ASE Technology: Still The Global OSAT Powerhouse (Rating Downgrade)

In our previous analysis, we focused on ASE Technology Holding Co., Ltd.’s (NYSE:ASX) OSAT business, particularly its advanced packaging segment due to robust growth in the advanced packaging market serving key customers like smartphone chipmakers and Apple.

In this analysis, we examine ASE’s ability to retain its lead in the OSAT market despite a 12% revenue decline in 2023, with OSAT making up 55% of its total revenue. We investigate the reasons behind the slowed revenue growth, identifying the most impacted segments between ATM and EMS. Our analysis includes the company’s revenue breakdown by these segments and its OSAT market share to determine whether the contraction is due to market decline or market share losses. We also explore how the company’s outlook could improve as the OSAT market recovers, with advanced packaging serving as a major growth driver. Additionally, we compare the historical growth of the top 10 OSAT companies to the market growth, focusing on potential country-specific advantages, particularly in Taiwan with TSMC. Finally, we assess ASE’s advanced packaging capabilities against its competitors by analyzing technologies such as Flip Chip and WLP. We rank ASE’s capabilities and develop a competitive factor score to forecast ASE’s potential for excess growth compared to the market.

Market Share Decline But Still Market Leader

Firstly, we examine why the company’s revenue growth slows down in 2023 and identify which segment (ATM or EMS) is most impacted.

We analyze the company’s revenue breakdown by these segments and assess its OSAT market share to determine whether the contraction is due to a market decline or market share losses.

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Source: Company Data, Khaveen Investments

Based on the table above, the company’s revenue declined across all segments in 2023. Its ATM segment includes Packaging and Testing revenues, which declined by 15.5% and 10.8% respectively. In addition, EMS activities also declined 11% in 2023, but slightly better than its total company revenue growth of -13%. Based on its previous earnings briefing, management highlighted the decline “principally as a result of the electronics industry downturn” in ATM and EMS segments. In terms of its end market breakdown, its Communications segment represented its largest segment (51% of revenue) and declined by 17.7% in 2023. We believe this could be due to the weakness in the smartphone market where two of the leading players in the smartphone AP market, including Qualcomm and MediaTek, which are the company’s customers, experienced revenue declines of -21.7% (Handset segment) and -20.8% in 2023. Furthermore, the company’s Consumer electronics/industrial/automotive/other segment (31% of revenue) also experienced a significant decline of 16.1% which, we believe, is primarily due to the decline in the consumer end market which declined by 38% in 2023 according to Amkor.

We examined the company’s market share below to determine whether its decline was affected by the market or by a company-specific factor. We updated our share breakdown of the top 34 OSAT companies by their OSAT revenue from Yole Development in the past 10 years.

Based on the chart above, ASE’s share declined to 20.2% from 17.8% in 2023, remaining as the market leader. This is as ASE’s OSAT growth in 2023 was -17%, underperforming the overall growth of the 34 companies in total of -6.8%, which is fairly in line with the decline of the semiconductor market in 2023 by 8.2% as the memory market declined by 28.9% as pricing collapse due to demand-supply imbalance and the analog market declining by 8.7% due to end market weaknesses as we previously covered. One factor for the underperformance of ASE, we believe, is due to its larger exposure to the Communications end market, which the company experienced the largest decline in 2023 by 17.7% (50% of revenue compared to 31% of the overall OSAT market).

Over the past 10 years, ASE’s market share had been eroded slightly with a surge in 2018 following the acquisition of SPIL which we previously highlighted contributing $2.9 bln additional revenue but still maintained its position as the leading OSAT company, indicating increased competition. Additionally, Amkor trails behind consistently at second place behind ASE and also saw its share moderate slightly over the period. TSMC (TSM) performed the best with the strongest share gains over the period as TSMC rapidly expanded its advanced packaging capacity with the highest capex spend according to Yole Development for advanced packaging as we previously highlighted. Additionally, other companies that also gained market share over the period include Samsung (OTCPK:SSNLF) and China-based OSATs JCET, Tianshui Huatian, and Tongfu Microelectronics. The share of the top 10 companies overall had increased in the past 10 years, whereas the share of the remaining 24 companies in total moderated, indicating the market consolidating among the largest 10 OSAT companies.

