Taiwan Semiconductor's salesperson who increased 10 times in 5 years
Taiwan Semiconductor and Intel consume a large amount of water resources in chip manufacturing, with the former using 200,000 tons of water per year and the latter as high as 34 million tons. Chip manufacturing requires ultra-pure water, and the market demand continues to expand. It is estimated that the global ultra-pure water market for semiconductors will reach $1.692 billion in 2023 and $2.711 billion in 2030, with an annual growth rate of 7.9%. Wafer manufacturing is the main application market, accounting for 82% of the market share
Chip manufacturing is a thirsty industry.
On one hand, Taiwan Semiconductor uses 200,000 tons of water to wash chips, equivalent to the daily drinking water consumption of the entire province of Taiwan. On the other hand, Intel consumes 34 million tons of water per year, equivalent to drying up 2.5 West Lakes in Hangzhou.
In the process of thousands of chip manufacturing steps, 30% of them are repeating one thing: giving delicate and extremely clean chips a bath with a large amount of water and chemical solvents to remove residues from the previous step and prepare for the next one.
But if you think this water can be provided by nature or a farmer's spring water, you are wrong. Every step in the chip manufacturing process requires professional equipment and material support for production, and even "water" has a high entry threshold. Currently, most semiconductor materials and equipment can only be supplied by Japanese companies with rich industry experience.
The reason why Japan's stock market has outperformed the United States, Taiwan, and South Korea in the global influx of funds into semiconductor-related stocks is because most of their semiconductor companies have never left the table, accumulating experience that can be put into use at any time, greatly reducing the time and cost of trial and error that downstream customers value most, thus winning market favor.
I. Not Everyone Is Equal in the Face of Opportunities
The water used to wash chips is called ultrapure water, which requires almost no impurities other than H2O. Ultrapure water is essential for the miniaturization and stacking of semiconductor circuits, and the law states that the more advanced the chip, the more process steps, and the greater the water consumption.
Therefore, as the global semiconductor market is expected to reach a historical high of $576 billion, the demand for ultrapure water is also expanding.
In 2023, the global market size of ultrapure water for semiconductors was approximately $1.692 billion, and it is expected to reach $2.711 billion by 2030, with a CAGR of 7.9% from 2024 to 2030. In terms of downstream, wafer manufacturing is the largest application market, accounting for about 82% of the market share.
From the perspective of market demand, it seems that all global semiconductor-related companies have equal opportunities in this potential market. However, in the hierarchical semiconductor industry, the reality is different.
Because the semiconductor equipment industry is a B2B business, the core of competition in the industry lies in the level of technological advancement and the certification issues of entering the customer supply chain. In such a high-threshold and lengthy certification process, to reduce trial and error costs, downstream customers rarely accept new faces. Over time, the industry has become a closed circle of familiar faces, collectively exclusive And as early as the 1980s, Japan had already become the world's largest semiconductor producer, with a well-established independent semiconductor industry system. This has made Japan the second economy after the United States capable of embracing the resurgence of the semiconductor industry. This time, benefiting from the rise of AI in the semiconductor industry, the companies with the largest stock gains are also the semiconductor companies in Japan.
Today, under the oligopoly of TSMC, Samsung Electronics, and Intel, the investment scale of semiconductor equipment is getting larger and larger, requiring ultra-pure water treatment equipment of the size of a football field. There are very few manufacturers in the world who can design and deliver such huge equipment in a short period of time and have the experience and tricks to quickly respond to faults in after-sales service.
Of course, it doesn't mean that new entrants have no chance at all, but to ensure that the company always stays at the forefront of technology, NVIDIA's new semiconductor technology roadmap has been updated annually; from ChatGPT to Midjourney, from Sora to Kimi, AIGC needs to maintain a frequency of historic breakthroughs every month to keep consumers feeling fresh.
From the production end of computing power to the application end of programs, the entire industry is in a tense competition akin to military preparation. Time is money, and no one is willing to wait for a newcomer to grow. Japanese companies that already have skilled workers, technological expertise, equipment, and scale advantages in the semiconductor industry naturally become the first group to ride the wave.
Second, two world leaders have mutual admiration
Almost every material involved in semiconductor manufacturing has been monopolized by Japanese companies for a long time, and ultra-pure water is one of them. The global market size of ultra-pure water for semiconductors is estimated to be around USD 1.692 billion in 2023. As the main participants in this market, the top three Japanese companies, Kurita, Organo, and Nomura Micro Science, hold a market share of 86% globally.
Organo (6368.jp) is a comprehensive water treatment company with a history of more than 70 years, holding a high market share of 30% in the global semiconductor equipment water treatment field. In the already highly competitive landscape, compared to the other two companies, Organo's biggest advantage is its deep cooperative relationship with TSMC.
