Semiconductor silicon industry

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1 Asia Pacific/Japan Equity Research Specialty Chemicals Research Analysts Masami Sawato masami.sawato@credit-suisse.com Achal Sultania achal.sultania@credit-suisse.com Semiconductor silicon industry SECTOR REVIEW 300mm wafer prices likely to rise 10% on tightening supply demand Figure 1: 300mm silicon wafer supply demand forecast (Million / month) 6,000 5,000 4,000 3,000 2,000 1,000 0 Demand (LHS) Supply (LHS) Demand / supply balance (RHS) E 110% 100% 90% 80% 70% 60% 50% Source: Credit Suisse estimates 300mm wafer supply demand outlook: We believe 300mm wafer demand increased to around 5.15mn units/month in 2016 from just under 5.0mn in DRAMeXchange projects that in 2017 wafer demand will increase by 2.5% for DRAM and 6% for NAND flash. Simple addition would suggest that 300mm wafer demand will rise by 4.5%. Our 300mm wafer demand forecast for 2017 is 5.35mn units/month (+3.9% YoY). Turning to manufacturing capacity at individual companies, we estimate 300mm global wafer supply is 5.15mm units/month. Based on this, we foresee an excess of 300mm wafer demand in 2017, with the ratio of demand to supply rising to 104% from 100% in mm wafer price outlook: We believe the average unit price for 300mm wafers will rise by 10% in This is currently based on recent comments from Taiwan supply chain, but we equally note that there is potential for further rise if demand continues to grow around 5% for 300mm and all wafer makers show rational behavior around pricing. Wafermakers may be in position to increase production: Imports from the US of polysilicon (a raw material for silicon wafers) rose sharply in November November import volume was the highest ever, at more than double the previous high. We expect a significant increase in production as silicon wafer demand rises. In their official statements, global polysilicon manufacturers note they are operating at full capacity, and given the sharp increase in polysilicon imports, we think wafer manufacturers may be in a position to increase production. Siltronic s current shell capacity (which we estimate to be 220,000 units/month) also leads us to think wafer manufacturers may be able to increase production. Sensitivity analysis: Assuming acceptance of a 20% increase in prices in FY17, we estimate theoretical share prices are as follows: SUMCO 2,410 (potential return +44%), Shin-Etsu Chemical 12,000 (+25%), and Siltronic 78.1 (+49%). DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Wafer supply demand and price outlook Supply demand outlook We believe 300mm wafer demand increased to around 5.15mn units in 2016 from just under 5.0mn in DRAMeXchange estimates that in 2016, wafer demand rose YoY by 1.3% for DRAM (Figure 2) and 9% for NAND (Figure 3). DRAMeXchange projects that in 2017 wafer demand will increase by 2.5% for DRAM and 6% for NAND flash. Simple addition would suggest that 300mm wafer demand will rise by 4.5%. Our 300mm wafer demand forecast for 2017 is 5.35mn units/month (+3.9% YoY). Our Asia semiconductor team foresees little growth for DRAM industry-wide. Although new NAND lines are being brought into service, the shift to 3D NAND from 2D NAND means that 2D-related demand is diminishing. Thus, the team expects total volume to increase in only limited fashion. In our view, a 4 5% increase in total demand is still a level that individual wafer companies can cope with by improving productivity and increasing production. Consequently, we do not expect any new additions to capacity. Turning to manufacturing capacity at individual companies, SUMCO has indicated (albeit not in an official statement) that its estimate of 300mm wafer demand is 5.10mn units/month (our estimate is 5.15mn). Thus, the general consensus is that supply demand is tightening. Based on this, we foresee an excess of 300mm wafer demand in 2017, with the ratio of demand to supply rising to 104% from 100% in 2016 (Figure 1). Figure 2: Demand for 300mm DRAM wafers Q1 Q2 Q3 Q4 Total (YoY) ,261 3,336 3,183 3,198 12, ,351 3,270 3,303 3,225 13, ,144 3,174 3,165 3,201 12, F 3,213 3,192 3,207 3,234 12, F 3,243 3,273 3,309 3,339 13, QoQ 3.0% 2.3% -4.6% 0.5% -1.4% 2014 QoQ 4.8% -2.4% 1.0% -2.4% 1.3% 2015 QoQ -2.5% 1.0% -0.3% 1.1% -3.5% 2016F QoQ 0.4% -0.7% 0.5% 0.8% 1.3% 2017F QoQ 0.3% 0.9% 1.1% 0.9% 2.5% Source: DRAMexchange Figure 3: Demand for 300mm NAND flash wafers 1Q 2Q 3Q 4Q Total ,091 2,196 2,346 2,409 9, ,502 2,610 2,796 3,036 10, ,018 3,108 2,853 2,976 11, ,045 3,039 3,198 3,141 12, ,162 3,375 3,390 3,495 13, ,516 3,606 3,819 3,960 14, E 3,957 4,020 4,122 4,206 16, F 4,191 4,236 4,329 4,554 17, QoQ 1% 5% 8% 4% 22% 2011 QoQ 2% 6% 7% 11% 22% 2012 QoQ -1% 3% -8% 4% 9% 2013 QoQ 2% 0% 5% -2% 4% 2014 QoQ 1% 7% 0% 3% 8% 2015 QoQ 1% 3% 6% 4% 11% 2016E QoQ 0% 2% 3% 2% 9% 2017F QoQ 0% 1% 2% 5% 6% Source: DRAMexchange Semiconductor silicon industry 2

