BRIDGE REPORT
Ferrotec Holdings Corporation (6890)
Akira Yamamura, President
Akira Yamamura, President
Corporate Profile
Company
Ferrotec Holdings Corporation
Code No.
6890
Exchange
JASDAQ
Industry
Electric Equipment (Manufacturing)
President
Akira Yamamura
HQ Address
Nihonbashi Plaza Building, Nihonbashi 2-3-4, Chuo-ku, Tokyo
Business
Sales, manufacturing and technological services for solar power related products, semiconductor, flat panel display parts, and other products
Year-end
March
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (Act.) Trading Unit
¥2,106 36,906,706 shares ¥77.726 billion 8.4% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Act.) PBR (Act.)
¥20.00 1.0% ¥126.67 16.6x ¥1,334.67 1.6x
* Share price as of closing on December 6, 2017. Number of shares issued at the end of the most recent quarter excluding treasury shares. ROE
 
Consolidated Earnings Trends
Fiscal Year Sales Operating
Income
Ordinary
Income
Net
Income
EPS (¥) DPS (¥)
March 2014 44,745 798 1,262 1,391 45.18 6.00
March 2015 59,078 1,671 2,030 -2,132 - 8.00
March 2016 69,463 4,024 3,822 2,162 70.18 10.00
March 2017 73,847 5,678 5,675 3,256 105.67 18.00
March 2018 Est. 85,000 8,500 7,500 4,400 126.67 22.00
* Estimates are those of the Company. From the FY3/16, the definition for net income has been changed to net income attributable to parent company shareholders (Abbreviated as parent net income).
 
 
This Bridge Report reviews Ferrotec's earnings results for the first half of fiscal year March 2018 and earnings estimates for fiscal year March 2018.
 
Key Points
 
 
 
Company Overview
 
Ferrotec Holdings Corporation conducts various technological services and manufactures and sells semiconductor and FPD manufacturing equipment parts including consumable products and thermal element "thermoelectric modules" as core products of the Electronic Device Business Segment, and various products in the photovoltaic related business. Ferrotec Group consists of 41 subsidiaries (32 consolidated subsidiaries, 1 non-consolidated equity accounting method held subsidiary, 5 equity accounting method held affiliated companies, 1 non-equity accounting method held affiliate, and two non-consolidated subsidiaries).

Ferrotec was born as a company with highly unique technologies including thermoelectric modules with uses in thermal elements and vacuum technologies that respond to magnetic fluids that were born from the NASA space program in the 1980s. Over the course of its 30 year history of operations, the Company has developed a wide range of diverse technologies with applications in the automobile, electronics, next generation energy and other industries. As a transnational company, Ferrotec deploys its businesses in Japan, Europe, the Americas, China, and Asia, and boasts of marketing, development, manufacturing, sales, and management capabilities in various countries and regions. A holding company structure was implemented from April 2017.
 
<Corporate Philosophy and Code of Conduct>
Corporate Philosophy
Bringing Satisfaction to Customers
Caring About the Environment
Providing Dreams and Vitality to the World
 
Code of Conduct
Our Company and its employees will endeavor to harmonize with the global society, and act with sincerity firmly based upon our corporate philosophy and social common sense. In addition, we will observe the laws and ordinances of each country, as a company which supplies products and services which contribute to the lives of people around the world.
Ferrotec Group's goal is to offer high quality products and services in the realms of "new energy" and "electronics", and gain the trust of customers by satisfying them through the provision of price competitive products and services.

Ferrotec Group will proactively promote activities that take the global environment into consideration as one of our most important management tasks and to adapt to the latest environment control technologies to our products and services. In addition, we seek to develop material, products, and services that can be utilized in "new energy" applications and as part of our efforts to resolve various problems confronting the global environment.

Ferrotec Group seeks to contribute to society by leveraging our core technologies and to be a company which continuously satisfies the expectations of our customers, stockholders, employees, clients, communities, and other stakeholders. Furthermore, all of our activities will be conducted to remain in strict compliance with laws, ordinances, social orders, international rules and social common sense.
 
