“On the Opposite Side of the Bad News for the Stock Market, Can SiC Drive the Market?”

14th December, 2020

Following the joint development between the U.S. pharmaceutical corporation Pfizer (PFE) and the German BioNTech, on 16/11, U.S. biotechnology Moderna (MRNA) demonstrated high efficacy in clinical trials involving the development of a COVID-19 vaccine. Reacting favourably to this, the Nikkei average also rose to exceed 26,000 points on 17/11. However, in addition to the accelerated spread of COVID-19 in Europe, the U.S. as well as Japan, on the other hand, there has been added bad news for the stock market which did not surface up to now, and the Nikkei average turned towards a decline from 18/11 onwards to fall under 25,500 points on 20/11.  

We can consider the following 3 points to be the main bad news for the stock market. ① Concerns of China’s financial crisis following the Chinese semiconductor giant, Tsinghua Unigroup, which is a subsidiary of Tsinghua University, the alma mater of President Xi Jinping, defaulting on a private placement bond, ② Softbank Group (9984)’s CEO Son expressing at the online summit hosted by the NY Times held from 17-18/11 on the possibility of a worst case scenario “of a level of the bankruptcy of the Lehman Brothers” occurring within the next 2-3 months, and that selling recent assets and raising the cash ratio was to prepare for the worst case scenario, and ③ the candidate Biden being elected in the U.S. presidential election and the Trump camp not showing signs of relent in their resistance to the bitter end in allegations on the election being rigged. Since it is believed that neither of these can be taken lightly, the reason for the market decline in the past few days was likely not only due to profit-taking from the sudden rise in the market. Perhaps a situation of a decline will be expected from 24/11 onwards which tests whether the Nikkei average will fall under around 24,500 points, which was a blank price range formed from the price jump from the closing price on 6/11 to the opening price on 9/11.

As a policy considered by the government and the ruling party towards achieving the government’s aim in having zero practical emission amount of greenhouse gases by 2050, it was said that they would introduce a tax incentive for investments (green investments) in production facilities of products related to the reduction of greenhouse gases. In green investments, in addition to wind power generation and the next-gen type of lithium-ion batteries, it includes power semiconductors which lead to electricity savings by controlling voltage. With the expectation of there being an importance in the role played by power semiconductors in self-driving cars, which are comprised of a multitude of different electronic systems, in terms of quality and as an element of it, the “silicon carbide (SiC)” wafer is regarded as leading. However, since there is an oligopoly in the SiC wafer market at the moment with a focus on the U.S. components manufacturer, Cree (CREE), there remains the issue of its stable procurement for semiconductor device manufacturers. 

Also, since materials from fibres using SiC are light, have high strength and superior heat resistance, as a next-gen material, it is expected to contribute to the reduction of greenhouse gas emissions by enhacing fuel consumption performance with a focus in the aviation industry. It is likely that attention will be on the movements of corporations possessing its manufacturing technology.

In the 24/11 issue, we will be covering Showa Denko (4004), Ube Industries (4208), Godo Steel (5410), and ROHM (6963).

 

Showa Denko K.K. (4004.JP) 52 weeks, Daily

  •  Showa Denko K.K. (4004)        1,928 yen (20/11 closing price)

・Started from a merger between Nihon Electrical Industries and Showa Fertilisers in 1939. Manages petrochemistry, chemicals, electronics, inorganic, aluminium and other businesses. Hitachi Chemical became their subsidiary in April 2020. Holds the top spot in Japan for electric furnace graphite electrodes.

・For 9M (Jan-Sep) results of FY2020/12 announced on 5/11, net sales decreased by 8.6% to 635.977 billion yen compared to the same period the previous year and operating income fell into the red from 109.313 billion yen the same period the previous year to (15.41) billion yen. Although there was a factor of an increase in revenue from their consolidated subsidiary, Hitachi Chemical, the decline in the market condition of petrochemical products and the revenue decrease in the graphite electrodes business following a decrease in production in the steel industry, etc. have affected.

・For its full year plan, net sales is expected to increase by 5.9% to 960 billion yen compared to the previous year and operating income to fall into the red from 120.798 billion yen the previous year to (30) billion yen. While there are effects of an increase in revenue following the acquisition of Hitachi Chemical, it is predicted that expenses following it and the decrease in sales quantities of graphite electrodes, etc. will affect profits. Improvement in finances via the sale of businesses and the increase in production of silicon carbide (SiC) epitaxial wafers, which will serve as a material for power semiconductors for the purpose of voltage control, will likely contribute to an improvement in business performance from next year onwards.