3 Figure 4: 300mm wafers account for around 60% of wafer shipments < 100 mm, 1% 125 mm, 3% 150 mm, 12% Figure 5: Smartphones account for 21% of wafer demand, PCs for 17% Solid-State Drives 6% Mobile Infrastructure 4% Others 14% Smartphones 21% 300 mm, 59% 200 mm, 25% Media Tablets & Tablet PCs 5% Switches, Hubs, Modems, etc. 6% Automotive 8% Appliances, Video Players, etc. 8% Industrial 11% Desktop, Notebook & Server PC 17% * As of 2015 * As of 2015 Source: Gartner, Credit Suisse Source: Company data, Credit Suisse Figure 6: Japan's silicon wafer sales amount and shipment volume (000sq. inch) Sales volume (000 sq. inch, LHS) ( mn) Sales value ( mn, RHS).0 11/00 11/02 11/04 11/06 11/08 11/10 11/12 11/14 11/16 Source: METI Figure 7: Global semiconductor shipments and Japan silicon wafer shipments (mn units) (mn sq.m) 250,000 1,400 1, ,000 1, , , ,000 World semiconductor shipment (LHS) Japan silicon wafer shipment (RHS) Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q Source: WSTS, METI Price outlook The price of 300mm wafers has consistently trended downward since 2006 (Figure 9). The domestic price per unit of surface area for all diameters combined has also fallen steadily since 2008 (Figure 8). Even in 2005, the year in which a shortage of the raw material polysilicon triggered a silicon panic, prices did not rise substantially. Now, however, wafer manufacturers are not adding capacity even amid a steady increase in demand, leading us to believe some users will opt to ensure wafer supply by accepting higher price. We project that the average unit price of 300mm wafers will rise by 10% in 2017, mainly reflecting a recovery in prices for epitaxial wafers, which fell sharply at the end of Statements by wafer manufacturers at their results briefings also suggest to us that prices will rise by around 10%, as these companies assume that it is prices, not capacity, that will rise as a result of negotiations to restore prices (the conventional wisdom is that it takes price increases of 30 40% to justify investing in new capacity). We have raised our earnings forecasts for Siltronic (WAFGn.DE) as we have increased our 300mm wafer price assumption from 5% to 10% (See our 9 January report, Siltronic: Wafer pricing and FX tailwinds ahead). In addition, based on comments accompanying earnings issued by TSMC (2330.TW), a semiconductor manufacturer (i.e., a consumer of silicon wafers), we expect a price increase of 5 8% from that company (see our 13 Semiconductor silicon industry 3

4 January report, SPE sector: TSMC 4Q results, implications for Japanese SPE stocks). According to TSMC s comment, wafer price increases will diminish gross margins by 0.2%. Since TSMC s wafer prices vary, we think it will be raising prices in the range of 5 8%. Figure 10 shows the breakdown of wafer demand by wafermaker. One can see from this that the 10 largest wafermakers account for 55% of demand. Of particular note, in 300mm wafers, the five largest companies account for 63% of demand (Figure 11). Hence, assuming that the five largest companies accept an average price increase of 5-10% and other manufacturers accept a 15-20% price increase, we estimate an overall average price increase of 11%. Based on this, we think it is appropriate to assume a price increase of around 10%. Figure 8: Silicon wafer price trend ( /sq. inch) Figure 9: 300mm silicon wafer price trend ( /sheet) Epitaxial wafers 300mm 45,000 Mirror polish wafer 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Source: METI - 06/12 07/12 08/12 09/12 10/12 11/10 12/12 13/12 14/12 15/12 16/12 Source: Rare Metal News Figure 10: Breakdown of wafer demand by wafermaker Others 43% IM Flash 1% Inotera 1% GF Intel UMC 3% 3% 3% Samsung 17% TSMC 10% Toshiba 7% SK Hynix 7% Micron 5% Figure 11: Breakdown of 300mm wafer demand by wafermaker IM Flash 2% Inotera 2% GF 3% Intel 5% Others 22% UMC 2% Micron 8% SK Hynix 10% Samsung 24% Toshiba 10% TSMC 11% * As of 2015 Source: Gartner, Credit Suisse * As of 2015 Source: Gartner, Credit Suisse Semiconductor silicon industry 4

