CUIRS INVESTMENT RESEARCH

10/01/2024

ASML Holding
Equity Research Report

CUIRS GET Team

Sky Wang | Eileen Wang | Simone Liu | Khoi Lam | Anna Nguyen
CUIRS Investment Research
10th January 2024

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ASML Holding | Europe
Stock Rating Over-weight
Global Leading Advanced PLM Manufacturer: Target Price
Share price (09/01/24)
EUR € 768.9
€ 654.8
Benefiting from the Growing Demand in Advanced Up/downside (%)
52-Week Range
17.4%
€ 534.4-698.1
Processes and Fusion in Supply Chain Shares Out. (mn) 394.6
Mkt Cap € 258.4 bn
EV/EBITDA 26.5x
Stock rating Target Price Diluted EPS 19.3x
P/LTM EPS 33.3x
Over-weight € 768.9

Key Positive Exhibit 1 : Global Semiconductor Market Value

by Vertical ($ bn) Global Equity Team
The continued growth of semiconductor industry (Source: McKinsey) Sky Wang
and demand for lithography due to the robust chip Computing and data Wireless comunication
Head of GET
business for transformative technologies Skywangcuhkirs2022@gmail.com
Automotive electronics Industrial electronics
Semiconductor has enjoyed a rapidly growing
significance in the fourth Industrial Revolution - being Consumer electronics Wired communication Eileen Wang
the key driver for essential technologies today, and ($ bn) GET Analyst
catalyst for transformative technologies tomorrow. In 1,200 eileenwangcuirs@gmail.com
2022, the industry achieved a record turnover of $574.1
bn (according to Semiconductor Industry Association) 1,000 60 Simone Liu
95 GET Analyst
and is widely expected to maintain an annual growth of
6-8% to reach the market value of over US$1 tn by 800
130 simoneliucuirs@gmail.com
2030. This positive forecast will also give hope to the 150
same promising prospect for activities along the value 600
Khoi Lam
35 GET Analyst
chain of the semiconductor industry, including machine 50
280
60 lamkhoi2001@gmail.com
and equipment. Machine and equipment play an 400 50
important role, providing tools for processes that add 170
huge values to the chip production. The area is Anna Nguyen
200
expected to grow right in line with the whole 350 GET Analyst
225
semiconductor industry, with the its market value due to annanguyencuirs@gmail.com
0
reach $130 bn in 2023. 2021 2030

ASML’s long-standing dominance boosted by the Exhibit 2 : ASML’s Position in the Value Chain of Fiscal year (12/31 End)
sole position in EUV technology the Semiconductor Industry
(US$ mn) 2021A 2022A 2023E
ASML has had a strong and huge hold onto the area of (Source: ASML annual report)
Revenue 18,611 21,173 27,573
semiconductor machine & equipment for a long period
of time. The company has claimed top spot in the YoY (%) 33% 14% 30%
industry’s revenue ranking since 2005, and has Gross Profit 9,809 10,700 14,118
maintained a market share of over 80% for nearly 10
years. The company offers lithography machines driven GPM 23% 19% 28%
by both prominent technologies of DUV (Deep EBIT 6,536.4 6,500.7 9,045.8
Ultraviolet) and EUV (Extreme Ultraviolet). EUV is OPM (%) 35% 31% 33%
increasingly replacing DUV as the premier technology Net Income 5,883 5,624 7,673
in the field of lithography, as it enables the production
NPM 32% 27% 28%
of higher-performing, more sophisticated chips that can
fuel new technologies like artificial intelligence, Basic EPS 14 14 19
autonomous vehicles but are more cost-effective.
ASML has enjoyed superiority by a vast margin from Exhibit 3 : Share of EUV to the total net sales of all
other competitors in producer DUV machines, while it’s ASML’s technologies
until now the only supplier of EUV equipment in the (Source: ASML annual report)
world. The extremely high barrier for other companies
(€ mn) EUV Other
to catch up in this area means ASML’s current
20,000
immense advantage will not be threatened anytime
soon. 15,000

