Kepler On Semi Cycle

12 April 2022
IT Hardware & Semis

Europe
Is a downcycle beginning in the semis market? This report is intended for m.gerber@vat.ch. Unauthorized distribution prohibited.
The semiconductor sector has been under pressure since its recent highs reached at
the end of last year, as investors have been increasingly questioning the strength of
the semis cycle for the coming quarters. While the current cycle started in 2020 (with
the semis market up by 6% in 2020 and 24% in 2021), the market remains on track to
grow by 10% in 2022E, despite growing uncertainties for the coming months
(supply/demand imbalances are unlikely to be fully resolved before the end of the
year and a global correction looks rather unlikely at this stage). The semis upcycles
rarely last more than 2-3 years (usually followed by a year of correction) and the
sharp increase in commodity prices that followed the outbreak of the Russia-
Sébastien Sztabowicz
Ukraine conflict (including oil, gas, wheat, aluminium, etc.) is likely to put increasing Head of IT Hardware & Semis Research
pressure on macro conditions for the coming months. Accordingly, in this report we +33 1 53 65 35 10
ask if we are seeing the beginning of a downcycle in the semis market. ssztabowicz@keplercheuvreux.com
See our answer inside… IT Hardware & Semis research team

Biographies at the end of this document
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This research is the product of Kepler Cheuvreux, which is authorized and
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IT Hardware & Semis
Q+A in 1 minute
Séba stienSzta bowiczHead of IT Hardware & Semi s Research+ 33 1 53 65 35 10ssztabowicz@ kepl ercheuvre ux.com
A soft-landing scenario appears likely at this stage

 Most of the European semiconductor companies do not have any material direct
exposure to Russia and Ukraine. While Ukraine is a large supplier of neon gas, the
impact seems manageable at this stage, as semis vendors have diversified their
sourcing and have elevated inventories, while prices are usually fixed under long-
term contracts, and the materials bill for neon gas remains very low. That said, we
see some indirect impacts on the automotive market with large supply disruptions
in wiring harnesses currently and some potential issues in catalytic converters
likely to emerge in the coming months.
 Visibility on the macroeconomic environment for the coming months has
deteriorated since the start of the Russia-Ukraine conflict, with rising commodity
prices across the board. While the final outcome remains uncertain, we cannot rule
out a cyclical correction in the semis market in the coming months. Given the still-
large supply-demand imbalance in the semis industry, the market should continue
to hold up fairly well in 2022, and the downside could rather come in 2023. We
believe the semis sector remains on track to grow by 10% in 2022E (after +24% in
2021), followed by a slowdown in 2023E (+3% vs. +6% previously), and a recovery
from 2024E (+7% in 2024E and +11% in 2025E). Note that we have modelled a soft-
landing scenario, rather than a harsh scenario for the time being.
 While the semis market is a structurally growing market (having expanded by 8%
per year since 2002), it remains cyclical by nature. Over the past two decades, the
upcycles have tended to last for 16 months (65% of the time) and the SOX index has
delivered a c. 90% performance on average, while downcycles tend to last for seven
months (35% of the time) and the SOX tends to fall by c. 31% on average.
 The outlook for the semiconductor market remains fairly positive for the coming
years (the market looks well on track to grow by 7% per year over 2022-30), as the
megatrends remain intact (digitalisation of enterprises and our daily lives, the
electrification and digitalisation of cars, strong secular demand for servers and data
centres, the ramp-up of 5G, the accelerated shift toward renewable energy, etc.).
 Despite the powerful growth drivers expected for the coming years, we believe
there is growing risk of a cyclical correction in the coming months, given the sharp
increase in commodity prices across the board due to the Russia-Ukraine conflict.
 While the semis sector has largely corrected since the beginning of the year (the
SOX index has declined by 23% since its recent highs), we see c. 10% potential
incremental downside in the coming months. All in all, we believe the semis sector
should remain volatile in the coming months.
 We believe there is a good chance that the sector may hit a trough over the summer
(potentially in July), and perhaps after the Q2 results release (when consensus
earnings cuts could materialise).
 Accordingly, we remain on a kind of tactical standby from a sector point of view,
while some stocks have already almost fully discounted a cyclical downturn and
are already trading at attractive entry prices (including Infineon and Soitec).
 We have significantly cut our estimates on most of the companies under our
coverage (taking into account a weaker semis market), trimming our TPs for most
of them (due to lower estimates/higher WACCs, reflecting a higher risk premium).
 We keep STMicroelectronics (TP cut from EUR60 to EUR50) and Soitec (TP cut from
EUR235 to EUR210) in our Most Preferred Stocks list for the IT Hardware & Semis
sector, and we also like Infineon (TP cut from EUR48 to EUR40) and AT&S (TP cut
from EUR63 to EUR60) in the semis sector.
keplercheuvreux.com 2
IT Hardware & Semis
Summary of key changes and valuation
There are two key tables to add here:

 A table recapping company names in our sector coverage, old/new TPs, old/new ratings,
upside/downside to TPs/ primary analyst on each stock.
 A table recapping EPS sequence average revisions within the sector.
 The valuation table of the semis sector.
Table 1: Semis sector coverage, including rating, TP, and primary analyst on each stock
Company Currency Current Old rating New rating Old TP New TP Upside/ Primary analyst
price downside
ams OSRAM CHF 11.99 Buy Buy 19 19 58% Sébastien Sztabowicz
AT&S EUR 48.80 Buy Buy 63 60 23% Patrick Steiner
Infineon EUR 27.55 Buy Buy 48 40 45% Sébastien Sztabowicz
Melexis EUR 76.65 Hold Hold 95 83 8% Matthias Maenhaut
Nordic Semiconductor NOK 178.40 Hold Hold 260 260 46% Lars Devold
Soitec EUR 157.15 Buy Buy 235 210 34% Sébastien Sztabowicz
STMicroelectronics EUR 35.04 Buy Buy 60 50 43% Sébastien Sztabowicz
u-blox CHF 79.9 Hold Hold 80 80 0% Torsten Sauter
Source: Kepler Cheuvreux
Table 2: EPS changes over 2022-24E

Company EPS 2022 EPS 2022 Delta EPS 2023 EPS 2023 Delta EPS 2024 EPS 2024 Delta
old new (%) old new (%) old new (%)
ams OSRAM 0.90 0.90 0.0% 1.22 1.22 0.0% 1.90 1.90 0.0%
AT&S 1.62 1.62 0.0% 3.89 3.89 0.0% 5.12 5.12 0.0%
Infineon 1.64 1.54 -6.6% 1.91 1.47 -22.6% 2.11 1.69 -20.3%
Melexis 3.55 3.48 -2.0% 4.03 3.55 -12.0% 4.58 3.87 -15.0%
Nordic Semiconductor 0.51 0.51 0.0% 0.79 0.79 0.0% 1.13 1.13 0.0%
Soitec 5.18 5.18 0.0% 6.32 6.32 0.0% 7.84 7.84 0.0%
STMicroelectronics 3.16 2.97 -6.0% 3.54 2.84 -19.8% 3.99 3.23 -19.0%
u-blox 4.46 4.46 0.0% 5.26 5.26 0.0% 6.09 6.09 0.0%
IT Hardware & Semis
Table 3: Semiconductor sector valuation (1)

Companies Rating Curr. Stock Target EV/Sales EV/Sales EV/Sales P/E P/E P/E
price Price 2022E 2023E 2024E 2022E 2023E 2024E
Semis chipset vendors
II-VI Not Rated USD 65.2 - 2.0 1.7 1.4 18.2 14.9 13.0
AMD Not Rated USD 101.0 - 7.2 6.3 5.7 27.6 23.1 21.9
ams OSRAM Buy CHF 12.0 19.0 1.2 1.3 1.1 13.1 9.7 6.2
Analog Devices Not Rated USD 158.7 - 8.1 7.6 7.2 20.2 18.2 16.7
AT&S Buy EUR 48.8 60 2.0 1.8 1.6 30.2 12.5 9.5
Avago Not Rated USD 587.0 - 8.7 8.1 7.6 17.6 16.2 14.9
Cirrus Logic Not Rated USD 76.9 - 2.3 2.0 1.9 13.2 12.4 12.5
Cree Not Rated USD 79.1 - 9.8 6.6 5.2 n.r. 41.2 26.5
Infineon Buy EUR 27.6 48.0 3.1 2.8 2.5 17.9 18.7 16.4
Intel Not Rated USD 47.0 - 2.7 2.8 2.6 13.0 12.5 12.3
Knowles Not Rated USD 19.4 - 1.8 1.6 1.4 12.0 10.8 10.2
Lumentum Not Rated USD 88.7 - 3.2 2.8 2.3 14.9 13.3 12.2
Macom Technology Not Rated USD 51.4 - 5.8 5.6 4.7 19.2 17.5 14.2
Marvell Technology Not Rated USD 63.2 - 9.5 8.1 6.8 28.9 22.6 21.1
Mediatek Not Rated TWN 840.0 - 2.0 1.8 1.6 11.2 10.4 7.8
Melexis Hold EUR 76.7 83.0 4.1 3.8 3.5 22.0 21.6 19.8
Micron Technology Not Rated USD 72.1 - 2.3 1.9 1.6 8.0 6.2 5.7
Microchip Not Rated USD 66.3 - 5.8 5.4 4.7 13.2 12.6 12.7
Nordic Semiconductor Hold NOK 177.9 260.0 4.4 3.4 2.6 40.0 25.7 18.0
NVIDIA Not Rated USD 231.2 - 17.0 14.6 11.6 43.3 36.1 26.8
NXP Not Rated USD 167.5 - 4.1 3.9 3.5 13.5 12.6 10.9
On Semiconductor Not Rated USD 52.7 - 3.2 2.8 2.4 14.4 13.5 12.2
Power Integrations Not Rated USD 81.2 - 6.0 5.3 4.8 23.5 22.1 21.7
Qualcomm Not Rated USD 136.7 - 3.7 3.3 3.0 12.2 11.3 10.7
Qorvo Not Rated USD 114.4 - 2.4 2.3 2.0 8.7 7.9 7.4
Renesas Not Rated JPY 1,298.0 - 2.3 1.8 1.7 9.7 9.1 8.1
Skyworks Not Rated USD 122.3 - 3.1 2.9 3.0 10.6 9.5 8.8
STMicroelectronics Buy EUR 35.0 60.0 2.3 2.0 1.8 12.8 13.4 11.8
S&T Not Rated EUR 17.0 - 0.7 0.6 0.5 14.1 12.1 10.8
Texas Instruments Not Rated USD 174.1 - 8.2 7.7 7.2 20.1 19.1 18.7
U-Blox Hold CHF 79.9 80.0 1.0 0.9 0.8 17.9 15.2 13.1
Average 4.6 4.1 3.6 18.0 16.2 13.4
Semis equipment manufacturers

Applied Materials Not Rated USD 120.0 - 3.9 3.6 3.6 14.7 13.3 13.1
ASM International Not Rated EUR 303.0 - 6.7 6.0 4.9 26.2 23.3 20.1
ASML Not Rated EUR 569.3 - 10.3 9.3 8.3 34.2 29.5 25.9
ASM PT Not Rated HKD 77.5 - 1.2 1.2 1.0 11.6 11.5 9.5
Besi Not Rated EUR 68.0 - 6.0 5.6 4.7 18.0 17.6 14.8
KLA Tencor Not Rated USD 341.2 - 5.7 5.1 4.9 16.3 15.1 14.4
Kulicke & Soffa Not Rated USD 52.3 - 1.8 1.7 1.8 8.6 9.4 10.8
Lam Research Not Rated USD 491.6 - 3.8 3.5 3.4 14.5 13.1 12.6
Average 4.9 4.5 4.1 18.0 16.6 15.2
Source: Refinitiv Eikon, Kepler Cheuvreux
IT Hardware & Semis

Companies Rating Curr. Stock Target EV/EBIT EV/EBIT EV/EBIT FCF FCF FCF
Semis chipset vendors
II-VI Not Rated USD 65.2 - 10.2 8.0 6.3 6.1% 6.9% 7.4%
AMD Not Rated USD 101.0 - 26.5 22.6 19.4 3.0% 3.7% 3.8%
ams OSRAM Buy CHF 12.0 19.0 12.4 11.5 7.4 n.r. n.r. 16.4%
Analog Devices Not Rated USD 158.7 - 18.0 16.7 15.6 4.5% 5.8% 5.6%
AT&S Buy EUR 48.8 60 29.8 17.1 13.8 n.r. n.r. n.r.
Avago Not Rated USD 587.0 - 14.5 13.5 12.9 5.8% 5.5% 5.6%
Cirrus Logic Not Rated USD 76.9 - 10.0 8.5 7.8 6.7% 7.2% 7.8%
Cree Not Rated USD 79.1 - n.r. 35.5 27.1 n.r. 1.4% 1.6%
Infineon Buy EUR 27.6 48.0 14.6 14.7 12.4 2.4% 2.9% 3.4%
Intel Not Rated USD 47.0 - 12.1 12.2 11.2 n.r. 4.0% 1.2%
Knowles Not Rated USD 19.4 - 9.1 8.4 8.1 5.2% 5.7% 6.2%
Lumentum Not Rated USD 88.7 - 10.6 8.9 7.4 9.6% 7.1% 8.8%
Macom Technology Not Rated USD 51.4 - 19.0 17.9 15.1 4.3% 5.1% 5.4%
Marvell Technology Not Rated USD 63.2 - 26.4 21.1 16.1 3.0% 4.1% 4.4%
Mediatek Not Rated TWN 840.0 - 8.7 7.8 6.2 9.1% 9.7% 10.1%
Melexis Hold EUR 76.7 83.0 17.9 17.4 15.9 4.0% 4.3% 4.4%
Micron Technology Not Rated USD 72.1 - 6.6 5.0 4.7 6.8% 8.7% 9.3%
Microchip Not Rated USD 66.3 - 13.1 12.2 12.8 6.7% 7.1% 7.4%
Nordic Semiconductor Hold NOK 177.9 260.0 28.4 17.9 12.0 1.1% 2.0% 3.4%
NVIDIA Not Rated USD 231.2 - 35.8 30.0 21.5 2.1% 2.7% 2.4%
NXP Not Rated USD 167.5 - 12.2 11.4 10.2 6.8% 7.1% 9.1%
On Semiconductor Not Rated USD 52.7 - 11.7 9.9 8.2 5.1% 6.4% 7.8%
Power Integrations Not Rated USD 81.2 - 20.2 17.8 17.4 3.1% 3.9% 3.9%
Qualcomm Not Rated USD 136.7 - 9.9 9.0 8.1 7.0% 9.2% 7.7%
Qorvo Not Rated USD 114.4 - 7.2 6.9 6.0 11.4% 14.1% 16.6%
Renesas Not Rated JPY 1,298.0 - 29.1 24.2 22.6 n.r. 0.1% 0.2%
Skyworks Not Rated USD 122.3 - 8.3 7.6 7.7 8.8% 11.2% 16.8%
STMicroelectronics Buy EUR 35.0 60.0 10.4 10.2 8.3 1.4% 6.4% 7.2%
S&T Not Rated EUR 17.0 - 10.5 8.4 7.3 8.1% 9.2% 10.6%
Texas Instruments Not Rated USD 174.1 - 16.5 15.8 15.1 3.8% 4.2% 4.7%
U-Blox Hold CHF 79.9 80.0 13.5 11.3 9.3 2.4% 4.6% 7.4%
Average 15.8 14.2 12.1 5.3% 5.9% 6.9%
Semis equipment manufacturers

Applied Materials Not Rated USD 120.0 - 12.3 11.3 11.1 6.2% 7.2% 7.8%
ASM International Not Rated EUR 303.0 - 22.8 20.0 16.7 3.1% 3.6% 4.1%
ASML Not Rated EUR 569.3 - 29.0 25.2 22.3 2.5% 4.2% 3.7%
ASM Pacific Technology Not Rated HKD 77.5 - 7.5 7.1 5.9 9.1% 7.4% 8.5%
Besi Not Rated EUR 68.0 - 13.6 12.7 10.4 5.4% 5.9% 6.3%
KLA Tencor Not Rated USD 341.2 - 13.6 12.4 11.8 5.7% 6.3% 6.8%
Kulicke & Soffa Not Rated USD 52.3 - 6.2 6.2 6.4 7.3% 8.8% 9.6%
Lam Research Not Rated USD 491.6 - 12.1 10.9 10.5 5.8% 7.1% 7.6%
Average 14.6 13.2 11.9 5.6% 6.3% 6.8%

Companies Rating Curr. Stock Target EV/Sales EV/Sales EV/Sales P/E P/E P/E
Wafer suppliers
GlobalWafers Not Rated TWD 654.0 - 3.8 3.3 3.1 16.2 13.2 11.2
Shin-Etsu Handotai Not Rated JPY 17,675.0 - 2.9 2.5 2.9 15.1 14.2 13.1
SUMCO Not Rated JPY 1,839 - 1.5 1.6 1.2 11.4 9.0 8.2
Average 2.7 2.4 2.4 14.2 12.2 10.8
Epitaxy & compound semiconductor suppliers

IQE Not Rated GBP 33.1 - 1.7 1.5 1.1 n.r. 36.1 7.9
II-VI Not Rated USD 65.2 - 2.0 1.7 1.4 18.2 14.9 13.0
LandMark Opto. Not Rated TWD 181.5 - 6.1 4.6 4.1 27.3 18.2 14.0
Sanan Optoelectronics Not Rated CNY 22.8 - 6.1 5.0 4.2 34.7 25.7 21.7
Soitec Buy EUR 157.2 210.0 5.5 4.4 3.6 30.4 24.9 20.0
Visual Photonics Epitaxy Not Rated TWD 99.4 - 4.3 3.7 3.4 17.3 15.3 13.3
Wolfspeed Not Rated USD 79.1 - 9.8 6.6 5.2 n.r. 41.2 26.5
Average 5.1 3.9 3.3 25.5 25.2 16.6
IT Hardware & Semis

Companies Rating Curr. Stock Target EV/EBIT EV/EBIT EV/EBIT FCF FCF FCF
Wafer suppliers
GlobalWafers Not Rated TWD 654.0 - 11.5 9.4 9.1 4.4% 5.6% 5.9%
Shin-Etsu Handotai Not Rated JPY 17,675.0 - 9.0 7.6 9.2 3.7% 4.1% 5.1%
Siltronic Not Rated EUR 86.9 9.4 7.5 6.0 6.7% 9.2% 14.4%
SUMCO Not Rated JPY 1,839 - 6.7 6.1 4.8 3.0% 2.2% 9.6%
Average 9.2 7.6 7.3 4.4% 5.3% 8.7%
Epitaxy & compound semiconductor suppliers

IQE Not Rated GBP 33.1 - 68.6 27.3 6.9 n.r. 3.0% 6.1%
II-VI Not Rated USD 65.2 - 10.2 8.0 6.3 6.1% 6.9% 7.4%
LandMark Opto. Not Rated TWD 181.5 - 20.8 13.1 10.0 5.4% 7.0% 7.4%
Sanan Optoelectronics Not Rated CNY 22.8 - 43.8 32.0 27.8 9.6% 10.1% 11.2%
Soitec Buy EUR 157.2 210.0 24.1 19.3 15.1 0.9% 1.8% 3.1%
Visual Photonics Epitaxy Not Rated TWD 99.4 - 13.8 11.6 10.5 3.0% 3.8% 4.1%
Wolfspeed Not Rated USD 79.1 - n.r. 35.5 27.1 n.r. 1.4% 1.6%
Average 30.2 21.0 14.8 5.0% 4.9% 5.8%
IT Hardware & Semis
Investment case in six charts
Chart 1: Semiconductor market Q1 2018-Q4 2022E (USDbn, %

change) Chart 2: Semiconductor market 1977-2025E (USDbn, % change)
Source: WSTS, Kepler Cheuvreux Source: WSTS, Kepler Cheuvreux
Chart 3: Automotive semiconductor market 2008-23E (USDbn, %

change) Chart 4: Smartphone market shipments 2015-25E (m units)
Source: Strategy Analytics, Kepler Cheuvreux Source: IDC, Kepler Cheuvreux
Chart 5: PC market shipments 2011-25E (m units, % change) Chart 6: Server market shipments 2011-25E (m units, % change)
Source: IDC, Kepler Cheuvreux Source: IDC, Kepler Cheuvreux
IT Hardware & Semis
Contents
Q+A in 1 minute 2
Summary of key changes and valuation 3
Investment case in six charts 7
Is a downcycle beginning in the semis market? 9
Limited direct impact from Russia-Ukraine conflict 10
Very limited direct impact on European semis from Russia-Ukraine conflict… 10
Some impact on sourcing conditions if the conflict lasts for a prolonged period 11
Tougher macro ahead, cyclical slowdown likely in 2023 13
Macro correction cannot be ruled out in coming months 13
Semis market could bottom in 2023 13
Underlying trends in the automotive market remain supportive so far 17
Industrial markets holding up well so far, potential downturn in 2023 22
Smartphone market slowing, 5G penetration picking up faster 24
PC market on track for a moderate decline over 2022-23E 25
Still-solid double-digit growth prospects for servers and data centres 27
Still some downside ahead before reaching the trough 28
Semis sector usually drops by c. 31% from peak to trough 28
Valuations almost back to the trough 34
Investment conclusion 40
Company inserts 41
ams OSRAM 42
AT&S 48
Infineon 53
Melexis 58
Nordic Semiconductor 64
Soitec 70
STMicroelectronics 75
u-blox 80
Investment case in six charts 84
Research ratings and important disclosures 87
Legal and disclosure information 90
IT Hardware & Semis
Is a downcycle beginning in the semis market?
The semiconductor sector has been under pressure since its recent highs reached at the end
of last year, as investors have been increasingly questioning the strength of the semis cycle
for the coming quarters.
While the current cycle started in 2020 (with the semis market up by 6% in 2020 and 24% in
2021), the market remains on track to grow by 10% in 2022E despite growing uncertainties
for the coming months (the supply/demand imbalances are unlikely to be fully resolved
before the end of the year and a global correction looks rather unlikely at this stage).
Semis upcycles rarely last more than 2-3 years (usually followed by a year of correction) and
the sharp increase in commodity prices that followed the outbreak of the Russia-Ukraine
conflict (including oil, gas, wheat, aluminium, etc.) is likely to put increasing pressure on
macro conditions for the coming months.
Accordingly, we ask in this report whether a downcycle could be beginning in the semis
market.
IT Hardware & Semis
Limited direct impact from Russia-Ukraine conflict
Most of the European semiconductor companies do not have any fabs in Russia or Ukraine
(at least the companies under our coverage at Kepler Cheuvreux) and do not have any
material direct exposure to the region. While Ukraine is a large supplier of neon gas, the
impact seems to be manageable at this stage, as semis vendors have diversified their
sourcing (with supplies increasingly coming from Europe, the US and Asia) and have elevated
inventories, while prices are usually fixed under long-term contracts, and the materials bill
for neon gas remains very low. That said, we see some indirect impacts on the automotive
market with large supply disruptions in wiring harnesses today and some potential issues
likely to emerge in catalytic converters in the coming months.
Very limited direct impact on European semis from Russia-Ukraine conflict…

Most of the European semiconductor companies do not have any fabs in Russia and Ukraine (at
least the companies under our coverage at Kepler Cheuvreux) and do not have any material direct
exposure to the region.
European semiconductor companies also have very limited direct sales exposure to Russia and
Ukraine globally (below 1% of sales for most of the semis companies under our coverage at Kepler
Cheuvreux).
World Semiconductor Trade Statistics (WSTS) estimates that Russia alone accounts for less than
0.1% of global chip purchases.
ams OSRAM (Buy, TP CHF19) has very limited exposure to Russia and Ukraine, with the region
representing less than 1% of sales (largely through distributors) and the group owns no fabs in the
region. While sourcing conditions look manageable in the short term (including neon gas), the
group is actively working to avoid any disruptions in the coming months, with a strong focus on
building up inventory, hedging, alternative suppliers, and materials, as well as shipping routes.
AT&S (Buy, TP EUR60 vs. EUR63 previously) has very limited sales exposure to Russia and
Ukraine and has no fabs in the region. The group does not use any neon gas in its manufacturing
process and is not directly exposed to the gas. While AT&S sources some palladium (and highly
likely from Russia), the group does not anticipate any material issues in the coming months, as
palladium does not play a major role in AT&S’s manufacturing process.
Infineon (Buy, TP EUR40 vs. EUR48 previously) generated sales in the mid-double-digit million
euros in Russia in FY 2021 (less than 0.5% of group sales) and does not own any fabs in Russia and
Ukraine. While Infineon has a multi-sourcing strategy in place to reduce any potential risks to its
supply capabilities, it has no direct suppliers in Russia and only one supplier in Ukraine, which
provides Infineon with electronic gases.
Melexis (Hold, TP EUR83 vs. EUR95 previously) has limited sales exposure to Russia and Ukraine
and does not own any fabs globally (the group is fabless). The group only owns an R&D centre in
Ukraine (60 people) and does not expect any significant manufacturing disruption. While X-fab
(Melexis’s foundry) does not own any fabs in the region, it could be affected by tougher sourcing
conditions (including for neon gas) in the coming months.
Nordic Semiconductor (Buy, TP NOK260) only has limited sales to Russia and Ukraine (likely less
than 1% of sales) and has no direct exposure to Russia and Ukraine, as the group is 100% fabless.
Soitec (Buy, TP EUR210 vs. EUR235 previously) does not have any direct sales to Russia and
Ukraine, and indirect sales (through smartphones or automotive) are fairly limited. Soitec also
does not own any fabs in the region. The group does not source any neon gas or palladium from
Russia and Ukraine and is only suffering from an indirect impact (as are its foundry partners, such
as GlobalFoundries).
STM (Buy, TP EUR50 vs. EUR60 previously) has very limited sales to Russia and Ukraine, mainly
through its distributors, and does not own any fabs in Russia and Ukraine. STM has no presence
in Ukraine and only owns a small office in Moscow. STM has a multi-sourcing strategy in place and
IT Hardware & Semis
sources some industrial gases (including neon gas) from some suppliers with production facilities
in Ukraine.
u-blox (Hold, TP CHF80) has very limited direct exposure to Russia and Ukraine, with limited sales
in the region. The group has all production outsourced to third parties (with no exposure to the
region).
Some impact on sourcing conditions if the conflict lasts for a prolonged period
Russia and Ukraine are critical suppliers of neon gas and palladium, which are used in
semiconductor chip manufacturing.
Neon gas is a by-product of steel manufacturing and is largely used in lasers for lithography and
specifically for DUV (deep ultraviolet) light source excimer (excited dimmer) lasers, from the
180nm to 10nm node. The semiconductor market represents c. 45% of the neon gas demand
globally, while the rest is spread between LCDs, imaging & lighting, refrigerators, and lasers, etc.
Ukraine accounts for about 40-50% of the global neon gas production worldwide, while the rest
comes from China, and, to a lesser extent, from Europe and the US. Cryoin, Iceblick, and Ingas are
the largest Ukrainian players, with fabs located close to Odessa and Mariupol, which have halted
operations since the start of the conflict, while Linde seems to be one of the major players
worldwide and Air Liquide is also exposed to that market.
Palladium is used for component and connector plating in semiconductors, as well as by the
automotive industry for catalytic converters (which represent c. 85% of global palladium
production output and are expected to shrink in the coming years with the accelerated shift from
ICE cars to xEVs). Russia represents c. 35-40% of global palladium production today and palladium
shortages could affect car production volumes in the coming months (even though the carmakers
do not seem to be facing any constraints on palladium sourcing so far).
On top of that, there are large wiring harness manufacturing capacities in Ukraine, and some
carmakers have already been affected by supply disruptions (including Audi, BMW, Porsche,
Volkswagen and, to a lesser extent, Daimler).
Additionally, the conflict could also affect the sourcing of other noble gases such as xenon (largely
used in the semiconductor and lighting industry with the purpose of producing an intense white
light or a laser) and krypton (largely used in the lighting industry and environmental insulation
products, and c. 40% of the global krypton production comes from Ukraine).
While neon gas is used by most of the integrated device manufacturers (IDMs), the volumes of
palladium required by the semis industry seem limited and this does not look like a source of
concern at all (and it could potentially be replaced by other metals, including platinum, rhodium,
or even gold).
In the short term, most of the semis players expect limited supply chain disruptions on neon gas
from the Russia-Ukraine conflict, thanks to their diversified sourcing and elevated inventories
(some players seem to have up to one year of inventory on hand), while prices are usually fixed
under long-term contracts, and the materials bill for neon gas remains very low (even with
significant price increases it should not affect margins in the coming quarters, especially as part
of that could potentially be passed on to customers through price increases).
Semis vendors already started diversifying their neon gas and palladium sourcing following the
annexation of the Crimean Peninsula by Russia in 2014, and the sourcing conditions are now less
vulnerable.
In the near term, the conflict could lead to tougher sourcing conditions if the situation lasts for a
prolonged period, bearing in mind that suppliers outside Ukraine and Russia could finally increase
their capacities. Accordingly, Linde (which is one of the largest neon gas suppliers) has capacities
in Germany and the US and plans to expand its supply by mid-2022, with another significant step-
up by early 2023. While China seems to have room to increase its neon gas production capacities,
it should prioritise its own semis industry in the event of a prolonged conflict in Ukraine.
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The largest Korean steel manufacturer Posco also plans to start mass production of neon gases from
this year at its new Gwangyang steel fab with an annual production capacity of 22,000-normal-cubic-
metres of neon gases, representing c. 15% of Korean demand, according to the newswires.
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Tougher macro ahead, cyclical slowdown likely in 2023
Macro visibility for the coming months has deteriorated since the start of the Russia-Ukraine
conflict with rising commodity prices across the board (including oil, gas, wheat, aluminium,
etc.). While the final outcome remains uncertain, we cannot rule out a cyclical correction in
the semis market in the coming months. Given the still-large supply-demand imbalance in
the semis industry, we believe the market should continue to hold up fairly well in 2022, and
the downside could rather come in 2023. We believe the semis market remains on track to
grow by 10% in 2022E (after +24% in 2021), followed by a slowdown in 2023E (+3% vs. +6%
previously), and a recovery from 2024E (+7% in 2024E and +11% in 2025E). Note that we have
modelled a soft-landing scenario, rather than a harsh scenario for the time being.
Macro correction cannot be ruled out in coming months

