BRIDGE REPORT
(6890)

JASDAQ

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
Nihonbashi Plaza Building, Nihonbashi 2-3-4, Chuo-ku, Tokyo
Year-end
March
URL
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥1,500 30,810,278 shares ¥46.215 billion 5.58% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥12.00 0.8% ¥97.37 15.4x ¥1,255.55 1.2x
* Share price as of closing on June 10, 2016. Number of shares issued at the end of the most recent quarter excluding treasury shares.
 
Consolidated Earnings Trends
Fiscal Year Sales Operating
Income
Ordinary
Income
Net
Income
EPS (¥) DPS (¥)
March 2013 38,424 -3,608 -3,465 -6,532 - 5.00
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 Est. 75,000 5,000 4,200 3,000 97.37 12.00
* Estimates are those of the Company. From the current fiscal year, 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 fiscal year March 2016.
 
Key Points
 
 
 
Company Overview
 
Ferrotec 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. The Ferrotec Group consists of 27 consolidated subsidiaries, 1 non-consolidated subsidiary and 5 affiliated companies held under the equity accounting method. 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. And 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.
 
<Corporate Philosophy and Code of Conduct>
Corporate Philosophy
Bringing Satisfaction to Customers
Caring About the Environment
Providing Dreams and Vitality to the World
 
Our Company and its employees will always seek harmony with the international society from a global perspective, and act with sincerity firmly based upon our corporate ethics and social common sense. As a law-abiding company in every country where we operate, we will provide products and services that contribute to the lives of people around the world.

The Ferrotec Group's goal is to offer high quality products and services primarily in the realms of "new energy" and "electronics", and gain the trust and satisfaction of customers through the provision of price competitive products and services.

The Ferrotec Group will proactively promote global eco-friendly activities as one of our important management tasks and without delay comply with the latest environmental regulations. In addition, we seek to develop material, products, etc. that can be utilized in "new energy" applications and as part of our efforts to resolve various problems confronting the global environment.

The Ferrotec Group seeks to contribute to society by leveraging our core technologies and to be a company that 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 into three segments: 1) The Equipment Related Business Segment, where vacuum feedthroughs, quartz products, ceramic products, etc. used in semiconductor, FPD, and LED related manufacturing equipment are manufactured, 2) The electronic device business segment, where thermoelectric module application products are mainly made, and 3) The photovoltaic related business segment, where silicon crystal, PV wafers, and crucibles used in crystal manufacturing devices are produced. In fiscal year March 2016, sales of the production device, electronic device, and photovoltaic business segments accounted for 45.2%, 19.2% and 26.6% of total sales respectively, while saw blades, equipment parts cleaning, machine tools, and other business segment (non-reported segment) accounted for 9.0%.
 
 
 
Equipment Related Business
Ferrotec provides total engineering services in the equipment related business segment, including the manufacture and sale of vacuum feedthroughs of equipment parts for solar power, semiconductor, FPD and LED applications, consumable products used in manufacturing, quartz products, ceramic products, CVD-SiC products, silicon wafer processing and equipment cleaning services (50% share in China).

The main product of vacuum feedthroughs 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 feedthroughs 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 feedthroughs 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 SiC products manufactured by chemical vapor deposition method, or "CVD method" (Chemical vapor is created with a mixture of silicon gas 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 300,000 units per month of 6 inch wafer processing (Ingot slicing) primarily for discrete semiconductor applications, and its contributions in the realm of small diameter wafer processing are becoming significant.
 
(*) CVD-SiC
SiC (Silicon Carbide) is a compound that combines one part each of silicon and carbon, and while it is found to a slight extent in meteorites, it is almost non-existent on earth. It is classified as ceramic, and has high degrees of hardness, oxidation resistance, chemical stability, heat resistance, etc. SiC boasts of high antioxidant characteristics because of the SiO2 coating formed on the surface of the compound, and is almost completely resistant to corrosion from strong acids like hydrochloric, sulfuric, nitric, hydrofluoric, and boiling nitric acids. In addition, it does not have melting and softening points, and remains stable at temperatures in excess of approximately 2,000 degrees centigrade. Moreover, SiC is the third hardest compound (New Mohs hardness of 13) after diamond (New Mohs hardness of 15) and boron carbide (New Mohs hardness of 14), making it difficult to process. Mohs hardness is a commonly used indicator of hardness.