46% 10,000

5,000 46% 46%

43%
17% 23% 31%
0
2017 2018 2019 2020 2021 2022

（Source: Bloomberg, Morningstar, Yahoo Finance, CUIRS estimate）

https://www.cuhkirs2022.com/ 10 January 2024

CUIRS Investment Research
Advanced Semiconductor Materials Lithography | Europe

Key Risk

Heavy exposure to geopolitical instability

For the last few years, the semiconductor industry has been used as a pawn in major geopolitical conflicts,
given its increasing indispensability to the global supply chain, or even more critical, the world’s
development. One ongoing example is the the ban of export of semiconductor products to China imposed by
the United States, as well as its allies, including the Netherlands with the export of ASML’s EUV-driven
lithography machines. Chinese market is forecasted to account for 60% of the growth of the global
semiconductor industry’s market value to over $1 tn by 2030; however, increasing barriers will pose grave
threats to the sector and its entire value chain’s development. ASML will be hit especially hard by any
unfavorable development in China, as in the 3rd quarter of 2023, sales to the Asian take up 46% of its
revenue. Threat will also come from the boiling tensions over Taiwan, who for many years has taken up 20%
share of the global semiconductor market. Any further situational aggravation, especially the explosion of a
military conflict, will lead to a heavy disruption of chips supply as well as curtailment in the semiconductor
sector’s growth.

Highly cyclical nature of the entire industry

Semiconductor is a highly cyclical industry, with its well-being highly dependent on the prospect of the global
economy. When the economy is strong, the demand for electronic devices/equipment will expand in any side
of consumption – civil, corporate, government – and that in turn will boost the demand of chips. Furthermore,
given that the sector typically depends largely on external financing, a favorable economic condition will be
be so helpful, during which credit markets are loose and companies may have easier access to debt at very
low costs. Technological development is also a big factor in semiconductor’s well-being. The industry will
see a steep rise in innovation and demand when a technological transformation takes place, which calls for
newer, more advanced chip products that can accommodate the innovation. Similarly, a decline will be
triggered when new technology becomes more widely adopted and the sector loses the momentum for
advancement. At the moment, the semiconductor industry is well-supported by the drastic development in
artificial intelligence as well as other technological innovations such as autonomous vehicles. The high
interest rates and tight credit access also do not pose any grave threats, as enormous stimulus packages
have been sanctioned by the governments for semiconductor companies to expand their operation.
Nevertheless, it will become inevitable that the sector incurs a downturn, albeit for a while, when the current
transition is over.

Exhibit 6 : Global Semiconductor Sales by Geographic Location in Exhibit 7 : Shares of ASML’s Sales by Region in 2022
September 2023 (in US$ bn) (Source: ASML annual report)
(Source: Semiconductor Industry Association)

Asia China 46%

Pacific/All Americas,
Other, 11.32 11.79
Taiwan 24%

South Korea 21%

Europe, 4.82 United States 5%

China, 13.05 Japan, 3.91 EMMA 4%

（Source: Company report, Capital IQ, Bloomberg, CUIRS estimate）

https://www.cuhkirs2022.com/ 10 January 2024

CUIRS Investment Research
Advanced Semiconductor Materials Lithography | Europe

Financials
Income Statement

We modeled ASML’s net income growth at a +20.33% CAGR in 2022A-27E, with revenue and EBIT
growth at +16.1%/+20.9% 5-yr CAGR, reaching 27E € 44.6 bn revenue scale (Exhibit 8) and € 14.2 bn
net profit.

Revenue growth will be mainly driven by EUV/DUV sales and economics of scale
From 2018 to 2022, the company‘s operating income continued to grow. Total revenue in 2022 was €21.2
bn (a YoY increase of 14%), corresponding to a CAGR of 18% from 2018 to 2022. We projected the
revenue would grow at 1-yr/3-yr/5-yr CAGR of +30.2%/+18.5%/+16.1% mainly being contributed to its
existing orders of EUV/DUV and its economics of scale as the worldwide factories been built for the
capacity improvement.

Profitability: A little fluctuating but favorable profit margin

The gross profit margin in the past two years has been close to 50%, slightly ahead of its competitors. The
company's gross profit margin in 2021-2022 has increased from 43.1% in 2018, mainly due to the
optimization of the company's EUV lithography machine volume and product mix. In 2022, the decrease in
gross profit margin is mainly due to the increase in material, freight and labor expenses caused by inflation,
as well as the increase in factory costs caused by increasing production capacity and meeting customer
demand. Looking forward, the company's future gross profit margin is expected to continue to increase as
the shipment volume of EUV lithography machines.

Stable Margin and R&D proportion based on dominating pricing power

As for net profit, ASML achieved significant growth, mainly benefiting from the growth in gross profit. The
company's GAAP net profit in 2022 was €5.6 bn (-4% YoY), and the company's GAAP net profit margin in
2022 was 26.6%. We prospected the profit margin of ASML at 51%/54%55% for 2023E/2025E/2027E, and
as for the cost and expense side, we model the SG&A as % of COGS, R&D as % of COGS at stable level
at 8% and 30% for the coming years, respectively, due to ASML’s current R&D policy and dominating
pricing power for its products metrics.

