BRIDGE REPORT
(6890)

JASDAQ

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Ferrotec Corporation (6890)
President Akira Yamamura
President
Akira Yamamura
Corporate Profile
Company
Ferrotec Corporation
Code No.
6890
Exchange
JASDAQ
Industry
Electric Equipment (Manufacturing)
President
Akira Yamamura
HQ Address
1-4-14 Kyobashi, Chuo-ku, Tokyo 104-0031
Year-end
March
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥981 24,803,678 shares ¥24.332 billion 0.8% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥12.00 1.2% ¥92.73 10.6x ¥896.93 1.1x
* Stock price as of closing on 2010/11/25. Number of shares at the end of the most recent quarter excluding treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating Profit Ordinary Profit Net Profit EPS (¥) Dividend (¥)
March 2007 32,517 2,288 2,081 1,703 86.38 12.00
March 2008 36,625 3,057 2,414 1,903 99.25 12.00
March 2009 36,653 2,790 2,097 743 34.39 12.00
March 2010 31,541 703 524 156 6.58 12.00
March 2011 Est. 46,500 4,100 3,400 2,300 92.73 12.00
* Estimates are those of the Company.
 
We present this Bridge Report along with the first half fiscal year March 2011 earnings results for Ferrotec Corporation.
 
Key Points
 
 
 
Company Overview
 
Ferrotec manufactures and sells silicon single crystal pulling equipment and other products in the photovoltaic related products segment, and semiconductor manufacturing equipment and flat panel display (FPD) manufacturing equipment parts, semiconductor materials, and various thermoelectric temperature controllers. And while consumers do not have direct contact with most of these products, they are widely used in personal computers, cellular telephones, and devices using liquid crystal and plasma technologies. Originally, Ferrotec was a manufacturer of magnetic fluids application product. One of the most representative examples are Ferrotec's vacuum seals used in semiconductor and FPD manufacturing equipment parts, which have contributed significantly to the development of Japan's semiconductor and liquid crystal manufacturing equipment industry. Ferrotec's thermoelectric modules, which have become the next major product after the magnetic fluid products and have become the "only one" product within the industry, are extremely precise parts that require high levels of metal and surface processing. The outsourced manufacturing business (CMS) segment combines these technologies with the low labor costs in China. Furthermore in recent years the photovoltaic business where silicon crystal products, quartz crucibles and other consumable products are manufactured has also seen rapid expansion. Ferrotec's vacuum seals are important parts used in silicon crystal manufacturing devices of the photovoltaic business segment and they leverage the technologies and knowhow accumulated until now.

The Ferrotec Group is comprised of 20 consolidated subsidiaries and five equity accounting method held affiliates in Japan and overseas. Its business segments are defined as follows.
 
Production Device Segment: Vacuum seals, quartz crucibles, silicon products used in semiconductors, ceramic, deposition apparatuses, silicon wafer processing
Photovoltaic Segment: Silicon crystal (multiple, single) manufacturing equipment, photovoltaic silicon ingots, quartz crucibles
Electronic Device Segment: Thermoelectric modules, magnetic fluid products, others
Other Business Segment: Saw blades, equipment part cleansing, machine tools, others (Not included as an officially reported business segment)
 
Photovoltaic Use Single Silicon Crystal Pulling Equipment
Single crystal pulling devices are vacuum furnaces (high temperature, low pressure) where silicon is dissolved in quartz crucibles, after which the core parts of single crystals are melted and immersed and spun after which single crystal ingots are pulled.
Photovoltaic Use Multiple Silicon Crystal Manufacturing Equipment
Employing the newest technologies, multiple crystal materials and recycled materials (H&T, remnant crucibles, wafers, others) are filled, melted, crystallized, and cooled to cast multiple crystal blocks used in the preproduction processes of photovoltaic applications.