The three main methods of manufacturing SiC include the "sintering method" that forms compound by sintering powdered materials, the "chemical vapor deposition" method that forms compound from silicon and carbon gas, and the "sublimation method" that forms recrystallization from sublime SiC crystal. "CDV method" is able to form highly fine and pure SiC. Using only the CVD-SiC to manufacture of CVD-SiC products allows for thin and light-weight products free from impurities to be made with few particulate matters being born. These CVD-SiC products can also be used in high-speed applications and reused multiple times after cleaning.
 
Electronic Device Business
Thermal element "thermoelectric modules" are products that can instantly raise or lower temperatures to a highly precise degree and are core products 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 devoting efforts to expanding the range of applications for this product by improving product quality, introducing automated manufacturing lines to reduce costs, and developing new high performance materials. Sales 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 in this segment.
 
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 single crystal crucibles manufactured when making ingots and silicon-use multiple crystal vessels (Both manufactured using quartz processing technologies), 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.
 
 
* ROE (Return on Equity) is calculated by multiplying by"net profit to sales margin (net profit/sales)," times "total assets turnover (sales/total assets)" times "leverage (total assets/equity capital, inverse of equity capital ration.)" ROE = net profit to sales x total assets turnover x leverage.
* The figures above are calculated using earnings results and assets data from official financial reports. Total assets and equity are averages of the balance during the term (average of balance at the end of previous term and current term). Capital ratio on earnings results and assets security reports is calculated based on balance at the end of term. Therefore, its reverse and above leverage may differ.
 
 
Fiscal Year March 2016 Earnings Results
 
 
Sales, Operating Income Grow by 17.6%, 140.8% Year-On-Year
Sales rose by 17.6% year-on-year to ¥69.463 billion. Sales of the electronic device business rose by 37.7% year-on-year on the back of increases in sales of thermoelectric modules from car seat temperature controller applications, and the equipment related business sales rose by 18.2% year-on-year on the back of favorable trend in materials products used in semiconductor manufacturing processes. While photovoltaic use silicon and silicon crystal manufacturing equipment encountered difficulties in the photovoltaic related business, sales of quartz crucibles, which are consumables, and a significant increase in sales of photovoltaic use cells, primarily for China and India, offset this weakness., resulting in an increase in the sales of photovoltaic related business by 3.1% year-on-year.

With regards to profits, gross income rose by to 2.1% points year-on-year to 24.9% due to an increase in the sales composition ratio of the equipment related business and electronic device business segments. Operating income rose by 2.4 times year-on-year to ¥4.024 billion thanks to Ferrotec's ability to absorb higher sales, general and administrative expenses and other costs arising from increases in expenses of overseas subsidiaries due to the weakening of the yen and other factors. While a decrease in foreign exchange translation gain (From a gain of ¥854 million in the previous term to a gain of ¥236 million in a current term) contributed to a deterioration in non-operating income, an improvement in extraordinary loss and a decline in impairment loss (¥3.302 billion in the previous term to ¥415 million in the current term) allowed ¥2.162 billion of net income to be secured. With regards to impairment loss, photovoltaic related business and others accounted for ¥295 and ¥120 million respectively.

The average exchange rate for the dollar and Chinese yuan were ¥121.03 and ¥19.19 respectively (Compared with ¥106.46 and ¥17.26 respectively in the previous term). Capital investments on a cash flow basis amounted to ¥3.44 billion (¥3.375 billion in the previous term) with a focus upon subsidiaries in Shanghai, Hangzhou, and Yinchuan accounting for ¥0.649 million, ¥1.424 and ¥0.797 billion respectively, and depreciation of ¥4.303 billion (Compared with ¥3.964 billion in the previous term) was recorded. Dividend payment is planned to be raised by ¥2 to ¥10 per share at the end of the fiscal year March 2016.
 