5 Manufacturers may be in a position to increase production Shell capacity, potential for increased production Achal Sultania, our analyst covering Siltronic, estimates that Siltronic s shell capacity is 220,000 units/month (shell capacity is the potential for increasing manufacturing capacity by installing new machinery and equipment, given the amount of space there is in the company s clean rooms). This is equivalent to 4.1% of our demand forecast for 2017 (5.35mn units/month). We believe it takes 6 9 months to purchase, install, and bring into service new machinery and equipment. Figure 12: Breakdown of Siltronic wafer capacity by diameter Wafer production sites (operational since) Small Diameter (SD) * Capacity (in wafers per month) 200mm 300mm 300mm (incl. shell capacity) Freiberg, Germany (1995) K 300K Burghausen, Germany (1953) 1000K - 170K 200K SSW Singapore (2008) K 500K SSP Singapore (1999) - 380K - - Portland, US (1980) - 230K - - Total Siltronic capacity 1000K 610K 780K 1000K 2016E Global demand (in '000 wpm) 4,911 4,651 5,116 5,116 Siltronic capacity as % of global demand 20% 13% 15% 20% * Small Diameter (SD) refers to wafer with diameter of 150mm or less; also SD capacity is in 150mm equivalent Source: Company data Potential for increased production in Japan as well Imports of polysilicon (a raw material for silicon wafers) rose sharply in November Total import volume in November was 4,978t, up 3.3x YoY and 2.3x MoM (Figure 13). The main factor was a sharp rise in imports from the US. Import volume from the US in November totaled 4,533t, up 5.0x YoY and 2.8x MoM. The average price rose 13.7% MoM in November, from 4,124/kg in October to 4,690/kg (Figure 14). November s import volume was the highest ever, at more than double the previous high. We expect a significant increase in production as silicon wafer demand rises. Taking into account the impact of yields, we estimate that it takes around 400g of polysilicon to produce one 300mm wafer. At 400g/wafer, the volume of polysilicon imported from the US in November (4,533t) works out to 11.33mn 300mm wafers. This is the equivalent of 2.2 months worth of demand in 2016, when global 300mm wafer demand averaged 5.15mn units/month. In their official statements, global polysilicon manufacturers note that they are operating at full capacity, and given the sharp increase in polysilicon imports, we believe wafer manufacturers may be in a position to increase their production. Siltronic s current shell capacity (which we estimate to be 220,000 units/month) also leads us to think that wafer manufacturers may be in a position to increase their production. In Japan, Shin-Etsu, SUMCO, and GlobalWafers manufacture 300mm wafers. SUMCO sources polysilicon primarily from Mitsubishi Materials and Osaka Titanium Technologies, and because of its long-term contracts the company is currently dealing with excess inventories. Consequently, it is unlikely to increase importing polysilicon from the US. In contrast, Shin-Etsu purchases polysilicon from Hemlock Semiconductor Group, so we think it could increase imports from the US. Semiconductor silicon industry 5

6 Figure 13: Japan's polysilicon total import volume and average unit price (t) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, /1 03/1 04/1 05/1 06/1 07/1 08/1 09/1 10/1 11/1 12/1 13/1 14/1 15/1 16/1 17/1 Source: MOF Volume (LHS) Unit price (RHS) 4,978 t ( /kg) 12,000 10,000 8,000 6,000 4,000 2,000 Figure 14: Japan's polysilicon import volume and average unit price from the US (t) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, /1 03/1 04/1 05/1 06/1 07/1 08/1 09/1 10/1 11/1 12/1 13/1 14/1 15/1 16/1 17/1 Source: MOF Volume (LHS) Unit price (RHS) 4,533 t ( /kg) 12,000 10,000 8,000 6,000 4,000 2,000 Figure 15: Global production capacity for polysilicon <Japan > (t) E 2017E Tokuyama 5,000 6,200 6,200 8,200 8,200 Mitsubishi Material 2,800 2,800 2,800 2,800 2,800 Osaka Titanium Technologies 3,000 3,000 3,000 3,000 3,000 <Malaysia> <Korea> Tokuyama 5,000 9,000 13,800 13,800 OCI Company 42,000 50,000 50,000 50,000 50,000 Lotte Chemical (Samsung Fine Chemicals) / SunEdison (MEMC) <China> <US> 10,000 13,500 13,500 13,500 GCL Poly 65,000 65,000 75,000 90,000 90,000 Hemlock 40,000 40,000 40,000 42,000 42,000 REC Silicon 19,000 19,000 19, Wacker 20,000 20,000 SunEdison (MEMC) 9,000 9,000 9, Mitsubishi Polycrystalline Silicon America 1,500 1,500 1,500 1,500 1,500 <Germany> Wacker 49,000 52,000 60,000 60,000 60,000 Total 236, , , , ,800 Source: Rare Metal News Semiconductor silicon industry 6

7 Sensitivity of earnings, share price to increases in 300mm wafer price We have analyzed the sensitivity of EBITDA and EPS to 300mm wafer price increases and have calculated theoretical share prices accordingly (Figures 16 21). We assumed prices rise by 10%, 20%, and 30%. Assuming acceptance of a 20% increase in prices in FY17, our theoretical share prices are as follows: SUMCO 2,410 (potential return +44%), Shin-Etsu Chemical 12,000 (+25%), and Siltronic 78.1 (+49%). Assuming acceptance of a 30% increase in prices in FY17, our theoretical share prices are as follows: SUMCO 3,170 (+90%), Shin-Etsu 13,370 (+39%), and Siltronic 98.2 (+87%). At SUMCO, where 300mm wafers account for a large percentage of overall profits, price increases contribute substantially to earnings and our theoretical share price. However, even for Shin-Etsu, which has a wide variety of businesses, such as PVC resin, the difference between the theoretical share price based on acceptance of a 10% price rise and a 30% one is substantial, at 30%. We think there could be even more upside potential for share prices depending on the direction of wafer price increases. Figure 16: Sensitivity of EPS, share price to 300mm wafer price increases EPS ( ) SUMCO Shin-Etsu Chemical Siltronic Theoretical share price ( ) EPS ( ) Theoretical share price ( ) EPS ( ) Theoretical share price ( ) 10% price hike , , % price hike , , % price hike , , Source: Credit Suisse Figure 17: SUMCO (3436) Sensitivity of 300mm wafer price increases 300mm wafer price rise 10% 20% 30% EBITDA ( bn) EPS ( ) EV/EBITDA (X) Theoretical share price ( ) 1,600 2,410 3,170 Current share price ( ) 1,669 1,669 1,669 Potential return -4% 44% 90% 0 Figure 18: SUMCO (3436) Theoretical share price for 300mm wafer price increases ( ) 3,500 3,000 2,500 2,000 1,500 1, /1 2015/7 2016/1 2016/7 2017/1 2017/7 2018/1 30% 20% 10% Source: Credit Suisse estimates Source: Credit Suisse, Thomson Reuters Datastream Semiconductor silicon industry 7

