"Ultimate Faith" ASML

Although the increase is not as impressive as "doubling and doubling again" by NVIDIA, the stock price of$ASML(ASML.US) has also doubled steadily from the bottom. This round of growth is driven by the release of demand from new applications such as AI, and as companies like NVIDIA emerge from the trough, the entire semiconductor industry chain is gradually starting to recover.

ASML, as one of the most important companies in the upstream equipment sector of the semiconductor industry, has frequently appeared in public discussions in recent years. With ASML already doubling from the bottom, can the company continue to rise?

Source: Longport, Dolphin Investment Research

After covering and tracking US tech stocks such as Apple, NVIDIA, and TSMC, Dolphin would like to take a look at the higher end of the industry chain - ASML.

ASML has always focused on lithography systems and has gradually grown into a "giant" in the lithography market. In the company's latest financial report, the proportion of EUV revenue has exceeded 50%. Based on the company's situation and the industry, Dolphin estimates that the average price of a single EUV lithography machine is approximately 150-200 million euros, much higher than other types of lithography machines.

ASML, with its technological accumulation, was the first to develop EUV lithography machines. Not only does it lead in EUV lithography technology, but ASML also holds over 80% market share in both ArF DUV and EUV lithography machine markets.

EUV lithography machines are an important part of the current wafer manufacturing process for entering advanced processes. Currently, TSMC, Samsung, and Intel all have urgent order demands, and only ASML has the ability to deliver in the market. This not only ensures the stability of the company's customers and orders but also gives ASML absolute discourse power in the market and industry chain.

This article mainly focuses on ASML's lithography business and industry situation. In the next article, Dolphin will provide specific performance estimates and valuation pricing for the company, giving a specific viewpoint on ASML in the current market. Stay tuned for more updates from Dolphin~

The following is Dolphin's specific analysis of ASML:

I. Disassembling ASML: Focusing on lithography machines for a decade

Benefiting from the boost of the previous semiconductor boom cycle, ASML's quarterly revenue has also doubled in the past few years. In the first quarter of 2023, the company's revenue reached a new high of 6.746 billion euros.

By dissecting ASML, we found that the company's revenue mainly comes from two parts: system sales revenue related to product sales (System) and service revenue related to after-sales and operation and maintenance (Service). From the latest quarterly report, service revenue accounts for about 20%, while system sales revenue is the largest proportion.

Continuing the dissection, we can see that system sales revenue is composed of projects such as EUV, immersion DUV (ArFi), and dry DUV (ArF Dry, KrF), among which EUV and ArFi account for more than 80%.

If we put this proportion into the company's total revenue, EUV and ArFi account for more than 60% of the total revenue. Therefore, EUV and ArFi are the company's largest sources of revenue.

Although we often hear about EUV and DUV, dry and immersion, what exactly do they refer to and what are the differences?

1) EUV and DUV: This refers to the types of lithography machines, and different lithography machines are mainly used to produce wafers for different processes. ①EUV is the most advanced lithography machine currently used in advanced processes such as 3nm-7nm, and the products are mainly used in the direction of CPUs, GPUs, etc.; ②DUV is a relatively mature lithography machine that can be used in processes of 7nm and above.

2) Dry and immersion: These are subdivisions within DUV lithography machines, and the main difference between the two lies in the immersion DUV using water instead of air for the filling between the objective lens and the wafer, thereby achieving a higher numerical aperture, and the lithography machine also has better resolution and imaging capabilities.

3) Difference in light source: The name of EUV lithography machine mainly comes from its use of EUV light source; immersion DUV uses ArF light source; while dry DUV can use ArF, KrF, and other light sources. Different light sources are suitable for different process technologies and products. And in the revenue breakdown of ASML, it is mainly differentiated from the perspective of light sources.

4) Price situation: Due to the high unit price of both types of lithography machines, their impact on the company's performance is also significant. The average price of a dry DUV lithography machine is generally below 25 million euros per unit, while the equipment using other ArF light sources is more expensive than KrF.

2. Leading ASML: Absolute Technological and Market Leader

Since ASML's business revolves around lithography machines, let's take a look at the lithography machine market and the company's position:

2.1 The Purpose of Lithography Machines

First, let's see what role lithography machines play in chip production.