Factors for Divergence from Estimates
The greater-than-expected sales of equipment related business due in large part to stronger sales of quartz crucibles and thermoelectric modules in the photovoltaic related and electronic device businesses, as well as smaller-than-expected declines in capital investments and capacity utilization rates for miniaturization and three dimensional applications in semiconductor applications towards the end of the year. Profits were profoundly affected by the positive influence of the prolonged weak yen trend and a more-than-expected increase in sales of thermoelectric modules.
 
 
Equipment Related Business
Sales and operating income rose by 18.2% and 106.6% year-on-year to ¥31.405 and ¥3.148 billion respectively. Semiconductors and flash memories used in smartphones contributed to increased sales of quartz products used for semiconductor manufacturing processes (Rose by 47.5% year-on-year to ¥7.624 billion), ceramic products (Rose by 18.6% year-on-year to ¥6.147 billion), and new CVD-SiC products (Recorded sales of ¥1.685 billion since the second half of the term through M&A). At the same time, sales of vacuum feedthroughs, which are functional parts of various manufacturing equipment, declined by 4.7% year-on-year to ¥7.163 billion due to a trough in investments for semiconductor miniaturization applications. Strong pricing requests on in-house branded products within silicon wafer processing and intensified price competition for automotive applications caused sales of silicon wafer processing to decline by 9.9% year-on-year to ¥4.317 billion.
 
Photovoltaic Related Business
Sales rose by 3.1% year-over-year to ¥18.505 billion, and operating loss rose from ¥1.272 billion in the previous term to ¥1.692 billion in the current term. Although prices of photovoltaic panels bottomed out due to the increased demand, they have hardly bounced back, and been hovering at a low level. Severe operating conditions continued with production adjustment and withdrawal from businesses within Japan, and business failures in overseas markets. Sales of cells and other products primarily in China and India rose by 129.7% year-on-year to ¥6.141 billion, and sales of quartz crucibles, which are consumable products used for manufacturing processes in silicon crystal ingots, rose by 4.7% year-on-year to ¥3.524 billion. However, sales of photovoltaic cell use silicon declined by a large margin of 26.0% year-over-year to ¥8.483 billion, and sales of silicon crystal manufacturing equipment also fell 20.6% year-on-year to ¥359 million. With regards to profits, the booking of doubtful account reserves due to business failure of clients and valuation losses on materials inventories and other factors contributed to an expansion in losses.
 
Electronic Device Business
Sales and operating income rose by 37.7% and 69.0% year-on-year to ¥13.328 and ¥2.467 billion respectively. Favorable trends in sales of luxury automobiles equipped with car seat temperature controller applications in the United States market contributed to stronger sales of thermoelectric modules from car seat temperature controller applications, and sales of medical testing equipment and high-performance products for biotechnology related equipment also rose. Sales of thermoelectric modules as a whole rose by 40.6% year-on year to ¥12.559 billion and reached a record high due to favorable sales trends in consumer equipment and Chinese communication equipment. In addition, sales of magnetic fluids rose by 2.8% year-on-year to ¥769 million on the back of strong demand for use in speakers for automobile audio systems, 4K high resolution television applications, fishing reels, etc. while sales of power semiconductor substrates rose due to certifications from new clients.
 
 
Total assets fell by ¥641 million from the end of the previous fiscal year to ¥78.769 billion at the end of the current fiscal year. Tangible noncurrent assets declined due to a rise in depreciation. On debit side, increases in accounts receivables and goodwill amortization were recorded due to the consolidation of Admap Inc. While goodwill amortization of Admap Inc. amounted to ¥295 million, depreciation of ¥155 million was recorded. On credit side, accounts payables declined due to a decrease in purchase of paid supplied materials arising from production adjustments of OEM contracts in photovoltaic wafers. Capital adequacy ratio rose from 48.9% in the previous term to 49.1% in the current term.
 