The visibility on the evolution of the semiconductor market has deteriorated for the coming
months as a result of the Russia-Ukraine conflict, and the significant rise in commodity prices,
including oil & gas (Russia represents 40% of EU gas consumption, and 15-20% of global gas
production worldwide; Ukraine represents c. 40-50% of the global neon gas production
worldwide), wheat (Russia and Ukraine represent almost one-third of worldwide production),
aluminium (Russia is the second-largest producer worldwide), palladium (Russia represents c. 35-
40% of the global palladium production), etc.
We cannot rule out a macro correction in the coming months, with downward pressure on
discretionary spending, and specifically on consumer electronic products (smartphones, tablets,
PCs, accessories, etc.) and automotive products (global car production could ultimately fall below
initial expectations, despite improving sourcing conditions in the coming quarters), while the
industrial and enterprise markets could also be affected by the gloomy macro conditions.
Note that the multiple lockdowns in China since the start of the year seem to have started to affect
consumer demand throughout the country, specifically with regard to smartphones, PCs, TVs, etc.
(according to recent comments from Mark Liu, TSMC’s chairman).
On the other hand, both TSMC and SMIC have mentioned that their production capacities have
not been affected by the recent lockdowns in Shanghai.
Overall, the visibility has deteriorated globally, implying that there could be some downside to the
semis market in the coming months, depending on how macro conditions evolve in the months
ahead.
While the market is set to continue to hold up fairly well in 2022 (as there is still a very big gap
between supply and demand), we believe there is a growing risk of a cyclical correction moving
into 2023.
Semis market could bottom in 2023

The semis sector has corrected since the start of the year (the PHLX Semiconductor Sector Index
(SOX) has dropped by c. 23% since its recent highs at the start of the year), with increasing
concerns about the semis cycle in the coming months.
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Chart 7: Semiconductor market by end market (%)
Source: Gartner
The semiconductor market remains spread out across many industries, with large exposure to
smartphones (25% of the market), PCs (21% of the market), servers, data centres & storage (16%
of the market). Consumer electronics (11% of the market), industrial (10% of the market),
automotive (9% of the market), and wired & wireless infrastructure (8% of the market) account for
the rest of the market.
While the automotive and industrial verticals only represent 9% and 10% of the semis market
respectively, European semis companies are over-exposed to these two verticals, including ams
OSRAM (c. 40% of sales from automotive and c. 33% of sales from industrial and medical), Infineon
(c. 45% of sales from automotive and c. 25% of sales from industrial), Melexis (c. 90% of sales from
automotive), and STM (c. 30% of sales from automotive and c. 30% of sales from industrial).
On the other hand, Soitec is over-exposed to smartphones with c. 75% of sales coming from this
vertical, and it has more limited exposure to the automotive and industrial markets (only c. 10%
of sales today).
Finally, Nordic Semiconductor is heavily exposed to consumer electronics (which represent c. 80%
of the group’s sales, according to our estimates).
Chart 8: Semiconductor market Q1 2018-Q4 2022E (USDbn, % change)
Source: WSTS, Kepler Cheuvreux
The strong trends seen in 2021 continued at the beginning of the year, and the semiconductor
market remained strong in January (+27% YOY and virtually stable MOM) and February (+32% YOY
and +3% MOM). To date, it has grown by more than 20% for the eleventh consecutive month.
Despite the growing macro uncertainties fuelled by the Russia-Ukraine conflict, the environment
remains fairly supportive in the semis market, with strong underlying demand globally, record
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backlogs in hand, very low inventories in the market, a still favourable pricing environment, and
large ongoing supply/demand imbalances across the industry (and specifically in the automotive
and the industrial markets, to which ams OSRAM, Infineon, Melexis and STM have high exposure).
Note that the multiple lockdowns in China since the beginning of the year (notably in Shanghai
and Shenzhen) are likely to put increasing pressure on a global supply chain that is already
stretched (that said, both TSMC and SMIC have just mentioned that their production capacities
have not been affected so far), while also potentially affecting consumer demand throughout the
country, specifically on smartphones, PCs, TVs, etc.
While new capacities are only gradually coming online (the large greenfield fabs that have been
launched since the start of the component shortage back in 2021 are currently under construction
today and are only expected to ramp up volumes from H2 2023), the cost of building additional
capacities has significantly increased over the last few years (including for leading-edge and
legacy technologies) and the substantial capex plans announced across the industry are not likely
to bring huge incremental volumes in the coming quarters.
All in all, the supply/demand imbalance is unlikely to be resolved before H1 2023, providing that
we do not see a severe macroeconomic slump in the coming quarters, and we believe the semis
market should continue to hold up relatively well in 2022.
While the final outcome of the Russia-Ukraine conflict remains uncertain, we now see a growing
risk of a cyclical correction in the semis market from 2023.
All in all, we believe the semis market should gradually decelerate in the coming quarters and
could potentially end up being moderately down in Q4 2022E, depending on the evolution of the
macro conditions in the coming months.
Table 7: Semis market by product 2010-22 (USDbn, %)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Discrete semis 20 21 19 18 20 19 19 22 24 24 24 30 33
Change (%) 40% 8% -11% -5% 11% -8% 4% 11% 11% -1% 0% 27% 10%
Optoelectronics 22 23 26 28 30 33 32 35 38 42 40 43 47
Change (%) 27% 6% 13% 5% 8% 11% -4% 9% 9% 9% -3% 7% 8%
Sensors 7 8 8 8 9 9 11 13 13 14 15 19 22
Change (%) 45% 15% 0% 0% 6% 4% 23% 16% 6% 1% 11% 28% 17%
Integrated Circuits 250 247 238 252 277 274 277 343 393 333 361 463 511
Change (%) 31% -1% -4% 6% 10% -1% 1% 24% 15% -15% 8% 28% 10%
Analog 42 42 39 40 44 45 48 53 59 54 56 74 85
Change (%) 32% 0% -7% 2% 11% 2% 6% 11% 11% -8% 3% 33% 14%
Micro 61 65 60 59 62 61 61 64 67 66 70 80 90
Change (%) 25% 8% -8% -3% 6% -1% -1% 6% 5% -1% 5% 15% 12%
Logic 77 79 82 86 92 91 91 102 109 107 118 155 181
Change (%) 19% 2% 4% 5% 7% -1% 1% 12% 7% -3% 11% 31% 17%
Memory 70 61 57 67 79 77 77 124 158 106 117 154 155
Change (%) 55% -13% -6% 18% 18% -3% -1% 61% 27% -33% 10% 31% 1%
Total 298 300 292 306 336 335 339 412 469 412 440 556 614
Change (%) 32% 0% -3% 5% 10% 0% 1% 22% 14% -12% 7% 26% 10%
Total ex-memory 229 239 235 239 257 258 262 288 311 306 323 402 458
Change (%) 26% 4% -2% 2% 8% 1% 2% 10% 8% -2% 6% 25% 14%
Source: WSTS
Despite the growing macro pressure, WSTS has just increased its forecast for the semis market in
2022 from +9% to +10% (after +25% in 2021). It now sees solid growth prospects for the sensor
(+17%), logic (+17%), analog (+14%), micro (+12%), discrete semiconductors (+10%), and
optoelectronics segments (+8%), but it expects growth to slow down (+1%) in the memory segment.
Outside memory, the semis market is expected to grow by 14% again in 2022 (after +25% in 2021),
which is a better indicator of the underlying trends for European semis vendors, as they now have
very limited exposure to that market (only Infineon inherited a small specialty memory business
on the back of the Cypress acquisition).
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Chart 9: Semiconductor market 1977-2025E (USDbn, % change)
Source: WSTS, Kepler Cheuvreux
Despite the highly supportive trends for the coming years with the semis market well on track to
double to USD1trn by 2023E (+7% CAGR over 2021-23E), the market remains affected by short-
term cycles, which are usually driven by changes in the macro conditions.
All in all, the semis sector usually experiences an upcycle that lasts for two to three years followed
by a downcycle that lasts for one year, when the industry actively works to reduce excess
inventories (which usually lasts for three to four quarters), before resuming another cycle of
expansion.
While the previous downcycle started in 2019 (market down by 12%, but largely stable ex-
memory), we surprisingly entered the current upcycle in 2020, despite the pandemic.
The semis market finally rebounded by 6% in 2020 (despite the negative impact of the pandemic
on the global macro environment) and picked up sharply by 24% in 2021.
While 2022 is now the third year of the upcycle in the current cycle, there is theoretically a high
risk of seeing a cyclical correction in 2023, even more so now that there is more downside to the
macro conditions for the coming months due to the Russia-Ukraine conflict.
Looking at the previous cycles, we rarely saw more than three years of upcycle in the past, as:
1. The market corrected over 2015-16 (+1% per year on average) and picked up materially over
2017-18 (+21% in 2017 and +16% in 2018).
2. The market corrected over 2011-12 (+2% in 2011 and -3% in 2012) and rebounded over 2013-
14 (+4% in 2013 and +10% in 2014).
3. The market corrected materially in 2009 (-15% due to the great financial crisis) and massively
rebounded in 2010 (+36%).
The only time over the past two decades that the upcycle has lasted for more than two to three
years was after the tech bubble crash in 2001. The market surged by 37% in 2000, then crashed by
32% in 2001 and finally stabilised in 2002 (+1%). Then the semis market experienced a four-year
upcycle over 2003-06 (+18% in 2003, +28% in 2004, +7% in 2005 and +9% in 2006).
We have kept our estimates unchanged for the semis market at +10% for 2022E (after +24% in
2021) and have revised down our assumptions to +3% for 2023E (down from +6% previously).
Our new assumptions are based on a soft-landing scenario (which seems credible at this stage),
bearing in mind that a tougher scenario with the market down by mid-single digits could also be
a possibility, depending on the final outcome of the conflict and the evolution of commodity
prices in the months ahead.
Moving ahead, we model a gradual recovery, with 7% growth in 2024E and 11% in 2025E.
Despite the growing uncertainties in the short term, the outlook for the semiconductor market
remains positive for the coming years, as the global megatrends remain intact, with the
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digitalisation of enterprises and our daily lives, the electrification and the digitalisation of cars,
strong secular demand for servers and data centres, the ramp-up of 5G, the accelerated shift
toward renewable energy (solar and wind) and energy-efficient applications, growing
applications for the IoT/industrial IoT, artificial intelligence, and potentially the metaverse, etc.
In this context, IC Insights (an industry analyst group focusing on the semis market) sees the semis
market growing by +11% in 2022 (after +25% in 2021), and at a 7% CAGR over 2021-26, with
sensors/actuators growing at a +12% CAGR, optoelectronics at a +9% CAGR, logic at an +8% CAGR,
analog at a +7% CAGR, memory at a +7% CAGR, microcomponents at a +5% CAGR, and discretes
at a +3% CAGR.
While most industry analysts still see the semis market growing in the 10% range in 2022 (Gartner
sees the semis market growing by 9%, WSTS now by 10%, and IC Insights by 11%), many semis
vendors have guided for double-digit revenue growth in 2022 (including AMD, Infineon, NXP, STM,
etc.).
Underlying trends in the automotive market remain supportive so far

Global car volumes growing by 6.5% in 2022E and 8.5% in 2023E
Kepler Cheuvreux’s automotive team has updated its global light vehicle assumptions (see our 9
March report 2022 headwinds accumulate) to reflect the new headwinds on global light vehicle
production deriving from the war in Ukraine (including wiring harnesses, while other issues are
likely to emerge in the coming weeks/months, potentially including palladium sourcing), in
addition to the heavy impact of the semiconductor shortage in 2022, which is set to continue even
in 2023.
Table 8: Global light vehicle demand 2012-23E (m units, %)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E
Europe 18.1 17.8 18.2 18.7 19.6 20.4 20.4 20.4 16.4 16.4 16.7 19.0
Change (%) -4.9% -1.4% 1.8% 3.0% 5.0% 4.0% -0.2% 0.3% -19.6% -0.3% 2.2% 13.6%
Asia 34.2 36.5 38.4 39.4 43.2 44.5 44.2 41.2 37.8 38.8 41.0 43.5
Change (%) 12.7% 7.0% 4.9% 2.6% 9.8% 3.1% -0.7% -6.8% -8.4% 2.7% 5.7% 6.1%
o/w China 19.2 21.9 23.6 24.9 28.0 28.6 27.8 25.5 24.4 25.3 26.4 28.0
Change (%) 6.7% 13.9% 8.0% 5.3% 12.6% 2.1% -3.0% -8.0% -4.2% 3.7% 4.1% 6.1%
North America 17.1 18.4 19.5 20.7 21.1 20.8 20.6 20.2 17.0 17.6 18.6 20.4
Change (%) 12.6% 7.3% 6.0% 6.3% 2.0% -1.6% -0.5% -2.0% -16.1% 4.0% 5.4% 9.7%
South America 5.5 5.6 5.0 4.0 3.5 4.0 4.3 4.1 3.0 3.3 3.5 4.0
Change (%) 4.3% 0.7% -9.4% -21.1% -11.4% 13.2% 7.5% -4.5% -27.3% 9.8% 6.9% 14.3%
RoW 6.3 6.1 6.4 6.4 5.6 5.6 4.9 4.3 3.7 5.3 6.9 7.2
Change (%) -9.2% -3.2% 4.4% 0.5% -12.6% -0.1% -12.4% -11.8% -14.7% 44.9% 29.1% 4.2%
Total 81.2 84.4 87.4 89.1 93.0 95.3 94.4 90.3 77.8 81.4 86.7 94.1
Change (%) 5.8% 4.0% 3.5% 2.0% 4.4% 2.4% -0.9% -4.4% -13.8% 4.6% 6.5% 8.5%
Kepler Cheuvreux’s automotive team estimates that global light vehicle demand could grow by
6.5% in 2022E (vs. 10% previously, with no more re-stocking assumed in 2022), showing a gradual
acceleration in global light vehicle demand over 2022-23E, as global supply becomes
progressively less constrained, and automakers begin to restock and more appropriately fill
channels than have been starved of supply over the last 18 months.
The automotive team now assumes only limited growth in Europe in 2022E (+2%, affected by the
war in Ukraine, impact of the semiconductor shortages and OEMs’ mix allocations) thanks to easy
comps, but a double-digit growth rate for 2023E (+14%).
Note that the automotive team mostly expects supply to constrain demand in the coming months,
as OEMs currently have exceptionally high order books (in excess of three months). While the war
in Ukraine should put pressure on the level of orders in the coming weeks, there is relatively
limited downside potential to European demand.
North America should keep expanding moderately in 2022E (+5%) with stronger gains in 2023E
(+10%) as well, as the semiconductor supply normalises.
China is now seen growing by +4% for 2022E (with some support coming from customers who
choose to avoid using public transportation given still elevated Covid cases in some parts of the
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country, even though this trend may be more visible in the used car market) and +6% for 2023E
amid government efforts to boost economic growth.
Our automotive team’s estimates for 2022 are now lower than current consensus, but the impact
of the semiconductor shortage on production, which ended up capping demand in H2 2021 in
most regions, still leaves solid growth prospects as it is mainly Europe that is being affected by the
war in Ukraine.
The consequent mini-rebound in demand in 2021 means that the easy base remains in place,
supporting the possibility of a fresh new cycle, assuming that the production headwinds
progressively abate in the coming months.
Megatrends remain intact in the automotive market
Despite the growing macro uncertainties for the coming months, the automotive market is still
benefiting from powerful megatrends, such as car electrification and digitalisation.
Trends in the automotive market are set to remain very supportive for the coming quarters, with
growing volumes, an acceleration in the shift toward electrification and digitalisation, very low
inventories in the market (everything that is shipped by semis suppliers is usually directly
embedded into cars, there are no signs of inventory in the channel, and car inventories are at
record-low levels across the board), strong bookings across the board, and record backlogs, well
above the manufacturing capacities planned for 2022 (capacities are largely sold out in the
automotive industry for 2022).
The supply/demand imbalance should continue well into 2023, as all capacities at IDMs and
foundries at 28nm and above are fully utilised today, and the main challenge will be to ramp up
capacities in the coming quarters.
While supply constraints should gradually ease in the coming quarters, the replenishment of
inventories should continue into 2023.
While the visibility for 2022 seems fairly high in the automotive market, there are some
uncertainties moving into 2023, as much higher commodity prices in the coming months could
dampen consumer spending and automotive demand.
While the production of c. 10m cars has shifted from 2021 to 2022 onward, a harsh macro
correction could wipe out a portion of the pending volumes and could potentially imply some
downside to demand in the coming quarters/years.
Chart 10: PHEV/HEV and BEV volumes 2008-30E (m units)
Source: Macquarie, Kepler Cheuvreux
The volumes of Plug-in Hybrid Electric Vehicles (PHEVs), Hybrid Electric Vehicles (HEVs) and
Battery Electric Vehicles (BEVs) have boomed since the start of the pandemic alongside the rush
from carmakers to meet stringent CO2 emission reduction targets, a strong push from
governments across the world (and supportive subsidies), and a strong appetite from customers
to avail of the much more attractive automotive offering.
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The penetration of xEVs (including PHEV/HEVs and BEVs) jumped from c. 5% in 2019 to more than
12% in 2021, and Macquarie (our research distribution partner in Asia) targets c. 16% xEVs
penetration in 2022 and c. 27% by 2025, with BEVs representing a 50% share of the mix.
All in all, the penetration of xEVs has exploded since the start of the pandemic and industry
analysts have materially revised up their xEV volume forecasts for the coming years since the start
of the pandemic (volumes have been revised up by c. 50% for 2030).
While xEV volume growth should slow from 2025, we believe xEV penetration remains on track to
exceed 40% by 2030E.
While commodity prices have been picking up materially since the start of the Russia-Ukraine
conflict (including the price of nickel, which is widely used for batteries), Macquarie has not seen
any demand destruction so far and still believes that cost increases are a concern but remain
manageable so far (a 60% rise in the nickel price would increase BEV costs by c. 1%).
Chart 11: xEV semis content and incremental power semis by application
Source: Infineon
The move toward xEVs is a very powerful driver for the automotive semis market, as xEVs have
large incremental semis content across the board, with USD600 worth of incremental semis
content for a Mild Hybrid Electric Vehicle (MHEV), USD890 for a Full Hybrid Electric Vehicle (FHEV),
and USD950 for a PHEV/BEV.
Interestingly, the automotive semis market is almost agnostic to the level of electrification with
rather similar semis content for both the FHEV and PHEV/BEV.
Chart 12: ADAS Level 2 and above penetration 2020-30 (%) Chart 13: ADAS semiconductor content (USD)
Source: Soitec Source: Soitec
While xEVs are set to be the largest growth driver for the automotive semiconductor market,
advanced driver assistant systems (ADAS) should also support growth in the coming years.
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The penetration of ADAS L2 and above reached 15% in 2020 and should gradually climb toward
32% in 2025 and 60% in 2030.
That said, the adoption of advanced ADAS levels (such as Level 4/5, which feature large USD1,400
incremental semis content) has been slow and we are very far from the inflexion point where
demand picks up. At the same time, we have seen a gradual ramp-up in the adoption of Level 2
and Level 2+ applications in the market, which supports semiconductor content.
Chart 14: Semiconductor content per car 2009-23E (USD, % change)
Source: Strategy Analytics, Kepler Cheuvreux
The semiconductor content per car has materially increased since the start of the pandemic, with
8% growth in 2020 and a huge increase in 2021E (+28%, materially above the trends seen over
2009-19, +4% per year), on the back of the accelerated shift toward xEVs (and positive support
from ADAS, albeit to a lesser extent), the highly favourable mix (as carmakers have largely
prioritised high-end cars in their production mix over the past few months) and substantial price
increases following intense component shortages over the past quarters.
Moving ahead, we believe the semiconductor content per car should slow from 2022E, as the mix
and the pricing environment should gradually normalise, while the move toward xEVs and ADAS
remains a solid driver for the next decade.
Chart 15: Automotive semiconductor market 2008-23E (USDbn, % change)
Source: Strategy Analytics, Kepler Cheuvreux
While we do not yet have the final numbers from industry analysts, we believe the automotive
semiconductor market has likely expanded by 32% in 2021E (well above the semis market, up by
24%), largely benefiting from strong semiconductor content growth (+28%) and a moderate
volume increase (+4.6%).
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Moving ahead, we believe the automotive semiconductor market remains on track to grow by c.
13% per year over 2022-23E as volumes gradually pick up (+6.5% in 2022E and +8.5% in 2023E,
providing that there is no macro slump in the coming quarters) and semiconductor content
gradually normalises (+6% in 2022E and +4% in 2023E).
Moving beyond 2023, we believe the automotive semis market remains well on track to grow by
around 10% through to 2030.
While semiconductor supply started to improve last October, the situation has worsened recently
with the Russia-Ukraine conflict and the recent lockdowns in China, and the automotive
semiconductor market is likely to remain imbalanced for the whole year in 2022, and potentially
in H1 2023. Nonetheless, the automotive semiconductor market appears to be one of the most
resilient segments in the market today.
Chart 16: Powertrain cost and Silicon Carbide (SiC) system cost benefits
Source: Soitec
While SiC technology is 2-3x more costly than silicon-based IGBTs, it brings 15-20% gains in the
cost of the overall system.
Overall, SiC technology allows for a faster charging time (c. 50%), a longer battery range (c. 5-10%),
and lower system/battery costs (c. USD500-1,000).
SiC has enormous potential for use in a broad range of applications for the coming years, including
inverters (xEVs and train traction), on-board chargers, DC-DC converters, DC/AC converters (for
solar, wind), integrated motor drives, and solid-state breakers.
Specifically, SiC-based inverters and on-board chargers (OBC) have 3x more power density than
silicon-based products (smaller, lighter, and more efficient with a 5-10% higher vehicle range).
Chart 17: SiC market 2018-26E (USDm) Chart 18: SiC based EV powertrain (%)
Source: Yole Développement, Kepler Cheuvreux Source: Soitec
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The Silicon Carbide market is close to the inflexion point and should expand toward USD4.5bn by
2026E (+35% CAGR over 2021-26E, with some upside ahead), benefiting from strong momentum
in the automotive (driven by the aggressive transition from internal combustion engines (ICEs) to
xEVs and the shift from silicon to Silicon Carbide within xEVs) and industrial (thanks to the rapid
deployment of fast-charging EV infrastructure, the renewable energy market, and the move
towards smaller and lighter industrial systems) markets.
While the penetration of SiC for EV powertrain reached 30% in 2020 (largely coming from Tesla), it
should materially increase in the coming years with rising adoption by carmakers (all large OEMs
are expected to ramp up SiC-based powertrain cars in the coming quarters).
STM looks very well positioned on this front with its incumbent position at Tesla, and it appears
to be well on track to reach its USD1bn SiC sales target by 2024 (up from USD1bn initially targeted
in 2025, USD500m in 2021 and c. USD700m now expected in 2022E). While STM remains the
undisputed leader in the SiC market, management expects to keep a 30% market share in a much
bigger market in the coming years.
While Infineon has been lagging in the SiC market following its failed attempt to acquire
Wolfspeed in 2016-17, the group is gradually catching up and targets USD1bn of SiC sales by 2025
(up from USD100m in FY 2020, USD200m in FY 2021 and c. USD380m expected in FY 2022E). Note
that Infineon also expects to reach a c. 30% market share in SiC in the coming years, thanks to its
solid technology offering in SiC trench technology.
Soitec has been gradually deploying its SiC technology roadmap and remains on track to generate
the first SiC sales in Q3 FY 2024 (i.e. Q4 calendar 2023), c. USD170m in sales in FY 2026E, and
potentially USD1bn in sales by 2030E (assuming that the upcoming Bernin 4 fab is running at full
capacity at that time).
Wolfspeed (the undisputed leader in SiC wafers with a c. 60% market share, along with some large
ambitions on SiC devices) aims to reach USD1.5bn in sales in FY 2024 (ending June) and USD2.1bn
in sales in FY 2026 (and more than 70% coming from devices), posting a c. 30% CAGR over FY 2021-
26.
Following the acquisition of GT Advanced Technologies last November (a SiC substrate supplier
that is also Siltectra’s SiC boule provider, which is now part of Infineon), onsemi aims to reach a
USD1bn sales run-rate by the end of calendar 2023.
II-VI is the number two player in the SiC wafer market with a c. 13% market share. It has also built
a vertically integrated platform for products ranging from SiC substrate, to epiwafers, chips,
devices and modules. The group has not provided any specific market share target, but sees a c.
USD30bn SiC market opportunity by 2030.
Lastly, Rohm (which owns SiCrystal, the number three player in the SiC wafer market with a c. 13%
market share, and also has major ambitions in SiC devices) targets a 30% market share in SiC in
the coming years.
While most SiC players all expect to significantly increase their market shares in the coming years,
the math actually does not work at all, and we believe that most of them should end up with lower-
than-anticipated market shares. That said, the adoption of SiC is progressing well above initial
plans and the market should be bigger and should evolve faster than expected.
All in all, most of the SiC vendors should reach their sales ambitions in the coming years, and we
even see upside for some of them.
Industrial markets holding up well so far, potential downturn in 2023

The industrial market is largely exposed to microcontrollers (MCU), general-purpose analog, and
power semiconductor (and specifically IGBTs for high power applications).
Despite growing concerns about the macro conditions in the coming months, the outlook for the
industrial market remains positive so far, supported by the ongoing shift toward electrification
and digitalisation along with growing semis content.
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Fab automation is a clear growth driver in the industrial market, along with power-related
applications, including renewable energies, energy storage systems, motion controls, power
tools, home appliances, etc.
Following a strong recovery in 2021, part of the industrial power semis market has been slowing
down with the normalisation of demand in some areas, (including electric drives, and home
appliances, also affected by supply constraints). The transportation market should also remain
subdued in the coming months, still affected by the delayed recovery of the train traction market
in China, while demand looks better for train traction outside China, as well as for delivery vehicles
and eTrucks.
On the other hand, the demand for power infrastructure (including storage and EV charging
infrastructure) and renewable energy (solar power should keep growing by double digits in 2022,
while wind should stabilise) remains strong and is still being affected by the ongoing supply
constraints.
The demand for MCUs and general-purpose analog remains strong across the board (despite very
tough comps, the MCU market should keep expanding in the double digits in 2022E, while the
analog market should grow by 14%, with c. 10% for the general-purpose analog segment), and the
market is still being heavily affected by supply-demand imbalances.
Chart 19: Microcontroller market 2013-25E (USDbn, % change)
Source: IC Insights, Kepler Cheuvreux
Despite tough comps, the microcontroller (MCU) market is set to keep expanding by 10% in 2022E
(after +23% in 2021), benefiting from higher volumes (+6%) and ASPs (+4%).
Moving ahead, the MCU market is set to expand by c. 5% per year over 2023-25E, with high-single-
digit growth in 32-bit MCUs, low-single-digit growth in 16-bit MCUs, and flat trends in 4/8-bit MCUs.
By segment, the MCU market is expected to grow in the high-single-digit range in automotive
systems and general embedded applications (including smartphones, computers and
peripherals, industrial uses, and consumer products) and in the low-single-digit range in
smartcards (including payments, transport, identity, etc.) over 2022-25E.
Semiconductors are being used throughout the industrial market and there are increasing
opportunities to provide customers with an integrated system offering (including MCUs,
connectivity, power semis, analog, security, and software solutions, etc.).
Most semis vendors exposed to industrial markets remain in clear allocation mode today, and
demand still largely exceeds the available production capacities.
The supply-demand imbalance is unlikely to be resolved in the industry vertical before the
beginning of 2023, providing that there is no major deterioration in macro conditions in the
coming months.
There is still good visibility on the industrial market for the coming quarters, as semis vendors are
deeply engaged with large OEMs and distributors.
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The level of inventories in the industrial market remains extremely low today, and inventory
turnover remains high.
While many segments in the industrial market are not widely addressed by the foundries (largely
based on legacy technologies), rather limited incremental capacities are expected to come on
stream over the next 4-5 years and we see a rather limited risk of major over-supply in the
industrial market going forward.
That said, the industrial market remains largely addressed through distribution (which is usually
more difficult to predict than in the OEM channel) and it usually undergoes an inventory correction
in the event of a market downturn.
The semiconductor industry is still highly cyclical and increasingly there have been questions
about the strength of the semis cycle today, notably after several quarters of very strong growth
(the semis market expanded by 24% in 2021 and remains on track to grow again by 10% in 2022E,
with some moderate upside risk ahead).
Accordingly, there are some real uncertainties about the evolution of the industrial market in
2023, as this vertical is usually a bit of a laggard (compared to consumer electronic products,
which tend to correct faster in the cycle) and it could be hit by tougher macro conditions.
That said, a hard-landing scenario is far from certain at this stage, given the lack of capacities in
these markets today (providing that the macro conditions do not totally collapse in the coming
quarters).
The most likely scenario would be a kind of normalisation in 2023, with growth slowing, but not
collapsing.
Smartphone market slowing, 5G penetration picking up faster