The entire process of chip production involves three stages: "wafer manufacturing - packaging." Among them, wafer manufacturing is the most difficult and important step.

Specifically, in the wafer manufacturing process, it generally goes through the steps of "diffusion - thin film deposition - lithography - etching - ion implantation - CMP." Lithography is the most crucial step, where light is used in the lithography system to create patterns on the photoresist. And the above process needs to be repeated several times because each layer requires a cycle.

2.2 Leading Lithography Technology

Looking at the historical development of lithography machines, they have gone through "UV lithography - DUV dry lithography - DUV immersion lithography - EUV lithography." With the evolution of lithography technology, the corresponding wavelength has become shorter, enabling more advanced and precise manufacturing processes.

There are three major players in the current lithography machine market: ASML, Nikon, and Canon, with ASML being the clear technological leader.

Comparison of the technological capabilities of the three major global lithography manufacturers:

ASML: i-line → KrF → ArF Dry → ArFi → EUV. The company has sold nearly 200 EUV machines since selling its first one in 2011.

Nikon: i-line → KrF → ArF Dry → ArFi. The company has completed continuous delivery of its ArFi lithography systems.

Canon: i-line → KrF. Canon's lithography technology is currently the most backward among the three companies, and its products are mainly used for mature process production. 2.3 Market Monopoly Position

In addition to its absolute technological leadership, ASML also holds a "monopoly" position in the lithography market. The company has over 80% market share in both the ArF DUV and EUV markets for advanced processes, with the EUV market in particular dominating the entire market.

Currently, Canon's positioning is relatively clear, focusing on the mature process market of i-line and KrF. Nikon is expected to catch up with ASML and become a disruptor, currently holding a certain market share in the ArF DUV market, but still lagging behind the company by a considerable margin.

III. Stable ASML: Collaborating with Global Major Customers

Although ASML has not disclosed specific customer information, we can still infer the company's customer situation.

1) Product End: Due to the company's top-notch lithography products, only a few manufacturers worldwide have the capability to use them. EUV is mainly used for advanced processes of 7nm and below, while ArFi is mainly used for storage and logic chips of 45nm and below.

2) Regional Revenue: Looking at the company's latest disclosed revenue by region, Taiwan and South Korea have the highest proportions at 49% and 26% respectively. The United States and mainland China closely follow, accounting for 15% and 8% respectively.

$ Taiwan Semiconductor(TSM.US)$ Samsung Electronics (SSNGY.US)$ Intel(INTC.US)$ Micron Tech(MU.US)

Due to the strong demand for EUV from TSMC and Samsung, and currently ASML is the only company in the world that can do it. And when Intel made mistakes in entering advanced processes before, they also wanted to catch up in the EUV direction and increase the demand for EUV lithography machines. Therefore, the demand for the company's EUV lithography machines will be quite stable, with the latest quarter's EUV revenue accounting for over 50%.

Currently, facing the demands of multiple downstream customers, only the company can supply EUV lithography machines, and ASML has a good industry position and influence.

This article by Dolphin mainly focuses on ASML's lithography business and the industry situation. The company has always focused on lithography systems and has gradually become the "king" in the market. Currently, ASML is far ahead in lithography technology and market share, with its EUV technology leading by nearly a decade.

With the collaborative development with major customers such as TSMC, Samsung, and Intel, ASML is expected to maintain its leading position in the lithography market. In the next article, Dolphin will provide specific performance calculations and valuation for the company, giving a detailed viewpoint on ASML. Stay tuned for more updates from Dolphin~

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June 24, 2022, "Order Cancellations, Is the Semiconductor Industry Really Going to Change?"

June 17, 2022, "Consumer Electronics Market Maturity: Apple Holding Strong, Xiaomi Struggling"

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April 8, 2022, "TSMC (Part 2): Price Discounts, Unwavering Faith"

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In-depth Analysis of NVIDIA

September 16, 2021, "NVIDIA (Part 1): How Did the Chip Giant Achieve a Twentyfold Growth in Five Years?" invite-code=032064)》

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