 
 
Fiscal Year March 2017 Earnings Estimates
 
 
Sales and Operating Income Expected to Rise by 8.0% and 24.2% Year-On-Year
Estimates call for sales to rise by 8.0% year-on-year to ¥75.0 billion. Photovoltaic use silicon manufactured on an OEM basis and cell applications in China and India are expected to contribute to a 27.3% year-on-year rise in sales of photovoltaic related business, while an 8.5% year-on-year decline is expected in the electronic device business on the back of the stronger yen and a decline in thermoelectric modules used in car seat temperature controller applications due to a peaking of automobile sales in North America. In addition, sales of equipment related business are expected to rise by 0.8% with CVD-SiC products playing a pivotal role in driving sales.

Operating income is expected to rise by 24.2% year-over-year to ¥5.0 billion. Sales, general and administrative expenses are expected to fall by 4.5% due to a decline in expenses of overseas subsidiaries in yen terms arising from the stronger yen and despite of a decline in gross income margin on the back of changes in sales composition. Viewed by segment, photovoltaic related business is expected to return to profitability. While foreign exchange translation loss of ¥300 million is expected, and despite that the growth rate in ordinary income is expected to be no higher than 9.9% year-on-year, the disappearance of impairment loss is expected to allow net income to rise by 38.8% year-over-year to ¥3.0 billion.

The full year foreign exchange rate assumptions are ¥105.00 per US dollar (¥121.03 in the previous term), and ¥16.50 per Chinese yuan (¥19.19 in the previous term). Capital investments are expected rise by 32.6% year-on-year to ¥8.0 billion (¥3.440 in the previous term) on the back of capital investments for renewal of 8-inch wafer manufacturing facilities in China, added by facility renewal capital investments. Depreciation of ¥4.5 billion (¥4.303 billion in the previous term) is also expected. The dividend will be ¥12 per share, up ¥2 a year (¥6 each at the end of both the first and second halves of the fiscal year).
 
 
 
Vacuum feedthroughs during the second half of the fiscal year just ended generally recovered on the back of active investments for semiconductor miniaturization investments and launch of investments for OLED panels by Korean manufacturers. Quartz products are also expected to exceed sales of the term just ended due to increased demand from three dimensional manufacturing process applications of semiconductors, firm demand from major OEM manufacturers in China, Japan and the United States, and continued high capacity utilization rates of manufacturers in China and Taiwan. At the same time, factors which have not been considered in these estimates include signs of full-scale semiconductor related investments in China. CVD-SiC products are expected to trend favorably in North America, Japan and Asia, with strong growth in sales of non-semiconductor applications and OEM components sold to major equipment manufacturers expected to also contribute to stronger earnings. On the other hand, sales of 6-inch wafer processing are expected to decline due to price competition.
 
 
Quartz crucibles used in semiconductor applications are expected to expand, with increases in demand for large G6 applications of multiple crystal square tanks also expected. While sales on a local currently basis are expected to grow, the stronger yen is expected to contribute to a 0.7% year-on-year decline in sales in yen terms. However, earnings are expected to improve along with the transfer of production to the Yinchuan Plant. Photovoltaic silicon demand globally is expected to grow and allow OEM sales to grow. Delay in the implementation of the feed-in tariffs (FIT) system in the United States is acting as a tailwind, and the China market is expected to continue to grow despite uncertainties there. Demand in India, South Africa, Chile, Mexico, Turkey, Honduras, Algeria and other emerging markets are expected to grow. In addition, evaluation is in the final states for new OEM supplies, expected to begin from the second half. Photovoltaic use cells are expected to increase in China, India and other emerging countries.
 