Smartphone volumes declined by 3% YOY in Q4, largely impacted by the supply chain disruptions
and component shortages, and some weakness in several emerging markets (including China,
India, etc.).
5G penetration jumped to 49% in Q4, (up from 41% in Q3), with a very high 5G penetration rate in
China (c. 80%) and a strong take-up in the emerging markets (including Eastern Europe, and Latin
America).
The smartphone ASPs grew again in the low-double-digit range YOY in Q4, driven by very quick 5G
adoption.
Chart 20: Smartphone market shipments 2015-25E (m units)
Source: IDC, Kepler Cheuvreux
Smartphone volumes finally rebounded by 5.5% in 2021 (after -6.5% in 2020) and were almost
back to pre-pandemic levels (i.e. 1% below 2019 shipments), despite large supply constraints
toward the second half of the year. Volume growth would have been much higher in 2021 without
any component shortages.
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The visibility has deteriorated for the coming months due to the Russia-Ukraine conflict and there
could be potential downward pressure on consumer spending (amid the strong rise in commodity
prices) in the coming months.
We believe the smartphone market would likely be one of the most vulnerable markets (along
with the PC market) in the event of a severe macro correction in the coming months.
In this sense, smartphone shipments in China have been weak since the start of the year, down by
23% YOY (with February alone down by c. 32% YOY, due to tough comps and poor underlying
demand globally). 5G smartphone shipments also declined by c. 11% YOY in China in
January/February, and 5G penetration reached c. 80%. Note that the multiple lockdowns in China
since the start of the year seem to have started to affect smartphone demand throughout the
country (according to recent comments from Mark Liu, TSMC’s Chairman). While smartphone
shipments in China are set to start improving from Q2, we finally expect volumes to slightly decline
over the full-year 2022.
Accordingly, Nikkei Asia mentioned at the end of March that Apple was planning to make 20%
fewer iPhone SE units (its first 5G budget phone) than originally planned next quarter, only three
weeks after having launched the device. It seems that Apple has asked its suppliers to lower their
production orders by 2-3m units, due to weaker-than-expected demand.
Apple also asked its suppliers to produce several million fewer units of the entire iPhone 13 range
than previously planned, however this seems to be linked more to a seasonal demand variation.
Apple is also said to be reducing AirPod orders by more than 10m units for the full-year 2022, due
to weaker demand and an inventory correction (this could lead to a c. 10-15% downward revision
over the full year).
Apple’s volume reduction confirms that the Russia-Ukraine conflict is likely to hamper global
consumer spending and specifically discretionary spending, such as for consumer electronic
products (including smartphones, tablets, PC, laptops, etc.).
That said, smartphone volumes could remain rather resilient in 2022E (largely flattish), with some
pent-up demand in almost all areas driven by component shortages, increasing customer interest
in 5G and new form factors like foldables, and rather low inventories in the channel.
5G penetration is picking up faster than expected and finally climbed to c. 40% in 2021 (up from
20% in 2020 and 1% in 2019).
Despite some downward pressure on smartphone volumes in the coming months, 5G penetration
should keep picking up rapidly in the coming quarters, and climb toward 55% in 2022E, 68% in
2023E, 76% in 2024E and 83% in 2025E.
Despite the muted smartphone volumes expected in the coming quarters, the smartphone semis
market continues to benefit from the increase in semis content that has accompanied the fast
adoption of 5G (5G phones have higher semi content than 4G phones in many areas, including
application processors, memory, RF, power, sensors, etc.), and should keep expanding faster than
smartphone volumes in the coming quarters and years.
According to the newswires, MediaTek (one of the largest smartphone semis suppliers globally
with Qualcomm, with strong exposure to Asian smartphone vendors) has seen its inventory level
for smartphone application processors (including 4G and 5G ones) increasing to 160-180 days
recently from the normal levels of around 100 days, due mainly to lacklustre demand from Chinese
smartphone vendors over the past few months.
Inventories in the smartphone channel remain low across the board (outside MediaTek for
application processors in China) and the market should remain affected by the supply-demand
imbalance until H2 2022.
PC market on track for a moderate decline over 2022-23E

Following almost a decade of structural decline, the PC market has rebounded materially since
the start of pandemic with volumes up in the mid-teens over 2020-21, on the back of strong
demand linked to work-from-home trends.
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PC volume growth slowed to +1% YOY in Q4 (after +58% YOY in Q1, +16% YOY in Q2 and +7% YOY
in Q3), largely due to a sharp decline in US shipments (due to supply chain issues and the collapse
of Chromebook demand), and supply constraints globally, while the emerging markets continued
to hold up well.
While consumer and educational demand has slowed in some developed markets (including the
US), the overall PC market has reset at a much higher level than before the pandemic, notably
supported by some ASP increases.
Chart 21: PC market shipments 2011-25E (m units, % change)
While there was strong PC volume growth in 2021 (+16%, after +15% in 2020), it could actually
have been even stronger in the absence of the challenging logistics issues and ongoing
component shortages.
The PC market ended 2021 with many buyers still waiting for their PC orders to ship, and supply is
likely to remain constrained in H1, especially in the commercial segment where demand remains
robust.
While consumer demand seems to be slowing in some markets, and some education markets are
gradually becoming saturated, demand for gaming remains strong globally.
We believe the PC market would likely be one of the most vulnerable markets (along with the
smartphone market) in the event of a severe macro correction in the coming months.
Note that the multiple lockdowns in China since the beginning of the year have started affecting
PC demand throughout the country (according to recent comments from Mark Liu, TSMC’s
chairman).
According to newswires in Asia, some ODMs are about to cut consumer notebook prices to
stimulate demand in the coming months, notably after a slow start to the year. Some notebook
vendors seem to have revised down shipment forecasts for H1 2022 by double digits.
Asustek’s co-CEO Samson Hu recently mentioned that notebook component shortages are
gradually improving, and the situation now looks more manageable amid a slowdown in market
demand for consumer electronic devices, while the supply of some specific chips from US IDMs
remains pretty tight.
Acer’s management seems to have conservative assumptions for its business for the second half
of the year, as it believes that inflation could affect consumer spending in the coming months.
While Taiwanese notebook ODMs (including Compal Electronics, Quanta, Wistron, etc.) still have
a positive outlook for H1 2022, the visibility on orders is limited and the Russia-Ukraine conflict
has significantly reduced the shipment prospects for H2 2022.
The impact of the component shortages (including MOSFETs, power management ICs, audio ICs,
driver ICs) peaked at the end of last year and the situation seems to have been gradually improving
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since the beginning of the year. According to the supply chain in Asia, the supply constraints in the
PC market should finally be resolved in H2 2022.
While visibility has deteriorated since the start of the Russia-Ukraine conflict, PC shipments could
decline by 5% in 2022E and 3% in 2023E, before stabilising at a lower level from 2024E.
Despite some downward pressure on the consumer segment in the coming months, there are still
solid growth prospects for notebook PCs, gaming, and education products in the coming years, as
the pandemic has changed the way people have been using PCs (including remote or hybrid
workstyles, online courses, etc.).
Still-solid double-digit growth prospects for servers and data centres

The server and data centre market remains a secular growth driver within the semis market, along
with car electrification and digitalisation, renewable energy and energy-efficient applications,
IoT/industrial IoT, 5G, etc.
Chart 22: Server market shipments 2011-25E (m units, % change)
Despite supply constraints, the server market was recovering in 2021 (up by 5% after +3% in 2020
and flattish volumes in 2019).
Despite the growing macro uncertainties, the server market should keep growing moderately in
2022E (+5%), benefiting from a historically high level of backlogs, pent-up demand and an aging
installed base ready for a refresh cycle.
That said, the supply chain issues and depleted inventories are likely to affect volumes into mid-
2022.
The server market is regaining momentum, as enterprises have been accelerating their
modernisation projects and server shipments are reaccelerating (after a clean-up of some excess
inventory in 2021).
Moving beyond 2022, the server shipments should gradually accelerate in the high-single-digit
range over 2023-25E.
While the server market benefits from secular growth drivers, including strong structural demand
from hyperscalers, part of the market is linked to enterprise investments and tougher macro
conditions could affect enterprise spending in the coming months.
The supply of components for the server market remains extremely tight (particularly for
microcontrollers, power management ICs, and other ASICs), and the shortage remains much more
severe than that for notebook components. The supply chain in Asia believes that the supply
constraints are likely to continue through the end of the year in the server market.
While server shipments remain on track to grow in the mid-to-high-single-digit range in the coming
years, the semis market for servers, data centres and storage is more likely to grow in the low double
digits in the coming years, benefiting from solid semis content growth across the board.
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Still some downside ahead before reaching the trough
While the semiconductor market is a structurally growing market (which has expanded by
8% per year since 2002), it remains cyclical by nature. Over the past two decades, the
upcycles tend to last for 16 months (65% of the time) and the SOX posted a c. 90%
performance on average, while the downcycles tend to last for seven months (35% of the
time) and the SOX dropped by c. 31% on average.
Although the current downcycle started in January 2020, we believe the trough could
theoretically be reached next summer (potentially in July), when companies report Q2
results, and the semis sector could decline by c. 10% from the current level (the SOX already
dropped by 23% from its recent highs).
The sector is set to remain volatile in the coming months, suggesting that it is probably a bit
too early to invest aggressively in the sector. That said, some stocks have already almost
fully discounted a cyclical downturn (including Infineon and Soitec) and are already back to
good entry prices.
Semis sector usually drops by c. 31% from peak to trough

We have analysed the last ten cycles in the semiconductor market over the past two decades, to
better understand where we could be in the current cycle and gauge the downside potential, the
timing before potentially reaching the trough, and the potential upside once we have reached the
trough.
We have decided to use the PHLX Semiconductor Sector Index (SOX) as a proxy for the
semiconductor sector, as it is the main semiconductor index and is fairly representative of the
semiconductor industry (despite the limited number of European semiconductor companies in
the index).
The SOX is made up of 30 semiconductor companies (mostly US companies, excluding ASML, NXP
and TSMC), including AMD, Amkor Technologies, Analog Devices, Applied Materials, ASML, Azenta,
Broadcom, Entegris, II-VI, Intel, IPG Photonics, KLA, Lam Research, Lattice Semiconductor,
Marvell, Microchip, Micron, Monolithic Power Systems, Nvidia, NXP, onsemi, Power Integration,
Qorvo, Qualcomm, Silicon Labs, Skyworks, TSMC, Teradyne, Texas Instruments, and Wolfspeed.
The 2003-04 cycle
Chart 23: SOX index from February 2003 to September 2004
Source: Refinitiv Eikon
The upcycle started in February 2003 and lasted for 11 months before reaching the peak in
January 2004. The SOX index delivered a 106% performance over the period.
The downcycle began in January 2004 and lasted for eight months before reaching the trough in
April 2004. The SOX index dropped by 35% over the period.
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The 2004-06 cycle

Chart 24: SOX index from September 2004 to July 2006
The upcycle began in September 2004 and lasted for 15 months before reaching the peak in
December 2005. The SOX index delivered a 42% performance over the period.
The downcycle started in December 2005 and lasted for eight months before reaching the trough
in July 2006. The SOX index declined by 23% over the period.
The 2006-08 cycle
Chart 25: SOX index from July 2006 to October 2008
The upcycle started in July 2006 and lasted for 12 months before reaching the peak in July 2007.
The SOX index delivered a 35% performance over the period.
The downcycle began in July 2007 and lasted for 16 months before reaching the trough in
November 2008. The SOX index dropped by 69% over the period.
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The 2008-10 cycle

Chart 26: SOX index from November 2008 to August 2010
The upcycle began in November 2008 and lasted for 17 months before reaching the peak in April
2010. The SOX index delivered a 122% performance over the period.
The downcycle started in April 2010 and lasted for four months before reaching the trough in
August 2010. The SOX index declined by 23% over the period.
The 2010-11 cycle
Chart 27: SOX index from September 2010 to August 2011
The upcycle started in September 2010 and lasted for six months before reaching the peak in
February 2011. The SOX index posted a 47% performance over the period.
The downcycle began in February 2011 and lasted for six months before reaching the trough in
August 2011. The SOX index dropped by 31% over the period.
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The 2011-12 cycle

Chart 28: SOX index from August 2011 to November 2012
The upcycle began in August 2011 and lasted for seven months before reaching the peak in March
The downcycle started in April 2010 and lasted for eight months before reaching the trough in
November 2012. The SOX index declined by 19% over the period.
The 2012-16 cycle
Chart 29: SOX index from November 2012 to January 2016
The upcycle started in November 2012 and lasted for 30 months before reaching the peak in May
2015. The SOX index achieved a 105% performance over the period.
The downcycle began in June 2015 and lasted for eight months before reaching the trough in
November 2016. The SOX index declined by 25% over the period.
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The 2016-18 cycle

Chart 30: SOX index from February 2016 to December 2018
The upcycle began in February 2016 and lasted for 28 months before reaching the peak in June
The downcycle started in June 2018 and lasted for seven months before reaching the trough in
December 2018. The SOX index declined by 26% over the period.
The 2018-20 cycle
Chart 31: SOX index from December 2018 to February 2020
The upcycle started in December 2018 and lasted for 14 months before reaching the peak in
February 2020 (with the start of the pandemic). The SOX index achieved a 71% performance over
the period.
The downcycle began in February 2020 and lasted for only one month before reaching the trough
in March 2020. The SOX index declined by 35% over the period.
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The current cycle

Chart 32: SOX index from March 2020 to today
The upcycle began in March 2020 and lasted for 21 months before reaching the peak in December
The downcycle started three months ago in January 2022. The SOX index has already declined by
23% since the start of the current downcycle.
The trough could be reached in July
While the semiconductor market is structurally growing (having expanded by 8% per year since
2002), it remains cyclical by nature, and 65% of the time it is in an upcycle.
Table 9: Upcycles vs. downcycles over the past 20 years

Cycle Length of upcycle (months) Performance upcycle (%) Length of downcycle (months) Performance downcycle (%)
2003-2004 11 106% 8 -35%
2004-2006 15 42% 8 -23%
2006-2008 12 35% 16 -69%
2008-2010 17 122% 4 -23%
2010-2011 6 47% 6 -31%
2011-2012 7 32% 8 -19%
2012-2016 30 105% 8 -25%
2016-2018 28 150% 7 -26%
2018-2020 14 71% 1 -35%
Current cycle (2020-?) 21 193% 3 -23%
Average 16 90% 7 -31%
Over the past two decades, the upcycles have tended to last for 16 months (65% of the time) and
the SOX has usually posted a c. 90% performance on average.
On the other hand, the downcycles tend to last for seven months (35% of the time) and the SOX
has generally dropped by c. 31% on average.
While the current downcycle started in January 2020, the trough could theoretically be reached
next summer (potentially in July), when companies report their Q2 results.
The SOX index dropped to c. 3,050 in mid-March, showing a 25% decline from the peak of c. 4,040
reached at the end of December (c. 6% to the average decline observed in downcycles over the
past two decades).
That said, the SOX has been erratic since the middle of March and is now down by 23% from its
recent highs (after a rebound in the back half of March, the SOX is almost back to its recent lows).
Accordingly, we estimate that there is theoretically still c. 10% downside ahead, suggesting that it
is perhaps a bit too early to buy the semis sector more aggressively.
That said, the situation is highly different from one company to another, as some companies have
outperformed/underperformed since the start of the correction:
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1. ams OSRAM is down by 36% from its recent highs reached at the middle of November.
2. AT&S is close to all-time high levels today (only down by 9% from its recent highs at the end
of March).
3. Infineon is down by 37% from its recent highs reached at the end of November.
4. Melexis is down by 30% from its recent highs reached at the middle of November.
5. Nordic Semiconductor is down by 43% from its recent highs reached at the end of November.
6. STM is down by 24% from its recent highs reached at the middle of November.
7. Soitec is now down by 35% from its recent highs reached at the beginning of December, after
a solid 20% rebound from its recent lows reached at the beginning of March.
8. u-blox is now 5-10% above its recent highs reached over the past few months, following
strong sales growth in 2021, and it stands to benefit from the strong outlook for 2022.
From the current share price (not considering our rating on the stocks), there is less potential
downside on ams OSRAM, Infineon, Melexis, Nordic Semiconductor, STM and Soitec, and maybe
more downside risk on AT&S, and u-blox.
Buying the semis sector around the trough usually yields significant returns for investors as the
sector usually almost doubles from the trough to the peak (90% average performance) and the
sector is also structurally growing through the cycle (c. 23% average returns per year over the past
two decades).
Valuations almost back to the trough

While consensus estimates have not been cut materially so far, we have started to take a more
conservative view on the semis market and cut our estimates for most of the semis companies
under our coverage (with very few exceptions for company-specific reasons).
It is fair to say that we have modelled a soft-landing scenario, with the semis market decelerating
in 2023 (+3% in 2023E, down from 10% in 2022E, and +24% in 2021), but not collapsing.
With a very tough macro correction, we believe the semis market would definitely decline, bearing
in mind that the market ex-memory has not declined in any year since the great financial crisis
back in 2009 (the semis market dropped by 12% in 2019, due to the weakness in the memory
segment, but it remained stable excluding memory).
Chart 33: SOX index (LHS) and EPS trends (RHS) from 2018 to today
Source: Bloomberg
The semiconductor sector usually reaches the trough before earnings are massively cut (as
observed during the pandemic, when the market troughed in March 2020 and earnings finally
troughed at the end of April).
While the SOX has started to correct since its recent highs reached at the end of last year, the
earnings cuts are likely to come in the coming months.
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While the semiconductor sector usually reaches the trough before consensus starts revising
estimates, it usually starts rebounding when the earnings downgrades materialise.
Assuming that the potential earnings downgrades from consensus come after Q2 results at the
end of July, then the right time to buy the semis sector more aggressively might be during the
summer and potentially around the Q2 earnings season.
While consensus has not yet cut forecasts massively for the coming years, there is likely to be some
downside to estimates in the coming months.
That said, the SOX has corrected by 23% since its recent highs and valuation is back to more
reasonable levels (EV/EBIT and P/E ratios are now closer to the 20-year average).
Chart 34: SOX index EV/Sales from 2004 to today
Source: Bloomberg
The SOX currently trades on an EV/Sales of c. 5.6x, well above the average of the past two decades
(c. 3.4x), which appears to be fully justified by the structural changes in the industry (stronger
growth prospects, lower cyclicality, higher margin and free cash flow profiles, etc.). Note that the
SOX has nevertheless corrected since the recent highs reached at the end of November (c. 7x
sales).
Chart 35: SOX index EV/EBIT from 2004 to today
Source: Bloomberg
The SOX currently trades on an EV/EBIT of c. 21x, slightly above the average of the past two
decades (c. 20.6x), and well below the recent highs (c. 27x reached at the end of November).
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Chart 36: SOX index P/E from 2004 to today
Source: Bloomberg
Lastly, the SOX currently trades on a P/E of c. 23x, slightly below the average of the past two
decades (c. 25.7x), and well below the recent highs (c. 30x reached at the end of November).
Looking at the European semis sector and companies under our coverage, we see that valuations
are already back to the trough.
While we have already cut our estimates significantly for the coming years, we cannot rule out
further downward revisions in the coming months.
That said, our estimates already factor in tougher macro conditions and valuations are now back
to more reasonable levels.
Chart 37: AT&S EV/EBIT from 2010 to today
Source: Bloomberg, Kepler Cheuvreux
AT&S now trades at 30x EV/EBIT FY 2023E, 17x FY 2024E, and 14x FY 2025E, well above the average
since 2010 (c. 14x), as the group’s growth profile is totally changing with strong growth
opportunities around ABF substrate in the coming years (AT&S aims to become one of the top two
suppliers for high-tech ABF substrates by 2026E).
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Chart 38: ams OSRAM EV/EBIT from 2010 to today (ams standalone until July 2020 and ams Osram from July 2020)
ams OSRAM currently trades at 12x EV/EBIT 2022E, 12x 2023E, and only 7x 2024E, well below the
average since 2010 (c. 18x), as the group has materially de-rated with the loss of Apple’s 3D sensing
and the acquisition of Osram back in 2020. Note that we have already significantly cut our
estimates on ams OSRAM, meaning that valuation is undemanding on rather conservative
estimates.
Chart 39: Infineon EV/EBIT from 2010 to today
Infineon’s valuation is now back to attractive levels, at c. 15x EV/EBIT FY 2022E, 15x FY 2023E, and
only 12x FY 2024E, quite close to the average since 2010 (c. 15x), on rather conservative estimates
(as we have already significantly cut our estimates).
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Chart 40: Melexis EV/EBIT from 2010 to today
Melexis currently trades at c. 18x EV/EBIT 2022E, 17x 2023E, and 16x 2024E, slightly below the
group’s average since 2010 (c. 19x).
Chart 41: Nordic Semiconductor EV/EBIT from 2011 to today
Nordic Semiconductor currently trades at c. 28x EV/EBIT 2022E, 18x 2023E, and 12x 2024E, below
the group’s average since 2011 (c. 27x).
Chart 42: Soitec EV/EBIT from 2016 to today
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Note that we have taken Soitec’s EV/EBIT multiples since the beginning of 2016, as the group was
loss-making prior to that, due to the painful restructuring of its solar business in previous years.
While Soitec used to trade on rich multiples, the stock is now back to more attractive valuation
levels today, at c. 24x EV/EBIT FY 2023E, 19x FY 2024E, and 15x FY 2025E, below the average since
2016 (c. 24x), on rather reasonable estimates.
Chart 43: STMicroelectronics EV/EBIT from 2016 to today
Note that we have taken STM’s EV/EBIT multiples since the beginning of 2016, as the group had
been generating very low margins or was loss-making prior to that, due to the painful turnaround
of its wireless semiconductor business following the collapse of Nokia (its largest customer
historically, which represented as much as 25% of group sales and totally collapsed following the
ramp-up of the iPhone).
STM’s valuation is now back to fairly attractive levels, at c. 10x EV/EBIT 2022E, 10x 2023E, and only
8x 2024E, well below the average since 2016 (c. 15x), on rather conservative estimates (as we have
already significantly cut our estimates).
Chart 44: u-blox EV/EBIT from 2010 to today
u-blox currently trades at c. 14x EV/EBIT 2022E, 11x 2023E, and 9x 2024E, well below the group’s
average since 2010 (c. 19x).
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Investment conclusion
The semiconductor sector remains a structurally growing market, with a positive outlook for
the coming years (the market looks well on track to grow by 7% per year over 2022-30E), as
megatrends remain intact, with the digitalisation of enterprises and our daily lives, the
electrification and digitalisation of cars, strong secular demand for servers and data centres,
the ramp-up of 5G, the accelerated shift toward renewable energy (solar and wind) and
energy-efficient applications, growing applications for IoT/industrial IoT, artificial
intelligence, potentially the metaverse, etc.
Despite the powerful growth drivers anticipated for the coming years, the semis sector
remains cyclical and heavily dependent on macro conditions. Accordingly, we believe there
is a growing risk of a cyclical correction in the coming months, with the sharp increase in
commodity prices across the board on the back of the Russia-Ukraine conflict.
While the semis sector has already corrected significantly since the beginning of the year
(the SOX index has declined by 23% since its recent highs), we see c. 10% potential
incremental downside in the coming months. All in all, we believe the semis sector should
remain volatile in the coming months.
We believe there is a good chance that the sector could reach the trough during the summer
(potentially in July), or perhaps around the Q2 results release (when consensus earnings
cuts could materialise).
Accordingly, we remain on a kind of tactical standby from a sector point of view, while some
stocks have already almost fully discounted a cyclical downturn and are already trading at
attractive entry prices today (including Infineon and Soitec).
We keep STMicroelectronics (TP cut from EUR60 to EUR50) and Soitec (TP cut from EUR235
to EUR210) in our Most Preferred Stocks list for the IT Hardware & Semis sector, and we also
like Infineon (TP cut from EUR48 to EUR40) and AT&S (TP cut from EUR63 to EUR60) in the
semis sector.
IT Hardware & Semis
Company inserts
 ams Osram (Buy , TP: CHF19.00): Radical shift to automotive/industrial markets

 AT&S (Buy, TP: EUR60.00 (63.00)): Uniquely positioned in rising ABF-S industry
 Infineon (Buy, TP: EUR40.00 (48.00)): Back to good entry prices
 Melexis (Hold, TP: EUR83.00 (95.00)): A soft landing?
 Nordic Semiconductor (Hold, NOK260.00): Vulnerable in high-inflation environment
 Soitec (Buy, EUR210.00 (235.00)): High degree of visibility for the coming months
 STM (Buy, EUR50.00 (60.00)): Solid growth drivers, attractive valuation
 u-blox (Hold, CHF80.00): Attractive near-term dynamics
#EstimatesRevision
Release date: 11 April 2022
ams Osram Buy

Head of IT Hardware & Semis Research
+33 1 53 65 35 10
ssztabowicz@keplercheuvreux.com
Switzerland | IT Hardware & Semis Beta Profile: MCap: CHF3.3bn
Target Price: CHF19.00 Change in TP: none Bloomberg: AMS SW Reuters: AMS.S
Current Price: CHF11.99 Change in Sales: none 22E/none 23E Free float 77.8%
Avg. daily volume (CHFm) 41.4
Up/downside: 58.5% Change in Adj. EBIT: none 22E/none 23E
YTD abs performance -26.4%
Market data: 11 April 2022 Change in Adj. EPS: none 22E/none 23E 52-week high/low (CHF) 19.42/11.90
Radical shift to automotive/industrial markets FY to 31/12 (EUR)

Sales (m)
12/22E
4,960.0
12/23E
5,010.0
12/24E
5,260.0
Why this report? EBITDA adj (m) 1,097.5 1,211.0 1,516.5
EBIT adj (m) 497.5 551.0 786.5
Despite ongoing supply constraints in the market (and specifically in the Net profit adj (m) 251.5 347.4 552.7
automotive market), ams OSRAM started the year with a solid backlog globally Net financial debt (m) 1,915.0 2,110.0 1,580.0
and an opportunity to deliver the missed sales from 2021 in the automotive FCF (m) -120.0 -195.0 530.0
business, once the supply-demand imbalance starts to ease. Despite some EPS adj. and ful. dil. 0.90 1.22 1.90
Consensus EPS 1.17 1.48 1.86
potential weakness in the consumer market in the coming quarters, there is Net dividend 0.00 0.00 0.00
higher visibility in the automotive and industrial markets. The group benefits
FY to 31/12 12/22E 12/23E 12/24E
from plenty of growth opportunities (including LEDs, microLEDs, UV-C LED, P/E adj and ful. dil. 13.1 9.7 6.2
horticulture, LIDAR, in-cabin sensing, 3D sensing, AR/VR, etc.) and a much EV/EBITDA 5.6 5.2 3.8
broader portfolio with higher exposure to automotive/industrial markets. We EV/EBIT 12.4 11.5 7.4
keep our Buy rating (TP CHF19), as ams OSRAM remains an attractive FCF yield -3.7% -6.0% 16.4%
Dividend yield 0.0% 0.0% 0.0%
transformation story, and valuation looks undemanding. ND(F+IFRS16)/EBITDA 2.0 2.0 1.2
Key findings Gearing 61.9% 67.4% 46.9%
ROIC 9.1% 9.9% 14.5%
 The non-core asset disposal strategy is progressing well, and the group looks well
EV/IC 1.5 1.5 1.5
on track to complete full disposals by year-end and to start 2023 from a clean base.
Sector Most Pref.
Deconstructing the forecasts Soitec
We still expect flattish sales LFL in 2022E, +1% LFL in 2023E, +5% LFL in 2024E, and STMicroelectronics

+8% LFL in 2025E (unchanged).
 We still expect a stable adjusted operating margin at 10% in 2022E, 11% in 2023E,
15% in 2024E, and 17% in 2025E (unchanged).
 We keep our CHF19 TP based on a DCF valuation with an 11% WACC.
Investment case Valuation methodology
ams benefits from plenty of growth opportunities for the
 
Our CHF19 TP is based on a DCF with reasonable
coming years, including LEDs, microLEDs, UV-C LED, assumptions (11% WACC, 6% sales growth and a 16%
horticulture, LIDAR, in-cabin sensing, 3D sensing, AR/VR, adjusted operating margin in the medium term).
etc. Using a conservative 10x EBIT multiple for 2024E could

The acquisition of Osram looks fairly strategic, allowing the
 push FV to CHF18.4 by 2024E or CHF16.6 discounted back
group to create disruptive products in the medium term, to Q2 2023E.
diversify outside smartphones and Apple, strongly 
At our TP, ams should trade on reasonable multiples (c. 10x
reinforce positions in automotive, and generate large 2024E EBIT).
synergies by spring 2024E (EUR350m). Risks to our rating

While sales should gradually recover in the coming eaker-than-expected demand in smartphone and
W
quarters (flat LFL in 2022E, despite the loss of significant automotive markets hitting sales at both ams and Osram
business at Apple and supply constraints, with +5% LFL (consumer is c. 27% of sales, automotive is c. 40% of sales).
over 2023-25E), the adjusted operating margin should The Osram integration could prove more complex than

rebound toward 17% by 2025E (vs. 10% in 2021). expected, jeopardising the EUR350m of synergies for spring
Catalysts 2024.
etter/faster-than-expected integration of Osram.
B 
The loss of the 3D sensing and part of the ambient light
Stronger-than-expected sales in the automotive business
 sensing designs at Apple is set to cause big downside to
in next quarters. sales and margins (up up to 12% of group's sales and up to
Ramp-up of 3D sensing designs within the Android
 25% of the group's adjusted operating result).
ecosystem. ams OSRAM
This research is the product of Kepler Cheuvreux, which is authorised
information and disclosures. and regulated by the Autorité des Marchés Financiers in France.
ams OSRAM Buy | Target Price: CHF19.00
Keeping conservative scenario for the coming quarters