Overall, we believe ASE was mainly affected by its larger exposure to the Communications end market, where the company experienced the largest decline of 17.7% as key smartphone AP players such as Qualcomm (QCOM) and MediaTek, which are its customers contracted by around 20% in 2023. However, we believe the company’s outlook could improve in 2024 as the semicon market is poised for a rebound with full-year projected growth of 16% by SIA. This is amid the recovery in the memory market as chip prices begin to stabilize, following the capex cut by top memory chipmakers last year. Additionally, the improvements in end markets such as PC and smartphones would help recover the semicon market. Furthermore, the semicon market could be benefited from the potential recovery in industrial and automotive in the 2^nd half of the year. Additionally, we expect ASE’s outlook to improve as we expect Qualcomm to recover in 2024 in our previous analysis as the smartphone market recovers. Moreover, in its latest Q2 2024 earnings briefing, management noted a positive outlook supported by strength in automotive segment that “will represent roughly 11% of the overall sales” and the “momentum continue to grow”, which we believe bodes well with our outlook.

Geographical Advantages

ASE is based in Taiwan. In our previous analysis, we had highlighted the partnership between ASE and TSMC. Now, we examine if OSAT competitors have country-specific advantages.

We compile the historical average growth (10-year CAGR) of the top 34 OSAT companies based on the country in which the company is headquartered and compare it with the overall average to determine if any country-specific advantages are indicated.

Click to enlarge

Source: Company Data, Khaveen Investments

Based on the table above, our data shows Taiwan-based companies accounting for the majority of the total OSAT revenues with a 43.2% share with ASE contributing a significant share of 18%, representing 41% of the total Taiwan share. However, the average growth of Taiwan companies is 4.9%, lower than the overall average but higher than Malaysia and Japan. On the other hand, Mainland China is third with a 19% share of the total OSAT revenues but has the fastest average growth of 17%, this is due to the rise of leading Chinese OSAT companies such as JCET (19% CAGR), Tongfu (29% CAGR), Tianshui (16% CAGR), the top 3 largest OSATs in the country. We believe the high growth for Chinese OSATs is due to the rapid growth of the Chinese semiconductor market, with an average growth of 14% in the past 10 years, higher than the overall average of 6.2%. This is because there have been various government incentives such as China’s National IC Funding Phase 2 ($32bln) and Phase 3 ($40 bln), China’s 14^th Five Year Plan (>28nm manufacturing subsidies), and many others totaling $142 bln as the government set a goal of 70% chip production self-sufficiency by 2025. Additionally, we believe the US-China trade tensions further push the Chinese semiconductor industry towards self-sufficiency following the imposition of sanctions on the sales of various semiconductor devices such as 5G chips and server GPUs as covered in our previous analyses. Other countries that outperformed include Korea due to the rapid expansion of Samsung (14.2% CAGR) and Singapore due to UTAC (10.5% CAGR) due to company-specific factors.

However, ASE slightly outperformed the average for Taiwan-based OSAT with a higher growth of 5.6% compared to the average of 4.9%. We believe this may be due to ASE’s partnership with TSMC, the world’s largest foundry with a market share of around 60%, as its preferred non-exclusive packaging partner, which we covered previously. For example, ASE is part of the 3D Fabric Alliance of TSMC besides Amkor and STATS ChipPAC. According to Trendforce, TSMC partnered with ASE to increase the capacity of CoWoS packaging, which is supply constrained due to the high demand from Nvidia.

Overall, we believe our analysis does not indicate a specific country advantage for Taiwanese OSATs that has underperformed the overall total revenue growth of the top 34 OSATs. Instead, we see that Chinese OSATs have an advantage due to the rise of the Chinese semicon market which, we believe, is due to factors such as strong government incentives, domestic push for self-reliance amid geopolitical tensions, and demand consumption by Chinese chipmakers such as HiSilicon, YMTC, UNISOC, Will Semiconductor, and GigaDevice Semiconductor. Furthermore, based on our research, we find that ASE caters more to the US semicon market as 60% of its revenues are derived from US customers. We believe one of the factors for the advantages of Chinese OSATs compared to Taiwan-based OSATs could be due to cost differences as China is ranked 1^st, indicating it is more competitive in terms of KPMG’s primary cost index compared to Taiwan at 6^th place. Going forward, we expect ASE not to derive advantages from Chinese OSATs due to its larger exposure to US customers, while Chinese customers accounted for around 10% of revenues. However, we expect ASE to continue outperforming other Taiwanese OSATs due to its partnership with TSMC as its preferred packaging partner. Additionally, 65% of TSMC FY2023 revenue came from the US, whereby TSMC’s top 3 customers are all US-based (Apple 25%, Nvidia 11%, AMD 7%) and had together contributed to 42% of TSMC FY2023 revenue. Thus, we expect ASE to benefit from TSMC’s large geographical exposure to the US, due to their long-standing partnership together and as 62% of ASE FY2023 revenues are from the US.

Strong OSAT Competitiveness

Finally, we examine how the company’s advanced packaging capabilities compare to those of its competitors and whether it will benefit from advanced packaging market growth.