 
Thermoelectric modules for general industry use applications are expected to remain in line with the previous year's levels, with some potential for higher sales to be derived from new projects. However, car seat temperature controller applications are expected to decline due to the stronger yen and a peaking in automobile sales in North America. Efforts to fortify product lineup of and marketing for subassemblies for consumer equipment applications are expected to be implemented.
 
 
Conclusions
 
Ferrotec will endeavor to achieve its sales and operating income targets of ¥100.0 and ¥8.0 billion respectively in fiscal year March 2019. By product, OEM production of photovoltaic use multiple crystal silicon (Wafers) to major North American customers are expected to begin from July, and 50% of the wafer manufacturing capacity of the Yinchuan Plant (1.2 Gigawatts) is expected to be devoted to these products. While demand for silicon pulling equipment in China is strong, there is significant risk of difficulties in recovering business due to the fear of excessive investments there. Therefore, Ferrotec will not pursue volumes and stick to a policy of cash payments for products and selectively choose to deal with superior clients depending on how highly they think of our technologies. In addition, the Company will shift its focus from silicon pulling equipment and crucibles towards semiconductor applications. Large diameter 38 centimeter crucibles use furnaces are being commercialized at a rapid pace, along with efforts to manufacture silicon pulling equipment for 12 inch applications based upon its successes in 8 inch applications. Ferrotec seeks to achieve profitability in the photovoltaic related business during the coming term, and it appears that it has achieved profitability during the January to March period (First quarter of its subsidiary which ends its fiscal year in March 2017).

In the equipment related business, manufacturing and sales of semiconductor wafers will be started. And while technological support has been received from Japanese and Taiwanese manufacturers, production of 8-inch wafers of 100,000 units per month will be started with evaluation expected to begin from January 2017. In addition, the range of applications of CVD-SiC products used in nuclear power generation, aeronautics and space development and other non-semiconductor applications will be expanded in addition to applications within the semiconductor realm. In the electronic device business, efforts will be made to expand applications of automobile related (Electric power, cooling), units, and high power device substrates.
 
 
Reference: Corporate Governance
 
 
◎ Corporate Governance Report
Ferrotec Corporation has submitted a Corporate Governance Report on September 1, 2015 after the Corporate Governance Code came into effect (in June 2015) that calls for the implementation of all of the basic principles of the Corporate Governance Code.
 
Fundamental Thinking
Ferrotec seeks to increase its corporate value by becoming a company that maintains credibility with shareholders, customers, transacting partners, regional society and all stakeholders, by prioritizing management soundness, and by establishing a management structure that can quickly and accurately respond to sudden changes in the business environment.

As of June 25, 2015, Ferrotec employed 9 managing directors of whom 2 were appointed as external directors. In addition, the term of employment of managing directors is one year based upon the need to respond quickly to changes in the business environment. In addition to participation in regular board of directors' meetings on a monthly basis, board of directors' meetings may be held flexibly on an ad hoc basis as needed to respond to important issues that develop.

With regards to implementation of executive duties, Ferrotec also employed 11 executive officers, 10 of which are male and one female, as of June 25, 2015. Within these numbers, 6 are also managing directors (All six are male) with various operational and divisional responsibilities assigned to them, and they share clearly defined executive duties with executive officers. Ferrotec also employs a board of corporate auditor structure, with 4 corporate auditors (Of which one is a full time auditor) as of June 25, 2015, who are all external auditors and as part of Ferrotec's efforts to strengthen its corporate governance.

Ferrotec maintains a legal advisor contract with Gotoh Law Office to obtain advice on various legal issues as required in the course of our business. In addition, we retain Ernst & Young Shin Nihon LLC as our accounting auditor and obtain accounting auditing services in accordance with the rules and guidelines for disclosure by publicly traded companies as defined by the standards of the JASDAQ Market of the Tokyo Stock Exchange. Furthermore, we endeavor to disclose information on a timely basis and without delay. Ferrotec has submitted an overview of its internal structure for timely disclosure to the Tokyo Stock Exchange entitled "Internal Structure Conditions for Timely Disclosure of Corporate 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) 2016 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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