While the environment remains fairly supportive for the coming months, we cannot rule out the
possibility of tougher macro conditions (notably affecting consumer spending and consumer
goods) and a potential slowdown in the semis cycle.
While ams was initially overexposed to the consumer market (c. 75% of sales before the
acquisition of OSRAM), the group has materially shifted its business mix toward the automotive
and industrial markets following the acquisition of OSRAM.
ams OSRAM now generates c. 40% of sales in automotive and 33% of sales in industrial & medical,
while its exposure to consumer has dropped materially (c. 27% of sales, including c. 10-15% from
Apple, in our view), which could weaken in the coming quarters.
We already significantly cut our estimates last week following the CMD (we have cut EPS by 21%
per year over 2022-25E), adopting a more conservative scenario for the coming quarters, with
moderate revisions in 2022 and more severe cuts over 2023-25.
We now see largely stable sales LFL in 2022E, with semiconductor sales down by 5% LFL (affected
by the loss of the 3D sensing design at Apple and part of the ambient light sensing design, and
slower smartphone volumes in the coming quarters), and lamps & systems sales up by 10% LFL
(benefiting from a gradual recovery in automotive LEDs).
We now see sales growing by 1% LFL in 2023E, with semiconductor sales down by 1% LFL (largely
affected by softer demand in the consumer electronics market) and lamps & systems sales up by
4% LFL (as tougher macro conditions could affect demand for LEDs in automotive and industrial
markets).
Moving ahead, we have modelled a gradual recovery, with sales up by 5% LFL in 2024E (at the very
low end of the company guidance range for 2024), and by 8% LFL in 2025E.
While management still aims to accelerate sales growth in the double-digit range once the
disposal strategy has been completed, we have modelled a rather conservative scenario with a
return to double-digit growth only beyond 2025E.
Following the acquisition of Osram, the group now benefits from plenty of growth opportunities
for the coming years, and specifically in:
1. Automotive (including forward lighting dynamic, backlighting, signalling dynamic, in-cabin
sensing, interior ambient, LIDAR, microLEDs, smart surfaces, projection, etc.).
2. Consumer (including 3D sensing & camera enhancements, vital signs monitoring, microLED
displays, AR/VR glasses sensing & visualisation, etc.).
3. Industrial & medical (including horticulture & smart farming, LED & laser projection, UV-C
LED, micro-cameras, point-of-care diagnostics, etc.).
We now see the adjusted operating margin largely stable at 10% in 2022E and only climbing by
100bps to 11% in 2023E, affected by slower sales and a less favourable pricing environment, while
the group is still set to benefit from the ramp-up of the EUR350m of synergies for spring 2024 and
the disposals of loss-making non-core assets from OSRAM (including the majority of the digital
business and the automotive lighting systems (AMLS) business).
Moving ahead, we believe margins should gradually rebound to 15% in 2024E (at the lower end of
company guidance, i.e. margins of at least 15%) and 17% in 2025E, still well below company’s
margin target for the coming years (>20%).
While ams OSRAM would be affected by any potential macro correction in the coming months, the
group’s margins look somewhat protected by company-specific drivers (including the ramp-up of
synergies and the disposal of loss-making non-core assets from OSRAM).
Following the announcement of the large EUR800m 8” LED front-end fab build-up in Kulim,
Malaysia, we have updated our D&A estimates for the coming years and now see D&A at c. 12-14%
of sales over 2022-25E (vs. 10-11% of sales expected previously).
We still see significantly higher capex over 2022-23, with capex jumping to EUR750m in 2022E (c.
15% of sales) and EUR1bn in 2023E (c. 20% of sales), and then dropping significantly towards
EUR530m in 2024E (c. 10% of sales) and EUR460m in 2025E (c. 8% of sales).
Accordingly, we have revised up our cash generation estimates for the coming years, and now see
EUR120m of negative FCF in 2022E (vs. EUR200m of negative FCF previously) and EUR195m of
negative in 2023E (vs. EUR315m of negative previously).
Moving beyond 2023, we believe the group should start generating significant FCF from 2024
onward (EUR530m FCF in 2024E and EUR760m FCF in 2025E), showing very high FCF yields at
current levels (c. 16% in 2024E and 24% in 2025E).
While we are currently at the very low end of the company guidance range for 2024 (in terms of
sales and margins), we believe the group could generate breakeven to slightly positive FCF over
2022-23, at the midpoint of the guidance range, and even positive FCF at the high end of the
guidance range.
Worst-case scenario would lead to an incremental 22% EPS cut over 2023-25E
While we have already adopted a more conservative scenario for the coming quarters, we cannot
rule out a severe macro slump and much weaker demand in the coming quarters than we have
modelled.
In a worst-case scenario, we believe ams OSRAM could potentially end up with a moderate LFL
sales decline in 2023E (-3% LFL; we do not have strong visibility on historical performance, as the
two groups were only combined in July 2020) and a 100bp adjusted operating margin decline to
9% (as the group should continue to benefit from the ramp-up of the EUR350m of synergies
targeted for spring 2024 and the disposals of loss-making non-core assets from OSRAM).
Moving beyond 2023, we believe sales could then rebound by 3% LFL in 2024E and 8% LFL in
2025E, while adjusted operating margins could gradually climb toward 15% by 2025E.
This would lead to an incremental cut of c. 22% over 2023-25E (on top of the 21% EPS cut over
2022-25 that we already made after the CMD last week).
In a worst-case scenario, ams OSRAM would trade at c. 15x 2023E EBIT, bearing in mind that we
do not have any relevant historical valuation data for the combined entity (as ams and OSRAM
have only been combined since July 2020). That said, we believe a 15x EBIT multiple at the trough
looks acceptable, given the potential upside in the following years.
We keep our Buy rating with a CHF19 TP
We cut our TP significantly following the CMD last week and keep it at CHF19 TP now, based on a
DCF valuation model with conservative assumptions, including an 11% WACC, 6% medium-term
growth, 3% long-term growth, and a 16% adjusted operating margin in the medium term (well
below the group’s long-term margin target of above 20%).
Table 10: 2024E multiple valuation model

Multiple EBIT Valuation Net debt Value of minorities Equity value FV (EUR) FV (CHF) Discounted back to
(EURm) (EURm) (EURm) (EURm) (EURm) Q2 2023E (CHF)
EV/EBIT 8 787 6,292 1,580 866 3,846 12.8 13.1 11.8
EV/EBIT 10 787 7,865 1,580 866 5,419 18.1 18.4 16.6
EV/EBIT 12 787 9,438 1,580 866 6,992 23.3 23.8 21.4
In a rather conservative scenario (with a 10x EBIT multiple for 2024E, consistent with the valuation
of LED and semiconductor peers in 2024), we derive a fair value of close to CHF18.4 per share by
2024E, or c. CHF16.6 discounted back to Q2 2023E (c. 38% above the current share price).
ams OSRAM shares have been under severe pressure since the start of the year (and specifically
after the CMD last week and the announcement of the EUR800m 8” LED front-end fab build-up in
Kulim) and are now close to the trough at c. CHF12 (down by c. 35% from recent highs).
While the semis sector usually drops by c. 30% from peak to trough, we believe a large part of the
downside is already priced in and ams OSRAM looks like a rather defensive play at this level, as
investor expectations are very low, the stock is under-owned and the valuation is starting to be
supportive (on rather conservative estimates).
Despite the limited visibility for the coming months, we keep our Buy rating (TP CHF19, with 58%
upside at current levels), as:
1. ams OSRAM remains an attractive transformation story for the coming years.
2. Expectations have been largely rebased (now that ams OSRAM has lost a significant part of
Apple’s business) and the risk related to Apple looks more manageable (only representing c.
10-15% of sales).
3. Sales should remain rather resilient in the coming quarters, with room to return to double-
digit growth in the coming years.
4. Margins should gradually rebound towards 17% by 2025E (700bps above 2021 levels), thanks
to solid operating leverage, the ramp-up of synergies (EUR350m of savings for spring 2024)
and large benefits from the disposal of loss-making non-core assets.
5. Despite the short-term headwinds, the group now trades at undemanding multiples (c. 6x
2025E EBIT) on rather conservative margins (only 17% adjusted operating margin, still below
management’s >20% target for the coming years), which looks like a good support in the
current environment.
Company description Management

Following the acquisition of Osram, ams is now a global leader in sensor solutions and Alexander Everke, CEO
Ingo Bank, CFO
photonics with strong positions in optical, imaging and LEDs. ams has developed a Dr. Thomas Stockmeier, COO
unique end-to-end offering in 3D sensors (from VCSEL to WLO, imaging sensor and
advanced packaging) and is a leading player in the LED market (with a number one Key shareholders
Free float 77.80%
position in the automotive market). The group generates c. 30% of sales in Consumer,
Temasek 5.40%
40% in Automotive and 30% in Industrial and Medical. ams 5.00%
BlackRock 4.70%
Key data charts

Price performance Sales split by region Sales split by division
FCF Sales and EBITDA margin FCF and Capex to sales
SWOT analysis
Strengths Weaknesses
Global number one in optical sensors and number two in Moderate scale relative to other analog chipmakers.
LEDs. Regular change in product strategy.
Technology, innovation, quality leader based on top Volatility in sales/results due to exposure to
engineering & IP. smartphones/automotive.
Diversified blue-chip customer base across diverse end- Stretched balance sheet with high financial leverage.
markets.
High-margin, efficient analog chip business model.
Opportunities Threats
Increasing penetration of sensors/LEDs within broad range Risk of slowdown in the smartphones and automotive
of markets. markets.
Optimised exploitation of IP to expand TAM and accelerate Risk of losing remaining designs at Apple.
growth. Large execution risk linked to the acquisition of Osram.
High free cash flow generation potential when fabs are fully Stronger competition in the LED market in the medium
loaded. term.
Very capital-efficient increase in in-house.
Price performance Sale s split by regionSal es split by divi sionFCFSales a nd EBI TD A marginFCF a nd Capex to sales
Key financials Market data as of: 11 April 2022
FY to 31/12 (EUR) 12/15 12/16 12/17 12/18 12/19 12/20 12/21 12/22E 12/23E 12/24E
Income Statement (EURm)

Sales 623.1 549.9 1,063.8 1,426.3 1,885.3 3,504.3 5,038.0 4,960.0 5,010.0 5,260.0
% Change 34.2% -11.7% 93.4% 34.1% 32.2% 85.9% 43.8% -1.5% 1.0% 5.0%
EBITDA adjusted 210.2 159.3 317.2 340.2 671.9 1,042.4 960.0 1,097.5 1,211.0 1,516.5
EBITDA adj. margin (%) 33.7% 29.0% 29.8% 23.9% 35.6% 29.7% 19.1% 22.1% 24.2% 28.8%
EBIT adjusted 162.2 97.1 168.7 127.6 391.7 462.4 502.0 497.5 551.0 786.5
EBIT adj. margin (%) 26.0% 17.7% 15.9% 8.9% 20.8% 13.2% 10.0% 10.0% 11.0% 15.0%
Net financial items & associates 11.7 4.0 -2.2 78.4 -12.9 -216.3 -198.0 -200.0 -190.0 -180.0
Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Tax -10.3 5.7 15.0 2.1 -16.0 -10.0 -32.0 -34.0 -6.2 -48.7
Net profit from continuing operations 148.7 102.9 88.7 93.4 299.8 -88.5 -32.0 -56.5 34.9 237.8
Net profit from discontinuing activities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net profit before minorities 148.7 102.9 88.7 93.4 299.8 -88.5 -32.0 -56.5 34.9 237.8
Net profit reported 148.7 102.9 88.7 93.4 299.8 -43.5 -31.0 -56.5 34.9 237.8
Net profit adjusted 163.6 106.7 221.2 126.2 362.8 281.1 273.0 251.5 347.4 552.7
Cash Flow Statement (EURm)

Levered post tax CF before capex 153.0 79.7 -8.4 302.3 610.2 629.2 583.0 630.0 805.1 1,060.0
Capex -79.8 -91.1 -581.9 -412.9 -181.8 -172.5 -298.0 -750.0 -1,000.0 -530.0
Free cash flow 73.3 -11.4 -590.3 -110.6 428.3 456.7 285.0 -120.0 -195.0 530.0
Acquisitions & divestments -209.4 18.9 63.3 -4.9 -739.7 -1,850.5 -256.0 0.0 0.0 0.0
Dividend paid -22.8 -34.6 -25.0 -27.6 0.0 2.0 1.0 0.0 0.0 0.0
Others -17.3 -97.9 -57.7 -185.0 -76.5 1,267.7 -119.0 0.0 0.0 0.0
Change in net financial debt 176.3 125.0 609.6 328.0 387.9 124.2 89.0 120.0 195.0 -530.0
Balance Sheet (EURm)

Intangible assets 582.0 603.4 1,182.1 1,221.6 1,128.0 4,051.0 3,989.0 4,048.5 4,101.0 4,156.1
Tangible assets 256.6 319.3 996.9 1,206.5 1,252.9 2,227.0 1,866.0 2,016.0 2,356.0 2,156.0
Financial & other non-current assets 43.7 61.0 74.1 62.3 1,010.4 440.0 647.0 685.8 720.1 756.1
Total shareholders' equity 681.2 667.6 828.6 1,293.8 1,689.7 3,027.0 3,150.0 3,093.5 3,128.4 3,366.1
Pension provisions 32.4 37.0 40.2 40.3 49.0 218.0 181.0 181.0 181.0 181.0
Liabilities and provisions 509.7 718.5 2,392.5 2,250.5 2,694.8 6,718.0 6,313.0 6,397.8 6,472.8 6,551.5
Net debt 163.7 293.2 906.1 1,234.2 1,756.8 2,214.0 2,266.0 2,386.0 2,581.0 2,051.0
Net financial debt 131.3 256.2 865.8 1,193.9 1,581.8 1,706.0 1,795.0 1,915.0 2,110.0 1,580.0
IFRS 16 debt 0.0 0.0 0.0 0.0 126.0 290.0 290.0 290.0 290.0 290.0
Net working capital 26.5 66.9 -312.0 140.4 119.2 -1,210.0 -758.0 -923.1 -1,102.7 -1,267.8
Invested capital 603.0 802.4 1,405.9 2,106.4 2,086.1 4,015.0 4,106.0 4,090.9 4,251.3 3,886.2
Per share data (EUR)

EPS adjusted 2.38 1.62 2.71 1.54 4.48 1.08 1.05 0.96 1.33 2.12
EPS adj and fully diluted 2.25 1.54 2.55 1.49 4.21 0.96 0.97 0.90 1.22 1.90
% Change 51.6% -31.8% 66.1% -41.7% 183.2% -77.2% 1.2% -7.4% 35.5% 56.2%
EPS reported 2.16 1.56 1.09 1.14 3.70 -0.17 -0.12 -0.22 0.13 0.91
Cash flow per share 2.22 1.21 -0.10 3.68 7.53 2.41 2.23 2.41 3.08 4.06
Book value per share 9.89 10.11 10.14 15.76 20.85 11.85 12.03 11.82 11.95 12.86
Dividend per share 0.51 0.30 0.33 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Number of shares, YE (m) 73.41 73.41 84.42 84.42 84.42 274.29 274.29 274.29 274.29 274.29
Ratios
ROE (%) 26.5% 15.8% 29.6% 11.9% 24.3% 11.8% 8.8% 8.1% 11.2% 17.1%
ROIC (%) 22.7% 10.4% 11.5% 5.4% 14.0% 11.4% 9.3% 9.1% 9.9% 14.5%
ND(F+IFRS16) / EBITDA (x) 0.6 1.6 2.7 3.5 2.5 1.9 2.2 2.0 2.0 1.2
Gearing (%) 19.3% 38.4% 104.5% 92.3% 93.6% 56.4% 57.0% 61.9% 67.4% 46.9%
Valuation
P/E adjusted 16.2 16.6 21.7 41.6 7.7 18.2 16.3 12.3 8.9 5.6
P/E adjusted and fully diluted 17.1 17.5 23.0 43.0 8.2 20.5 17.5 13.1 9.7 6.2
P/BV 3.9 2.7 5.8 4.1 1.6 1.7 1.4 1.0 1.0 0.9
P/CF 17.3 22.3 na 17.4 4.6 8.1 7.6 4.9 3.8 2.9
Dividend yield (%) 1.3% 1.1% 0.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
FCF yield (%) 2.6% -0.6% -11.9% -2.0% 14.8% 8.5% 6.1% -3.7% -6.0% 16.4%
EV/Sales 4.8 4.1 5.5 4.7 2.0 2.4 1.5 1.2 1.3 1.1
EV/EBITDA adj. 14.3 14.3 18.6 19.5 5.5 7.9 7.8 5.6 5.2 3.8
EV/EBIT adj. 18.6 23.5 35.0 52.1 9.5 17.9 14.9 12.4 11.5 7.4
#TPchange #HighConviction
Patrick Steiner
AT&S Buy
Equity Research Analyst
+43 (1) 20 577 383
psteiner@keplercheuvreux.com
European SMID
Austria | IT Hardware & Semis Beta Profile: MCap: EUR1.9bn Selected List
Target Price: EUR60.00 (63.00) Change in TP: -4.8% Bloomberg: ATS AV Reuters: ATSV.VI
Current Price: EUR48.80 Change in Sales: none 21E/none 22E Free float 64.4%
Avg. daily volume (EURm) 8.5
YTD abs performance 12.7%
Market data: 08 April 2022 Change in Adj. EPS: none 21E/none 22E 52-week high/low (EUR) 53.40/28.50
Uniquely positioned in rising ABF-S industry FY to 31/03 (EUR)

Sales (m)
03/22E 03/23E 03/24E
1,537.8 1,888.5 2,312.3
Why this report? EBITDA adj (m) 321.3 443.4 654.3
EBIT adj (m) 92.4 126.7 244.3
AT&S has no direct exposure to Russia/Ukraine, nor should it have any issues Net profit adj (m) 53.7 62.8 151.2
from a supply chain perspective. Despite worsening macroeconomic conditions, Net financial debt (m) 1,196.8 1,775.4 2,159.8
the environment for AT&S remains positive with supply-demand imbalances for FCF (m) -477.1 -543.6 -345.5
high-end ABF substrates expected to prevail over the next few years. The EPS adj. and ful. dil. 1.38 1.62 3.89
company remains on track to grow sales by 23% in FY 2023/24E (ramp-up of ABF Net dividend 0.45 0.55 0.80
substrate production) along with an EBIT margin climbing by 386bps to 10.6%.
FY to 31/03 03/22E 03/23E 03/24E
We cut our TP from EUR63 to EUR60 per share and keep our Buy rating, as the P/E adj and ful. dil. 35.3 30.2 12.5
medium-term outlook remains impressive, and the valuation seems attractive. EV/EBITDA 9.9 8.5 6.4
EV/EBIT 34.5 29.8 17.1
Key findings
FCF yield -25.2% -28.7% -18.2%
 The demand for high-end ABF substrates for server and AI applications continues to Dividend yield 0.9% 1.1% 1.6%
outpace supply, which is resulting in a strong pricing environment for AT&S. ND(F+IFRS16)/EBITDA 3.8 4.1 3.3
 The ABF substrate business could represent EUR2.4bn, or 63%, of AT&S’s top line Gearing 179.2% 249.0% 256.2%
ROIC 4.6% 4.6% 7.1%
once production capacities are fully ramped by FY 2026/27E.
EV/IC 1.6 1.5 1.3
Deconstructing the forecasts Sector Most Pref.
 We see annual sales growth of 24.2% until FY 2025/26E resulting from the ramp-up Soitec
of ABF substrate production capacities in China and Malaysia. STMicroelectronics
 We expect the EBIT margin to increase from 6.7% in FY 2020/21 to 21.7% in FY

2026/27E, mainly as a result of the strong pricing environment caused by expected
ongoing undersupply of high-end ABF substrates.
 We increase our WACC from 8.0% to 8.5% and cut our DCF-based TP to EUR60.

AT&S is one of the leading global suppliers of high-tech
 
Our target price is derived from a two-stage DCF model
PCBs and IC substrates, which strongly benefits from with a WACC of 8.5% and a long-term growth rate of 3.0%.
secular trends such as IoT, Industry 4.0 and autonomous Risks to our rating
driving. ecelerating demand and a worsening pricing environment
D
With the construction of its third IC substrate plant in
 for high-tech IC substrates.
Malaysia, the company aims to become one of the top two 
Difficulties related to the ramp-up of the ABF substrate
suppliers for high-tech ABF substrates by 2026E. production plants in Chongqing and Malaysia.

We are confident about AT&S reaching its mid-term 
Negative developments in the smartphone market.
guidance of revenues of EUR3.5bn and achieving an EBITDA
margin of 27-32% by FY 2025/26E.
Catalysts
he successful ramp-up of ABF substrate production
T
capacities at Chongqing 3 (beginning of Q3 2023/24) and
Malaysia (end of 2026).

The successful entry into the business of module
integration services.
AT&S
AT&S Buy | Target Price: EUR60.00
Reiterating our forecasts based on strong substrate capacity expansion

We expect AT&S to deliver a solid set of results for FY 2022/23E, with revenues of EUR1,889m
(23% YOY) and EBIT of EUR127m (6.7% EBIT margin), primarily due to a strong expected effect
from the ABF substrate capacity ramp-up at the company’s plant in Chongqing, China
(Chongqing 3). AT&S will invest a total of EUR1.2bn in the construction of the plant and we
expect an EUR800m revenue contribution with EBITDA margins above 40-45% once fully
ramped up in the second half of 2023E. As part of the company’s big strategic move into the
high-end ABF substrate business in cooperation with Intel, the plant is fully dedicated to
manufacturing substrates using the highest level of technology, mainly for applications in the
areas of datacentre/servers and Artificial Intelligence, but also for 5G base stations, high-end
client computing/gaming, and autonomous driving.
The next step towards becoming a top ABF substrate player is already in place with the construction
of a large manufacturing facility (two ABF substrate production factories for two leading global
semiconductor customers) in Malaysia. AT&S will invest a total of c. EUR1.7bn in the location and c.
50% of the investment is pre-financed by the two large customers (we expect the first customer to
be Intel most certainly, and the second one to be AMD) under what we would expect to be very
favourable financing terms for AT&S. This situation, in which customers not only support the ramp-
up of a supplier’s production capacity in every respect but also finance large parts of the investment
through pre-payments, gives us a good picture of the large gap between supply and demand for
high-tech substrates. When it is fully ramped up in 2026E, we would expect some EUR1.2bn of
revenue contribution from the plant and similar if not even slightly higher EBITDA margins than at
the Chongqing 3 plant, which is currently in the ramp-up process.
In addition, AT&S often indicates in its presentations that there would be enough space to build
further production facilities and thus substantially increase capacities at its location in Kulim,
Malaysia. Given the large supply-demand gap for high-end ABF substrates, which is even expected
to widen within the next few years mainly as a result of an architecture change for high-
performance chips but also due to the strong underlying demand for server/datacentre and AI
applications, we would not be surprised to see another announcement stating that AT&S will
increase capacity provided that an arrangement with a suitable partner can be made.
Medium-term guidance implies a 24% top-line CAGR and margin expansion
The current FY 2025/26E medium-term guidance projects revenues of c. EUR3.5bn and an EBITDA
margin of 27-32% by FY 2025/26E while generating an ROCE of above 12% after the successful
ramp-up of ABF substrate production capacities. By then, the company’s fundamental
characteristics should have changed substantially from being mainly a supplier of high-end PCBs
for mobile devices as well as for industrial, automotive, and medical applications in the past, to
becoming a high-end manufacturer with a focus on ABF substrates for high-performance
computing with a strongly growing modules business. The unabated strong demand for
substrates due to an architecture change towards heterogenous integration in semiconductor
chips for high-end computing and the company’s very prudent approach to communication give
us the impression that the current medium-term guidance could actually be rather conservative.
Worst-case scenario would lead to a c. 42% EPS cut over FY 2022-24E
While we have not changed our estimates so far (as we believe that AT&S is well-protected due to
the increasing exposure to the highly sought-after ABF substrates for high-performance
computing), we cannot completely rule out an economic downturn with a corresponding drop in
demand, especially for mobile devices and automotive.
In a worst-case scenario, we believe that AT&S could potentially end up with group sales up by
13% in FY 2022/23E while the company’s EBIT margin would go down to 4.2%, as we accounted
for a 10% decline in PCB sales for mobile devices, as well as for automotive, industrial, and medical
applications.
Moving beyond FY 2022/23E, we believe that PCB sales could rebound by 8% in FY 2023/24E and
by 10% in FY 2024/25E while EBIT margins could expand to 9.0% in FY 2023/24E and to 11.4% in FY
2024/25E.
In our view, a worst-case scenario would lead to a c. 42% EPS cut over FY 2022-24E, as operational
leverage is quite high and as AT&S is still in the ramp-up phase of ABF substrate production
capacities, which should also weigh on margins due to start-up effects.
We keep our Buy rating and cut our TP from EUR63 to EUR60
Due to the application of a higher risk premium in accordance with our group guidelines, we
increase the WACC in our DCF-based valuation model from 8.0% to 8.5%, which leads to a
reduction in our TP from EUR63 to EUR60 per share. As AT&S is currently in a heavy ramp-up and
construction phase of two large ABF substrate manufacturing plants, we do not think that a
multiple-based valuation would generate any meaningful results in the short term, since the
company has spent a significant amount of capital, which has not yet been used in operations. We
therefore apply a conservative 4.5x multiple to FY 2025/26E EBITDA, as by then the majority of
capacities will have already been ramped up (the plant in Malaysia should be ramped up by then,
though with a full bottom-line contribution only from FY 2026/27E), and arrive at c. EUR59 per
share, in line with our DCF-based valuation. We discount the implied equity value with a cost of
equity of 14.3%.
Table 11: 4.5x EV/EBITDA forward multiple

EURm FY FY FY FY FY
2022/23E 2023/24E 2024/25E 2025/26E 2026/27E
EBITDA FY+1 654.3 778.4 1,125.7 1,314.2 1,322.9
EV/EBITDA multiple 4.5x 4.5x 4.5x 4.5x 4.x5
EV 2,944.5 3,502.6 5,065.6 5,913.8 5,953.2
Net debt 1,251 1,845 2,249 2,478 2,261
Equity value 1,693.4 1,657.2 2,816.8 3,435.8 3,691.9
Discount factor 0 1.0x 2.0x 3.0x 4.0x
Equity value discounted 1,693.4 1,449.6 2,155.3 2,299.6 2,161.5
Per share 43.6 37.3 55.5 59.2 55.6
In the table below, we also provide an overview of implied fair values per share based on different
EV/EBITDA multiples.
Table 12: EV/EBITDA multiple valuation table

#x EV/EBITDA FY 2022/23E FY 2023/24E FY 2024/25E FY 2025/26E FY 2026/27E
2x EBITDA 1.5 -6.5 0.1 2.6 5.8
3x EBITDA 18.3 11.0 22.2 25.2 25.7
4x EBITDA 35.2 28.6 44.4 47.9 45.7
5x EBITDA 52.0 46.1 66.6 70.5 65.6
6x EBITDA 68.9 63.6 88.7 93.2 85.5
7x EBITDA 85.7 81.1 110.9 115.8 105.5
8x EBITDA 102.5 98.7 133.1 138.4 125.4
9x EBITDA 119.4 116.2 155.2 161.1 145.4
Despite the uncertain macro environment, AT&S remains on our European SMID Selected List, as
the company is uniquely positioned as the only European player among a few ABF substrate
manufacturers able to produce a crucial product that serves as the foundation for high-
performance chips (at most three to four players globally) in a market with a substantial supply-
demand gap and tremendous barriers to entry.