(Source: Ferrotec)
 
 
First Half Fiscal Year March 2011 Earnings
 
 
Sales Rise 77.0% Year-Over-Year, Ordinary Income Improves to ¥1.89 Billion from ¥504 Million Ordinary Loss in Previous First Half
Sales grew by 77.0% year-over-year to ¥23.76 billion during the first half. Aggressive investments and production activities in the semiconductor and FPD applications allowed sales of the production device segment to rise by 2.1 times year-over-year. At the same time photovoltaic segment sales grew primarily on strength in photovoltaic silicon products and quartz crucibles. Thermoelectric modules were a main driver behind the doubling of sales in the electronic device segment. With regards to profits, the higher level of sales combined with rise in the share of the highly profitable production device segment of total sales to boost gross income margin by 6.8% points during the first half. Higher selling, general and administrative expenses arising from the normalization of labor costs and rises in variable costs were absorbed and operating income recovered from a loss of ¥543 million in the first half of the previous term to an income of ¥2.24 billion during the current first half. A worsening in translation gain or loss arising from foreign exchange from a gain of ¥0.15 billion in the previous term to a loss of ¥0.26 billion in the current first half contributed to ordinary income of ¥1.89 billion, while improvements at the extraordinary income and lower tax burden of ¥0.56 billion allowed Ferrotec to record net income of ¥1.34 billion. Ferrotec's assumptions for the US Dollar and the Chinese Yuan are ¥83.8 and ¥12.5 respectively (¥90.2 and ¥13.2 during the same period of the previous term).
 
 
Before the current term, Ferrotec had divided its sales into four divisions including the "production device segment," "photovoltaic segment," "electronic device segment," and the "CMS segment." However to better reflect product applications and the industries to which they market their products, Ferrotec has redefined its business segments and effective from the fiscal year March 2011 the silicon wafer processing business, which belonged to the CMS segment, has been reallocated to the production device segment. At the same time Ferrotec has chosen to divide its business segments into three main divisions of "production device segment," "photovoltaic segment," and "electronic device segment." The above data for fiscal year March 2010 have been restated in accordance with the new business segments.
 
Production Device Segment
In this segment, Ferrotec manufactures and sells ceramics products, EB-Guns, LED and other deposition equipment used in vacuum seals, quartz crucibles, wafer circuit inspection jigs, and production device parts. In addition, processing of silicon wafers is also undertaken in this segment. Sales grew by 117.8% year-over-year to ¥13.0 billion and operating income improved to ¥1.37 billion from a loss of ¥0.82 billion in the previous term. Sales of vacuum seals rose by 2.2 times to ¥3.63 billion on the back of strong demand derived from aggressive investments by Taiwanese, Korean and American semiconductor companies and from applications of European LED manufacturing equipment. At the same time sales of quartz and ceramic products used in the manufacturing process rose by 2.7 times and 56.7% year-over-year to ¥3.04 and ¥1.77 billion respectively on the back of continued high capacity utilization rates of device manufacturers. Aside from these strong performances, wafer processing also rose by 101.8% year-over-year to ¥2.36 billion and the deposition equipment used in LED manufacturing business transferred to Ferrotec's United States subsidiary at the beginning of the year also contributed to the favorable first half performance.
 
Photovoltaic Segment
In the photovoltaic segment the manufacture and sales of silicon crystal manufacturing equipment, quartz crucibles, and silicon parts used in photovoltaic applications is undertaken. Sales of this segment grew by 34.7% year-over-year to ¥6.78 billion while operating income declined by 17.9% year-over-year to ¥0.35 billion. In addition to a recovery in demand, the start of photovoltaic wafers sales contributed to 84.7% and 63.9% year-over-year increases in sales of photovoltaic silicon products to ¥2.1 billion and quartz crucibles to ¥1.42 billion respectively. At the same time while shipments of silicon crystal manufacturing equipment progressed smoothly, declines in pricing contributed to a 3.9% year-over-year decline in sales of these products to ¥2.91 billion. In addition to the lower product pricing, the allowance for doubtful receivables of some customers contributed to the decline in profits. Near term orders for silicon crystal manufacturing equipment continues to trend strongly and production facilities are running at full capacity as Ferrotec endeavors to deliver the equipment from its large order backlogs.
 