 

Ube Industries, Inc. (4208.JP) 52 weeks, Daily

 

  • Ube Industries, Inc. (4208)       1,822 yen (20/11 closing price)

・Originated from coal mining in 1897 and established in 1942. Operates business segments, such as chemistry, such as nylon resin and synthetic rubber, etc., construction materials, such as cement and limestone, etc., machines, such as moulding machines, etc., and carries out the manufacture and retail of those related to them. 

・For 1H (Apr-Sep) results of FY2021/3 announced on 30/10, net sales decreased by 16.4% to 280.013 billion yen compared to the same period the previous year and operating income decreased by 79.6% to 3.41 billion yen. The chemicals segment was mainly affected by the COVID-19 catastrophe, and the decrease in sales quantities of products related to automobiles, such as synthetic rubber and battery materials, as well as the drop in retail price of nylon, etc. have influenced the decrease in sales and income.  

・For its full year plan, net sales is expected to decrease by 11.4% to 592 billion yen compared to the previous year and operating income to decrease by 36.8% to 21.5 billion yen. With only this company and Nippon Carbon (5302) in the world which are able to manufacture fibres of silicon carbide (SiC), which is light, have high strength and superior heat resistance and which is expected to be the ace in improving fuel consumption such as in aircrafts, etc., towards achieving the government’s target of “zero greenhouse gas emissions by 2050”, it is predicted that there will be an increase in the number of uses of the material in addition to in aircrafts, such as automobiles, etc.

 

Godo Steel, Ltd. (5410.JP) 52 weeks, Daily

  •  Godo Steel, Ltd. (5410)         1,865 yen (20/11 closing price)

・An electric furnace manufacturer established in 1937. Is a group corporation of Nippon Steel (5401), which is their principal shareholder. Their main segments are steel and agricultural materials. Carries out political cross-shareholding with the electric furnace giant, Kyoei Steel (5440). 

・For 1H (Apr-Sep) results of FY2021/3 announced on 4/11, net sales decreased by 17.5% to 71.837 billion yen compared to the same period the previous year and operating income increased by 24.2% to 3.752 billion yen. While the drop in retail price and the decrease in sales quantities influenced the decrease in revenue, in addition to a compression of fixed costs and the decrease in variable cost, the effects on cost price from soaring raw material prices being partially carried over to the second half of the year, have led to an increase in profit.   

・For its full year plan, net sales is expected to decrease by 17.3% to 139 billion yen compared to the previous year and operating income to decrease by 50.7% to 4.5 billion yen. Towards achieving the target of “zero greenhouse gas emissions by 2050”, with the steel industry, which accounts for slightly less than 50% of domestic industries in the emissions amount, being forced to cope, it is believed that there would be a need for major ironmaking companies focusing on blast furnaces to raise the ratio of electric furnaces, which are able to reduce the amount of CO2 emissions by iron recycling. This could turn out to be the key to the reorganisation of the Nippon Steel Group.   

 

ROHM Co., Ltd. (6963.JP) 52 weeks, Daily

  • ROHM Co., Ltd. (6963)       8,750 yen (20/11 closing price)

・Founded in 1954 in Kyoto for the development and retail of fixed carbon film resistors. Expands business segments, such as large-scale integrated circuits (LSI), semiconductor elements, modules and others (resistors, etc.). Holds the top spot in Japan for custom LSIs.

・For 1H (Apr-Sep) results of FY2021/3 announced on 29/10, net sales decreased by 11.0% to 168.049 billion yen compared to the same period the previous year and operating income decreased by 28.6% to 12.687 billion yen. Although they strived to strengthen their retail system in overseas markets and reinforce their product lineup in markets related to industrial equipment and automobiles, the decrease in sales for the automobile-related market affected the overall decrease in sales and income.  

・For its full year plan, net sales is expected to decrease by 6.3% to 340 billion yen compared to the previous year and operating income to decrease by 22.0% to 23 billion yen. It appears that the stagnancy in semiconductors for automobiles is affecting. For the in-vehicle market where growth in predicted for autonomous driving, the company is currently reinforcing the production of power semiconductors that control voltage. With the worldwide issue on the stable supply of its material, the silicon carbide (SiC) wafer, the company which possesses a German SiC wafer material manufacturer as their subsidiary is likely to have superiority. 

 

【Disclaimer and Notes relating to this report】

Issuer of this report:  Phillip Securities Japan, Ltd.    4-2 Nihonbashi Kabutocho, Chuo-ku, Tokyo 103-0026

TEL: 03-3666-2101 URL: http://www.phillip.co.jp/

 

Authors of this report:

Phillip Securities Research Department 

Kazuhiro Sasaki, Certified International Investment Analyst(CIIA®), Chartered Member of The Securities Analysts Association of Japan (CMA®)

 

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