8 Figure 19: Shin-Etsu Chemical (4063) Sensitivity of 300mm wafer price increases 300mm wafer price rise 10% 20% 30% EBITDA ( bn) EPS ( ) EV/EBITDA (X) Theoretical share price ( ) 10,300 12,000 13,370 Current share price ( ) 9,634 9,634 9,634 Potential return 7% 25% 39% 4,000 Figure 20: Shin-Etsu Chemical (4063) Theoretical share price for 300mm wafer price increases ( ) 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5, /1 2015/7 2016/1 2016/7 2017/1 2017/7 2018/1 30% 20% 10% Source: Credit Suisse Source: Credit Suisse, Thomson Reuters Datastream Figure 21: Siltronic (WAFGn.DE) Sensitivity of 300mm wafer price increases, if shares were to trade at similar EV/EBITDA as Japanese peers 300mm wafer price rise 10% 20% 30% EBITDA ( m) EPS ( ) EV/EBITDA (X) Theoretical share price ( ) Current share price ( ) Potential return 1% 49% 87% 0 Figure 22: Siltronic (WAFGn.DE) Theoretical share price for 300mm wafer price increases ( ) /7 2016/1 2016/7 2017/1 2017/7 2018/1 30% 20% 10% Source: Credit Suisse Source: Credit Suisse, Thomson Reuters Datastream Semiconductor silicon industry 8

9 Details around Siltronic's sensitivity to wafer price hikes Figure 23: We estimate 55 60% of Siltronic's sales come from 300mm wafer, where prices are going up Small Diameter (<150mm) wafer 17% Figure 24: We currently estimate blended wafer prices to rise by around 5% (driven by around 10% price hike for 300mm and flattish pricing in 200mm or less wafers) 15% 10% 5% 0% -5% E 2017E -10% 200mm wafer 27% 300mm wafer 56% -15% -20% -25% Semiconductor unit pricing, % change yoy Silicon wafer pricing, % change yoy Source: Credit Suisse estimates Source: Gartner, Credit Suisse estimates Siltronic has a presence across all sizes of wafers (300mm, 200mm and 150mm or less). We estimate its production capacity caters to 15% of global demand for 300mm wafers, 13% for 200mm and 20% for 150mm (or less). We believe roughly 55 60% of Siltronic's group sales come from 300mm wafer market (Figure 23), where the majority of the demand (60 65%) comes from memory market (DRAM and NAND). As a result, if we were to assume that prices for 300mm wafer were to go up by around 10%, and prices for other wafers (200mm, 150mm or less) stay flattish, then it would imply around 5% price hike for wafers at a blended level, as we show in Figure 24. This is something which we already assume in our Siltronic published numbers as per our recent report, Siltronic: Wafer pricing and FX tailwinds ahead. Detailing 3 scenarios 300mm wafer price hikes of 10%, 20% and 30% In Figures 25 27, we show sensitivity to Siltronic's revenues, EBITDA and EPS depending on the 300mm wafer pricing increases over 2017, which look at close to 10% price hike, 20% price hike and 30% price rise respectively. In this, scenario 1 (close to 10% price hike for 300mm) is what we are already modeling for our published estimates for Siltronic. Semiconductor silicon industry 9