Electronic Device Segment
Ferrotec manufactures and sells thermoelectric modules, magnetic fluids, and other products in the electronic device segment. Sales of this segment rose by 101.9% year-over-year to ¥3.05 billion and operating income improved from a loss of ¥0.07 billion in the previous first half to income of ¥0.41 billion in the current first half. Sales of the main product of thermoelectric modules grew by 103.6% year-over-year to ¥2.79 billion. A recovery in the sale of automobiles spurred by government subsidies in the United States, strong growth in heated automobile seats from the Chinese market, where car sales are trending strongly, and strong demand for air cleaners and air conditioners contributed to this segment's strong performance. In addition, strong sales of medical use inspection devices, and biotechnology and fiber optical communications device applications also boosted sales of this segment. Furthermore the introduction of automated production lines at Ferrotec's subsidiary in China, which is mainly responsible for the production of this segment's products, contributed to increased productivity and reduced costs (Some of the products with higher functionality are produced by Ferrotec's Russian subsidiary.).
 
(3) Financial Conditions and Cash Flow
At the end of the first half of the current fiscal year total assets grew by ¥5.32 billion from the end of the previous fiscal year to ¥53.28 billion. Working capital expanded on the back of increases in orders and sales, and fixed assets grew on capital investments for the photovoltaic business. With regards to cash flow, operating cash flow declined on the increase in working capital arising from increases in orders and sales. At the same time increases in capital investments from ¥1.15 to ¥2.09 billion led to an expansion in the outflow in investing cash flow, and subsequently free cash flow turned to a net outflow of ¥0.59 billion. The inflow of financing cash flow declined due to the lack of any financing activities, and cash and equivalents declined by ¥0.57 billion from the end of the previous fiscal year to ¥6.44 billion at the end of the first half.
 
 
 
Fiscal Year March 2011 Earnings Estimates
 
 
Some Slowing in Second Half Anticipated, But Sales and Income Expected to Surpass Previous Record Highs by Large Margins
During the second half, sales of silicon crystal manufacturing equipment for photovoltaic applications are expected to recover to positive growth along with continued strong sales of quartz crucibles and photovoltaic silicon products. However at the same time sales of semiconductor and FPD related products are expected to slow and demand for thermoelectric modules for use in heated seats from the automobile industry applications are expected to decline as government subsidy assistance programs end. Consequently sales growth during the second half is expected to slow in comparison with the first half of the current term, but both sales and profits of the photovoltaic, production device, and electronic device segments are expected to continue to trend at high levels.

During the full fiscal year March 2011, sales, and operating, ordinary and net incomes are all expected to surpass initial estimates by large margins and reach new record highs. Ferrotec assumptions for foreign exchange call for ¥82.0 per US Dollar and ¥12.2 per Chinese Yuan (¥93.7 and ¥13.3 respectively in the previous term). Furthermore they will increase their capital investments from their initial estimate of ¥3.0 to ¥3.5 billion (¥2.38 billion in the previous term). Depreciation and amortization is expected to be ¥2.7 billion, compared with ¥2.6 billion in the previous term. Ferrotec projects a dividend payment of ¥12 per share at the end of the term.
 
 
 
Production Device Segment
During the second half, vacuum seals used in LED related applications are expected to trend strongly, while demand from semiconductors and FPD related applications are expected to weaken. However Chinese approval of applications for FPD related factories of Korean and Taiwanese manufacturers is expected to be given shortly, and orders after the approvals are granted are expected to grow. Demand for quartz crucibles is expected to slow during the second half compared with the first half, but continued firm demand from Taiwanese manufacturers and for OEM products is expected to allow this business to remain at high levels. Aside from these products, ceramics, EB-Guns, and deposition equipment are also expected to encounter weaker demand during the second half, but sales are anticipated to trend at high levels based on expanded investments in assembly plants for vacuum seals in China, and on investments to increase quartz product output capacity. Therefore during the full year sales of this segment are expected to rise by 62.9% year-over-year to ¥24.35 billion.
 