AT&S is one of the leading global suppliers of high-tech printed circuit boards and Andreas Gerstenmayer, CEO
Ingolf Schroeder, COO
integrated circuit substrates. The company operates six production plants in Europe Peter Schneider, CSO
and Asia and employs about 11,300 people worldwide. With its two divisions, Mobile
Devices & Substrates (MDS revenue 2020/21: EUR882m) and Automotive, Industrial, Key shareholders
Free float 64.40%
Medical (AIM revenue 2020/21: EUR307m), the company generated about EUR1,188m
Dörflinger Private Foundation 18.00%
of annual revenues in FY 2020/21 (financial year ending in March 2021). Androsch Private Foundation 17.60%
Key data charts

SWOT analysis
Strong market position in high-end PCBs and IC substrates Capital-intensive business model
Exposed to secular trends such as IoT and Industry 4.0 High customer concentration
Close relationships with key customers Quick commoditisation of products
Limited visibility
Strong demand for IC substrates. Pricing pressure from competitors/customers
Portfolio extension into module integration services Deceleration in end-markets
Strategic partnerships. Execution risk
FY to 31/03 (EUR) 03/15 03/16 03/17 03/18 03/19 03/20 03/21 03/22E 03/23E 03/24E

Sales 667.0 762.9 814.9 991.8 1,028.0 1,000.6 1,188.2 1,537.8 1,888.5 2,312.3
% Change 13.1% 14.4% 6.8% 21.7% 3.6% -2.7% 18.8% 29.4% 22.8% 22.4%
EBITDA adjusted 167.6 167.5 130.9 226.0 250.1 194.5 245.7 321.3 443.4 654.3
EBIT adjusted 90.1 77.0 6.6 90.3 117.2 47.4 79.8 92.4 126.7 244.3
EBIT adj. margin (%) 13.5% 10.1% 0.8% 9.1% 11.4% 4.7% 6.7% 6.0% 6.7% 10.6%
Net financial items & associates -5.1 -8.1 -17.5 -14.8 -2.0 -6.5 -20.1 -18.5 -29.9 -41.1
Others 0.0 0.0 0.0 -2.9 -8.3 -8.3 -8.3 -8.3 -17.5 -17.5
Tax -15.6 -12.9 -12.0 -19.0 -26.2 -19.5 -12.2 -11.8 -16.5 -34.6
Net profit from continuing operations 69.3 56.0 -22.9 53.6 80.7 13.1 39.1 53.7 62.8 151.2
Net profit before minorities 69.3 56.0 -22.9 53.6 80.7 13.1 39.1 53.7 62.8 151.2
Net profit reported 69.4 56.0 -22.9 53.6 80.7 13.1 39.1 53.7 62.8 151.2
Net profit adjusted 69.4 56.0 -22.9 53.6 80.7 13.1 39.1 53.7 62.8 151.2

Levered post tax CF before capex 143.9 136.9 136.4 143.2 170.5 185.1 184.7 222.9 357.0 548.9
Capex -165.3 -254.8 -240.9 -141.9 -100.9 -218.6 -438.0 -700.0 -900.6 -894.5
Free cash flow -21.4 -117.8 -104.5 1.3 69.6 -33.5 -253.3 -477.1 -543.6 -345.5
Acquisitions & divestments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dividend paid -7.8 -14.0 -14.0 -3.9 -14.0 -23.3 -9.7 -15.2 -17.5 -21.4
Others 9.6 -0.9 1.1 0.9 -3.2 -6.5 1.3 -8.3 -17.5 -17.5
Change in net financial debt 19.6 132.7 117.4 1.7 -52.5 63.2 261.7 500.5 578.6 384.4

Intangible assets 45.2 103.7 91.7 75.9 60.1 45.1 42.8 42.8 42.8 42.8
Tangible assets 603.7 689.2 833.1 766.4 777.7 903.5 1,301.4 1,772.5 2,356.5 2,841.0
Financial & other non-current assets 63.9 73.4 104.6 102.0 60.4 47.4 33.2 40.6 48.0 56.9
Total shareholders' equity 604.4 568.9 540.1 538.5 630.6 587.4 629.1 667.7 713.0 842.9
Liabilities and provisions 582.7 739.4 862.3 954.6 1,105.1 1,214.9 1,707.5 2,249.2 2,853.6 3,434.5
Net debt 165.1 387.4 423.7 479.4 611.5 607.3 774.6 1,290.8 1,885.2 2,288.6
Net financial debt 131.4 351.1 389.4 442.0 563.1 531.1 696.3 1,196.8 1,775.4 2,159.8
IFRS 16 debt 0.0 0.0 0.0 0.0 0.0 25.0 25.0 25.0 25.0 25.0
Net working capital 76.8 113.6 -49.9 93.2 365.5 215.4 69.3 146.2 195.0 235.6
Invested capital 725.7 906.4 874.9 935.4 1,203.4 1,164.0 1,413.5 1,961.5 2,594.3 3,119.4

EPS adjusted 1.79 1.44 -0.59 1.38 2.08 0.34 1.01 1.38 1.62 3.89
EPS adj and fully diluted 1.79 1.44 -0.59 1.38 2.08 0.34 1.01 1.38 1.62 3.89
% Change 47.6% -19.4% -chg +chg 50.5% -83.7% 197.6% 37.4% 16.9% 140.7%
EPS reported 1.79 1.44 -0.59 1.38 2.08 0.34 1.01 1.38 1.62 3.89
Cash flow per share 3.70 3.52 3.51 3.69 4.39 4.77 4.75 5.74 9.19 14.13
Ratios
ROE (%) 14.0% 9.5% -4.1% 9.9% 13.8% 2.2% 6.4% 8.3% 9.1% 19.4%
ROIC (%) 11.9% 7.7% -0.1% 7.5% 8.5% 2.1% 4.9% 4.6% 4.6% 7.1%
ND(F+IFRS16) / EBITDA (x) 0.8 2.1 3.0 2.0 2.3 2.9 2.9 3.8 4.1 3.3
Gearing (%) 21.7% 61.7% 72.1% 82.1% 89.3% 90.4% 110.7% 179.2% 249.0% 256.2%
Valuation
P/E adjusted 5.5 9.8 na 11.8 8.9 48.9 19.3 35.3 30.2 12.5
P/E adjusted and fully diluted 5.5 9.8 na 11.8 8.9 48.9 19.3 35.3 30.2 12.5
P/BV 0.6 1.0 0.8 1.2 1.1 1.1 1.2 2.8 2.7 2.2
P/CF 2.7 4.0 3.0 4.4 4.2 3.5 4.1 8.5 5.3 3.5
Dividend yield (%) 3.7% 2.5% 0.9% 2.2% 3.2% 1.5% 2.0% 0.9% 1.1% 1.6%
Dividend yield preference shares (%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
FCF yield (%) -5.6% -21.4% -25.4% 0.2% 9.7% -5.2% -33.6% -25.2% -28.7% -18.2%
EV/Sales 0.8 1.2 1.0 1.1 1.3 1.2 1.3 2.1 2.0 1.8
EV/EBITDA adj. 3.3 5.6 6.4 4.9 5.3 6.4 6.2 9.9 8.5 6.4
EV/EBIT adj. 6.1 12.2 na 12.3 11.3 26.4 19.2 34.5 29.8 17.1
#TPchange
Infineon Buy
+33 1 53 65 35 10
Germany | IT Hardware & Semis Beta Profile: MCap: EUR36.0bn
Target Price: EUR40.00 (48.00) Change in TP: -16.7% Bloomberg: IFX GR Reuters: IFXGn.DE
Current Price: EUR27.55 Change in Sales: -1.5% 22E/-5.1% 23E Free float 81.1%
Up/downside: 45.2% Change in Adj. EBIT: -6.1% 22E/-21.5% 23E
Market data: 08 April 2022 Change in Adj. EPS: -6.6% 22E/-22.6% 23E 52-week high/low (EUR) 43.46/26.49
Back to good entry prices FY to 30/09 (EUR)

Sales (m)
09/22E 09/23E 09/24E
12,830 13,850 15,230
Why this report? EBITDA adj (m) 4,345 4,480 5,040
EBIT adj (m) 2,692 2,630 3,040
The environment remains fairly supportive for the coming quarters, with Net profit adj (m) 2,003 1,923 2,197
strong underlying demand, low inventories across the board, record orders, a Net financial debt (m) 3,351 2,701 1,911
favourable pricing environment, and supply/demand imbalances continuing FCF (m) 880 1,040 1,220
well into FY 2022 for many applications. Despite some potential weakness in EPS adj. and ful. dil. 1.54 1.47 1.68
the consumer market in the coming quarters, there is strong visibility in the Net dividend 0.30 0.33 0.37
automotive and industrial markets (to which Infineon is over-exposed). We cut
FY to 30/09 09/22E 09/23E 09/24E
our TP from EUR48 to EUR40 and keep our Buy rating, as Infineon is benefitting P/E adj and ful. dil. 17.9 18.7 16.4
from large secular growth drivers and valuation is back to supportive levels. EV/EBITDA 9.0 8.6 7.5
EV/EBIT 14.6 14.7 12.4
Key findings
FCF yield 2.4% 2.9% 3.4%
 Infineon has a record EUR31bn of orders in hand, representing more than two years Dividend yield 1.1% 1.2% 1.3%
of revenue (80% of the backlog is for the next 12 months, with the rest for 2023). ND(F+IFRS16)/EBITDA 0.8 0.7 0.4
Gearing 29.3% 21.6% 13.8%
Deconstructing the forecasts
ROIC 14.7% 13.8% 15.4%
 We now see sales growing by 13% LFL in FY 2022E (vs. +15% LFL prev. and 10-19% EV/IC 2.5 2.3 2.2
LFL company guidance), 8% LFL in FY 2023E (vs. +12% LFL prev.), 10% in FY 2024E Sector Most Pref.
(unchanged), and 11% in FY 2025E (vs. +9% LFL prev.). Soitec
We now expect the adjusted operating margin to climb by 230bps to 21% in FY STMicroelectronics

2022E (vs. 22% prev.), followed by a19% margin in FY 2023E (vs. 23% prev.), 20% in
FY 2024E (vs. 23.5% prev.) and 21% in FY 2025E (vs. 24% prev.).
 We increase our WACC from 8% to 8.5% (to reflect the higher risk premium) and cut
our DCF-based TP from EUR48 to EUR40.

The integration of Cypress is running smoothly and
 
We have a EUR40 TP based on a DCF with an 8.5% WACC,
Infineon has already generated initial cross-selling 9% sales growth, and a 20% adjusted operating margin in
opportunities and extracted initial cost synergies. the medium term.

Infineon remains an attractive case for the long term Using a 18x EBIT multiple in FY 2024E could push the fair

thanks to high exposure to secular growth drivers (xEVs, value to EUR40.4 per share by FY 2024E, or c. EUR38
ADAS, renewable energy, energy efficiency for servers/data discounted back to Q3 FY 2023E.
centres/industrial applications, IoT, etc.) and targets to 
At our TP (EUR40), the group should trade on 18x FY 2024E
outperform the market in the long term (with >9% sales EBIT, which looks reasonable for such a high-profile.
CAGR). Risks to our rating

Infineon should keep developing rapidly in FY 2022E, with eaker demand for the semis market in the coming
W
sales up by 13% LFL and its adjusted operating margin up months due to the COVID-19 pandemic and/or softer macro
by 230bps to 21%. Sales should keep growing by 9% LFL conditions.
over FY 2023-24E, with the adjusted operating margin c. Weaker-than-expected car production volumes in the

20% by FY 2024E. coming months.
Catalysts A weaker-than-expected US dollar could impact sales and

tronger-than-expected demand in automotive market.
S results, as Infineon has high forex exposure. A 10% US
Stronger-than-expected synergies coming from Cypress.
 dollar decline could lead to a c. 6% cut in sales and a 13%
Some incremental designs around Silicon Carbide in the
 cut in adjusted operating result estimates.
coming months.
Infineon
Infineon Buy | Target Price: EUR40.00
Adopting a more conservative scenario for the coming quarters

Infineon generates c. 70% of sales in the automotive and industrial markets (c. 45% in the
automotive market and c. 25% in the industrial market) and has a relatively moderate exposure
to consumer electronics (c. 20% of sales), which appears to be more vulnerable to any potential
macro correction in the coming quarters.
We have decided to adopt a more conservative scenario for the coming quarters, with moderate
revisions in 2022 and more severe cuts over 2023-25E.
We now expect 13% sales growth LFL in FY 2022E (vs. +15% LFL previously) and are at the lower
end of the company guidance (+10-19% LFL), with strong traction in connected secure systems
(CSS: +19% LFL, thanks to strong demand for IT devices, and improving supply for MCUs and
connectivity chips, including WiFi), automotive (ATV: +15% LFL, with a gradual improvement in
supply constraints, higher volumes, and still solid semis content growth, driven by xEVs and ADAS)
and power & sensor systems (PSS: +12% LFL, thanks to still-strong demand in computing,
servers/data centres, 5G with the smartphone upgrade cycle, and large investments in mobile
networks, and sensors), offsetting lower growth from industrial power control (IPC: +3% LFL, as
demand for electric drives and major home appliances is gradually normalising, wind energy
demand is currently easing off, as subsidies in China ended in 2021, while demand for power
infrastructure (including storage and EV charging infrastructure) and solar power remains strong).
We now expect 8% sales growth LFL in FY 2023E (vs. +12% LFL previously), with still-solid growth
prospects in ATV (+12% LFL) and CSS (+8% LFL) and softer trends in PSS (+4% LFL) and IPC (+4%
LFL).
Moving ahead, we have modelled a gradual recovery, with sales up by 10% LFL in FY 2024E
(unchanged) and by 11% LFL in FY 2025E (vs. +9% LFL previously).
We have also revised down our margin forecasts for the coming years and now see the adjusted
operating margin climbing by 230bps to 21% in 2022E (vs. 22% previously) and declining by
200bps to 19% in 2023E (vs. 23% previously), affected by slower sales, higher D&A, a less
favourable pricing environment, and some opex expansion to support mid-term growth
opportunities.
Moving ahead, we believe margins should gradually rebound to 20% in 2024E (vs. 23.5%
previously) and 21% in 2025E (vs. 24% previously).
All in all, we have cut EPS by 7% in 2022E and by 20% per year over 2023-25E.
Worst-case scenario would lead to an incremental 20% EPS cut in FY 2023-25E
rule out a total macro crash and much weaker demand than what we have modelled in the coming
quarters.
In a worst-case scenario, we believe Infineon could potentially end up with flat sales LFL in FY
2023E (consistent with what Infineon delivered over FY 2019 and FY 2020, bearing in mind that the
group still grew by 6% LFL in the previous downturn back in FY 2016) and the adjusted operating
margin down by 400bps to 17% (while margins dropped by c. 410bps YOY to 13.7% in FY 2020
compared to FY 2018 levels).
Moving beyond 2023, we believe sales could then rebound by 6% LFL in FY 2024E and 11% LFL in
FY 2025E, while adjusted operating margins could gradually expand toward 19% by FY 2025E.
This would lead to an incremental cut of c. 20% over FY 2023-25E (on top of the 20% cut already
factored into our updated estimates).
In a worst-case scenario, Infineon would be trading on c. 18x FY 2023E EBIT, slightly below group’s
average over the past five years (c. 19x), meaning that the shares are likely not too far from a kind
of support, bearing in mind that we cannot rule out any overshooting in the event of a more severe
downturn.
Keeping our Buy rating, TP cut from EUR48 to EUR40

We revise down our TP from EUR48 to EUR40, derived from a DCF valuation based on an 8.5%
WACC (vs. 8% previously due to a higher risk premium, 9% sales growth, and a 20% adjusted
operating margin in the medium term (slightly above the group’s 19% through-the-cycle margin
target).
Table 13: FY 2024E multiple valuation model

Multiple EBIT Valuation Net debt Equity value FV (EUR) Discounted back to Q3 FY
(EURm) (EURm) (EURm) (EURm) 2023E (EUR)
EV/EBIT 16 3,040 48,640 1,911 46,729 35.8 33.7
EV/EBIT 18 3,040 54,720 1,911 52,809 40.4 38.0
EV/EBIT 20 3,040 60,800 1,911 58,889 45.1 42.4
Using an 18x EBIT multiple for FY 2024E (c. 20% above valuation of peers in the semiconductor
market in 2022, due to a superior profile for the coming years, but slightly lower than the group’s
average multiple over the past five years of c. 19x and still well below the group’s peak cycle
multiples in the mid-20s), we derive a fair value of close to c. EUR40.4 per share by FY 2024E, or c.
EUR38 discounted back to Q3 FY 2023E (38% above the current share price).
Infineon shares have dropped materially since their recent highs (-37%), materially
underperforming STM (the stock only declined by 24% from its recent highs).
We believe the shares now almost reflect a downcycle (the semis sector usually drops by c. 30%
from peak to trough), limiting the downside potential in the coming months.
While the shares are set to remain volatile in the coming weeks, we believe Infineon already offers
a good entry price for medium-term investors.
All in all, we keep our Buy rating on Infineon (TP cut from EUR48 to EUR40, with c. 45% upside at
current levels), as:
1. Infineon is benefitting from secular growth drivers with the accelerated shift toward
xEVs/ADAS, renewable energy, energy efficiency for data centres, data centres and industrial
applications, the IoT (with the move from products to systems), etc.
2. Sales should keep growing rapidly in FY 2022E (+13% LFL) and continue growing at c. 9% over
FY 2023-24E.
3. Margins should expand materially again in FY 2022E (+230bps to 21%, thanks to high fab
loading and solid operating leverage) and remain at around 21% by FY 2024E, despite the
potential slowdown in 2023.
4. FCF generation should remain at decent levels in FY 2022E (c. EUR880m) and should rebound
toward EUR1.220bn in FY 2024E as capex gradually normalises.
5. The valuation is now back to supportive levels (below 15x FY 2022E EBIT).

Infineon is Europe's largest semiconductor vendor and the world's eighth-largest Dr. Reinhard Ploss, CEO
Dr. Sven Schneider, CFO
player, with a broad range of analog, mixed-signal, and digital ICs for the automotive,
industrial, communication, computing and consumer sectors. The company is a Key shareholders
global leader in power semiconductors with strong in-house IP and expertise in Free float 81.07%
BlackRock 5.36%
system-on-chips. Norges Bank Investment Management 4.85%
Allianz Global Investors 4.82%
Key data charts

SWOT analysis
Very focused footprint with undisputed market/technology Rather limited profitability relative to industry standards.
leadership. FCF generation historically low.
Leading systems expertise and integration capability. Still fairly high capital intensity.
Long-established key customer relations rooted in a great Limited market share in the Japanese market.
reputation.
Portfolio strongly geared toward long-lifecycle
applications.
Well exposed to secular megatrends of mobility, power and Not immune to the general economic cycle, and thus the
security. chip cycle.
Opportunity to achieve substantially higher returns and Weakness of US dollar/euro rate would impair profitability.
greater FCF. Strong exposure to China (c. 40% of sales).
Unique 300mm thin-wafer technology to improve cost Risk of continued tendency towards over-engineering.
position.
Growing demand for system solutions (where Infineon
differentiates).
FY to 30/09 (EUR) 09/15 09/16 09/17 09/18 09/19 09/20 09/21 09/22E 09/23E 09/24E

Sales 5,795 6,474 7,063 7,599 8,030 8,566 11,060 12,830 13,850 15,230
% Change 34.1% 11.7% 9.1% 7.6% 5.7% 6.7% 29.1% 16.0% 8.0% 10.0%
EBITDA adjusted 1,658 1,815 2,020 2,213 2,264 2,429 3,584 4,345 4,480 5,040
EBIT adjusted 898 982 1,208 1,353 1,319 1,170 2,071 2,692 2,630 3,040
EBIT adj. margin (%) 15.5% 15.2% 17.1% 17.8% 16.4% 13.7% 18.7% 21.0% 19.0% 20.0%
Net financial items & associates -34 -58 -50 -57 -77 -156 -152 -138 -115 -98
Others 0 0 0 0 0 0 0 0 0 0
Tax 100 37 -143 -193 -194 -53 -144 -405 -426 -567
Net profit from continuing operations 626 741 790 1,219 890 372 1,175 1,614 1,509 1,795
Net profit from discontinuing activities 13 2 -1 -143 -20 -3 -7 -4 0 0
Net profit before minorities 639 743 789 1,076 870 369 1,168 1,610 1,509 1,795
Net profit reported 638 744 789 1,076 870 330 1,129 1,571 1,470 1,756
Net profit adjusted 912 929 981 1,120 1,024 787 1,655 2,003 1,923 2,197

Levered post tax CF before capex 817 1,292 1,723 1,576 1,601 1,882 3,025 3,280 3,190 3,570
Capex -728 -811 -1,018 -1,242 -1,436 -1,069 -1,496 -2,400 -2,150 -2,350
Free cash flow 89 481 705 334 165 813 1,529 880 1,040 1,220
Acquisitions & divestments -1,869 -3 -116 290 -128 -9,046 -19 -17 0 0
Dividend paid -202 -225 -248 -283 -305 -336 -286 -351 -390 -429
Others -30 -2 -194 52 1,480 1,337 -81 4 0 0
Change in net financial debt 2,012 -251 -147 -393 -1,212 7,232 -1,143 -515 -649 -790

Intangible assets 2,342 2,279 2,198 2,244 2,404 10,145 10,006 10,006 10,006 10,006
Tangible assets 2,093 2,119 2,659 3,038 3,510 4,396 4,779 5,526 5,826 6,176
Financial & other non-current assets 188 194 240 185 186 278 305 311 317 324
Total shareholders' equity 4,665 5,023 5,636 6,446 8,633 9,016 10,198 11,417 12,497 13,824
Pension provisions 426 604 503 552 733 739 617 617 617 617
Liabilities and provisions 3,650 3,460 3,806 3,881 4,046 12,244 12,519 12,827 13,169 13,535
Net debt -398 -490 -727 -1,107 -2,089 5,415 4,119 3,604 2,954 2,164
Net financial debt -220 -471 -618 -1,011 -2,223 5,009 3,866 3,351 2,701 1,911
IFRS 16 debt 0 0 0 0 0 294 331 331 331 331
Net working capital 722 967 913 1,156 1,709 988 1,056 1,086 1,308 1,593
Invested capital 4,553 4,742 5,158 5,790 7,024 14,902 15,146 15,923 16,445 17,080

EPS adjusted 0.81 0.82 0.87 0.99 0.82 0.61 1.27 1.54 1.48 1.69
% Change 60.3% 1.3% 5.3% 14.2% -16.8% -26.5% 110.2% 20.9% -4.0% 14.3%
EPS reported 0.57 0.66 0.70 0.95 0.70 0.25 0.87 1.21 1.13 1.35
Number of shares, YE (m) 1,129.27 1,132.14 1,136.20 1,137.00 1,250.68 1,305.92 1,305.92 1,305.92 1,305.92 1,305.92
Ratios
ROE (%) 20.7% 19.2% 18.4% 18.5% 13.6% 8.9% 17.2% 18.5% 16.1% 16.7%
ROIC (%) 21.9% 18.0% 20.7% 21.0% 17.5% 9.1% 11.7% 14.7% 13.8% 15.4%
ND(F+IFRS16) / EBITDA (x) -0.1 -0.3 -0.3 -0.5 -1.0 2.2 1.2 0.8 0.7 0.4
Gearing (%) -4.7% -9.4% -11.0% -15.7% -25.8% 55.6% 37.9% 29.3% 21.6% 13.8%
Valuation
P/E adjusted 12.2 15.5 20.7 22.8 21.6 32.4 25.6 17.9 18.6 16.3
P/BV 2.4 2.9 3.6 4.0 2.6 2.8 4.2 3.1 2.9 2.6
P/CF 13.6 11.1 11.8 16.2 13.8 13.5 14.0 10.9 11.2 10.0
Dividend yield (%) 2.0% 1.7% 1.4% 1.2% 1.5% 1.1% 0.8% 1.1% 1.2% 1.3%
FCF yield (%) 0.8% 3.3% 3.5% 1.3% 0.7% 3.2% 3.6% 2.4% 2.9% 3.4%
EV/Sales 1.8 2.1 2.8 3.2 2.5 3.6 4.2 3.1 2.8 2.5
EV/EBITDA adj. 6.4 7.6 9.6 11.0 8.8 12.7 12.9 9.0 8.6 7.5
EV/EBIT adj. 11.8 14.0 16.1 18.1 15.2 26.3 22.4 14.6 14.7 12.4
#TPchange
Matthias Maenhaut
Melexis Hold
Head of Belgian Equity Research
+32 11 49 14 61
mmaenhaut@keplercheuvreux.com
Belgium | IT Hardware & Semis Beta Profile: MCap: EUR3.1bn
Target Price: EUR83.00 (95.00) Change in TP: -12.6% Bloomberg: MELE BB Reuters: MLXS.BR
Current Price: EUR76.65 Change in Sales: 0.1% 22E/-4.3% 23E Free float 45.6%
A soft landing? FY to 31/12 (EUR)

Sales (m)
12/22E 12/23E 12/24E
738.9 787.1 857.6
EBIT adj (m) 170.5 173.6 189.1
Melexis has c. 90% exposure to the automotive sector which should offer more Net profit adj (m) 140.7 143.3 156.5
protection, at least in the short term, than companies with other consumer Net financial debt (m) -49.6 -72.2 -93.4
exposure. We assess the prospect of a soft-landing scenario, using the 2019-20 FCF (m) 123.8 133.6 136.4
EPS adj. and ful. dil. 3.48 3.55 3.87
performance as a base. However, the situation is very different now as: 1)
inventories are still very low; 2) there is a lower absolute level of Light Vehicle Net dividend 2.70 2.75 2.85
Production (LVP) than in 2018 (i.e. 72m units vs. 91m prev.); 3) order books are FY to 31/12 12/22E 12/23E 12/24E
high; and 4) the pricing environment is very different. We trim some of our P/E adj and ful. dil. 22.0 21.6 19.8
adjacent estimates for H2 and cut our TP to EUR83 after incorporating a EV/EBITDA 13.9 13.6 12.7
Ukraine war risk premium (WACC 9.4% vs. 9.2%) and lower mid-term growth EV/EBIT 17.9 17.4 15.9
FCF yield 4.0% 4.3% 4.4%
assumptions (12.5 % vs. 15% p.a.). We believe the risk/reward profile is Dividend yield 3.5% 3.6% 3.7%
balanced at this stage, given the valuation. In our view, earnings momentum ND(F+IFRS16)/EBITDA -0.2 -0.3 -0.4
should remain very buoyant in Q1/Q2, but this will not be enough to turn Gearing -11.8% -15.9% -18.9%
ROIC 41.8% 40.9% 42.8%
sentiment positive.
EV/IC 8.9 8.6 8.1
Key findings Sector Most Pref.
 Melexis does not have large sales exposure to Russia or Ukraine. It only has an R&D Soitec
department consisting of c. 40 employees. STMicroelectronics
 Melexis’s adjacent business has more consumer-related demand (i.e. gaming,) and
hence could be affected more quickly. For now, Auto is likely to compensate.
 We adjust our H2 2022 adjacent estimates and group gross margins downwards.
Melexis is a automotive semi player that operates a fabless
 
We value Melexis using a DCF model that we cross-check
business model and is a global leading sensor player, with multiples. For our DCF valuation, we use a WACC of
specifically in magnetic sensors. 9.4%, TG of 3.5% and a terminal EBIT margin of 24%

We like the company for its high returns, structural growth (EBITDA 29%). From a relative perspective, the stock trades
drivers and solid execution. However, Melexis's valuation at a premium to peers on 2023E EV/EBIT, partly due to the
has been uncompelling, fully discounting its attractive fact that Melexis is a fabless company.
traits. Risks to our rating
Catalysts pside risks: Faster-than-expected economic recovery, lift
U

S mall positive earnings surprises (which won't be in auto sales.
substantial enough to derate to attractive multiples). 
Downside risks: Significant signs of a renewed downturn in
auto sales could trigger derating and further downside.
More severe IC shortages.
Melexis
Melexis Hold | Target Price: EUR83.00
Estimates and scenario analysis

The 2019 situation reviewed, 2022 should be different
Melexis’s sales contracted by 14.5% in 2019. This was the result of a 14% revenue decline in
automotive and a 16% decline in the adjacent activities. The EUR/USD exchange rate had a small
positive impact. For automotive, this came after a -5.8% contraction in light vehicle production.
At that stage, the situation was very different in the sense that the company had just come out of
a period of high allocation driven by high demand (in allocation since the end of 2017), with light
vehicle production at a peak level (c. 91m units globally vs. c. 71m units in 2021). The consequent
economic shock, coupled with high inventories at clients, led to a significant destocking phase,
with the traditional bullwhip effect the sector is known for.
Taking into account 10% content growth and the above 6% LVP contraction, the fact that price
declines should have made only a minimal contribution, an inventory correction effect of roughly
20pp or c. EUR90m of sales (more including the forex effect on sales) should have been the key
factor behind the sales contraction. Melexis was also hit more heavily and rapidly than its peers at
that time. We believe this was triggered by differences in the product portfolio versus other
important automotive semi names such as Infineon (Buy, EUR40) and ST Micro (Buy, EUR50)
having no exposure to high(er) value power semis nor higher value ADAS content. Furthermore,
the company had come out of a cycle of heavy opex investments to prepare the company for a
new cycle of growth.
2022/23 estimate changes
We take a somewhat more cautious stance, mainly on the segments that are exposed to consumer
demand (ex-auto) and due to inflation, which could rise further. We make the following main
changes effectively mostly touching upon profitability and adjacent revenue growth:
 Sales growth in automotive stands at 17% in 2022E. Our auto team forecasts a 6.5% LVP for
2022. Banking on 10% content growth, we would already arrive at our growth estimate. Given
that the company is implementing a mid-single-digit price increase, we effectively assume a
negative inventory effect of c. 8-9% taking into account the consensus forecast for EUR/USD.
This already seems somewhat conservative given the backdrop and the factors described
above.
 Note that the EUR/USD exchange rate is down by c. 7% YOY versus the 2021 average. For Melexis
this could be another 1-2% tailwind if Bloomberg forecasts reverse due to spot rates.
 For 2023E, we expect automotive to be up 12%, which appears to be very conservative at first
glance given the fact that our auto team sees a 10% LVP. Effectively, this would imply a further
negative inventory correction of 8pp, amid a slightly negative effect from the EUR/USD.
 We lower our adjacent revenue growth estimate for 2023 from +5% to -5%.
 We lower our gross margin estimates by 50/100bps for 2022, respectively 23/24E given the
inflationary environment. We leave our opex estimates unchanged.
Table 14: Change in estimates (EURm)

2022E 2023E 2024E
Old New ∆ Old New ∆ Old New ∆
Sales 738.1 738.9 0.1% 822.0 787.1 -4.3% 912.4 857.6 -6.0%
Gross profit 317.4 314.0 -1.1% 357.6 334.5 -6.5% 396.9 364.5 -8.2%
Gross margin 43.0% 42.5% 43.5% 42.5% 43.5% 42.5%
OPEX -143.5 -143.5 0.0% -160.9 -160.9 0.0% -175.4 -175.4 0.0%
Sales growth 51.6% 51.8% 11.4% 6.5% 11.0% 9.0%
EBITDA adjusted 222.7 219.3 -1.5% 245.2 222.1 -9.4% 271.9 237.1 -12.8%
adj. EBITDA margin 30.2% 29.7% 29.8% 28.2% 29.8% 27.7%
EBIT adjusted 173.8 170.5 -1.9% 196.7 173.6 -11.7% 221.5 189.1 -14.6%
EPS 3.55 3.48 -2.0% 4.03 3.55 -12.0% 4.56 3.87 -15.0%
EPS adj 3.55 3.48 -2.0% 4.03 3.55 -12.0% 4.58 3.87 -15.4%
Net debt -53.9 -49.6 -7.9% -78.3 -72.2 -7.9% -109.2 -93.4 -14.4%
Sensitivity on 2023E, a mild recession based on the current fundamentals?

We pencil in a recession scenario. However, given the differences versus the previous downturn,
i.e. a lower absolute level of LVP, we believe this recession should have a relatively mild impact on
Melexis (i.e. lower LVP level). The adjacent activities could be hit harder, as they have more
exposure to non-auto.
We consequently have a scenario in which we see:
 Sales down by 5% versus 2022E, driven by automotive decreasing by 3% (vs. +12% previously,
which all else equal would imply that based on 10% content growth, the LVP would be down by
7% even if the base case envisaged by our auto team is +10%!) and adjacent down by 25%. Note
that in terms of LVP, our estimate is c. 4m units below the production level reported during the
pandemic. Note that forex (EUR/USD) will have a slightly negative effect. In our view, our LVP
estimates leave room for an inventory correction.
 Note that there could be a negative mix effect on content growth, as the OEMs favoured the
production of premium vehicles during the pandemic and the resulting supply chain
shortages.
 The gross margin is down by 300bps in 2023E, versus 2022E (albeit on a lowered scenario for
2022E, down 50bps YOY) to 39.5% (base-case scenario 42.5%) driven by operating deleverage.
 Opex was up 1% accounting for inflation, partly offset by the dissolution of the contracts of
temporary employees. We however do not believe that the company would continue to grow
opex, nor aggressively cut it.
Table 15: 2023 Recession scenario, sensitivity (%)

2018 2019 2020 2021 2022E 2023E 2024E
Sales growth 11.3% -14.5% 4.3% 26.8% 13.9% -5.4% 11.2%
Gross margin 45.9% 40.3% 39.0% 42.5% 42.0% 39.5% 39.5%
OPEX (EURm) (122.6) (125.6) (122.5) (125.2) (145.4) (146.9) (148.3)
Adj. EBIT margin 24.3% 14.5% 14.9% 23.1% 22.4% 18.5% 20.4%
Source: Kepler Cheuvreux, Company
Valuation in a soft landing scenario

Melexis would trade at a 17x and 15x 2023/24 EV/EBITDA respectively, which is still above the
historical average for the past five and ten years of 14x and 12x.
Chart 45: Ten-year average 2-year forward EV/EBITDA (x times) Chart 46: Five-year forward EV/EBITDA (x times)
Source: Bloomberg Source: Bloomberg
Valuation, TP, risks

DCF-based TP
We derive a new TP of EUR83 based on the following changes. At our TP, Melexis would trade at
13.5x 2023E EV/EBITDA and a 2023/24E FCF yield of 3.8% and 4.1% respectively.
 We roll forward our valuation by 1.25 years.
 We lower our mid-term growth assumptions to 12.5% (2025-2028E) from 15%.
 We leave the terminal margin unchanged at a 28% adj. EBITDA margin (24% EBIT margin).
However, the margins in the fade period have been lowered somewhat, given the reduced
forecasts.
 We apply a 50bps risk premium for the Ukraine war, resulting in a higher WACC of 9.4% (vs.
9.2 % previously)
Multiples
In our base case, Melexis is trading just shy of its five-year historical average two-year forward
EV/EBITDA multiple of 14x (effectively 13x). At our TP, it would trade in line.
A worst-case scenario, looking for a 2019 performance
If we pencil in the 2019 scenario for 2023E we would see EBIT cut by another 60% (EBIT down 50%
towards EUR70m). In 2019, the stock closed at 40x EBIT. However, this was with an improving
outlook going into 2020. The stock troughed at EUR45 per share, or 9x two year forward EBITDA.
At this stage, given all abovementioned elements, such a scenario seems unlikely. However, we
caution that an extreme macro shock, such as a significant disruption to gas supplies in the
Eurozone, could trigger such a scenario, in our view.