10 Semiconductor silicon industry 10 Figure 25: CS published estimates for Siltronic: We model close to 10% price hike for 300mm wafers during 2017, which drives EBITDA estimates of 170mn/ 176mn in 2017/2018 SCENARIO 1: 300mm wafer pricing is $76 per wafer (up nearly 10% yoy) Breakdown of Siltronic sales E 2017E 2018E 300mm wafers Industry volume shipments (mn sq inches) 6,087 6,453 6,726 6,962 7,319 % change yoy 16% 6% 4% 4% 5% Siltronic market share (%) --- assumed 13% 13% 13% 13% 13% Siltronic volume shipments --- assumed % change yoy 8% 4% 4% 3% 4% Blended Industry price per sq inch ($) for polished wafers % change yoy -6% -10% -6% 8% 0% Siltronic price per sq inch ( ) Siltronic sales from 300mm wafers ( mn) --- A % change yoy 1% 12% -1% 15% 4% Blended Industry price per sq inch ($) for 300mm polished wafers Surface area of 300mm wafer (= sq inch) Blended Industry price per wafer for 300mm polished wafers mm wafers Industry volume shipments (mn sq inches) 2,555 2,713 2,717 2,791 2,860 % change yoy 6% 6% 0% 3% 2% Siltronic market share (%) --- assumed 14% 13% 13% 13% 13% Siltronic volume shipments --- assumed % change yoy 2% -1% 0% 1% 2% Blended Industry price per sq inch ($) for polished & epitaxial wafers % change yoy -5% -7% -2% -2% -2% Siltronic price per sq inch ( ) Siltronic sales from 200mm wafers ( mn) --- B % change yoy -3% 10% -1% 3% 0% Smaller Diameter or SD wafers (150mm or less) Industry volume shipments (mn sq inches) 1,748 1,628 1,614 1,599 1,600 % change yoy 6% -7% -1% -1% 0% Siltronic market share (%) --- assumed 15% 14% 14% 14% 14% Siltronic volume shipments --- assumed % change yoy -7% -11% -1% -3% 0% Blended Industry price per sq inch ($) for polished & epitaxial wafers % change yoy -5% -7% -2% -2% -2% Siltronic price per sq inch ( ) Siltronic sales from SD/CLE wafers ( mn) --- C % change yoy -11% -1% -2% -1% -2% Total Siltronic Industry volume shipments (mn sq inches) 10,390 10,794 11,056 11,352 11,779 % change yoy 11% 4% 2% 3% 4% Siltronic market share (%) --- assumed 14% 13% 13% 13% 13% Siltronic volume shipments --- assumed 1,417 1,420 1,453 1,475 1,518 % change yoy 3% 0% 2% 1% 3% Blended Industry price per sq inch ($) for polished & epitaxial wafers % change yoy -6% -9% -5% 3% -1% Siltronic price per sq inch ( ) Total Siltronic sales ( mn) (A + B + C) ,001 1,021 % change yoy -3% 9% -2% 9% 2% Source: Company data, Credit Suisse estimates Income Statement E 2017E 2018E Sales (adjusted) ,001 1,021 % change yoy -3% 9% -2% 9% 2% Blended wafer pricing ($ per sq inch) % change yoy -6% -9% -5% 3% -1% FX (EUR / USD) % change yoy 0% -16% -1% -4% 0% Gross Profit (adjusted) Gross Margin (%) 7.7% 17.5% 17.6% 19.9% 20.3% Selling expenses (32) (35) (34) (35) (36) as % of sales 3.7% 3.7% 3.7% 3.5% 3.5% G&A expenses (17) (19) (22) (23) (23) as % of sales 2.0% 2.0% 2.4% 2.3% 2.3% R&D expenses (66) (64) (67) (69) (72) as % of sales 7.7% 6.9% 7.3% 6.9% 7.1% Other operating income (adjusted) Other operating expenses (adjusted) (62) (131) (65) (10) 0 of which FX hedging 0 (23) (10) 0 Loss from investment in JV (4) Total opex (incl. FX hedging losses) (97) (160) (148) (137) (131) as % of sales 11.4% 17.2% 16.1% 13.7% 12.9% EBIT (adjusted) (32) EBIT margin (%) -3.7% 0.3% 1.5% 6.2% 7.4% Adjusted D&A (excl. impairment) EBITDA (adjusted) EBITDA margin (%) 13.8% 13.3% 14.4% 17.0% 17.2% Interest income Interest expense (2) (4) (3) (3) (3) Other financial expense (6) (9) (9) (9) (9) Profit / (Loss) before taxes (adjusted) (39) (10) Income taxes (2) (11) (6) (13) (16) Tax rate (%) -9% -112% 197% 25% 25% Net Profit / (Loss) adjusted (41) (20) (3) of which attributable to Siltronic shareholders (30) (14) of which attributable to non-controlling interest (11) (6) (4) 8 9 Diluted EPS attributable to Siltronic shareholders (adjusted) ( ) (1.22) (0.47) Diluted share count (mn) January 2017