<Business Segments>
Ferrotec's operations can be divided between the Equipment Related business segment, where Vacuum Feedthrough, quarts products, and other ceramic products used in semiconductor, FPD, and LED related manufacturing equipment are produced, the Electronic Device Business Segment, where thermoelectric module application products are made, and the photovoltaic business segment, where silicon crystal, PV wafers, and crucibles used in crystal manufacturing devices are produced. In fiscal year March 2017, sales of the Equipment Related, electronic device, and Photovoltaic Related Business Segments accounted for 43.7%, 17.1% and 25.4% (FY3/16 = 45.2%, 19.2% and 26.6%) of total sales respectively, while saw blades, equipment part cleaning, machine tool, and other products not included in reported segments accounted for 13.8% (FY3/16 = 9.0%).
 
 
 
Equipment Related Business
Ferrotec provides total engineering services in the Equipment Related business segment, including the manufacture and sale of Vacuum Feedthrough of equipment parts for solar power, semiconductor, FPD and LED applications, consumable products used in manufacturing of devices, quartz products , ceramic products, CVD-SiC products, silicon wafer processing and equipment cleaning services (50% share in China).

The main product of Vacuum Feedthrough boasts of top market share in the world, and is a functional part that insulates the interior of manufacturing equipment from gas and dust contamination while supporting rotating action of the above mentioned equipment. These Vacuum Feedthrough use magnetic fluids (Fluids that respond to magnetic fields), which has been a core technology of Ferrotec since its founding. Because of instability in these applications arising from their link with corporate capital investments cycles, the Company focuses its marketing efforts upon expanding sales to applications for which demand is more stable, including transportation equipment, precision robots, and general industry usages. In addition, Ferrotec has also focused its efforts upon assuming consigned manufacture of vacuum chambers that use Vacuum Feedthrough and gate valves (Both use vacuum related equipment).

At the same time, quartz, ceramic, and CVD-SiC products are critical elements in the process of semiconductor manufacturing. Quartz products are able to resist high temperature conditions that exist in the semiconductor manufacturing process, and are a high purity silica glass product that protects semiconductors from undergoing chemical reaction by preventing it from activating with gas. Ferrotec boasts of a high share of quartz crucibles (Photovoltaic related business) used in the photovoltaic cell manufacturing process. This technology is also being used to cultivate high purity crucibles for use in semiconductor applications. The Company boasts of semiconductor manufacturing equipment manufacturers as their main clients in Japan and overseas who purchase ceramic products, which are Ferrotec's core material and technology. At the same time, semiconductor inspection tools for machinable ceramics and fine ceramics used in semiconductor manufacturing equipment are two main products in this realm.

CVD-SiC products are the term used to describe SiC products manufactured by "CVD method (Chemical Vapor Deposition method)" (created from compounds of silicon and carbon gas). Currently, semiconductor equipment and structural parts are provided, and research and development for products used in aeronautics and space (Turbine, mirrors), automobile (Power semiconductors), energy (Nuclear power related), information technology (Semiconductor manufacturing equipment parts) and other applications are also being conducted.

In addition, Ferrotec has achieved output of 360,000 units per month of 6 inch wafer processing (Ingot slicing) for discrete semiconductor applications, and its contributions in the realm of small diameter wafer processing are becoming significant.
 
Electronic Device Business
Thermal element "thermoelectric modules" are products that can instantly raise or lower temperatures to a highly precise degree and are a core product of this business. Thermoelectric modules are used primarily in heated automobile seats, and also in a wide range of other applications including genetic analysis equipment, optical communications, and consumer electronics. Ferrotec is also working on developing new demand and expanding further applications through cost reduction and quality improvement through development of new products using high performance materials and introduction of automated lines.
Earnings of magnetic fluids, including applications currently being developed for use in fishing reels (Water protecting internal seals) and speakers for 4K televisions, are also conducted.
 