Exhibit 17: Income Statement Key Metrics

Historical Fiscal Years Ending December 31
EUR in mn 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 12/31/2026 12/31/2027
Total Revenue 13,979 18,611 21,173 27,573 28,179 35,231 40,849 44,636
Gross Profit 6,797 9,809 10,700 14,118 14,879 19,131 22,589 24,550
Net Income 3,554 5,883 5,624 7,673 8,308 10,959 13,168 14,189
EBIT 4,052 6,536 6,501 9,046 9,791 12,966 15,596 16,811
D&A 475 370 497 524 544 564 584 604
EBITDA 4,527 6,907 6,998 9,570 10,335 13,530 16,180 17,415
Basic Weighted Avg 418 410 398 400 400 400 400 400
Basic EPS 8 14 14 19 21 27 33 35

Key Ratios (%)

Revenue growth - 33% 14% 30% 2% 25% 16% 9%

COGS growth - 23% 19% 28% -1% 21% 13% 10%
Gross Margin 49% 53% 51% 51% 53% 54% 55% 55%
SG&A as % of COGS 8% 8% 9% 8% 8% 8% 8% 8%
R&D as % of COGS 31% 29% 31% 29% 30% 30% 30% 30%
EBIT Margin 29% 35% 31% 33% 35% 37% 38% 38%
Net Income Margin 25% 32% 27% 28% 29% 31% 32% 32%
R&D/Sales 15.7% 13.7% 15.4% 14.4% 14.2% 13.7% 13.4% 13.5%
SG&A/Sales 3.9% 3.9% 4.5% 4.0% 3.9% 3.8% 3.8% 3.8%

（Source: CUIRS Estimate, Company Reports, Bloomberg, Capital IQ）

https://www.cuhkirs2022.com/ 10 January 2024

CUIRS Investment Research
Advanced Semiconductor Materials Lithography | Europe

Valuation
Absolute Valuation (DCF) – € 768.9 Per Share, +17.3% upside

Followed from previous base case projections on ASML (Net income growth at a +20.3% CAGR in 2022A-
27E, with revenue growth at 16.1%, reaching 2027E € 44.7 bn revenue scale and € 14.2 bn net profit), our
€ 768.9 price target is based on a DCF model reflecting long term growth of ASMI with terminal exit year of
2027. We further applied 7.6% WACC (Note: Beta calculated with comparable company unlevered beta:
1.05, The Netherlands 10-year treasury yield: 2.32%, AEX 10 yr annualized market return 7.6%, cost of
debt: 5.5%) and a 2.18% terminal growth rate that implies 19.8x exit EV/EBITDA multiple, yielding our TP
for € 768.9 target price from absolute valuation methodology.

Cash Balance:
We used the 23E total debt and total cash balance for our valuation in our net debt calculation to reflect the
real cash balance and light-debt structure as before.

Exhibit 19: DCF Valuation – TP at € 768.9

Discounted Cash Flow

Historical Fiscal Years Ending December 31
EUR in mn 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 12/31/2026 12/31/2027
Cash Flow from Operations
Revenue 13,978.5 18,611.0 21,173.4 27,573.4 28,179.4 35,231.5 40,848.8 44,635.9
YoY 18% 33% 14% 30% 2% 25% 16% 9%
EBITDA 4,526.7 6,906.8 6,997.6 9,569.9 10,335.1 13,529.7 16,179.7 17,415.3
EBITDA Margin 32% 37% 33% 35% 37% 38% 40% 39%
EBIT 4,051.5 6,536.4 6,500.7 9,045.8 9,791.0 12,965.6 15,595.6 16,811.2
EBIT Margin 29% 35% 31% 33% 35% 37% 38% 38%
Tax rate 15% 15% 16% 16% 16% 16% 16% 16%
EBIT* (1-Tax) 4,650.8 7,497.8 7,540.8 10,493.1 11,357.5 15,040.0 18,090.9 19,501.0
(plus) D&A 89.0 956.0 38.7 44.4 51.4 59.1 68.1 73.4
(less) Changes in Working
(741.4) 910.6 (1,952.7) (938.7) 99.8 (1,234.5) (945.2) (800.1)
Capital
(less) Capex (95.4) (72.2) (74.5) (85.4) (104.8) (116.1) (134.6) (156.0)
Unlevered Free Cash Flow 3,903.0 9,292.2 5,552.3 9,513.4 11,403.9 13,748.5 17,079.2 18,618.2

