- BE Semiconductor manufactures niche equipment used by companies that produce semiconductors
- It has large market shares in the areas in which it operates
Jamie Ross, manager of Henderson EuroTrust (HNE), explains why he invests in BE Semiconductor Industries (NL:BESI).
“When we look for potential investments, we always think about the quality of the company. For us, this means identifying companies that are able to generate a consistently high return on invested capital (ROIC). Often, this results in us investing in companies with high barriers to entry, strong gross and operating margins, and – ideally – exposure to structural growth drivers.
“There is huge variation in the quality of the businesses that we could invest in across the semiconductor industry. [The sector] is exposed to attractive structural growth drivers such as the growing ubiquity of semiconductor usage, and powerful technological themes such as machine learning, artificial intelligence and the Internet of Things. However, not all companies have a [strong] enough market position to translate this growth potential into a high-margin and high-return business.
“BE Semiconductor, however, is one of the few companies that manages to do this because it owns some unique technologies in which it has very high market shares. The company does not produce semiconductor chips, instead it manufactures niche equipment used by other companies that are in the business of semiconductor production. BE Semiconductor specialises in the unglamorous but vitally important area of semiconductor packaging. It has a market share of greater than 40 per cent in 'die attach systems' and a market share of about 90 per cent in a hugely exciting nascent technology called hybrid bonding.
“You can think of BE as being a small but crucial cog in a globally important manufacturing industry. By owning unique technologies and having leading market shares, it is able to extract pricing power and generate high gross margins of about 60 per cent, resulting in consistently high return on invested capital (ROIC). This consistently high level of returns generates substantial value for its shareholders over the cycle.
“Hybrid bonding, in particular, is a truly exciting technology. More advanced assembly processes are needed to continue to add features and functionality in a smaller-form factor in the semiconductor production process, and BE facilitates this. The commercial adoption of hybrid bonding, which is currently in its infancy, should drive the next stage of structural growth for this company. The margins and returns that it could generate from this technology should be equally – if not more – attractive than the economics of its die-attach business.
“As a point of caution, our thesis is long-term. The semiconductor industry is cyclical and die-attach in particular has experienced big swings in demand historically. The industry is currently experiencing tough demand conditions and the short-term conditions for BE are far harder to model than the long-term potential.”