11 Semiconductor silicon industry 11 Figure 26: CS scenario analysis for Siltronic: If we were to model 20% price hike for 300mm wafers during 2017, this would drive EBITDA estimates of 216mn/ 223mn in 2017/2018 SCENARIO 2: 300mm wafer pricing is $85 per wafer (20% up yoy) Breakdown of Siltronic sales E 2017E 2018E 300mm wafers Industry volume shipments (mn sq inches) 6,087 6,453 6,726 6,962 7,319 % change yoy 16% 6% 4% 4% 5% Siltronic market share (%) --- assumed 13% 13% 13% 13% 13% Siltronic volume shipments --- assumed % change yoy 8% 4% 4% 4% 5% Blended Industry price per sq inch ($) for polished wafers % change yoy -6% -10% -6% 20% 0% Siltronic price per sq inch ( ) Siltronic sales from 300mm wafers ( mn) --- A % change yoy 1% 12% -1% 29% 5% Blended Industry price per sq inch ($) for 300mm polished wafers Surface area of 300mm wafer (= sq inch) Blended Industry price per wafer for 300mm polished wafers mm wafers Industry volume shipments (mn sq inches) 2,555 2,713 2,717 2,791 2,860 % change yoy 6% 6% 0% 3% 2% Siltronic market share (%) --- assumed 14% 13% 13% 13% 13% Siltronic volume shipments --- assumed % change yoy 2% -1% 0% 3% 2% Blended Industry price per sq inch ($) for polished & epitaxial wafers % change yoy -5% -7% -2% -2% -2% Siltronic price per sq inch ( ) Siltronic sales from 200mm wafers ( mn) --- B % change yoy -3% 10% -1% 5% 0% Smaller Diameter or SD wafers (150mm or less) Industry volume shipments (mn sq inches) 1,748 1,628 1,614 1,599 1,600 % change yoy 6% -7% -1% -1% 0% Siltronic market share (%) --- assumed 15% 14% 14% 14% 14% Siltronic volume shipments --- assumed % change yoy -7% -11% -1% -1% 0% Blended Industry price per sq inch ($) for polished & epitaxial wafers % change yoy -5% -7% -2% -2% -2% Siltronic price per sq inch ( ) Siltronic sales from SD/CLE wafers ( mn) --- C % change yoy -11% -1% -2% 1% -2% Total Siltronic Industry volume shipments (mn sq inches) 10,390 10,794 11,056 11,352 11,779 % change yoy 11% 4% 2% 3% 4% Siltronic market share (%) --- assumed 14% 13% 13% 13% 13% Siltronic volume shipments --- assumed 1,417 1,420 1,453 1,492 1,547 % change yoy 3% 0% 2% 3% 4% Blended Industry price per sq inch ($) for polished & epitaxial wafers % change yoy -6% -9% -5% 10% -1% Siltronic price per sq inch ( ) Total Siltronic sales ( mn) (A + B + C) ,080 1,112 % change yoy -3% 9% -2% 18% 3% Source: Company data, Credit Suisse estimates Income Statement E 2017E 2018E Sales (adjusted) ,080 1,112 % change yoy -3% 9% -2% 18% 3% Blended wafer pricing ($ per sq inch) % change yoy -6% -9% -5% 10% -1% FX (EUR / USD) % change yoy 0% -16% -1% -4% 0% Gross Profit (adjusted) Gross Margin (%) 7.7% 17.5% 17.6% 23.1% 23.5% Selling expenses (32) (35) (34) (36) (38) as % of sales 3.7% 3.7% 3.7% 3.3% 3.4% G&A expenses (17) (19) (22) (24) (26) as % of sales 2.0% 2.0% 2.4% 2.2% 2.3% R&D expenses (66) (64) (67) (72) (75) as % of sales 7.7% 6.9% 7.3% 6.7% 6.7% Other operating income (adjusted) Other operating expenses (adjusted) (62) (131) (65) (10) 0 of which FX hedging 0 (23) (10) 0 Loss from investment in JV (4) Total opex (incl. FX hedging losses) (97) (160) (148) (141) (138) as % of sales 11.4% 17.2% 16.1% 13.1% 12.5% EBIT (adjusted) (32) EBIT margin (%) -3.7% 0.3% 1.5% 10.0% 11.1% Adjusted D&A (excl. impairment) EBITDA (adjusted) EBITDA margin (%) 13.8% 13.3% 14.4% 20.0% 20.1% Interest income Interest expense (2) (4) (3) (3) (3) Other financial expense (6) (9) (9) (9) (9) Profit / (Loss) before taxes (adjusted) (39) (10) Income taxes (2) (11) (6) (25) (28) Tax rate (%) -9% -112% 197% 25% 25% Net Profit / (Loss) adjusted (41) (20) (3) of which attributable to Siltronic shareholders (30) (14) of which attributable to non-controlling interest (11) (6) (4) Diluted EPS attributable to Siltronic shareholders (adjusted) ( ) (1.22) (0.47) Diluted share count (mn) January 2017

