin for this quarter was 51.9%, showing a slight increase QoQ. The demand in China drove the shipment volume and average price of products such as ArFi to increase significantly.
1.3 Operating Expenses: ASML's operating expenses in Q3 2023 were 1.279 billion euros, a YoY increase of 21.3%.
Specifically:
Research and Development Expenses: R&D expenses for this quarter were 0.991 billion euros, a YoY increase of 22%. The R&D expense ratio increased to 19.2%, indicating the company's continued high investment in research and development.
Sales, Management, and Administrative Expenses: Sales and management expenses for this quarter were 0.288 billion euros, a YoY increase of 22%. The sales and management expense ratio remained relatively stable at 4.3%.
1.4 Net Profit: ASML achieved a net profit of 1.893 billion euros in Q3 2023, a YoY increase of 11.2%, slightly exceeding market expectations (1.825 billion euros).Company's performance in this quarter is mainly driven by a significant increase in cargo delivery from mainland Chinese customers.
2. Detailed data breakdown: Strong cargo delivery in mainland China
ASML's business consists of system sales revenue and service revenue, with system sales revenue accounting for nearly 80% and being the company's core source of income.
2.1 Business performance
1) System sales revenue
ASML's system sales revenue in the third quarter of 2023 reached 5.308 billion euros, a year-on-year growth of 24.8%. The growth in system sales business is mainly driven by significant increases in ArFi and ArF Dry, both of which have grown by over 50%. With the increase in cargo delivery from mainland Chinese customers, ArFi now accounts for nearly 50% of the system sales business, and the average selling price has also increased to around 80 million euros.
2) Service revenue
ASML's service revenue in the third quarter of 2023 reached 1.365 billion euros, a year-on-year decline of 10.4%. ASML's service revenue mainly includes equipment maintenance and other projects, and the business revenue remains relatively stable.
2.2 Revenue breakdown by region
Revenue in mainland China has significantly increased this quarter, accounting for over 40% and reaching a historical high. This is mainly due to the increased demand for ArFi and other products from mainland Chinese customers for capacity expansion.
Apart from mainland China, sales performance in other regions has been mediocre, mainly due to the impact of the semiconductor cycle. Customers in other regions have relatively slowed down their cargo delivery pace.
Longbridge Dolphin Research has conducted in-depth research on ASML and related topics.
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On March 16, 2022, we published an article titled "After the Market Crash, Let's Talk About the Legendary Foundry King TSMC".
SMIC In-depth Analysis
On July 16, 2021, we published an article titled "SMIC (Part 2): The Undervalued Chinese 'Core'".
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