Photovoltaic Related Business
Ferrotec entered the photovoltaic related business in 2005, and manufactures and sells silicon crystal manufacturing equipment, consumable products including quartz crucibles, and silicon products used in photovoltaic applications. Based upon the current needs of the market, the Company is conducting manufacture and sales of silicon-use multiple crystal vessels (Manufactured using quartz processing technologies), single crystal crucibles manufactured when making ingots, and consigned manufacturing of silicon crystal ingots and wafers used in photovoltaic substrates. With regards to consumable products like crucibles, Ferrotec boasts of a high market share due to its wide ranging lineup of products and ability to manufacture customized products.
 
 
 
Ferrotec was established in September 1980 and began manufacturing and selling magnetic fluids and applied products (CP seals, Vacuum Feedthrough). CP seals used as seals in hard disc drives and Vacuum Feedthrough used as seals in vacuum equipment have been drivers of growth and the foundation of the Company's overall business. From 1990 onwards, Ferrotec has conducted aggressive overseas business deployment including the establishment of local companies in Massachusetts, United States in 1991, Hangzhou, China in 1992, Shanghai, China in 1995, and Singapore in 1997. Meanwhile, the company started manufacturing and selling thermoelectric modules in China (1992), and started manufacturing and selling quartz products for semiconductor related business (1998).. In 1999 the original parent company Ferrofluidex Co., Ltd. was acquired to deploy businesses in North America and Europe.

From 2000 onwards, Ferrotec started business process consignment for machine tools and silicon wafer processing that leverage its integrated manufacturing technologies including parts processing and assembly in 2002. In 2005, the Company launched the photovoltaic related business and began full scale manufacturing and sales of quartz manufacturing equipment and crucibles. In 2008, the production and sales of ceramic products was started to become a new driver of earnings. Now, Ferrotec operates its businesses in the four geographic regions of China, Asia, North America and Europe including Russia, and it has a goal of achieving ¥100.0 billion in sales from these four geographic operating territories in the fourth phase of its growth strategy.
 
 
First Half of Fiscal Year March 2018 Earnings Results
 
 
Sales, Operating Income Rise by 14.2%, 33.2% Year-On-Year
Sales rose by 14.2% year-on-year to ¥42.983 billion on the back of 28.5% year-on-year growth in sales of the semiconductor manufacturing equipment business arising from favorable trends in FPD production devices, vacuum seals and jigs, and consumable products (Including material products, quartz products, silicon parts, ceramic product, and CVD-SiC products), and despite a small 2.8% year-on-year rise in sales of the electronic device business and a 6.3% year-on-year decline sales of the photovoltaic related business.
Operating income rose by 33.2% year-on-year to ¥4.498 billion due to sales pricing revisions and cost reductions that allowed gross income margin to improve and gross income to rise by 21.8% year-on-year. This higher level of gross income also allowed increases in sales, general and administrative expenses including variable and labor costs to be absorbed. Declines in foreign exchange translation loss (From ¥1.122 to ¥0.312 billion) and in noncurrent asset disposal loss (From ¥288 to ¥35 million) allowed net income to rise by 122.5% year-on-year to ¥2.299 billion.

Foreign exchange rates (Average for the first half) of ¥112.14 relative to the United States dollar and ¥16.37 relative to the Chinese yuan (¥111.80 and ¥17.03 in the previous term) were recorded. Capital investments rose by 49.3% year-on-year to ¥4.702 from ¥3.149 billion in the previous term, and depreciation fell by 0.7% year-on-year to ¥1.916 from ¥1.930 billion.
 
 
 
Sales of vacuum seals rose by 41.8% year-on-year on the back of investments in OELD in China and 3D-NAND in Korea and Japan. By product applications, sales to semiconductors, FPD, photovoltaic cells, consigned processing and others amounted to 28%, 7%, 23%, 22% and 20% respectively (29%, 6%, 25%, 18% and 22% in the previous first half).