12 Semiconductor silicon industry 12 Figure 27: CS scenario analysis for Siltronic: If we were to model 30% price hike for 300mm wafers during 2017, this would drive EBITDA estimates of 248mn/ 255mn in 2017/2018 SCENARIO 3: 300mm wafer pricing is $92 per wafer (30% up yoy) Breakdown of Siltronic sales E 2017E 2018E 300mm wafers Industry volume shipments (mn sq inches) 6,087 6,453 6,726 6,962 7,319 % change yoy 16% 6% 4% 4% 5% Siltronic market share (%) --- assumed 13% 13% 13% 13% 13% Siltronic volume shipments --- assumed % change yoy 8% 4% 4% 4% 5% Blended Industry price per sq inch ($) for polished wafers % change yoy -6% -10% -6% 30% 0% Siltronic price per sq inch ( ) Siltronic sales from 300mm wafers ( mn) --- A % change yoy 1% 12% -1% 40% 5% Blended Industry price per sq inch ($) for 300mm polished wafers Surface area of 300mm wafer (= sq inch) Blended Industry price per wafer for 300mm polished wafers mm wafers Industry volume shipments (mn sq inches) 2,555 2,713 2,717 2,791 2,860 % change yoy 6% 6% 0% 3% 2% Siltronic market share (%) --- assumed 14% 13% 13% 13% 13% Siltronic volume shipments --- assumed % change yoy 2% -1% 0% 3% 2% Blended Industry price per sq inch ($) for polished & epitaxial wafers % change yoy -5% -7% -2% -2% -2% Siltronic price per sq inch ( ) Siltronic sales from 200mm wafers ( mn) --- B % change yoy -3% 10% -1% 5% 0% Smaller Diameter or SD wafers (150mm or less) Industry volume shipments (mn sq inches) 1,748 1,628 1,614 1,599 1,600 % change yoy 6% -7% -1% -1% 0% Siltronic market share (%) --- assumed 15% 14% 14% 14% 14% Siltronic volume shipments --- assumed % change yoy -7% -11% -1% -1% 0% Blended Industry price per sq inch ($) for polished & epitaxial wafers % change yoy -5% -7% -2% -2% -2% Siltronic price per sq inch ( ) Siltronic sales from SD/CLE wafers ( mn) --- C % change yoy -11% -1% -2% 1% -2% Total Siltronic Industry volume shipments (mn sq inches) 10,390 10,794 11,056 11,352 11,779 % change yoy 11% 4% 2% 3% 4% Siltronic market share (%) --- assumed 14% 13% 13% 13% 13% Siltronic volume shipments --- assumed 1,417 1,420 1,453 1,492 1,547 % change yoy 3% 0% 2% 3% 4% Blended Industry price per sq inch ($) for polished & epitaxial wafers % change yoy -6% -9% -5% 16% -1% Siltronic price per sq inch ( ) Total Siltronic sales ( mn) (A + B + C) ,135 1,170 % change yoy -3% 9% -2% 24% 3% Source: Company data, Credit Suisse estimates Income Statement E 2017E 2018E Sales (adjusted) ,135 1,170 % change yoy -3% 9% -2% 24% 3% Blended wafer pricing ($ per sq inch) % change yoy -6% -9% -5% 16% -1% FX (EUR / USD) % change yoy 0% -16% -1% -4% 0% Gross Profit (adjusted) Gross Margin (%) 7.7% 17.5% 17.6% 25.3% 25.5% Selling expenses (32) (35) (34) (37) (39) as % of sales 3.7% 3.7% 3.7% 3.3% 3.3% G&A expenses (17) (19) (22) (26) (27) as % of sales 2.0% 2.0% 2.4% 2.3% 2.3% R&D expenses (66) (64) (67) (73) (77) as % of sales 7.7% 6.9% 7.3% 6.4% 6.6% Other operating income (adjusted) Other operating expenses (adjusted) (62) (131) (65) (10) 0 of which FX hedging 0 (23) (10) 0 Loss from investment in JV (4) Total opex (incl. FX hedging losses) (97) (160) (148) (147) (143) as % of sales 11.4% 17.2% 16.1% 12.9% 12.2% EBIT (adjusted) (32) EBIT margin (%) -3.7% 0.3% 1.5% 12.4% 13.3% Adjusted D&A (excl. impairment) EBITDA (adjusted) EBITDA margin (%) 13.8% 13.3% 14.4% 21.9% 21.8% Interest income Interest expense (2) (4) (3) (3) (3) Other financial expense (6) (9) (9) (9) (9) Profit / (Loss) before taxes (adjusted) (39) (10) Income taxes (2) (11) (6) (33) (36) Tax rate (%) -9% -112% 197% 25% 25% Net Profit / (Loss) adjusted (41) (20) (3) of which attributable to Siltronic shareholders (30) (14) of which attributable to non-controlling interest (11) (6) (4) Diluted EPS attributable to Siltronic shareholders (adjusted) ( ) (1.22) (0.47) Diluted share count (mn) January 2017

13 What does it mean for Siltronic valuation? Both SUMCO and Siltronic are currently trading on a material premium to historic ranges given the anticipation around 300mm wafer price increases, which could potentially drive meaningful upward revision to both sales and EBITDA. Figure 28: Current and historic valuation ranges (EV/sales and EV/EBITDA) for wafer makers EV/Sales (x) EV/EBITDA (x) FY1 FY2 FY3 FY1 FY2 FY3 SUMCO (current) Shin-Etsu (current) Siltronic (current) Average (current) --- A SUMCO (avg. since 2010) Shin-Etsu (avg. since 2010) Siltronic (avg. since IPO in mid-2015) Average (historic) --- B Source: Datastream, Credit Suisse research Our TP of 37 for Siltronic is based on 6.5x 2018 EV/EBITDA. We currently value Siltronic based on 6.5x EV/EBITDA on our 2018 EBITDA estimate of 176mn. This assumes that total wafer demand goes up by 2% pa (around 4 5% for 300mm within that) and 300mm wafer prices go up by close to 10%, driving blended wafer pricing going up by close to 5% in 2017 and then flat YoY in That drives our TP of 37. Note for our EV calculations, we use net cash of 165mn for Siltronic ending Q316, along with our estimate of 200mn as debt due to unfunded part of pension obligations (out of total 496mn of pension obligations). Current share price implies 20% price hike and 7.0x EV/EBITDA multiple. Our analysis suggests that the current share price of 52 for Siltronic is already implying 20% price hike for 300mm wafer, with shares trading at 7.0x EV/EBITDA on 2018 estimates. Still potential upside if 300mm prices go up by 30% and shares re-rate to SUMCO historic levels of over 7.5x. Further, we demonstrate that in a scenario that 300mm wafer prices go up by 30% and Siltronic shares were to re-rate to 7.50x (something similar to where SUMCO shares have traded on an average since 2010), then in that scenario we may still see another 20% potential upside. However, we also need to see evidence that 30% price hike for 300mm wafer is across the board for all wafer customers along with its sustainability. Figure 29: Our view on what current share price of Siltronic is implying 300mm wafer price rise FY18 estimates 10% 20% 30% EBITDA ( m) EPS ( ) EV/EBITDA (X) Theoretical share price ( ) Current share price ( ) Potential return -29% -3% 20% Source: Credit Suisse estimates Semiconductor silicon industry 13