Melexis NV is a Belgium-based company that designs, develops, tests and markets Marc Biron, CEO
Karen van Griensven, CFO
advanced integrated semiconductor devices mainly for use in automotive electronics
systems (c90% of sales). The Company supplies sensor and driver chips with analog Key shareholders
and digital outputs. The company operates under a fabless business model. It is Free float 45.57%
Xtrion 53.85%
number three globally in magnetic sensors and the world leader in magnetic position Public 45.57%
sensors.
Key data charts

SWOT analysis
Return on invested capital Positioning at the end of the automotive value chain
Exposure to secular sales growth drivers Heavy dependency on key personnel
Long-term focused and conservative management Cyclicality
Balance sheet Size disadvantage versus largest competitors
Further electrification of vehicles Technological obsolecence
More stringent emission legislation Disruption of large supplier/sister company
Autonomous driving Car-sharing
Higher ADAS content Imposition of large-scale tariffs
FY to 31/12 (EUR) 12/15 12/16 12/17 12/18 12/19 12/20 12/21 12/22E 12/23E 12/24E

Sales 400.1 456.3 511.7 569.4 486.8 507.5 643.8 738.9 787.1 857.6
% Change 20.4% 14.0% 12.1% 11.3% -14.5% 4.3% 26.8% 14.8% 6.5% 9.0%
EBITDA adjusted 130.4 140.2 165.0 177.6 119.2 121.9 191.4 219.3 222.1 237.1
EBIT adjusted 107.6 114.4 132.6 138.5 70.6 75.5 148.4 170.5 173.6 189.1
EBIT adj. margin (%) 26.9% 25.1% 25.9% 24.3% 14.5% 14.9% 23.1% 23.1% 22.1% 22.0%
Net financial items & associates 1.9 -1.3 3.4 0.3 -1.4 0.4 5.9 -5.0 -5.0 -5.0
Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Tax -10.4 -16.8 -25.0 -23.3 -9.0 -6.6 -23.1 -24.8 -25.3 -27.6
Net profit from continuing operations 99.1 96.3 111.0 115.5 60.3 69.3 131.2 140.7 143.3 156.5
Net profit before minorities 99.1 96.3 111.0 115.5 60.3 69.3 131.2 140.7 143.3 156.5
Net profit reported 99.1 96.3 111.0 115.5 60.3 69.3 131.2 140.7 143.3 156.5

Capex -40.3 -28.8 -46.4 -76.3 -26.6 -24.9 -38.8 -48.0 -47.2 -51.5
Free cash flow 74.7 79.2 66.9 22.8 66.0 69.9 100.7 123.8 133.6 136.4
Acquisitions & divestments 0.0 0.0 6.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dividend paid -52.1 -76.1 -80.3 -84.1 -88.1 -52.1 -88.9 -109.1 -111.1 -115.1
Others -5.4 -1.1 7.2 0.4 -0.6 2.4 26.3 0.0 0.0 0.0
Change in net financial debt -17.2 -2.0 0.3 60.9 22.7 -20.1 -38.1 -14.7 -22.5 -21.3

Tangible assets 90.3 97.4 116.8 157.4 148.4 132.7 136.6 138.8 140.5 146.9
Liabilities and provisions 64.3 95.7 109.1 102.0 119.5 118.6 72.1 99.1 102.8 108.1
Net debt -58.7 -60.6 -60.4 0.5 28.1 6.9 -30.3 -45.0 -67.5 -87.8
Net financial debt -58.7 -60.6 -60.4 0.5 23.2 3.1 -35.0 -49.6 -72.2 -93.4
IFRS 16 debt 0.0 0.0 0.0 0.0 4.9 3.8 4.6 4.6 4.6 4.6
Net working capital 77.3 76.3 84.9 139.2 146.2 151.9 189.4 204.2 212.2 225.8
Invested capital 167.6 173.7 201.7 296.6 294.6 284.5 326.0 342.9 352.6 372.7

EPS adjusted 2.45 2.38 2.75 2.86 1.49 1.72 3.25 3.48 3.55 3.87
% Change 16.6% -2.8% 15.3% 4.1% -47.8% 15.0% 89.3% 7.3% 1.9% 9.2%
EPS reported 2.45 2.38 2.75 2.86 1.49 1.72 3.25 3.48 3.55 3.87
Ratios
ROE (%) 44.6% 38.1% 39.9% 37.2% 19.3% 22.6% 37.3% 34.8% 32.8% 33.0%
ROIC (%) 56.8% 55.0% 57.9% 45.6% 19.6% 21.4% 39.9% 41.8% 40.9% 42.8%
ND(F+IFRS16) / EBITDA (x) -0.4 -0.4 -0.4 0.0 0.2 0.1 -0.2 -0.2 -0.3 -0.4
Gearing (%) -24.2% -23.1% -20.5% 0.2% 7.8% 1.0% -9.0% -11.8% -15.9% -18.9%
Valuation
P/E adjusted 19.9 22.9 28.6 26.5 41.6 38.4 28.9 22.0 21.6 19.8
P/BV 8.1 8.4 10.8 9.4 8.4 8.5 9.7 7.4 6.8 6.3
P/CF 17.2 20.4 28.0 30.9 27.0 28.1 27.1 18.0 17.1 16.5
Dividend yield (%) 3.9% 3.7% 2.7% 2.9% 0.0% 3.6% 2.8% 3.5% 3.6% 3.7%
FCF yield (%) 3.8% 3.6% 2.1% 0.7% 2.6% 2.6% 2.7% 4.0% 4.3% 4.4%
EV/Sales 4.8 4.7 6.1 5.4 5.2 5.3 5.8 4.1 3.8 3.5
EV/EBITDA adj. 14.7 15.3 18.9 17.2 21.2 21.9 19.6 13.9 13.6 12.7
EV/EBIT adj. 17.8 18.7 23.5 22.1 35.9 35.4 25.3 17.9 17.4 15.9
#ModelReiterated
Lars Devold
Nordic Semiconductor Hold

Equity Research Analyst
+47 2313 9076
lkallar@keplercheuvreux.com
Norway | IT Hardware & Semis Beta Profile: MCap: NOK34.0bn
Target Price: NOK260.00 Change in TP: none Bloomberg: NOD NO Reuters: NOD.OL
Current Price: NOK177.85 Change in Sales: none 22E/none 23E Free float 74.1%
Avg. daily volume (NOKm) 332.2
Market data: 08 April 2022 Change in Adj. EPS: none 22E/none 23E
52-week high/low (NOK) 315.40/160.30
Vulnerable in high-inflation environment FY to 31/12 (USD)

Sales (m)
12/22E 12/23E 12/24E
809.8 1,043.3 1,287.1
EBIT adj (m) 125.7 195.6 279.4
We recently downgraded Nordic from Buy to Hold in a 1K published on 6 April.
Net profit adj (m) 98.0 152.6 217.9
With an estimated two-thirds of end demand coming from consumer Net financial debt (m) -321.0 -397.0 -528.1
electronics, much of which could fall under non-essential purchases, we think FCF (m) 41.7 76.0 131.1
Nordic, despite its large backlog, could be vulnerable. We are c. 10% below EPS adj. and ful. dil. 0.51 0.79 1.13
consensus. With the stock down about 17% since our downgrade, it now offers Consensus EPS 0.58 0.86 1.21
Net dividend 0.00 0.00 0.00
c. 45% upside. This is significant; however, the valuation sensitivity to key
FY to 31/12 12/22E 12/23E 12/24E
parameters is massive and the worst-case scenario set out in this note points
P/E adj and ful. dil. 40.0 25.7 18.0
to 33-35% possible EPS 2023/24E cuts. EV/EBITDA 21.1 14.5 10.2
Key findings EV/EBIT 28.4 17.9 12.0
We believe the backlog will peak in Q1 2022. Q2 2022 should see the first quarter of FCF yield 1.1% 2.0% 3.4%
 Dividend yield 0.0% 0.0% 0.0%
sequential backlog reduction, as customers adjust to the new high-inflation ND(F+IFRS16)/EBITDA -1.9 -1.6 -1.6
environment and increased geopolitical uncertainty. Gearing -57.7% -56.0% -57.0%
 We think consensus might be underestimating SG&A. Travel costs are returning (c. ROIC 69.4% 83.7% 93.6%
USD10-12m a year), and R&D expenses are likely to continue exceeding 20% of EV/IC 13.9 10.5 8.0
revenues throughout 2022. Sector Most Pref.
Soitec
 Our business case relied on the Matter protocol and VR to drive growth in demand
STMicroelectronics
for the company’s BLE chips. Matter has been delayed and we think VR will take a
backseat to other priorities in the context of declining consumer purchasing power.
 Our worst-case scenario sees sales growth halved in 2023 with elevated R&D
expenses, for a c. 33-35% cut in EPS for 2023/24E.

Leading position (40% market share) in short-range wireless
 We value Nordic using a ten-year DCF with terminal growth

connectivity - a market with a CAGR of 20-30%. We see this of 3.5%, a long-term EBIT margin of 20%, and a WACC of
market growth supported by demand for home office 10%.
equipment, XR headsets and smart home appliances. A 1pp lower WACC and 4% long-term growth rate would

The company's rich valuation is supported by its high
 point to an equity value of NOK329 per share.
relative EBIT growth. This growth relies on the BLE market A 1pp higher WACC and 3% growth would point to an equity

growing at a c. 25% CAGR, NOD defending its market share, value of NOK219 per share.
and margins improving with scale. Risks to our rating
Nordic is benefitting from megatrends that will drive
 Our bull case for the company relies on strong growth
demand for connectivity (especially short-range), but

trends for the core BLE product line (especially for XR
simultaneously faces headwinds in the short- to medium equipment and smart home appliances). Low consumer
term on supply and consumer end-demand. At current uptake of XR/smart home tech would have a big negative
levels we find risk-reward balanced and rate stock a Hold. impact on the case.
Catalysts We could be under/overestimating negative effects on


High-volume Bluetooth design wins from XR equipment and demand from the semis shortage and could
smart home appliances. under/overestimate the duration of the backlog.

End-demand for consumer electronics slowing due to high We apply conservative expectations for cellular IoT, but

inflation. these may still be too high.

Weaker margins in short term due to high SG&A.
Nordic Semiconductor
Nordic Semiconductor Hold | Target Price: NOK260.00
Short- to medium-term concerns weigh on investment case

Revisiting our investment case for Nordic, we turn more bearish on the short- to medium-term
outlook. The main reason for this is the change in the geopolitical situation and the spectre of war-
related inflation for food, energy, and staples. We think this might soften demand for consumer
electronics, especially for categories towards the more discretionary end of the scale. For more
information, see our recent 1K (The real world does Matter). We observe the following:
Roadblocks for major Nordic BLE chip demand drivers
 Our investment case for the company relied on strong end demand for consumer electronics,
specifically from increased consumer penetration in the nascent categories of smart home
The delay of the appliances and VR.
Matter protocol has  We were bullish on increased smart home adoption due to the introduction of the Matter
pushed our expected protocol. The promise of Matter is to increase interoperability between different smart home
ramp-up in smart ecosystems (enabling an Apple HomeKit user to use products designed for Google Nest and
home demand out in vice versa). Since each smart-enabled home can support many products in need of
time connectivity, success in the smart home market could potentially be very volume-driving for
Nordic. We had expected c. USD200m in revenues in 2023 from this category.
 Matter has taken longer to materialise than we initially expected. The high number of
participating companies has created coordination problems for the development and testing of
the protocol. After a recent (mid-March) delay announcement, we do not see Matter-certified
products having an impact on the take-up of smart home products until 2023.
 VR has seen a number of promising developments. First, the Nordic-enabled Oculus Quest 2
saw strong sales over the holidays (see our January report: XR update: strong Quest 2 sales
over the holidays, CES announcements), and downloads of the Oculus app have continued to
be strong. The Quest 2 design paradigm (headset + wireless 6DoF controllers) seems to have
increasingly cemented its place as the industry standard, with Sony adopting it for the
recently announced PSVR 2.
 After a site visit to a local developer of XR training solutions (read here: Hands-on with the
future of enterprise XR), we became convinced that VR training has a place in the enterprise.
Furthermore, we also became convinced that in its current state, VR will need physical input
Despite strong methods (and thus Nordic chips) to achieve latency low enough for a good user experience.
fundamentals, We do not currently see AR and hand-tracking as a credible threat to Nordic’s market
macroeconomic opportunity in VR.
headwinds are likely  While we still have faith in VR end demand, macroeconomic developments make us
to delay mass cautious. The Russia/Ukraine conflict has significantly raised inflation expectations, especially
adoption of VR for items like food and energy. With the threat of reduced consumer earnings power, we revise
our bullish expectations for mass adoption of VR and smart home technology, which we see as
occupying the more discretionary end of consumer electronics spending.
Backlog might turn soft, renewed concerns over Taiwan
 As capacity at its main supplier TSMC capped revenues, Nordic’s backlog has swollen from a
pre-pandemic average book-to-bill of 1x to c. 10x at the end of 2021 (USD1.7bn). The majority
(>80%) of the backlog is due for delivery in 2022, raising question about the firmness.
 While orders are cancellable within a one-month window, we do not price in material softness
in the backlog. However, given the current environment, we think customers will be hesitant
to place new orders, such that we now expect a halving of book-to-bill during 2022, followed
by a gradual downscaling of the backlog to pre-pandemic levels (from c. 5x book-to-bill back
to c. 1x).
 The Russia/Ukraine situation has triggered renewed discussions about the strategic importance
of Taiwan as the main semiconductor supplier to the world. Nordic sources c. 90% of its
production from TSMC, a risk that needs to be reflected in the valuation parameters (cost of
equity). In the long term, new supply will come online in other parts of the world; however, this
is not likely to impact Nordic’s supply situation for many years to come.
 We do not see material alleviation on supply until 2023.
R&D spending likely to exceed 20% of revenues in 2022

 We believe consensus may be underestimating SG&A over 2022 and 2023. While the company
guides for 15-20% R&D expenses in its operating model, this is assuming a normalised (i.e.
non-supply constrained) revenue situation.
 R&D expenses have averaged c. 23% of revenues throughout 2020 and 2021, and we think
they will exceed 20% in 2022.
 Travel expenses have effectively been zero during the pandemic, but we believe this is set to
change as the company is now starting to have a physical presence at conferences, while
physical collaboration among its R&D staff, which is spread out across many countries, is also
set to increase.
Worst-case scenario sees EPS cut by c. 35% in 2023E and 33% in 2024E
For our worst-case scenario, we assume that 100% of unfulfilled orders for delivery in 2022 are
cancelled, and 50% of orders for delivery in 2023 are cancelled. This translates into c. 43% of the
backlog being soft. This assumption still leaves 100% visibility on our 2022 estimate.
Our worst-case Consequently, we see risk on 2022E sales as limited. We see 2022E sales increasing by 30%,
scenario prices in compared to 33% in our published estimates.
c.43% backlog
softness, a halved For 2023E, we assume half the growth rate of our published estimates, c. 15% compared to 29%. We
growth rate in 2023, see risk to gross margin as limited, given that Nordic has amply demonstrated its ability to pass on
and >400bps lower TSMC price increases during 2021. However, instead of our more optimistic assumption of c. 51%
EBITDA margins; this gross margins, we instead price in 49.5% to account for negative mix effects and cost inflation.
results in an EPS cut R&D spending is important to Nordic’s long-term investment case, and as such we see it continuing
of >30% for 2023 at a brisk pace, with c. 24% R&D expenses as a percentage of revenues, 22% in 2023E, and 21% in
2024. This leaves EBITDA margins at c. 19% in 2023E, down by 462bps from our published estimates.
We subsequently see a rebound and recovery in 2024E to 25% sales growth and 21% EBITDA
margins. All told, this results in an EPS cut of c. 35% in 2023E and c. 33% in 2024E.
Valuation
We use a long-term growth rate of 3.5%, a long-term EBIT margin of 20%, and a WACC of 10%. Our
DCF analysis leads us to an equity value of USD5,747m and a target price of NOK260 per share. For
more details on our valuation, please see our 1K published on 6 April.
Table 16: Nordic Semiconductor, DCF summary

DCF summary
PV, explicit forecasts 166
PV, medium-term estimates 1683
PV of TP 3,577
EV 5,426
Cash at 31/12/2022 321
Equity value at 31/12/2021 5,747
Shares 191.0
Equity value per share 30.1
USDNOK 8.62
Target price in NOK 260
A 1pp lower WACC and 4% long-term growth rate would point to an equity value of NOK329 per
share. A 1pp higher WACC and 3% long-term growth rate would point to an equity value of NOK219
per share.
Table 17: DCF sensitivity to changes in long-term growth

Long-term growth (%)
2.50% 3.00% 3.50% 4.00% 4.50%
12.0% 190.0 195.0 201.0 208.0 215.0
11.0% 211.0 219.0 226.0 236.0 246.0
WACC
10.0% 238.0 248.0 260.0 274.0 289.0

9.0% 275.0 290.0 307.0 329.0 355.0
8.0% 328.0 350.0 379.0 414.0 460.0
Richly valued compared to peers, which may be justified by EBIT growth expectations
Compared to Nordic’s core peer group of fabless semiconductor companies, Nordic is priced at a
premium, at c. 25x FY1 EV/EBIT versus an average of c. 19x for peers.
Table 18: Nordic Semiconductor vs. peers, valuation

Price NIBD Market Revenue growth EBIT margin (%) EV/EBIT FCF yield (%)
Ticker 11/04 /EBITDA Cap (EURm) FY1E FY2E FY3E FY1E FY2E FY3E FY1E FY2E FY3E FY1E FY2E FY3E
NVDA 231.2 -3.1x 533,551 30% 17% 11% 48% 50% 50% 33.9x 28.1x 25.1x 2.2 2.6 2.9
AVGO 587.0 2.2x 220,359 16% 6% 4% 59% 60% 58% 14.2x 13.3x 13.1x 6.7 7.2 7.5
SLAB 136.9 -8.1x 4,805 37% 17% 13% 15% 15% 15% 24.5x 20.4x 18.3x 1.7 2.2 -
QCOM 136.7 0.2x 141,642 26% 8% 5% 38% 38% 37% 9.8x 9.3x 9.0x 7.2 9.1 9.6
AMD 101.0 -3.2x 150,457 54% 13% 16% 30% 30% 33% 21.1x 18.4x 14.5x 3.2 3.8 3.2
MTEK 840.0 -5.2x 42,747 19% 11% 11% 24% 23% 24% 8.5x 7.9x 6.9x 9.5 9.3 5.6
Fabless
Average: 31% 12% 10% 36% 36% 36% 18.7x 16.2x 14.5x 5.1 5.7 5.7
Median: 28% 12% 11% 34% 34% 35% 17.7x 15.9x 13.8x 4.9 5.5 5.6
Price NIBD Market Revenue growth EBIT margin (%) EV/EBIT FCF yield (%)
Ticker 11/04 /EBITDA Cap (EURm) FY1E FY2E FY3E FY1E FY2E FY3E FY1E FY2E FY3E FY1E FY2E FY3E
QCOM 136.7 0.2x 141,642 26% 8% 5% 38% 38% 37% 9.8x 9.3x 9.0x 7.2 9.1 9.6
TXN 174.1 -0.4x 147,741 8% 4% 4% 50% 49% 47% 15.9x 15.6x 15.7x 3.8 3.9 4.5
IFXG 27.6 1.3x 35,985 19% 9% 9% 20% 20% 21% 14.4x 13.3x 11.9x 3.0 4.1 5.4
RENS 1298.0 2.6x 18,675 31% 4% 9% 25% 25% 27% 9.8x 9.3x 7.9x 10.3 12.1 13.0
BLE
Average: 21% 6% 7% 33% 33% 33% 12.5x 11.9x 11.1x 6.1 7.3 8.1
Median: 23% 6% 7% 31% 31% 32% 12.1x 11.3x 10.5x 5.5 6.6 7.5
Nordic Semiconductor
NOD 36% 31% 25% 17% 20% 21% 25.4x 17.0x 12.6x 1.2 2.1 3.8
Source: Refinitiv Eikon, Kepler Cheuvreux. Fabless peer group consisting of: Nvidia, AMD, Qualcomm, MediaTek, Xilinx, Broadcom. BLE peer group consisting of Qualcomm, Texas Instruments, Infineon,
Renesas
Compared to the peer group, the company is trading in line on EV/EBIT multiples when seen in
relation to consensus expectations for FY3 EBIT growth.
Chart 47: Fabless semiconductor companies, FY1 EV/EBIT vs. FY3 EBIT growth, on consensus estimates

Nordic Semiconductor is a fabless semiconductor company listed on the Norwegian Svenn-Tore Larsen, CEO
Pål Elstad, CFO
Oslo stock exchange. The company is market leader in Bluetooth Low Energy with a Ståle Ytterdal, IR
40% market share. It is moving into long-range connectivity with cellular LTE-M/NB-
IoT technology, and mid-range connectivity with Wi-Fi. The company is also looking Key shareholders
to expand into services, and new chip types like PMICs. Free float 74.12%
Folketrydfondet 12.85%
Accelerator 10.69%
DNB Norge 4.82%
Key data charts

SWOT analysis
Market leader in Bluetooth Low Energy. Limited diversification.
Highly skilled personnel, with strong track record. Highly competitive market.
Strong customer relationships. High cost level.
Solid operational cash flow, no debt. Constantly changing technologies.
Cellular IoT-M/NB-IoT. Margin pressure due to intensified competition.
Strong growth in Bluetooth Low Energy segment. Commoditisation of older technologies.
Design wins with Tier 1 customers. Risk of betting on wrong technology.
Potential acquisition target. High multiples compared with peers.
FY to 31/12 (USD) 12/15 12/16 12/17 12/18 12/19 12/20 12/21 12/22E 12/23E 12/24E
Income Statement (USDm)

Sales 193.1 197.7 236.0 271.1 288.4 405.2 610.5 809.8 1,043.3 1,287.1
% Change 15.6% 2.4% 19.4% 14.9% 6.4% 40.5% 50.7% 32.6% 28.8% 23.4%
EBITDA adjusted 55.0 20.3 23.0 30.5 32.4 75.9 137.7 169.1 241.3 331.1
EBIT adjusted 46.6 8.8 10.1 13.7 8.9 44.8 99.9 125.7 195.6 279.4
EBIT adj. margin (%) 24.1% 4.5% 4.3% 5.1% 3.1% 11.1% 16.4% 15.5% 18.7% 21.7%
Net financial items & associates 0.0 0.0 -0.3 1.4 0.8 -0.8 -0.4 0.0 0.0 0.0
Others 2.0 -0.9 -0.3 -0.3 -0.4 -0.9 0.7 0.0 0.0 0.0
Tax -12.8 -2.3 -3.0 -6.2 -2.4 -4.5 -16.1 -27.6 -43.0 -61.5
Net profit from continuing operations 26.8 6.4 6.8 8.9 7.3 39.5 83.4 98.0 152.6 217.9
Net profit before minorities 26.8 6.4 6.8 8.9 7.3 39.5 83.4 98.0 152.6 217.9
Net profit reported 26.8 6.4 6.8 8.9 7.3 39.5 83.4 98.0 152.6 217.9
Cash Flow Statement (USDm)

Levered post tax CF before capex -4.7 19.8 28.5 11.3 14.5 15.7 64.4 86.5 133.9 202.4
Capex -20.1 -15.5 -19.4 -30.5 -31.5 -24.9 -30.7 -44.9 -57.8 -71.3
Free cash flow -24.8 4.4 9.1 -19.2 -17.0 -9.2 33.7 41.7 76.0 131.1
Acquisitions & divestments 0.0 0.0 0.0 0.0 0.0 -13.2 0.0 0.0 0.0 0.0
Dividend paid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Others 11.0 7.0 0.0 67.2 -1.5 123.5 -28.3 0.0 0.0 0.1
Change in net financial debt 13.8 -11.4 -9.1 -48.0 18.4 -101.2 -5.4 -41.7 -76.0 -131.2
Balance Sheet (USDm)

Tangible assets 35.9 41.8 48.2 61.7 98.8 113.9 108.8 110.2 122.4 142.0
Net debt -19.3 -21.1 -36.7 -103.9 -86.6 -236.7 -273.2 -314.9 -390.9 -522.0
Net financial debt -19.3 -21.1 -36.7 -103.9 -90.6 -242.5 -279.3 -321.0 -397.0 -528.1
IFRS 16 debt 0.0 0.0 0.0 0.0 4.0 5.8 6.1 6.1 6.1 6.1
Per share data ($)

EPS adjusted 0.22 0.03 0.04 0.05 0.04 0.20 0.44 0.51 0.80 1.14
% Change 75.7% -84.5% 16.8% 22.0% -19.3% 407.2% 119.6% 16.7% 55.7% 42.8%
EPS reported 0.16 0.04 0.04 0.05 0.04 0.21 0.44 0.51 0.80 1.14
Cash flow per share -0.03 0.12 0.18 0.06 0.08 0.08 0.34 0.45 0.70 1.06
Ratios
ROE (%) 35.6% 4.8% 5.3% 4.9% 3.1% 12.2% 19.5% 19.3% 24.1% 26.6%
ROIC (%) 74.1% 10.6% 11.4% 15.3% 7.9% 32.0% 65.0% 69.4% 83.7% 93.6%
ND(F+IFRS16) / EBITDA (x) -0.4 -1.0 -1.6 -3.4 -2.7 -3.1 -2.0 -1.9 -1.6 -1.6
Gearing (%) -17.2% -18.2% -29.4% -46.9% -39.0% -60.3% -61.0% -57.7% -56.0% -57.0%
Valuation
P/E adjusted 28.1 137.0 113.5 118.3 119.5 43.0 60.6 39.7 25.5 17.8
P/BV 9.0 6.5 5.8 4.6 3.6 4.1 11.1 7.0 5.5 4.2
P/CF na 38.1 25.6 89.3 57.3 na 79.1 44.9 29.0 19.2
Dividend yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
FCF yield (%) -2.5% 0.6% 1.2% -1.9% -2.0% -0.6% 0.7% 1.1% 2.0% 3.4%
EV/Sales 5.1 3.7 2.9 3.3 2.6 3.5 7.9 4.4 3.4 2.6
EV/EBITDA adj. 17.9 36.2 30.2 29.8 22.9 18.8 35.0 21.1 14.5 10.2
EV/EBIT adj. 21.2 83.5 68.5 66.0 83.6 31.7 48.3 28.4 17.9 12.0
Soitec Buy
+33 1 53 65 35 10
France | IT Hardware & Semis Beta Profile: MCap: EUR5.5bn
Target Price: EUR210.00 (235.00) Change in TP: -10.6% Bloomberg: SOI FP Reuters: SOIT.PA
Current Price: EUR157.15 Change in Sales: none 21E/none 22E Free float 61.4%
Market data: 11 April 2022 Change in Adj. EPS: none 21E/none 22E 52-week high/low (EUR) 241.20/130.70
High degree of visibility for the coming months FY to 31/03 (EUR)

Sales (m)
03/22E 03/23E 03/24E
820 976 1,181
Why this report? EBITDA adj (m) 283 341 417
EBIT adj (m) 177 221 271
Soitec has a very limited direct exposure to Russia/Ukraine and has very large Net profit adj (m) 157 192 234
inventories of xenon gas. Despite growing pressure on macro conditions, Net financial debt (m) -115 -163 -264
Soitec has not seen any change in customer demand so far and the visibility for FCF (m) -20 48 101
FY 2023 (ending in March) looks very high, as almost 90% of sales are backed by EPS adj. and ful. dil. 4.32 5.18 6.32
firm, non-cancellable, take-or-pay contracts. Soitec remains on track to grow Net dividend 0.00 0.00 0.00
sales by 18% LFL in FY 2023 (strong semis content growth, driven by higher 5G
FY to 31/03 03/22E 03/23E 03/24E
penetration), along with adjusted EBITDA margin climbing by 50bps to c. 35%. P/E adj and ful. dil. 36.4 30.4 24.9
We cut our TP to from EUR235 to EUR210 and keep our Buy rating (Soitec is one EV/EBITDA 19.0 15.6 12.5
of our Sector Most Preferred Stocks), as the medium-term outlook is bright, EV/EBIT 30.3 24.1 19.3
and the valuation remains fairly attractive. FCF yield -0.4% 0.9% 1.8%
Dividend yield 0.0% 0.0% 0.0%
Key findings ND(F+IFRS16)/EBITDA -0.2 -0.3 -0.5
 The business opportunity around SiC looks fairly large and could represent c. Gearing -14.2% -16.6% -22.2%
ROIC 20.0% 22.8% 24.0%
USD1bn by 2030, almost the size of the group’s entire revenue in FY 2022.
EV/IC 9.0 7.6 6.5
Deconstructing the forecasts Sector Most Pref.
 We still see sales growing by 43% LFL in FY 2022E, along with sustained 20% LFL Soitec
sales growth over FY 2023-26E (unchanged). STMicroelectronics
 We still see the adjusted EBITDA margin growing by 380bps to 34.5% in FY 2022E,
with the margin climbing to 36% in FY 2026E (unchanged).
 We increase our WACC from 8.5% to 9% (to reflect a higher risk premium) and cut