Quartz product sales rose by 25.5% year-on-year due in part to a rapid rise in demand for etcher use applications (Surface processing using corrosive effect of chemicals) supplied on an OEM basis to two companies in the United States, and increases in demand from end users including semiconductor manufacturers in Taiwan. By product application, OEM, end users, LED, PV, LCD and other applications accounted for 67%, 23%, 1%, 1%, 1% and 4% respectively (Compared with 69%, 24%, 1%, 1%, 1% and 4% in the previous term). While capacity at the plant in Hangzhou, China was expanded, stronger than expected demand from OEM customers in the United States is expected to contribute to further investments to expand capacity a step further.

Ceramic product sales rose by 36.6% year-on-year due to increases in sales of machinable ceramic (MC) photoveels used primarily in overseas medical parts applications and to Japanese automobile manufacturing (Logic testing jigs) applications, in addition to higher fine ceramics (FC) sales for parts used in overseas etching equipment and Japanese semiconductor and FPD applications. By product application, semiconductor testing, MC domestic, MC exports, FC semiconductor manufacturing equipment use, FC exports, and others accounted fo 18%, 4%, 13%, 23%, 25% and 17% respectively (20%, 8%, 14%, 22%, 32% and 4% in the previous term). A research and development facility was established in November 2017 at the Ishikawa Plant of Ferrotec Ceramics Co., Ltd. in Ishikawa Prefecture as part of the Company's efforts to strengthen its research and development activities for development of next generation products.

Sales of CVD-SiC products rose by 35.6% year-on-year on favorable demand for consumable products used in the semiconductor manufacturing process due to the strong high thermal resistance properties of Ferrotec's CVD-SiC. The main consumers of these products are primarily overseas semiconductor manufacturing equipment makers and device makers, with 70% of sales being exported. Demand within Japan and in overseas markets trended favorably during the first half, and a newly installed mass production line began production as well. By geographic region, China, North America, Japan, Taiwan, and Europe accounted for 38%, 21%, 33%, 6% and 2% of sales (22%, 32%, 8%, and 1% in the previous term) respectively. Admap Inc., which is the subsidiary responsible for manufacturing, constructed a new plant in Korea (Currently awaiting certification) in addition to its existing Plant in Okayama, Japan to be able to respond to strong demand for large parts.

Wafer processing sales grew by 27.9% year-on-year on the back of increases in sales of 6 inch discreet use wafers for power semiconductor and sensor applications. Along with an increase in sales volumes, pricing improved as prices were revised twice. Currently, investments are being made to boost monthly output from 360,000 to 400,000 units. The Yinchuan Plant (Ingots) for 8 inch wafers and Shanghai Plant (Wafers) were completed in July and are currently undergoing the mass production certification process (Both plants are expected to begin manufacturing of 150,000 units per month from the coming term). In addition, the Hangzhou subsidiary established in September has begun production on a new plant which is expected to be completed in fall 2018. Consequently, Ferrotec is endeavoring to raise its monthly manufacturing capacity to 300,000 units at an early stage, and with further additions from the Yinchuan and Shanghai Plants to boost capacity to 450,000 units, the total production of 5 and 6 inch wafers is expected to rise to 850,000 units per month.

Sales of EB guns used as the heat source for lens film formation equipment and LED deposition equipment used in metal film deposition for compound semiconductors fell by 10.4% year-on-year. And while demand remains strong as indicated by inquiries regarding deposition equipment for next generation cellular telephone use compound semiconductors, the weaker first half sales are a reflection of delays in capital investments by communication chip manufacturers resulting from weak sales of smartphones during the first half.
 
 
Quartz crucible sales trended lower as expected and fell by 39.1% year-on-year due to weaker demand resulting from a shift to single sell crystals used in semiconductors. In response to the falling trends in multiple crystal square tank demand, Ferrotec is implementing structural reforms. Sales of single crystal products provided to new clients in the photovoltaic use silicon on an OEM basis have been started and rose 10.9% year-on-year. Demand for multiple crystals trended favorably in China resulting from the termination of the fixed rate electricity purchase system implemented in the previous first half (However sales during the second half are expected to decline on a half-on-half basis). Sales of cells and other products fell by 9.9% year-on-year, but Ferrotec is implementing steps to bolster sales in China and India by introducing PERC technology with high conversion efficiencies for its high conversion efficiency multiple crystal cells.