In 2000, Organo became a supplier to TSMC and established a subsidiary in Taiwan in 2005. Today, Organo also produces ultra-pure water for TSMC's semiconductor fab in Japan. After TSMC entered the U.S. market, Organo also established a subsidiary in the U.S.
Organo, which is always by TSMC's side wherever it goes, its technological strength is the primary competitive factor that has enabled its development.
Organo is the world's first company to manufacture a detectable 10nm particle measuring device. Its patent advantages in the ultra-pure water field exceed those of its industry competitors. This technological strength has not only been favored by TSMC but also enabled the company to win the new factory project order for Rapidus, a local Japanese foundry, in Hokkaido in 2023.
The advantage of industry chain integration makes Organo more resilient in the face of market fluctuations, maintaining its unbeatable position in ultra-pure water. This clear industry monopoly advantage and continuous technical strength that wins the favor of major customers have led to a tenfold increase in Organo's stock price over 5 years.
However, the essence of stock price growth still relies on performance. Even though the stock price of foundry factory Taiwan Semiconductor has risen more than many AI technology stocks, the key point is that both performance and profits have reached new highs. Without performance like Intel's, even bundling with NVIDIA won't guarantee long-term success.
Therefore, for Organo, the relationship with Taiwan Semiconductor is not the only factor, but more importantly, this relationship and its own business model have created high certainty in profits for the company. The tenfold increase over five years is based on solid value enhancement.
3. High Certainty of Equipment Companies
As an upstream semiconductor equipment and material supplier, Organo has relatively low overall business risks. Just like selling water, regardless of whether downstream gold diggers make money or not, as long as more people dig for gold, ultra-pure water will continue to be in demand.
With the expansion of the market related to generative artificial intelligence, the rise of new data centers, and the recovery of the memory market, semiconductor-related capital expenditures and factory utilization rates remain high both domestically and internationally. Benefiting from this, Organo's performance continues to shine. As of the first quarter of the 2025 fiscal year (April 1, 2024, to June 30, 2024), both sales, operating income, and quarterly profit totals have seen double-digit year-on-year growth.
Breaking it down, water treatment engineering business is Organo's largest source of revenue. By industry, 70% of this business's revenue comes from the electronics industry (mainly semiconductors, equivalent to about 60% of revenue from the semiconductor industry). By service type, although solutions in the water treatment engineering business do not have the largest share, they contribute relatively higher profits.
More importantly, Organo's high profit level is sustainable.
The performance of equipment and material suppliers is closely related to order confirmations, and future performance and competitiveness can be roughly analyzed through existing orders. Organo currently has orders on hand totaling 139.269 billion Japanese yen, which, although slightly reduced, is sufficient as a sales base for the next fiscal year, supporting performance growth.
Furthermore, Taiwan Semiconductor's second Kumamoto factory is about to be built, and Rapidus' 2nm pilot wafer fab is also planned to start construction in 2025. As the main supplier of ultra-pure water materials and equipment to them, Organo still has continuous opportunities for orders, and the enterprise's historically high profit level can still be maintained.
From a global perspective, the surging capital expenditures of downstream large tech companies have long overshadowed the cyclical nature of the semiconductor industry in the AI era. This also provides Organo, which has already achieved international layout, with ample room for performance growth.
Although NVIDIA's lower-than-expected revenue growth and the current commercialization of the AI industry still focusing on infrastructure rather than consumer terminals have raised concerns in the market about the industry's sustainable development. But as mentioned at the beginning, equipment companies have higher certainty. Even if they are not profitable now, under the fomo (Fear of missing out) sentiment, large tech companies need to continuously increase capital expenditures, further strengthening the demand for upstream equipment, and Organo's "water" is still in high demand.
Conclusion
From demand, following the "buddy" Taiwan Semiconductor, Organo has taken the largest share in the growing ultra-pure water market demand; to supply, Organo's established patent technology barriers make peers look up to, expanding the customer base continuously; and to certainty, with existing orders, the establishment of large projects, and the continuous expansion of capital expenditures by global large tech companies, Organo, as an upstream "water seller," has high certainty in performance growth.
More importantly, this is a growth stock that is committed to rewarding shareholders. With a certain level of growth, the company is also continuously increasing its dividend payout ratio to enhance shareholder returns
Organo currently has a market value of about $2 billion and is one of the components of the JPX-Nikkei Small Cap Index. It is an enterprise that has not been timely covered by analysts. During the inflation-stimulated economic growth, these under-researched Japanese companies are expected to provide investors with higher alpha return opportunities driven by profit growth.