The group has a unique position in the engineered
 
A DCF valuation model with an 9% WACC and 36% adjusted
substrates market with its Smart Cut technology and there EBITDA margin in the medium term (above company's
are increasing opportunities ahead (from SOI to POI, GaN, conservative 35% target for FY 2026) leads to EUR210 per
SiC, etc.). share.
Sales should grow rapidly in the coming years (+25% LFL
 
A 20x EBIT multiple in FY 2026E could push the shares to
CAGR over FY 2021-26E) thanks to solid demand for RF-SOI EUR254 by FY 2026E (or EUR209 discounted back to Q4 FY
(driven by 5G), strong momentum from POI (for the 5G RF 2023E).
filters), a significant rebound of the FD-SOI business (driven At our TP (EUR210), Soitec would trade at c. 15x FY 2026E

by 5G and edge computing), and the gradual expansion EBIT, which remains reasonable.
into compound semiconductors (incl. GaN, SiC, etc.). Risks to our rating
We see solid margin upside ahead, with adjusted EBITDA
 isk of technology shift from large customers, potentially
R
margins climbing toward 36% by FY 2026E (530bps above moving away from Soitec’s key technologies (SOI, POI,
FY 2021), benefiting from higher fab loading and solid GaN, SiC, etc.).
operating leverage. 
Lower demand from Soitec’s large customers (in the
Catalysts smartphone, automotive, or IoT markets).
tronger-than-expected traction from the POI business.
S 
Some potential forex headwinds, as a 10% US dollar
Gradual ramp-up of group's Silicon Carbide offering.
 decline would shave c. 10% off EBITDA (assuming hedges
Larger-than-expected adoption of FD-SOI within edge
 roll off).
computing.
Soitec
Soitec Buy | Target Price: EUR210.00
Reiterating our forecasts for the coming years

Soitec is set to report a strong set of results in FY 2022 (likely at the high end of guidance), with
sales up by 43% LFL (unchanged), with very strong demand across the board, including in RF-SOI
(largely supported by the ongoing deployment of 5G smartphones and strong semis content),
Power-SOI (benefiting from a strong recovery in the automotive market), FD-SOI (benefiting from
growing adoption in the edge computing, automotive and 5G markets), Imager-SOI (boosted by
the growing adoption of 3D sensing for facial recognition in smartphones and AR/VR devices), and
POI (benefiting from the ongoing ramp-up in POI production dedicated to Qualcomm and the
gradual ramp-up of a couple of other customers in H2 FY 2022).
Management recently confirmed its 34% adjusted EBITDA margin guidance for FY 2022, with
100bps upside toward 35%, and we still see the adjusted EBITDA margin climbing by 380bps to
34.5% in FY 2022E (unchanged).
Despite the potential macro slowdown in the coming months, Soitec seems to be ready to keep a
positive outlook for FY 2023.
We still expect 18% organic growth in FY 2023E and 21% per year over FY 2024-26E.
While input costs are going up, Soitec still has the opportunity to increase wafer prices to protect
margins going forward and contracts are increasingly embedding some price components.
Management is likely to update its conservative 35% adjusted EBITDA margin target for FY 2026
when it reports FY 2022 results next June.
We already expect a 36% adjusted EBITDA margin in FY 2026E (unchanged), with some clear
upside thanks to higher fab loading, a positive mix shift toward differentiated products, and solid
operating leverage.
All in all, we have kept our estimates fully unchanged for the coming years at Soitec.
Worst-case scenario would lead to c. 24% EPS cut over FY 2023-26E
While we have not moved our estimates on Soitec so far (as we believe the group is well protected
with strong semis content growth in the coming years), we cannot rule out a total macro crash
and much weaker demand than what we have modelled in the coming quarters.
In a worst-case scenario, we believe Soitec could potentially end up with sales broadly up by 10%
LFL in FY 2023E (showing a deceleration of sales rather consistent with the last downturn in FY
2021; sales decelerated by c. 27 points from FY 2020 to FY 2021) and adjusted EBITDA margin down
by 250bps to 32% (while margins dropped by c. 330bps YOY to 30.7% in FY 2021).
Moving beyond FY 2023, we believe sales could then rebound 15% LFL in FY 2024E, 20% LFL in FY
2025E, and 22% LFL in FY 2026E, while the adjusted EBITDA margin could gradually expand toward
34% by FY 2026E.
We believe a worst-case scenario would lead to a c. 24% EPS cut over FY 2023-26E.
In a worst-case scenario, Soitec would be trading on c. 31x FY 2023E EBIT, above the group’s
average over the past five years (c. 27x), bearing in mind that the group’s growth profile has
significantly improved with large growth opportunities across the board (RF-SOI, FD-SOI, POI, SiC,
GaN, etc.), and the group now deserves to trade at higher multiples than in the past.
We cut our TP from EUR235 to EUR210, based on a DCF valuation with a 9% WACC (up from 8.5%
previously, due to a higher risk premium), 18% medium-term sales growth, 4% long-term sales
growth, and a 36% adjusted EBITDA margin in the medium term (100bps above management’s
conservative target for FY 2026).
Table 19: FY 2026E multiple valuation model

Multiple EBIT Valuation Net debt Equity value FV FV discounted back to
(EURm) (EURm) (EURm) (EURm) (EUR) Q1 FY 2024E (EUR)
EV/EBIT 18 436 7,844 -711 8,554 231 190
EV/EBIT 20 436 8,715 -711 9,426 254 209
EV/EBIT 22 436 9,587 -711 10,297 278 229
In a conservative scenario (with a 20x EBIT multiple for FY 2026E, c. 30% above the semiconductor
sector today, as group structurally grows 4x faster than the sector), we derive a fair value of close
to EUR254 per share by FY 2026E, or c. EUR209 discounted back to Q1 FY 2024E (c. 33% above the
current share price).
While Soitec shares have strongly rebounded from their recent lows (c. +20% since the beginning
of March), the shares are still down by c. 35% since their recent highs (partly due to concerns over
governance following the decision not to reappoint Paul Boudre as CEO and partly due to
uncertainties regarding the strength of the semis cycle in the coming quarters), not too far from
the average decline experienced over the past downcycles (the semis sector usually drops by c.
30% from peak to trough). The shares could remain volatile in the coming months, but we see
some support around the current level and see good buying opportunities for the medium term.
Despite the short-term uncertainties, Soitec remains on our Most Preferred list for the IT hardware
& Semis sector and we keep our Buy rating (TP down from EUR235 to EUR210), as:
1. The group has a unique position in the engineered substrates market with its Smart Cut
technology, and there are increasing market opportunities ahead (from SOI to POI, GaN, SiC,
and other compound semiconductors).
2. Sales are set to grow very fast in the coming years (a 25% LFL sales CAGR over FY 2021-26E)
thanks to solid demand for RF-SOI (driven by the ramp-up of 5G technology), strong
momentum from POI (for the 5G RF filters), a significant rebound at the FD-SOI business
(driven by 5G, edge computing, and automotive), and the gradual expansion into compound
semiconductors (including GaN, SiC, etc.).
3. We see solid margin upside ahead, with the adjusted EBITDA margins climbing to 36% by FY
2026E (530bps above FY 2021), benefiting from higher fab loading, a better mix, and solid
operating leverage.
4. FCF generation is set to climb to EUR275m by FY 2026E and the group should end up with a
net cash position of c. EUR711m by the end of FY 2026E (vs. net debt of EUR4m at the end of
FY 2021).
5. The valuation remains fairly attractive (c. 19x FY 2024E EBIT).

Soitec is the global leader in the silicon-on-insulator wafers market with a c. 70% Paul Boudre, CEO
Léa Alzingre, CFO
market share. After struggling for years, the group has materially recovered, and its Bernard, Aspar COO
products benefit from strong adoption momentum among foundries worldwide. On
top of that, Soitec benefits from incremental growth prospects from compound Key shareholders
Free float 61.40%
semiconductors (GaN, SiC, etc.) and a structural increase in SOI content, which should
NSIG Sunrise 10.90%
enable it to double in size over the next three to four years. Bpifrance Participations 10.90%
BlackRock 9.10%
Key data charts

SWOT analysis
Market leader in the SOI market, with c. 70% market share. Still relatively limited scale effect.
SmartCut technology is a clear competitive advantage. Production ramp availability could be a bottleneck.
RF-SOI is a standard for RF front-end modules. Bad free cash-flow generation track record.
Strong adoption momentum of FD-SOI technology among High dependency to RF-SOI for RF front-end module.
foundries.
Promising IoT and 5G market for FD-SOI. High exposure to limited growth markets (smartphones
Structural increase in SOI content. and auto).
Large opportunities from POI. Innovation from competitors.
Additionnal growth from compound semiconductors (GaN, Risk of technology shift from large customers.
SiC, etc.).
FY to 31/03 (EUR) 03/15 03/16 03/17 03/18 03/19 03/20 03/21 03/22E 03/23E 03/24E

Sales 223 233 246 311 444 598 584 820 976 1,181
% Change -9.8% 4.6% 5.4% 26.4% 42.9% 34.6% -2.3% 40.5% 19.0% 21.0%
EBITDA adjusted -80 46 51 91 152 185 179 283 341 417
EBITDA adj. margin (%) -36.1% 19.8% 20.8% 29.2% 34.3% 31.0% 30.7% 34.5% 35.0% 35.3%
EBIT adjusted -126 22 30 71 126 137 110 177 221 271
EBIT adj. margin (%) -56.5% 9.5% 12.3% 23.0% 28.5% 23.0% 18.8% 21.6% 22.6% 22.9%
Net financial items & associates 18 -23 -12 3 -8 -4 -15 -14 -12 -11
Others 0 0 0 0 0 0 0 0 0 0
Tax 0 -4 -1 17 -11 -5 -1 -15 -23 -31
Net profit from continuing operations -259 -33 7 92 90 111 74 137 166 209
Net profit from discontinuing activities 0 -39 1 -6 0 -1 -1 0 0 0
Net profit before minorities -259 -72 8 87 90 110 73 137 166 209
Net profit reported -259 -72 8 87 90 110 73 137 166 209
Net profit adjusted -97 0 17 67 108 132 101 157 192 234

Levered post tax CF before capex -9 -21 25 34 58 98 172 220 268 321
Capex -3 -9 -6 -27 -119 -82 -133 -240 -220 -220
Free cash flow -12 -30 19 7 -61 16 39 -20 48 101
Acquisitions & divestments -26 14 3 9 2 -8 2 1 0 0
Dividend paid 0 0 0 0 0 0 0 0 0 0
Others 100 -5 136 37 -29 -15 8 138 0 0
Change in net financial debt -62 20 -158 -53 88 7 -50 -119 -48 -101

Intangible assets 11 6 4 8 38 87 99 114 124 131
Tangible assets 157 121 113 134 254 297 378 512 601 668
Financial & other non-current assets 107 61 74 110 98 61 88 88 89 90
Total shareholders' equity 50 -7 149 279 398 552 676 813 979 1,188
Liabilities and provisions 339 327 232 192 411 435 876 912 961 1,028
Net debt 155 175 20 -32 59 121 76 -44 -91 -192

Net financial debt 150 170 12 -42 46 54 4 -115 -163 -264
IFRS 16 debt 0 0 0 0 0 53 55 55 55 55
Net working capital -57 -10 -16 -4 76 253 213 84 103 138
Invested capital 99 110 97 130 330 550 592 595 705 806

EPS adjusted -9.65 -0.03 0.81 2.16 3.43 4.02 3.04 4.59 5.50 6.71
EPS adj and fully diluted -8.02 0.00 0.82 2.12 3.14 3.82 2.74 4.32 5.18 6.32
% Change +chg +chg +chg 158.4% 47.9% 21.5% -28.3% 57.8% 19.9% 22.0%
EPS reported -25.69 -6.20 0.40 2.79 2.85 3.35 2.18 4.02 4.77 5.99
Cash flow per share -0.92 -1.83 1.18 1.10 1.85 3.00 5.17 6.45 7.67 9.19
Book value per share 4.95 -0.62 7.12 9.00 12.59 16.86 20.27 23.82 28.06 34.05
Ratios
ROE (%) -72.0% -1.6% 23.7% 31.3% 32.0% 27.7% 16.5% 21.1% 21.4% 21.6%
ROIC (%) -36.5% 14.1% 19.6% 42.0% 36.8% 20.9% 12.9% 20.0% 22.8% 24.0%
ND(F+IFRS16) / EBITDA (x) -1.9 3.7 0.2 -0.5 0.3 0.6 0.3 -0.2 -0.3 -0.5
Gearing (%) 300.4% na 7.8% -15.0% 11.7% 9.7% 0.6% -14.2% -16.6% -22.2%
Valuation
P/E adjusted na na 25.8 25.6 19.2 22.3 41.6 34.2 28.6 23.4
P/E adjusted and fully diluted na na 25.3 26.1 21.0 23.5 46.2 36.4 30.4 24.9
P/BV 5.7 na 2.9 6.2 5.2 5.3 6.2 6.6 5.6 4.6
P/CF na na 17.6 50.7 35.6 30.0 24.4 24.4 20.5 17.1
Dividend yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
FCF yield (%) -3.8% -23.4% 3.0% 0.4% -2.9% 0.5% 0.9% -0.4% 0.9% 1.8%
EV/Sales 1.8 1.1 2.5 5.3 4.7 5.1 7.2 6.5 5.5 4.4
EV/EBITDA adj. na 5.8 11.9 18.3 13.7 16.5 23.6 19.0 15.6 12.5
EV/EBIT adj. na 12.0 20.0 23.2 16.5 22.3 38.4 30.3 24.1 19.3
STMicroelectronics Buy
+33 1 53 65 35 10
Italy | IT Hardware & Semis Beta Profile: MCap: EUR31.9bn
Target Price: EUR50.00 (60.00) Change in TP: -16.7% Bloomberg: STM IM Reuters: STM.MI
Current Price: EUR35.03 Change in Sales: -1.9% 22E/-5.5% 23E Free float 57.6%
Solid growth drivers, attractive valuation FY to 31/12 (USD)

Sales (m)
12/22E 12/23E 12/24E
14,760 15,504 16,740
Why this report? EBITDA adj (m) 4,508 4,474 5,170
EBIT adj (m) 3,248 3,104 3,520
The environment remains supportive, with a very high backlog in hand, a very Net profit adj (m) 2,724 2,606 2,965
low level of inventories in the market, and capacities almost fully booked for Net financial debt (m) -1,228 -3,220 -5,491
2022. Despite some potential weakness in the consumer market in the coming FCF (m) 470 2,210 2,490
quarters, there is strong visibility in the automotive and industrial markets, EPS adj. and ful. dil. 2.97 2.84 3.23
and a hard-landing scenario in 2023 is far from certain at this stage, given the Net dividend 0.24 0.24 0.24
lack of capacity on the market today. We cut our TP to EUR50 and keep our Buy
FY to 31/12 12/22E 12/23E 12/24E
rating on STM (one of our Sector Most Preferred Stocks), as the group is P/E adj and ful. dil. 12.8 13.4 11.8
benefitting from solid growth drivers and valuation remains fairly attractive. EV/EBITDA 7.5 7.1 5.7
EV/EBIT 10.4 10.2 8.3
Key findings
FCF yield 1.4% 6.4% 7.2%
 Trends in automotive remain very supportive, with growing volumes, very low Dividend yield 0.6% 0.6% 0.6%
inventories, and a backlog of 18 months of sales, well above 2022 capacities. ND(F+IFRS16)/EBITDA -0.2 -0.7 -1.0
Gearing -10.4% -22.7% -32.5%
ROIC 31.3% 25.9% 28.3%
 We now see sales growing by 16% LFL in 2022E (vs. +18% LFL prev. and 16-20% LFL EV/IC 3.6 3.2 2.9
company guidance), 5% LFL in 2023E (vs. +9% LFL prev.), 8% LFL in 2024E (vs. +9% Sector Most Pref.
LFL prev.), and 10% LFL in 2025E (vs. +9% LFL prev.). Soitec
We now expect STM’s adjusted operating margin to climb by 300bps to 22% in STMicroelectronics

2022E (vs. 23% prev.), followed by a 20% margin in 2023E (vs. 23.5% prev.), 21% in
2024E (vs. 24.3% prev.), and 22.5% in 2025E (vs. 25% prev.).
 We increase our WACC from 8.5% to 9% (to reflect a higher risk premium) and cut

STM benefits from several growth opportunities ahead
 
A DCF valuation model with an 9% WACC, 8% sales growth,
(ADAS/xEVs with SiC, STM32 MCUs, power, 3D sensing, etc.) and a 19% adjusted medium-term operating margin (which
and looks well on track to outperform its addressable looks reasonable, as STM should already deliver a 22%
market with 10% organic growth over 2022-24E. margin in 2022E) leads to EUR50 per share.
We see solid margin upside ahead, with the adjusted
 
A 14x EBIT multiple in 2024E could push the shares to
operating margin expanding to 21% by 2024E (c. 800bps EUR55 by 2024E (or EUR51 discounted back to Q2 2023E).
above 2020 levels) thanks to solid gross margin 
At our TP (EUR50), STM would trade below 13x 2024E EBIT.
improvements and operating leverage. Risks to our rating
Despite elevated capex in the medium term, we see strong
 
Weaker demand for the semis market in the coming
FCF generation with USD2.5bn in FCF by 2024E, while the months due to the COVID-19 pandemic and/or softer macro
net cash position should climb to USD5.5bn by 2024E, conditions.
paving the way for a potentially sizeable acquisition after The loss of large design wins (specifically the 3D sensor

2024E and/or significant cash return to shareholders. design at Apple).
Catalysts A weaker-than-expected dollar could impact sales and


I mproving trends in the semis market in coming quarters. results as STMicroelectronics has high forex exposure. A

Some additional design wins, spec. for 3D sensors and SiC. 10% US dollar decline could lead to a c. 8% cut in sales and

A stronger recovery in global car production in coming a 12% cut in adjusted operating result estimates.
quarters.
STMicroelectronics
STMicroelectronics Buy | Target Price: EUR50.00
Adopting a more conservative scenario for the coming quarters

While STM generates c. 60% of sales in the automotive and industrial markets (30% in each
market), it also has a sizable exposure to personal electronics (c. 30% of sales, including c. 20%
from Apple), which could weaken in the coming quarters.
We have decided to adopt a more conservative scenario for the coming quarters, with moderate
revisions in 2022 and more severe cuts over 2023-25.
We now expect 16% sales growth LFL in 2022E (vs. +18% LFL previously) and are at the lower end
of the company’s guidance range (+16-20% LFL), with strong growth in the automotive & discrete
group (ADG: +24% LFL, supported by buoyant demand in ADAS and xEVs with SiC, and a gradual
replenishment of inventories) and the microcontrollers & digital ICs group (MDG: +19% LFL
benefiting from very high demand in MCUs and improving sales in RF communications), while the
analog, MEMS & sensors group should grow at a slower pace (AMS: +7% LFL, with growing
semiconductor content at Apple, including 3D sensing, and several design wins, including ambient
light sensors, but some downside on smartphone volumes in the coming quarters).
We now expect 5% sales growth LFL in 2023E (vs. +9% LFL previously), with still-solid growth
prospects in ADG (+9% LFL) but softer trends in AMS (+2% LFL) and MDG (+4% LFL).
Moving ahead, we have modelled a gradual recovery, with sales up by 8% LFL in 2024E (vs. +9%
LFL previously) and by 10% LFL in 2025E (vs. +9% LFL previously).
We have also cut our margin forecasts for the coming years and now see the adjusted operating
margin climbing by 300bps to 22% in 2022E (vs. 23% previously) and declining by 200bps to 20%
in 2023E (vs. 23.5% previously), affected by slower sales, higher D&A, a less favourable pricing
environment, and some opex expansion to support mid-term growth opportunities.
Moving ahead, we believe margins should gradually rebound to 21% in 2024E (vs. 24.3%
previously) and 22.5% in 2025E (vs. 25% previously).
All in all, we have cut EPS by 6% in 2022E and by 18% per year over 2023-25E.
Worst-case scenario would lead to an incremental 16% EPS cut over 2023-25E
rule out a total macro crash and much weaker demand than what we have modelled in the coming
quarters.
In a worst-case scenario, we believe STM could potentially end up with broadly stable sales LFL in
2023E (rather similar to the trends seen in 2019 and 2016, bearing in mind that the group still grew
by 7% LFL in 2020) and adjusted operating margin down by 400bps to 18% (while margins only
dropped by c. 210bps YOY to 12.6% in 2019).
Moving beyond 2023, we believe sales could then rebound by 6% LFL in 2024E and 10% LFL in
2025E, while adjusted operating margins could gradually expand toward 20% by 2025E.
This would lead to an incremental cut of c. 16% over 2023-25E (on top of the 18% cut already
factored into our updated estimates).
In a worst-case scenario, STM would be trading on c. 12x 2023E EBIT, well below the group’s
average over the past five years (c. 15x), meaning that the shares are likely close to a kind of
support, bearing in mind that we cannot rule out any overshooting in the event of a more severe
downturn.
We cut our TP from EUR60 to EUR50, based on a DCF valuation with a 9% WACC (up from 8.5%
previously due to a higher risk premium), 3% long-term and 8% medium-term sales growth, and
a 19% adjusted operating margin in the medium term (which looks fairly conservative, given that
the group should already deliver a 22% margin in 2022E).
Table 20: 2024E multiple valuation model

Multiple EBIT Valuation Net debt Equity value Equity value FV (EUR) Discounted back to
(USDm) (USDm) (USDm) (USDm) (EURm) Q2 2023E (EUR)
EV/EBIT 12 3,520 42,240 -5,491 47,731 43,790 48 44
EV/EBIT 14 3,520 49,280 -5,491 54,771 50,249 55 51
EV/EBIT 16 3,520 56,320 -5,491 61,811 56,707 62 57
Under a conservative scenario (with a 14x EBIT multiple for 2024E), we derive a fair value of close
to EUR55 per share by 2024E, or c. EUR51 discounted back to Q2 2023E (c. 45% above the current
share price).
STM has materially outperformed the market (and Infineon) since the start of the year and is only
down by 24% since its recent highs (Infineon is still down by 34% from its recent highs).
While the shares are still vulnerable to any macro corrections in the coming months, the valuation
remains undemanding despite more conservative estimates, providing clear support to the shares
in the coming months.
We maintain our Buy rating and cut our TP from EUR60 to EUR50 (implying 42% upside), while
STM remains one of our favourite stocks in the semis sector, as:
1. The visibility for Apple’s 3D sensing design has materially improved (and remains fairly high
for the next two to three years).
2. STM is set to benefit from many growth opportunities ahead (ADAS/xEVs with SiC, 5G, MCUs,
3Dsensing, etc.) and looks to be on track to outperform its addressable market with c. 10%
organic growth per year over 2022-24E.
3. We expect the adjusted operating margin to gradually climb to 21% by 2024E (c. 800bps
above 2020 levels).
4. We expect solid cash generation, with USD2.5bn in FCF by 2024E, while the net cash position
is set to climb to USD5.5bn by 2024E.
5. Its valuation remains fairly attractive (only c. 10x 2022E EBIT) and we see substantial upside
ahead.

STM is the world's ninth-largest semiconductor vendor. The company operates using Jean-Marc Chéry, CEO
Lorenzo Grandi, CFO
an integrated device manufacturer (IDM) model. It designs, develops, manufactures,
and markets a broad range of analog, power, digital, microcontroller, MEMS and Key shareholders
sensor products used in a variety of applications, including automotive, industrial, Free float 57.60%
ST Holding II 27.50%
personal electronics, communications equipment, computers and peripherals (share Blackrock 9.90%
of distribution: c. 35%). Capital Group 5.00%
Key data charts

SWOT analysis
Close ties to strategic customers, strong presence in China. Less focused than its main peers.
Diversified technology, product and customer portfolio. Relatively limited track record.
Leading position in ADAS, 32-bit MCUs, 3D sensors, SiC, Relatively high exposure to consumer markets.
MEMS. Financial strength limited relative to sector peers.
Innovation strength based on broad IP portfolio.
Strong position in promising applications (ADAS, SiC, 3D Mismatch between costs and revenues in certain regions
sensors...). (forex risk).
Most key technology building blocks in-house (for auto, State-dominated ownership structure.
IoT, etc.). Risk of losing the 3D sensing socket at Apple in the future.
Large opportunity in 5G (RF power amplifier). Arrival of more competitors in 3D sensing (including Sony).
Capitalise on proprietary FD-SOI process (licensing out).
FY to 31/12 (USD) 12/15 12/16 12/17 12/18 12/19 12/20 12/21 12/22E 12/23E 12/24E
Income Statement (USDm)

Sales 6,897 6,973 8,346 9,664 9,556 10,219 12,761 14,760 15,504 16,740
% Change -6.8% 1.1% 19.7% 15.8% -1.1% 6.9% 24.9% 15.7% 5.0% 8.0%
EBITDA adjusted 910 1,003 1,688 2,213 2,062 2,256 3,467 4,508 4,474 5,170
EBIT adjusted 174 307 1,038 1,422 1,208 1,333 2,422 3,248 3,104 3,520
EBIT adj. margin (%) 2.5% 4.4% 12.4% 14.7% 12.6% 13.0% 19.0% 22.0% 20.0% 21.0%
Net financial items & associates -19 -14 -39 -10 -14 -56 -85 -39 -33 -27
Others 0 0 0 0 0 0 2 0 0 0
Tax 21 -29 -144 -95 -155 -160 -331 -481 -461 -524
Net profit from continuing operations 111 171 810 1,294 1,034 1,107 2,005 2,728 2,610 2,969
Net profit from discontinuing activities 0 0 0 0 0 0 0 0 0 0
Net profit before minorities 111 171 810 1,294 1,034 1,107 2,005 2,728 2,610 2,969
Net profit reported 105 165 803 1,287 1,032 1,106 2,001 2,724 2,606 2,965
Net profit adjusted 160 244 841 1,307 1,036 1,136 2,042 2,724 2,606 2,965
Cash Flow Statement (USDm)

Levered post tax CF before capex 842 1,039 1,707 1,845 1,869 2,093 3,059 3,970 3,926 4,535
Capex -467 -607 -1,298 -1,262 -1,174 -1,279 -1,828 -3,500 -1,716 -2,045
Free cash flow 375 432 409 583 695 814 1,231 470 2,210 2,490
Acquisitions & divestments -14 -78 0 0 -136 -112 0 0 0 0
Dividend paid -356 -257 -214 -220 -216 -176 -211 -219 -219 -219
Others -57 -78 -219 -166 -357 -99 -1,142 0 0 0
Change in net financial debt 52 -19 24 -197 14 -427 122 -251 -1,992 -2,271
Balance Sheet (USDm)

Intangible assets 242 311 332 333 461 775 751 764 778 796
Tangible assets 2,321 2,287 3,094 3,495 4,007 4,596 5,660 7,900 8,246 8,400
Financial & other non-current assets 1,048 1,023 1,156 1,185 1,143 1,473 1,301 1,340 1,380 1,435
Total shareholders' equity 4,693 4,596 5,467 6,424 7,111 8,506 9,273 11,778 14,166 16,912
Liabilities and provisions 3,151 3,065 3,829 4,058 4,312 5,442 5,825 5,917 6,013 6,144
Net debt -143 -166 -104 -301 -20 -397 -332 -583 -2,575 -4,846
Net financial debt -494 -513 -489 -686 -672 -1,099 -977 -1,228 -3,220 -5,491
IFRS 16 debt 0 0 0 0 207 196 203 203 203 203
Net working capital 939 809 781 1,110 1,480 1,265 1,229 1,191 1,187 1,435
Invested capital 3,336 3,212 3,998 4,726 5,649 6,191 7,202 9,404 9,746 10,147
Per share data ($)

EPS adjusted 0.18 0.28 0.94 1.45 1.16 1.25 2.25 3.01 2.88 3.27
% Change -21.2% 51.3% 236.7% 54.5% -20.1% 7.7% 78.7% 34.4% -4.3% 13.8%
EPS reported 0.12 0.19 0.90 1.43 1.16 1.22 2.21 3.01 2.88 3.27
Ratios
ROE (%) 3.3% 5.3% 16.9% 22.2% 15.5% 14.7% 23.1% 26.0% 20.2% 19.2%
ROIC (%) 4.0% 7.5% 23.0% 26.1% 18.6% 18.0% 28.9% 31.3% 25.9% 28.3%
ND(F+IFRS16) / EBITDA (x) -0.5 -0.5 -0.3 -0.3 -0.2 -0.4 -0.2 -0.2 -0.7 -1.0
Gearing (%) -10.5% -11.2% -8.9% -10.7% -9.5% -12.9% -10.5% -10.4% -22.7% -32.5%
Valuation
P/E adjusted 43.6 25.6 18.4 14.2 16.0 23.2 18.4 12.7 13.2 11.6
P/BV 1.5 1.4 2.9 2.9 2.4 3.1 4.1 2.9 2.4 2.0
P/CF 8.3 6.0 9.0 10.1 8.9 12.6 12.3 8.7 8.8 7.6
Dividend yield (%) 3.0% 3.4% 1.4% 1.2% 0.9% 0.8% 0.6% 0.6% 0.6% 0.6%
FCF yield (%) 5.2% 6.7% 2.6% 3.1% 4.1% 3.1% 3.3% 1.4% 6.4% 7.2%
EV/Sales 1.0 0.8 1.8 1.9 1.7 2.5 2.9 2.3 2.0 1.8
EV/EBITDA adj. 7.3 5.8 8.9 8.1 7.9 11.3 10.7 7.5 7.1 5.7
EV/EBIT adj. 38.1 18.9 14.5 12.6 13.5 19.2 15.3 10.4 10.2 8.3
#ModelReiterated
Torsten Sauter
u-blox Hold
Head of Swiss Equity Research
+41 43 333 6002
tsauter@keplercheuvreux.com
Switzerland | IT Hardware & Semis MCap: CHF554.3m
Target Price: CHF80.00 Change in TP: none Bloomberg: UBXN SW Reuters: UBXN.S
Current Price: CHF79.90 Change in Sales: none 22E/none 23E Free float 100.0%
Avg. daily volume (CHFm) 3.3
YTD abs performance 13.4%
Market data: 08 April 2022 Change in Adj. EPS: none 22E/none 23E 52-week high/low (CHF) 92.15/56.50
Attractive near-term dynamics FY to 31/12 (CHF)

Sales (m)
12/22E 12/23E 12/24E
538.3 581.3 616.2
EBIT adj (m) 40.5 47.4 54.6
U-blox has managed to adapt its own supply chain to deal with industry-wide Net profit adj (m) 30.9 36.5 42.2
disruptions and bottlenecks. This has led to unprecedented new customer wins Net financial debt (m) -27.7 -42.6 -71.5
and triggered a surge in orders. After years without growth, this helped u-blox FCF (m) 13.1 25.5 41.1
to return to growth in FY 2021. Going forward, the order book provides strong EPS adj. and ful. dil. 4.46 5.26 6.09
visibility for the near term and the resources to invest in R&D (net cash again). Net dividend 1.50 1.70 2.00
This limits the near-term risk. The near-term growth outlook is backed by a
FY to 31/12 12/22E 12/23E 12/24E
significant order book, suggesting it might be worth revisiting the case. P/E adj and ful. dil. 17.9 15.2 13.1
Key findings EV/EBITDA 6.3 5.6 4.8
EV/EBIT 13.5 11.3 9.3
 Thanks to the record-high order book, u-blox currently has very solid business
FCF yield 2.4% 4.6% 7.4%
visibility. The order book as of December 2021 was nine times the level seen prior to Dividend yield 1.9% 2.1% 2.5%
the outbreak of Covid-19 in 2020, according to u-blox. Apparently, the order book ND(F+IFRS16)/EBITDA -0.3 -0.4 -0.7
stretches well into FY 2022. Gearing -8.6% -12.2% -18.8%
ROIC 11.6% 12.9% 14.6%
 In spite of end market exposure to ailing sectors like automotive or industrial,
EV/IC 1.9 1.8 1.7
demand is strong, and u-blox’s sales in FY 2022 are thus very dependent on how
Sector Most Pref.
well the company can secure access to supplied components. Soitec
Deconstructing the forecasts STMicroelectronics
 For FY 2022, it expects to grow by 21% to 32% YOY and for profitability to improve.
 Beyond the guided growth targets, management recently highlighted that FY 2022
growth could even reach 50% if not held back by supply chain constraints.
 While some concerns remain, the strong near-term dynamics cannot be ignored.