With regard to profits, implementation of valuation losses on inventories and processing of doubtful account reserves (Totaling ¥4.9 billion) caused an operating loss to be recorded during the first half. However, Ferrotec is currently implementing structural reforms to be able to realize profits during the coming term.
 
 
Thermal module sales rose by 2.0% year-on-year on the back of strong growth in semiconductor application sales, and increases in sales to biotechnology, Chinese communication equipment, consumer electronics, power substrate and other applications. At the same time, sales of automobile seat automated heating applications fell due to declines in North American automobile sales (9 consecutive months of lower sales). Sales to automobile, automobile related, semiconductor, optical, biotechnology, communication equipment, physiochemical, consumer electronic, power substrate and other product application categories accounted for 37%, 1%, 12%, 4%, 11%, 7%, 3%, 9%, 9% and 7% (48%, 4%, 6%, 5%, 10%, 7%, 4%, 5%, 8% and 2% in the previous term) respectively.
 
 
Total assets rose by ¥18.387 billion from the end of the previous term to ¥110.487 billion. Current assets also rose on the back of increases in inventories, accounts payables arising from higher sales, and cash and deposits resulting from a third party placement of ¥8.7 and bond issuance of ¥3.3 billion. Noncurrent assets rose in response to capital investments for 8 inch wafers and to expand production of quartz crucibles and ceramic products which boosted tangible assets. At the same time, intangible assets declined due to amortization of ¥114 million. Capital adequacy ratio rose to 44.6% from 42.6% at the end of the previous fiscal year.
 
 
The large year-on-year increase in net income allowed Ferrotec to see a large net inflow of operating cash flow of ¥4.794 billion. Acquisition of tangible assets contributed to a large net outflow of investing cash flow of ¥4.640 billion. Amongst the acquisition of tangible assets were investments for the Shanghai, Hangzhou, and Yinchuan subsidiaries of ¥1.576, ¥1.522, and ¥0.595 billion respectively. Issuance of ¥3.245 billion in corporate bonds and ¥8.659 billion in shares allowed the margin of net inflow of financing cash flow to expand to ¥12.311 billion.
 
 
Fiscal Year March 2018 Earnings Estimates
 
 
Estimates Call for Sales, Operating Income to Rise 15.1%, 49.7% Year-On-Year in Full Fiscal Year
Strong demand for vacuum seals and photovoltaic cells use silicon allowed Ferrotec to upwardly revise its sales estimates to 15.1% year-on-year growth to ¥85.0 billion. As part of its assumptions, the Company expects production device business sales to rise by 29.3% year-on-year. With regard to profits, improvements in profitability of the semiconductor manufacturing equipment and photovoltaic related businesses are expected to allow operating income margin to rise by 2.3% points year-on-year to 10%.

Foreign exchange rate assumptions call for ¥110 relative to the United States dollar (Compared with ¥109.44 in the previous term) and ¥16.00 (Compared with ¥16.41 in the previous term) relative to the Chinese yuan. Capital investment and depreciation are expected to rise by 36.5% and 11.3% year-on-year to ¥10.0 and ¥4.0 billion respectively. Capital investment plans are expected to remain subdued as they have been made in consideration of the outstanding payments for capital investments at the end of the previous fiscal year and cash flow.

Ferrotec expects to pay a ¥10 per share dividend at the end of the current fiscal year, which will boost the full year dividend payment by ¥4 over the previous term to ¥22 per share, including the first half payment of ¥12 is considered.
 