We compile and analyze the traditional packaging and advanced packaging capabilities of ASE and its top 10 competitors to determine their rankings in packaging abilities based on Core FO, HD FO, UHD FO (Multi-Die, IC Substrate), Fan In, FC+WB (RFs, Multi-die, IC Substrate), FC (RFs, Multi-die, IC Substrate), FCBGA (Multi-die, IC Substrate), FCCSP (Multi-die, IC Substrate), as well as advanced packaging capabilities based on Yole Development 2.5D/3D packages including CIS, 3D NAND, 3D SoC, Embedded Si Bridge, Active/Passive Si Interposer, 3DS, and HBM. Furthermore, we compile the I/O pitch of the most advanced packaging of the companies. We then ranked the company based on the number of packaging capabilities and IO pitch and calculated a competitive factor score to forecast the company’s growth potential relative to market growth.

* We used an average of all other companies’ IO Pitch for Powertech, Tongfu Microelectronics, Tianshui Huatian, and UTAC

Based on the chart above, we calculated 18 total OSAT packaging capabilities for ASE, which is the third best behind JCET, and TSMC which has the most OSAT packaging capabilities. Additionally, in terms of advanced packaging capabilities, ASE has 6, tied with Amkor, Intel, Samsung, and TSMC while JCET has the most advanced packaging capabilities at 7 including CIS, 3D SoC, Embedded Si Bridge, Active/Passive Si Interposer, 3DS, HBM. However, ASE is ranked 8^th in terms of I/O pitch, IO pitch refers to the distance between adjacent input/output (IO) pads on a chip and has a role in determining the overall performance and efficiency of the chip.

Overall, we derived a competitive factor score of 1.13x for ASE, due to its high rankings in terms of the number of total advanced packaging capabilities. However, we derived a higher score for Intel, Samsung, TSMC, and JCET due to their high number of capabilities and lower IO pitch.

Overall, we expect ASE to outperform the OSAT market CAGR of 6.9% by Yole Development with a competitive factor score of 1.13x for a total revenue growth of 7.8%. We believe the top OSAT companies generally have a stronger advantage over competitors based on our analyses where the top 6 OSATs have higher packaging capabilities such as JCET, Samsung, TSMC, and Intel. Among the top competitors, we see these companies generally having a similar number of packaging capabilities, which indicates it is harder to obtain differentiation in the OSAT market. Furthermore, based on our analysis, we see Samsung and TSMC having the highest factor scores, due to their high number of packaging capabilities and IO pitch performance. Moreover, in its latest earnings briefing, management highlighted that its utilization for packaging and testing ratio “will go above 65% for both in quarter 3”, an increase from the current 60%, which we believe highlights its advanced packaging competitive strength and bodes well with its outlook.

Risk: DAO Market Segment Weaknesses

During Q1, ASE experienced a slower-than-expected performance as ASE’s revenue growth grew 1.5% QoQ, which could be attributed to a prolonged inventory correction within ASE’s ATM segment. During Q1, ASE’s Management highlighted that “For our ATM business… Certain devices initiated a short but unsustained inventory refresh, easing off initially more optimistic outlooks” and explained that “the market appears to be playing out slower than previous customers forecasts”. Furthermore, during Q4, ASE’s Management also explained that “In terms of the automotive, some of the IoT and the analog and mixed-signal customer, I think they’re having a lot of inventory concerns”.

Verdict

We believe ASE was mainly affected by its larger exposure to the Communications end market, which saw a decline of 17.7% as key smartphone AP players like Qualcomm and MediaTek contracted by around 20% in 2023. However, we expect ASE’s outlook to improve in 2024 as the semiconductor market rebounds with a projected growth of 16% by SIA, driven by stabilizing chip prices, reduced capex by memory chipmakers, and recovering end markets such as PCs and smartphones. Additionally, our analysis shows that Taiwanese OSATs have underperformed compared to the top 34 OSATs, with Chinese OSATs having an advantage due to strong government incentives and domestic demand. However, we expect ASE to continue performing due to its partnership with TSMC, which has a large exposure to the US market where ASE derives 60% of revenues. Overall, we expect ASE to exceed the OSAT market CAGR of 6.9%, achieving a total revenue growth of 7.8% with a competitive factor score of 1.13x. Top OSAT companies like JCET, Samsung, TSMC, and Intel have a stronger advantage due to higher packaging capabilities.

Based on a discount rate of 4.5% (company’s WACC), we derive a downside of 9.29% despite a higher price target of $10.56 ($9.05 previously), mainly due to a higher EV/EBITDA for the terminal value based on the company’s 5-year EV/EBITDA of 5.46x (4.23x previously) as well as a lower WACC (5.4% previously), while we maintained a 5-year forward revenue growth rate in line with our previous analysis (6.1%), as the company’s stock price had risen by 36% since our previous analysis. Thus, we downgrade the company as a Hold from a Buy.