In FY 2021, u-blox demonstrated that after a period of
 
As a tech company, top-line growth determines how the
stagnation, it was able to accelerate growth. stock will perform. A return to a higher growth trajectory
The group is entering new product territory in the cellular
 would be good evidence of successful innovation.
and short -range communications markets (IoT chips and We value the stock on a DCF (WACC: 8.5% to reflect higher

modules). In the IoT market, u-blox faces significant and risk and low visibility).
resourceful competition, with a risk of seeing further We back this valuation up with a wider peer group

entrants. valuation that incorporates both global chip makers and

Although we believe u-blox has strong IP, there is a risk that module manufacturers.
the group will now be trapped in a multi-year R&D arms Risks to our rating
race with competitors that have a strategic roadmap for severe component supply shortage is currently holding
A
IoT or lower cost of capital (Chinese) and that may back revenue growth. This may last another 12-24 months.
seriously eat into its limited resources. 
We remain cautious given the plethora of low-end products
Catalysts and market entrants, in some cases with lower a cost of
he coming months may see product news flow (IoT chips).
T capital (Chinese) and deep pockets. However, there may be
Product certifications may support the theme.
 more of a market than we believed for high-end IoT
M&A may serve as a catalyst. The sector needs
 solutions.
consolidation, and u-blox is on our M&A target list. If autonomous driving picks up quicker than thought, u-

blox may clearly benefit as a leader in the space with an
existing sales platform and top technology.
u-blox
u-blox Hold | Target Price: CHF80.00
Attractive near-term dynamics

Peer performance
Peers like Sequans or Sierra Wireless, which unlike u-blox have quarterly reporting, have also
noted the considerable impact of the pandemic on their global business. Yet, in spite of industry-
wide supply constraints, market growth seems to have somewhat accelerated in FY 2021, with u-
blox outperforming peers in H2 2021.
We forecast a comparative top-line growth performance as follows:
Chart 48: Quarterly growth performance, u-blox versus peers Chart 49: Forecast growth, u-blox versus peers
Source: Company data, S&P Global Market Intelligence, Kepler Cheuvreux Source: Company data, S&P Global Market Intelligence, Kepler Cheuvreux
Solid visibility
Thanks to the record-high order book, u-blox currently has very solid business visibility. The order
book as of December 2021 was nine times the level seen prior to the outbreak of Covid-19 in 2020,
according to u-blox. Apparently, the order book stretches well into FY 2022.
However, there is a considerable gap between bookings and billings, which are held back by
supply constraints. Demand is strong, and u-blox’s sales in FY 2022 are thus very dependent on
how well the company can secure access to supplied components. Management highlighted that
FY 2022 growth could even reach 50% if it is not held back by supply chain constraints. The supply
chain situation is unlikely to materially differ from H2 2021.
For FY 2022, u-blox recently introduced positive guidance, and it expects to grow by 21% to 32%
YOY (o/w c. 3-5% price increases are assumed) and for profitability to improve. u-blox guides for a
group EBITDA margin of 16-18% and a group EBIT margin of 8-10%, which sounds low considering
the operating leverage (fabless, R&D spend growing under-proportionately). The margin guidance
is deliberately conservative, specifically as personnel costs need to be increased considerably (to
retain key personnel and after many years of stagnation) and considering input cost uncertainty.
In a blue-sky scenario, medium-term EBITDA margins in excess of 20% have not been ruled out.
Supply constraints have led to a seller’s market
Semiconductor fabs appear to have indicated to management that the scarcity situation might
last for some years in u-blox’s domain. On a positive note, this situation is also likely to give u-blox
more pricing power (seller’s market for the moment).
In spite of its small scale, u-blox is currently able to secure considerable volume allocations for
components, as it buys through its (larger) manufacturing partners. It also seeks to find alternative
channels for sourcing components. However, its visibility on allocations remains very low, and
allocations are often announced at the very last minute.
Supply constraints are mostly related to third-party supplied components, specifically non-
commodities. u-blox has continually expanded its own module production capacities, i.e. by
adding new lines.
Chipmakers in its space remain overbooked, and according to management it may take until FY
2025 to see the supply situation normalise in some cases. When it comes to supplying chipset
manufacturing capacities, u-blox strategically works with TSMC and Global Foundries, and it
seems to have secured the demand needed to achieve its FY 2022 growth target.
Incremental margin growth in the guidance incorporates cost inflation and potentially a
normalisation of the mix. Forex rates currently benefit the company.
In turn, with respect to demand, u-blox hopes to keep the clients it has added. It highlights that in
its end markets there are often high switching costs involved, given the fact that these are complex
products with a long lifecycle, implying higher levels of client loyalty.
With respect to R&D, u-blox spends about half of the total expense per year on next-generation
products (to generate revenues within the next two to five years), about a quarter on innovations
and products in its long-term roadmap, and another quarter on maintenance (core platforms are
renewed about every three years). Of this, a portion of the products in the next generation and
maintenance categories are being capitalised.
The new u-blox 9 platform, with sub-categories to appeal to industrial customers (M line), and
with a version for high precision and another one for autonomous driving (a very high-end,
functional, safe product), is expected to find good demand in the market.
In fact, due to the supply chain crisis (seller’s market), customers are now more easily motivated
to change from the u-blox 8 platform to the u-blox 9, which is based on a different and improved
semiconductor architecture (and is likely higher margin).
Depending on the respective platforms, ASPs in general are increasing. This also implies that u-
blox can grow share of wallet, i.e. increase the content per vehicle equipped. u-blox already has
sufficient exposure to a large variety of customers, namely in the automotive space. The challenge
is now to win the respective platforms and sell more products in the next generation of customer
products.
No exposure to Russia
u-blox confirmed that it has almost no direct exposure to Russia/Ukraine. The strong order
backlog should provide support, even though u-blox has significant automotive and industrial
verticals exposure.
More constructive investment view but still cautious
Strong near-term dynamics cannot be ignored
The strong near-term outlook is clearly reassuring, especially as the company needs to prove itself
after the profit warnings and several years of top-line stagnation.
To win material market share, u-blox relies heavily on the IP it has built up in recent years, which
allows it to offer products that differ from mass market products. Of course, various new products
appear to have very specific USPs. However, chip sales need to scale up quickly now to make up
for the upfront R&D investments.
At the same time, the marketplace remains very crowded, and we continue to believe that u-blox
needs to clarify how it intends to take share away from incumbents like Qualcomm or Huawei in
IoT chips and from Thales and Sierra Wireless in cellular modules. Apparently, u-blox needs to
take on its deep-pocket competition alone. This adds some investment risk, specifically over the
medium term.
While some strategic concerns remain, the strong near-term dynamics cannot be ignored: u-blox
was able to move from a net debt to a net cash position in FY 2021. Thanks to the record-high order
book, u-blox benefits from surprisingly solid visibility.
Non-cyclical grower
At this stage, investors clearly have questions about the sustainability of demand for chips,
especially when associated with consumer electronics, automotive and industrials products with
tougher macro.
In this respect, we believe it is fair to say that u-blox does not cater to a cyclical end market. The
group’s end markets are steadily growing, and in fact, may even be poised to reach an inflection
point, as the penetration of distributed IoT devices is growing, as high-value positioning modules
are benefitting from the 5G roll-out, and with the market introduction of the connected and semi-
autonomous car, potentially with far higher semiconductor content from u-blox.
Previous macro corrections have not done significant harm to the business, and the number of
customers is growing virtually every year. Insofar, we think we can abstain from providing a worst-
case scenario here with a cyclical macro correction impacting demand in the IoT market in 2023.
U-blox’s case is different: as a very small company with limited resources, it has set itself very
ambitious targets, namely for becoming a significant provider of IoT hardware building blocks
globally. At this stage, u-blox may have a tech lead in some areas, and it also has the chance to
eventually scale up its managed service platforms (Thingstream).
However, it is also a comparatively small player which may eventually struggle to stay ahead of
and successfully compete with far larger (Qualcomm, Sierra Wireless) and more resourceful
competitors (Huawei, Chinese players like Quectel).
While the near-term prospects are clearly good, u-blox therefore runs a risk of having margins,
returns and cash flows capped and of being trapped in an R&D arms race in the long run.
Multiples low but are distorted
U-blox’s earnings multiples are still somewhat distorted by the capitalisation and amortisation of
R&D expenses. Capitalisation is still running higher than amortisation.
However, in the event that the group actually manages to return to growth, the stock could be
seen as decent value.
Chart 50: u-blox 1Y fwd P/E levels Chart 51: u-blox relative P/E vs. STOXX Europe 600 Technology index
Source: Bloomberg, Kepler Cheuvreux Source: Bloomberg, Kepler Cheuvreux
Needs to rebuild credibility

All in all, especially considering: 1) the order book; 2) the attractive near-term dynamics; and 3)
the low multiples, we do not see any reason to change our investment view and valuation at this
stage.
Yet, having surprised negatively for years, management needs to restore credibility with
continuously strong delivery and a return to a profitable growth path. Only further strong numbers
would allow for a better rating.
Investment case in six charts
Chart 52: Surge in customer numbers in FY 2021 Chart 53: Headcount growth has slowed
Source: Company data, Kepler Cheuvreux Source: Company data, Kepler Cheuvreux
Chart 55: Sharply higher sales volumes (modules prioritised over

Chart 54: R&D capex leads to rising R&D amortisation chips)
Chart 56: Intangibles still significant despite two impairments Chart 57: Swing from net debt to net cash

u-blox is a fabless semiconductor provider of embedded positioning and wireless Thomas Seiler, CEO
Roland Jud, CFO
communication solutions (ICs and modules). The group's focus lies in R&D and André Müller, Chairman
customer service, thanks to its global presence and focus on top quality. It
predominantly serves the automotive (c. 30%), consumer electronics (c. 15%), and Key shareholders
Free float 100.00%
industrial (c. 60%) markets with a total of c. 12,000 customers. u-blox generates
Credit Suisse Asset Management 5.00%
around half of its revenues in the APAC region, with the rest evenly split between the Acadian Asset Management 4.00%
US and EMEA. Zurcher Kantonalbank 3.20%
Key data charts

SWOT analysis
Leading GPS module supplier worldwide, with in-house Needs to reaccelerate after slowdown in growth since 2017.
positioning chip. Very ambitious R&D roadmap (high capitalised R&D,
Strong R&D: unique combination of connectivity and impairments).
positioning. Potentially somewhat small to effectively leverage all LTE
Global presence of own sales, diversified customer base, categories.
top service. Rather low transparency on R&D (road-map, launches,
Recently expanded product offering: LTE & Bluetooth chips cost/capex, etc.).
and modules.
Surging adoption of positioning and wireless tech in many Competitive industry with high price erosion risk (chipsets,
applications modules).
Unparalleled opportunity to innovate by integration (chips Commoditisation of products, pressure to innovate and
+ modules). mass-customise.
IoT and autonomous vehicles representing two fast- Competition with many, often bigger semiconductor and
growing end-markets. module vendors.
Development and rollout of own 4G LTE single-mode IC. High forex sensitivity to USD (85% sales), forex hedged at
GM level.
FY to 31/12 (CHF) 12/15 12/16 12/17 12/18 12/19 12/20 12/21 12/22E 12/23E 12/24E
Income Statement (CHFm)

Sales 338.3 360.2 403.7 393.3 385.1 333.5 414.1 538.3 581.3 616.2
% Change 25.3% 6.5% 12.1% -2.6% -2.1% -13.4% 24.2% 30.0% 8.0% 6.0%
EBITDA adjusted 78.7 81.8 87.4 71.6 65.2 35.4 65.9 87.2 96.1 105.7
EBIT adjusted 54.0 59.0 65.2 48.3 34.7 9.3 26.0 40.5 47.4 54.6
EBIT adj. margin (%) 16.0% 16.4% 16.2% 12.3% 9.0% 2.8% 6.3% 7.5% 8.2% 8.9%
Net financial items & associates -3.7 2.7 -0.4 -0.2 -7.8 -14.2 -4.8 -1.8 -1.8 -1.8
Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Tax -10.5 -15.5 -13.4 -9.6 -1.3 14.2 -5.7 -7.7 -9.1 -10.6
Net profit from continuing operations 37.1 46.2 51.3 38.5 12.9 -64.8 15.4 31.0 36.5 42.3
Net profit before minorities 37.1 46.2 51.3 38.5 12.9 -64.8 15.4 31.0 36.5 42.3
Net profit reported 37.1 46.2 51.3 38.5 13.1 -64.6 15.3 30.9 36.5 42.2
Cash Flow Statement (CHFm)

Capex -43.0 -49.5 -65.1 -61.4 -56.9 -42.8 -43.1 -49.5 -49.1 -47.9
Free cash flow 31.7 44.0 -4.6 -25.1 20.4 -3.3 54.6 13.1 25.5 41.1
Acquisitions & divestments -0.3 0.0 0.2 0.0 -7.3 -9.2 1.8 0.0 0.0 0.0
Dividend paid -10.7 -12.9 -14.5 -15.4 -11.1 -4.3 0.0 -9.0 -10.4 -11.8
Others 4.7 1.8 -25.2 5.5 -11.6 -18.4 -6.2 -0.3 -0.3 -0.3
Change in net financial debt -25.4 -32.9 44.2 35.0 9.6 35.2 -50.2 -3.8 -14.8 -29.0
Balance Sheet (CHFm)

Tangible assets 14.7 15.8 17.5 14.8 12.7 10.0 11.3 -8.3 -28.7 -50.3
Net debt -52.6 -84.0 -37.7 -0.6 12.4 50.9 -2.6 -5.9 -20.2 -48.6
Net financial debt -64.8 -97.7 -53.5 -18.5 -8.9 26.3 -23.9 -27.7 -42.6 -71.5
IFRS 16 debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Per share data (CHF)

EPS adjusted 5.79 6.63 7.36 5.54 3.71 1.38 2.22 4.46 5.26 6.09
% Change 12.6% 14.5% 11.0% -24.8% -32.9% -62.9% 61.3% 100.8% 17.9% 15.9%
EPS reported 5.39 6.63 7.34 5.54 1.89 -9.32 2.21 4.46 5.26 6.09
Ratios
ROE (%) 17.3% 17.3% 17.0% 11.5% 7.3% 3.0% 5.3% 9.9% 10.8% 11.6%
ROIC (%) 21.8% 21.8% 21.3% 12.3% 9.1% 2.4% 6.7% 11.6% 12.9% 14.6%
ND(F+IFRS16) / EBITDA (x) -0.8 -1.2 -0.6 -0.3 -0.1 0.7 -0.4 -0.3 -0.4 -0.7
Gearing (%) -26.1% -34.3% -16.8% -5.3% -2.5% 9.3% -7.9% -8.6% -12.2% -18.8%
Valuation
P/E adjusted 31.4 30.5 26.0 30.2 21.7 47.5 30.4 17.9 15.2 13.1
P/BV 5.0 5.0 4.2 3.3 1.6 1.6 1.5 1.7 1.6 1.5
P/CF 16.8 15.1 22.1 31.9 7.2 11.5 4.8 8.8 7.4 6.2
Dividend yield (%) 1.0% 1.0% 1.2% 1.0% 0.7% 0.0% 1.9% 1.9% 2.1% 2.5%
FCF yield (%) 2.5% 3.1% -0.3% -2.2% 3.7% -0.7% 11.6% 2.4% 4.6% 7.4%
EV/Sales 3.6 3.7 3.2 2.9 1.5 1.5 1.1 1.0 0.9 0.8
EV/EBITDA adj. 15.4 16.3 14.9 16.1 8.8 14.3 7.1 6.3 5.6 4.8
EV/EBIT adj. 22.4 22.5 19.9 23.9 16.5 54.5 17.9 13.5 11.3 9.3
IT Hardware & Semis
Research ratings and important disclosures

The term "KEPLER CHEUVREUX" shall, unless the context otherwise requires, mean each of KEPLER CHEUVREUX and its affiliates, subsidiaries and related companies (see
“Regulators” table below).
The investment recommendation(s) referred to in this report was (were) completed on 11/04/2022 19:58 (GMT) and was first disseminated on 12/04/2022 5:30 (GMT).
Unless otherwise stated, all prices are aligned with the “Market Data date” on the front page of this report.
Disclosure checklist - Potential conflict of interests
Company Name ISIN Disclosure
Air Liquide FR0000120073 nothing to disclose
ams OSRAM AT0000A18XM4 KEPLER CHEUVREUX is a liquidity provider in relation to price stabilisation activities for the issuer to provide liquidity in such
instruments
AT&S AT0000969985 nothing to disclose
BMW DE0005190003 nothing to disclose
Daimler Truck DE000DTR0CK8 nothing to disclose
Infineon DE0006231004 nothing to disclose
Linde IE00BZ12WP82 nothing to disclose
Melexis BE0165385973 Kepler Cheuvreux and Belfius have entered into a Co-operation Agreement to form a strategic alliance in connection with
certain services including services connected to investment banking transactions. Belfius provides investment banking
services to this issuer in return for which Belfius will receive a consideration or a promise of consideration. Separately,
through a Co-operation Agreement between Kepler Cheuvreux and Belfius, Kepler Cheuvreux provides services in
connection with such activities. Kepler Cheuvreux also receives a consideration or a promise of a consideration in
accordance with the general terms of the Co-operation Agreement.
Belfius holds or owns or controls 5% or more of the issued share capital of KEPLER CHEUVREUX. Belfius provides investment
banking services to this issuer in return for which Belfius has received a consideration or a promise of consideration
A representative of Belfius serves on the board of directors of KEPLER CHEUVREUX
Nordic Semiconductor NO0003055501 nothing to disclose
Porsche Holding SE DE000PAH0038 nothing to disclose
Soitec FR0013227113 nothing to disclose
STMicroelectronics NL0000226223 nothing to disclose
u-blox CH0033361673 nothing to disclose
Volkswagen DE0007664039 nothing to disclose
Organizational and administrative arrangements to avoid and prevent conflicts of interests

KEPLER CHEUVREUX promotes and disseminates independent investment research and have implemented written procedures designed to identify and manage potential
conflicts of interest that arise in connection with its research business, which are available upon request. The KEPLER CHEUVREUX research analysts and other staff involved in
issuing and disseminating research reports operate independently of KEPLER CHEUVREUX Investment Banking business. Information barriers and procedures are in place
between the research analysts and staff involved in securities trading for the account of KEPLER CHEUVREUX or clients to ensure that price sensitive information is handled
according to applicable laws and regulations.
It is Kepler Cheuvreux’ policy not to disclose the rating to the issuer before publication and dissemination. Nevertheless, this document, in whole or in part, and with the exclusion
of ratings, target prices and any other information that could lead to determine its valuation, may have been provided to the issuer prior to publication and dissemination, solely
with the aim of verifying factual accuracy.
Please refer to www.keplercheuvreux.com for further information relating to research and conflict of interest management.
Analyst disclosures
The functional job title of the person(s) responsible for the recommendations contained in this report is Equity/Credit Research Analyst unless otherwise stated on the cover.
Name of the Research Analyst(s): Sébastien Sztabowicz
Regulation AC - Analyst Certification: Each Equity/Credit Research Analyst(s) listed on the front-page of this report, principally responsible for the preparation and content of
all or any identified portion of this research report hereby certifies that, with respect to each issuer or security or any identified portion of the report with respect to an issuer or
security that the equity research analyst covers in this research report, all of the views expressed in this research report accurately reflect their personal views about those
issuer(s) or securities. Each Equity/Credit Research Analyst(s) also certifies that no part of their compensation was, is, or will be, directly or indirectly, related to the specific
recommendation(s) or view(s) expressed by that equity research analyst in this research report.
Each Equity/Credit Research Analyst certifies that he is acting independently and impartially from KEPLER CHEUVREUX shareholders, directors and is not affected by any current
or potential conflict of interest that may arise from any KEPLER CHEUVREUX activities.
Analyst Compensation: The research analyst(s) primarily responsible for the preparation of the content of the research report attest that no part of the analyst’s(s’)
compensation was, is or will be, directly or indirectly, related to the specific recommendations expressed by the research analyst(s) in the research report. The research
analyst’s(s’) compensation is, however, determined by the overall economic performance of KEPLER CHEUVREUX.
Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of KEPLER CHEUVREUX, which is a non-US affiliate
and parent company of Kepler Capital Markets, Inc. a SEC registered and FINRA member broker-dealer. Equity/Credit Research Analysts employed by KEPLER CHEUVREUX, are
not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of Kepler Capital Markets, Inc. and may not be subject to NASD Rule 2711
and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
Research ratings
Kepler Cheuvreux rating split as of 11 April 2022
Rating Breakdown A B
Buy 61% 70%
Hold 30% 22%
Reduce 6% 0%
Not Rated/Under Review/Accept Offer 3% 8%
Total 100% 100%
IT Hardware & Semis

A: % of all research recommendations
B: % of issuers to which material services of investment firms are supplied
12 months rating history

The below table shows the history of recommendations and target prices changes issued by KEPLER CHEUVREUX research department (Equity and Credit) over a 12 months
period.
Company Name Date Business Line Rating Target Price Closing Price
Air Liquide (EUR) 26/04/2021 04:59 Equity Research Buy 178.00 141.34
08/11/2021 11:33 Equity Research Buy 176.00 149.94
30/03/2022 05:06 Equity Research Hold 173.00 158.98
ams OSRAM (CHF) 05/05/2021 05:50 Equity Research Buy 22.00 16.18
AT&S (EUR) 07/07/2021 05:01 Equity Research Buy 50.00 36.70
BMW (EUR) 10/05/2021 05:02 Equity Research Reduce 79.00 83.64
28/06/2021 05:03 Equity Research Reduce 80.00 92.40
Daimler Truck (EUR) 13/12/2021 06:32 Equity Research Buy 35.00 29.77
Infineon (EUR) 05/05/2021 05:33 Equity Research Hold 33.00 31.73
Linde (EUR) 30/06/2021 05:05 Equity Research Buy 330.00 244.05
Nordic Semiconductor (NOK) 21/04/2021 05:07 Equity Research Buy 200.00 177.10
Porsche Holding SE (EUR) 28/06/2021 05:06 Equity Research Hold 96.00 95.26
Soitec (EUR) 11/06/2021 08:41 Equity Research Buy 225.00 180.00
STMicroelectronics (EUR) 30/04/2021 05:35 Equity Research Buy 42.00 32.52
u-blox (CHF) 23/08/2021 05:04 Equity Research Reduce 60.00 65.55
Volkswagen (EUR) 07/05/2021 05:18 Equity Research Buy 283.00 212.40
Credit research does not issue target prices. Left intentionally blank.
Please refer to the following link https://research.keplercheuvreux.com/disclosure/stock/ for a full list of investment recommendations issued over the last 12 months
by the author(s) and contributor(s) of this report on any financial instruments.
IT Hardware & Semis
Equity research
Rating system
KEPLER CHEUVREUX equity research ratings and target prices are issued in absolute terms, not relative to any given benchmark. A rating on a stock is set after assessing the
twelve months expected upside or downside of the stock derived from the analyst’s fair value (target price) and in the light of the risk profile of the company. Ratings are defined
as follows:
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IT Hardware & Semis Research Team
Sébastien Sztabowicz Sébastien Sztabowicz Matthias Maenhaut

Main author Team Head
ssztabowicz@keplercheuvreux.com ssztabowicz@keplercheuvreux.com mmaenhaut@keplercheuvreux.com
+33 1 53 65 35 10 +33 1 53 65 35 10 +32 11 49 14 61
Sebastien Sztabowicz joined Kepler Torsten Sauter

Cheuvreux in 2004 and is Head of IT
Hardware & Semis. Prior to Kepler tsauter@keplercheuvreux.com
Cheuvreux, he was an equity analyst +41 43 333 6002
covering the media sector at Aurel-Leven
(now Aurel BGC). Kepler Cheuvreux’s IT
Hardware & Semis team has regularly
ranked among the top 10 in the Extel/II
Survey over the last few years and was
ranked eleventh in the latest 2021 Extel/II
Survey. Sebastien has a Master’s in Finance
from the University of Paris I Pantheon-
Sorbonne.
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Kepler On Semi Cycle

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12 April 2022

IT Hardware & Semis

See our answer inside… IT Hardware & Semis research team

A soft-landing scenario appears likely at this stage

Summary of key changes and valuation

There are two key tables to add here:

Table 2: EPS changes over 2022-24E

Table 3: Semiconductor sector valuation (1)

Semis equipment manufacturers

Table 4: Semiconductor sector valuation (2)

Semis equipment manufacturers

Table 5: Semiconductor sector valuation (3)

Epitaxy & compound semiconductor suppliers

Table 6: Semiconductor sector valuation (4)

Epitaxy & compound semiconductor suppliers

Investment case in six charts

Chart 1: Semiconductor market Q1 2018-Q4 2022E (USDbn, %

Source: WSTS, Kepler Cheuvreux Source: WSTS, Kepler Cheuvreux

Chart 3: Automotive semiconductor market 2008-23E (USDbn, %

Source: Strategy Analytics, Kepler Cheuvreux Source: IDC, Kepler Cheuvreux

Source: IDC, Kepler Cheuvreux Source: IDC, Kepler Cheuvreux

Is a downcycle beginning in the semis market?

Limited direct impact from Russia-Ukraine conflict

Very limited direct impact on European semis from Russia-Ukraine conflict…

Tougher macro ahead, cyclical slowdown likely in 2023

Macro correction cannot be ruled out in coming months

Semis market could bottom in 2023

Chart 7: Semiconductor market by end market (%)

Chart 8: Semiconductor market Q1 2018-Q4 2022E (USDbn, % change)

Source: WSTS, Kepler Cheuvreux

Table 7: Semis market by product 2010-22 (USDbn, %)

Chart 9: Semiconductor market 1977-2025E (USDbn, % change)

Source: WSTS, Kepler Cheuvreux

Underlying trends in the automotive market remain supportive so far

Table 8: Global light vehicle demand 2012-23E (m units, %)

Chart 10: PHEV/HEV and BEV volumes 2008-30E (m units)

Source: Macquarie, Kepler Cheuvreux

Source: Soitec Source: Soitec

Chart 14: Semiconductor content per car 2009-23E (USD, % change)

Source: Strategy Analytics, Kepler Cheuvreux

Chart 15: Automotive semiconductor market 2008-23E (USDbn, % change)

Source: Strategy Analytics, Kepler Cheuvreux

Source: Yole Développement, Kepler Cheuvreux Source: Soitec

Industrial markets holding up well so far, potential downturn in 2023

Chart 19: Microcontroller market 2013-25E (USDbn, % change)

Source: IC Insights, Kepler Cheuvreux

Smartphone market slowing, 5G penetration picking up faster

Chart 20: Smartphone market shipments 2015-25E (m units)

Source: IDC, Kepler Cheuvreux

PC market on track for a moderate decline over 2022-23E

Chart 21: PC market shipments 2011-25E (m units, % change)

Source: IDC, Kepler Cheuvreux

Still-solid double-digit growth prospects for servers and data centres

Chart 22: Server market shipments 2011-25E (m units, % change)

Source: IDC, Kepler Cheuvreux

Still some downside ahead before reaching the trough

Semis sector usually drops by c. 31% from peak to trough

Source: Refinitiv Eikon