 
Amidst ongoing investments in 3D-NAND by Japanese and Korean manufacturers and in OELD by Chinese manufacturers, sales of vacuum seals during the full year are expected to rise by 34.0% year-on-year. Also, quartz products sales are anticipated to grow by 29.8% year-on-year. Despite the feeling of a near term peak, investments for mass production will continue to be made in response to strong demand from OEM clients in the United States. Ceramic product sales are expected to rise by 28.9% year-on-year. Demand for machinable ceramics from overseas medical related parts applications remains favorable, and demand from semiconductor memory inspection jigs within Japan is recovering. Demand for fine ceramics from semiconductor manufacturing equipment and FPD manufacturing parts applications within Japan, and etching equipment parts applications overseas are expected to grow. The new plant in China is that began operating in September is already at full capacity operations. CVD-SiC parts demand is also strong. Due in part to a change in the accounting period in the previous term, sales are expected to grow by a strong 73.4% year-on-year margin in the current full year. At the same time, sales of EB guns, and LED deposition equipment are expected to decline by 1.2% year-on-year. While the decline in first half sales is not expected to be covered, sales of automobile and IoT applications are expected to turn to positive growth in the second half.
 
 
Quartz crucible sales are expected to decline by 19.4% year-on-year. During the second half of the current term, Ferrotec will focus its efforts upon long term contracts and in-house uses in photovoltaic related applications, in addition to small and medium diameter crucible for use in semiconductor production applications. Photovoltaic use silicon sales are expected to rise by 10.9% year-on-year. During the second half, any potential inventory adjustments by customers are not expected to be accompanied by large pricing declines, unlike those which were seen during the previous second half due to similar inventory adjustments. Sales of cells and other products are expected to rise by 5.9% year-on-year. Demand for cells with high conversion efficiency single crystals and the strong pricing power due to the high value addition of these products has allowed both sales volume and value to rise.
 
 
Sales of thermal modules are expected to decline by 2.3% year-on-year. Shipments of power semiconductor substrates to European clients have started along with the outlook for a continuation of favorable demand from communications and semiconductor related applications during the second half. However, shipments to automobile seat automated heating applications are expected to trend weakly. Investments for mass production of power semiconductor substrates are planned in response to increasing orders.
 
(3) Medium Term Growth, Progress
According to Ferrotec's documents, the Chinese Government maintains a national strategy entitled "Chinese Made by 2025" that calls for the creation of its own semiconductor manufacturing equipment. Consequently, the Chinese semiconductor manufacturing equipment market has expanded from $4.9 billion in 2015 to $6.46 billion by 2016, and estimated to have grown to $6.84 billion in 2017, and is expected to rise a step further to ¥11.04 billion in 2018. Therefore, Ferrotec, which boasts of various fundamental technologies necessary for semiconductor manufacturing equipment, is preparing for mass production of 8 inch wafers and expanded manufacturing capability for semiconductor materials. The Company is also implementing efforts to begin OEM manufacture of semiconductor manufacturing equipment as part of its strategy to capture growth from that market. In addition, the Company is also implementing measures to cultivate demand for industrial use power semiconductors and semiconductors accompanying growth in the electronic vehicle (EV) market.

Furthermore, Ferrotec will strengthen its efforts for thermoelectric modules for automobile related applications. A project team targeting the automobile industry applications will be established in 2018, and begin marketing for electric vehicle electric current sensors, electric vehicle battery cooling systems, heads-up displays, magnetic fluid suspensions, electric vehicle use sub-air conditioning, rider communication chips and other products. With a goal of eventually achieving sales of ¥30.0 billion for this business, the Company seeks to first achieve sales of ¥20.0 billion within three years.

Based upon the above mentioned efforts, Ferrotec seeks to achieve sales and operating income margin targets of ¥100.0 billion and 10% in fiscal year March 2019. Within sales, the semiconductor production device, electronic device, photovoltaic related, and other businesses are expected to account for ¥43.0 to ¥46.0, ¥19.0 to ¥22.0, ¥18.0 to ¥20.0 and ¥14.0 to ¥16.0 billion respectively.
 