Electronic Device Segment
Despite some slowing is expected in thermoelectric modules supplied to the automobile and home electronics industries, sales are expected to remain at relatively high levels. Specifically, inventory adjustments in heated seats used by the automobile industry is anticipated due to the end of the government subsidies for car purchases along with a seasonal slowing in consumer applications, but demand for applications in the semiconductor, medical inspection, and biotechnology equipment is expected to remain favorable. Furthermore new products for optical communication applications, which are currently being tested by clients, are expected to gradually contribute to earnings going forward. Ferrotec will also endeavor to increase its cost competitiveness by expanding the level of automation at its China plant. During the full year sales of this segment are expected to rise by 56.5% year-over-year to ¥5.87 billion.
 
Photovoltaic Segment
In addition to growth in silicon crystal manufacturing equipment, which has been transferred along with staff from the other business segment, on the back of order backlog fulfillment, demand for quartz crucibles from Chinese clients, who have a high regard for these products, remains strong. In addition, trial sales of photovoltaic wafers in the realm of silicon products for photovoltaic applications begun during the first half of the year will see full scale sales launch. Moreover the facilitation of comprehensive processes for photovoltaic wafers (crystal manufacture • ingot cutting • wafer inspection • product supply) will enable large reductions in costs to be implemented going forward. And in the full year this segment's sales are expected to rise by 43.2% year-over-year to ¥15.15 billion.
 
 
(3) Capital Funding and Capital Investment Plans
On November 5, 2010 convertible bonds with stock options were issued to Tokio Marine & Nichido Fire Insurance Co., Ltd. (Stock options, equivalent to 1.915 million latent shares or 7.72% potential dilution) of which ¥2 billion was used for capital investments in the photovoltaic business segment.

Ferrotec manufactures and sells single crystal pulling equipment, multiple crystal manufacturing equipment, dicing saws, wafer inspection equipment and other devices as well as single and multiple crystal quartz crucibles, hot zones, other consumable products, and silicon ingots in the photovoltaic segment. In the future Ferrotec expects to begin manufacture and sales of silicon wafers for use in photovoltaic applications as well (Expected to begin in full scale during the second half of the current term). Specifically production of 6.5 and 8 inch wafers for use with 125 and 156 millimeter single crystal type, and 156 millimeter multiple crystal type applications for sale to photovoltaic cell manufacturers in China will begin shortly.
 
 
With regards to silicon wafers for photovoltaic applications, silicon ingots created from single crystal manufacturing equipment and quartz crucibles or multiple crystal manufacturing equipment and quartz square tank are cut using a dicing saws and then inspected using wafer inspecting equipment. In Ferrotec's example, a comprehensive production line can be created using the Company's own products making the manufacture of highly price competitive silicon wafers possible.
 
 
 
 
Conclusions
 
While demand for products in the production device and electronic device segments is expected to weaken during the second half, Ferrotec expresses its confidence in its outlook for earnings from the next term forward based on the capital investment plans announced in the field of photovoltaic applications. In actuality, surveys reveal that the worldwide market for photovoltaic applications is likely to grow by over 30% per annum from 2011 forward, and reports that all of the photovoltaic wafers produced in 2010 and expected to be produced in 2011 by major firms have already been sold. And while there are some concerns over a "knee jerk reaction" appearing in the next term in the aftermath of the strong performance in the production device and electronic device segments during the current term, sales of vacuum seals on the back of the approval of Korean and Taiwan FPD manufacturing plants in China and of spare parts sub assembly products are expected to expand. Furthermore Ferrotec expects to capture demand for quartz products, which have short delivery periods, to develop new applications for thermoelectric modules outside of the automobile industry, and to implement other measures designed to increase value addition and stabilize earnings. During the current fiscal year, sales are expected to reach ¥46.5 billion, putting it within easy reach of the Company's long term sales target of ¥50 billion and marking the start of a new chapter in which Ferrotec will endeavor to achieve new growth targets.
 
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) 2010, All Rights Reserved by Investment Bridge Co., Ltd.
 
 
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