Enterprise Value WACC Calculation

Net Present Value 60,883.8 Beta 1.05
Risk free rate 2.3%
Terminal Value Market premium 5.1%
Perpetual growth rate 2.18% Cost of equity 7.6%
Terminal Value 320,667.1 Cost of debt 5.5%
Implied EV/EBITDA 19.8x Debt/(Debt+equity) 0.02%
Present value of terminal value 222,097.7 Effective tax rate -16%
NPV of present value 60,883.8 WACC 7.6%
Enterprise Value 282,981.5
Total debt 209.06
Cash 9,191.14 Equity Value 291,963.5
Net Debt/ Net Cash (8,982.1) Number of share outstanding 380
Minority interest 0.0 Indicated per Share Price (EUR) 768.9

（Source: CUIRS Estimate, Company Reports, Bloomberg, Capital IQ）

https://www.cuhkirs2022.com/ 10 January 2024

CUIRS Investment Research
Advanced Semiconductor Materials Lithography | Europe

Industry Analysis
The growing demand in semiconductor industry market thanks to advanced chips’ needs
In 2022, the semiconductor industry increased the output to over 1.11 tn chips, which fed a $618 bn market.
The market is predicted to reach over $700 bn in 2025. This positive outlook on the current market size and
market opportunity derives from new trends in demands. The high demand for ASML’s products (especially
EUV and DUV) derives from major semiconductor and foundry customers’ needs to manufacture advanced
tools for memory and logic applications.

These applications are used to produce downstream products, namely smartphone, personal computing or
data services and storage, which are predicted to grow at a CAGR of 5.5%/16.5% in 2025/2030.

ASML is the market leader in EUV、AMAT、and LRCX

ASML is the leader in research and development in this area with an overall market share of more than 80%.
ASML holds a high market share in less-advanced DUV lithography systems, which progressively outpaces
two competitors namely Nikon Corporation and Canon Inc. As these two competitors lack the necessary
revenue in the lithography system to invest in R&D as ASML does.

Moreover, ASML is the pioneer and a leader in EUV and other extended technological advancements (EUV
High-NA). Realizing a huge profit from EUV, some companies including Applied Materials (AMAT) and Lam
Research (LRCX) also jump into this field. However, they are well behind ASML in terms of R&D and
customer base for EUV.

Exposure to economic and geopolitical issues might hinder growth rate of ASML, and semiconductor
industry can also be cyclical
ASML’s main customers are in Asia, while the US and Europe together account for less than 10% of revenue.
However, geopolitical instabilities in the Asian region affects the company’s revenue. For the China market,
ASML shares were pressured in 2022 because of the reduced demand for personal electronics, prohibitions
on shipping high-technology products to China. Furthermore, in 2023, the Netherlands government published
its plan to restrict exports to China, aiming at the export of EUV lithography machines from ASML. Sales from
South Korea market occupied for one third of total sales are threatened due to the worsening relationship and
war outbreak between South and North Korea. Meanwhile, the largest market in Taiwan is under risk
because of China’s more aggressive actions. Therefore, any geopolitical issues can reduce the
manufacturing capabilities of ASML’s customers then pull down the company's revenue.

From 1977 to 2021, turnover increased by 11% per year on average based on the constant drive to produce
more efficient semiconductors. However, the high demand for innovation also leads to short production life
cycles. It is reported that the sales will decline in every third year on average. First, this industry closely
relates to economic factors. Every economy-related series such as exchange rates, inflation, growth or global
economic impacts can easily affect the revenue. For example, a weakening global economy, tightening credit
markets, and rising interest rate can lead to difficulties to raise capital and finance purchases of
manufacturing companies, then resulting in sales decline. Second, clients have incentives to alter demand for
predecessor products before the launch of new chip generations, meanwhile, semiconductor products take a
long time to be produced. This means that the supply is very inelastic whereas the demand is super elastic
with market adjustments.
.
Exhibit 15: Semiconductor market share worldwide in 2022, by Exhibit 16:Semiconductor market revenue worldwide from 2020 to
function 2030, by application (in bn USD)

Logic Installed Base Management Memory Smartphone Personal computing

Consumer electronics Automotive
Industrial electronics Wired and wireless infrastructure
Servers, data centers, and storage

2030

26%
32%
2025

2022
27%

2020

0 200 400 600 800 1,000 1,200

（Source: Company report, Capital IQ, Bloomberg, Statista, CUIRS estimate）

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CUIRS Investment Research

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