Establish OEM Production Structure for Semiconductor Production Device (Consigned Production in Realms of Strength)
Ferrotec is currently conducting discussions for OEM provision of products to major semiconductor equipment manufacturers in Japan and the United States, and at the same time is confirming demand in unit related, robot and deposition equipment used in semiconductor manufacturing equipment. In addition, global replacement demand for metal organic chemical vapor deposition (MO-CVD) equipment is increasing and inquiries regarding OEM production have been received from several manufacturers. Of the some 3,600 MO-CVD machines operating around the world, about half of this number is expected to be replaced in the near term.
The businesses of the Hangzhou vacuum technology company and Shanghai subsidiary are expected to be integrated with the objective of becoming able to assemble equipment, in addition to manufacture of various parts for semiconductor manufacturing equipment and internalization of ingot pulling equipment necessary for the manufacture of 8 inch wafers. Consequently, sales for this business are expected to be ¥15.0 billion in fiscal year March 2019.
 
Mass Production Structure for Semiconductor Material Parts
With a target of mass producing semiconductor material parts, new facilities are being established at Ferrotec's existing plants. Quartz crucibles are provided to the major semiconductor manufacturing equipment makers around the world, but one of these makers is requesting that Ferrotec expand its output capacity to ¥10.0 billion within three years. Therefore, the Company maintains plans to newly add three lines each for its machine and fire processing at its Hangzhou Plant, with plans to start operations of two lines each within the current term. As evidence of strong demand, a client has asked Ferrotec to increase its output capacity by 1.5 times for ceramic products within the coming term. The plant newly started in January reached full capacity operation in September, and investments are being made to further expand capacity. Furthermore, Ferrotec had focused upon semiconductor applications and seeks to expand its business realm to include LCD and general industrial use applications to achieve sales of ¥30.0 billion within two to three years.

Aside from this, the Company will endeavor to expand the applications of its CVD-SiC equipment beyond semiconductors to include general manufacturing applications and expand sales to ¥11.0 billion. Also, Ferrotec expects to expand sales in the realms of manufacturing equipment parts cleaning of which it boasts a 60% market share in China, semiconductors, FPD, and OLED to ¥11.0 billion by 2020. In addition to the cleaning plants currently operating Shanghai, Tianjin, Neijiang (Sichuan), and Dalian, two new plants in Fujian and Anhui Provinces are expected to be newly constructed and begin operating in September to October of 2018, and July 2018 respectively.
 
Establish Mass Production Structure for 8 Inch Wafers: 150,000 Units Monthly at Yinchuan, Shanghai Plants, Total Output of 850,000 per Month Including Small Diameter
While monthly output of 5 and 6 inch wafers for discreet applications were 360,000 in 2001, orders have risen to 500,000. Furthermore, prices which had fallen temporarily are now recovering and these favorable conditions are expected to continue for the coming three to four years. Contracts for the coming term have been confirmed on an verbal basis, and in response to this favorable demand Ferrotec is expected to expand output capacity to 400,000 units within the year.

At the same time, new facilities at the Yinchuan (Initial stage processing for ingot manufacturing) and Shanghai (Latter stage processing) Plants are expected to be constructed through a collaboration with the third largest wafer manufacturer in Taiwan Global Wafers Co. (GWC) and begin operations in July. Output capacity is steadily ramping up from 50,000 units in October, to 80,000 in November and 100,000 in December, with a goal of 150,000 expected to be achieved after the start of 2018. Because all of the 8 inch wafers used in China had been imported until now and given the national strategy of "Chinese Made by 2025", Ferrotec will give top priority to 8 inch wafers. Consequently, the Company established a new company in September for the manufacture of 8 inch wafers in Yinchuan City, with construction started in December and expected to be completed in October 2018. A member of GWC is expected to oversee operations with test production expected to begin after the start of 2019 and mass production expected to begin from the second quarter with a goal of achieving 300,000 units per month within the year. A total investment of ¥30.0 billion is anticipated, of which ¥15.0 billion is expected to be received from Yinchuan City in the form of subsidies with loans expected to be used to pay for the remaining amount. The ability to internalize pulling equipment and crucibles is a factor that should allow for strong pricing competitive standing.
 
EV, Industrial Use Power Semiconductor Market Efforts
The market for electric vehicles and industrial use power semiconductors is expected to grow by over 30% to 2025, and Ferrotec plans on expanding its power semiconductor substrate manufacturing capacity by 1.8 times.
 
 
 
Conclusions
 
Demand is strong for material products accompanying growth in investments for brisk demand for mass production of 3D-NAND type flash memory, semiconductor miniaturization investments. Furthermore, strong demand for vacuum seals accompanying OLED panel mass production investments are contributing to strong sales of the semiconductor manufacturing device business. In the future, demand in IoT, AI, deep running, EV and other semiconductor related applications are expected to be negatively impacted from the national strategy of "Chinese Made by 2025" with a temporary slowing, but full scale adjustment in supply and demand seems to be avoidable. In addition, Ferrotec boasts of the strength of being able to conduct business collaboration with semiconductor manufacturers and semiconductor manufacturing equipment makers, along with its strong capabilities in China. Also, the Company has launched strategies designed to enable it to achieve its sales target of ¥100.0 billion. At the same time, if Ferrotec's medium term growth strategy proceeds as expected, its ¥100.0 billion sales target may become eclipsed on its way to new and even higher targets.
 
 
<Reference: Regarding Corporate Governance>
 
 
◎ Corporate Governance Report                    Updated on April 20, 2017
Basic policy
The company considers that it is important to improve its corporate value, emphasize the soundness of its business administration to become an enterprise that will be trusted and supported by stakeholders, including shareholders, customers, business partners, and local communities, and also establish a managerial system for responding the rapid changes to the business environment swiftly and accurately.
As of June 28, 2016, two out of nine directors are outside ones, and the term of each director is one year, so that the company can respond to the changes to the business environment swiftly. In addition to a monthly meeting of the board of directors, the company flexibly holds an extraordinary meeting of the board of directors every time an important transaction emerges.
As for business operation, twelve operating officers (including 11 males and 1 female or 6 directors [who are all male]) are appointed as managers in charge of respective tasks or sections and assigned with clearly defined roles for business operation.
The company has the audit and supervisory board. As of June 28, 2016, the board of auditors is composed of 3 outside auditors (including a full-time one), and aims to strengthen corporate governance.
The company receives advice about legal affairs from Goto Law Office when this is necessary for business, in accordance with a legal consultancy contract.
The company also undergoes account audit by Ernst & Young ShinNihon LLC serving as comptroller in accordance with an audit contract, and tries to disclose information without delay as a company listed in the standard section of the JASDAQ market of Tokyo Stock Exchange, if an event specified in the provisions regarding disclosure occurs.
 
<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
The company implements all of the basic principles of the Corporate Governance Code.
 
<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>
Principle 1-4   The so-called strategically held shares
The company holds strategically held shares for the purposes of maintaining and strengthening cooperative relations for business, keeping and cementing transaction relations, collecting and exchanging market information, and procuring funds stably.
 
Principle 1-7   Transactions with related parties
When making transactions with related parties, the board of directors needs to deliberate and make a decision. A director who have any interests about an item discussed by the board of directors shall not be involved with decision making about said item. The transactions with related parties shall be conducted under the same conditions as those for transactions with other companies that have no capital ties, and the company takes measures for preventing such transactions from harming the interests of minority shareholders.
 
Principle 5-1   Policies for constructive dialogue with shareholders
With the aim of achieving sustainable growth and improving corporate value, the company will promote the constructive dialogue with shareholders and explain its managerial policy and status understandably so that shareholders will understand them.

Policies for constructive dialogue with shareholders
(1) A director in charge of IR and managerial plans is included in the management that manages the dialogue with shareholders.
(2) The president's office for the cooperation among divisions for supporting the dialogue with shareholders cooperates with the accounting department in supporting the dialogue with shareholders.
(3) For enriching the means of dialogue other than individual interviews, the company holds a session for briefing financial results, and a business briefing session after each general meeting of shareholders, and utilizes a variety of information transmission methods, including printed matters. At the sessions for briefing financial results and business, the representative director gives explanations.
(4) The information on each dialogue is managed rigorously in accordance with the regulations for the management of insider information.
 
 
Disclaimer
This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
 
Copyright(C) 2018 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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