14 Companies Mentioned (Price as of 24-Jan-2017) GWC (6488.TWO, NT$143.0) Hemlock Semiconductor (Unlisted) Mitsubishi Materials Corporation (Unlisted) Osaka Titanium Technologies (5726.T, 1,690) SUMCO (3436.T, 1,669, NEUTRAL[V], TP 1,600) Shin-Etsu Chemical (4063.T, 9,634, NEUTRAL, TP 10,300) Siltronic (WAFGn.DE, 52.0, NEUTRAL, TP 37.0) SunEdison Inc. (SUNE.N^D16) Taiwan Semiconductor Manufacturing (2330.TW, NT$185.5) See Figures 10, 11, 15 for other companies Disclosure Appendix Analyst Certification Masami Sawato and Achal Sultania each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for SUMCO (3436.T) 3436.T Closing Price Target Price Date ( ) ( ) Rating 29-Jan N 10-Apr Oct-14 1,183 1, Dec-14 1,672 1,400 U 17-Mar-15 2,266 1, Jun-15 1,590 1, Aug-15 1,097 1, Oct-15 1,261 1, Dec-15 1, Mar Jun Sep Nov-16 1,252 1,000 * Asterisk signifies initiation or assumption of coverage. 2,500 2,000 1,500 1, N EU T RA L U N D ERPERFO RM Target Price Closing Price 3436.T 01- Jan Jan Jan Year Price and Rating History for Shin-Etsu Chemical (4063.T) 4063.T Closing Price Target Price Date ( ) ( ) Rating 28-Jan-14 5,606 7,100 O 08-Oct-14 6,882 7, Dec-14 8,105 9, Mar-15 8,196 8,500 N 28-Apr-15 7,909 8, Aug-15 6,573 7, Jun-16 6,262 6, Sep-16 6,999 7, Dec-16 9,096 8,700 * Asterisk signifies initiation or assumption of coverage. 10,000 9,000 8,000 7,000 6,000 5,000 O U T PERFO RM N EU T RA L Target Price Closing Price 4063.T 01- Jan Jan Jan Semiconductor silicon industry 14

15 3-Year Price and Rating History for Siltronic (WAFGn.DE) WAFGn.DE Closing Price Target Price Date ( ) ( ) Rating 20-Jul N * 02-Nov Mar Apr Oct Oct Jan * Asterisk signifies initiation or assumption of coverage Target Price Closing Price WAFGn.DE 01- Sep Jan May Sep Jan N EU T RA L The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts stock rating are defined as follows: Outperform (O) : The stock s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts sector weightings are distinct from analysts stock ratings and are based on the analyst s expectations for the fundamentals and/or valuation of the sector* relative to the group s historic fundamentals and/or valuation: Overweight : The analyst s expectation for the sector s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst s expectation for the sector s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst s expectation for the sector s fundamentals and/or valuation is cautious over the next 12 months. *An analyst s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (63% banking clients) Neutral/Hold* 38% (60% banking clients) Underperform/Sell* 15% (54% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Important Global Disclosures Credit Suisse s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse s analysts to clients may depend on a specific client s preferences regarding the frequency and manner of receiving communications, the client s risk profile and investment, the size and scope of the overall client relationship with Semiconductor silicon industry 15

16 the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: Target Price and Rating Valuation Methodology and Risks: (12 months) for SUMCO (3436.T) Method: We derive our 1,600 target price for SUMCO using an EV/EBITDA of 9.5x, the average for four wafer manufacturers (SUMCO, Shin-Etsu Chemical, SunEdison and Wacker Chemie) on FY17 forecasts. Prices on silicon wafer are expected to rise, and our target price reflects expectations that the valuation will also rise. On the basis of expected total return relative to our sector coverage, we assign a rating of NEUTRAL. We use our forecasts for Shin-Etsu Chemical and SUMCO, and I/B/E/S forecasts for Wacker Chemie and Sunedison for calculation. Risk: Upside risks to our 1,600 target price and NEUTRAL rating for SUMCO include stronger-than-anticipated growth in 300mm demand, leading to tighter supply-demand and higher prices. Downside: slower demand for smartphones/automotive chips and/or increased wafer capacity, resulting in softer supply-demand and more price competition. Target Price and Rating Valuation Methodology and Risks: (12 months) for Shin-Etsu Chemical (4063.T) Method: We derive our 10,300 target price for Shin-Etsu Chemical using an EV/EBITDA of 9.5x, the average FY17 multiple for four wafer makers. Wafer makers include Shin-Etsu Chemical, SUMCO, Wacker Chemie and Sunedison. We use our forecasts for Shin-Etsu Chemical and SUMCO, and I/B/E/S forecasts for Wacker Chemie and Global Wafers. Prices on silicon wafer are expected to remain flat, and our target price reflects expectations that the valuation will also track flat without significant price rise. On the basis of expected total return relative to our sector coverage, we assign a rating of NEUTRAL. Risk: Risks that could cause the share price to diverge from our 10,300 target price and NEUTRAL rating for Shin-Etsu Chemical are upside: tighter-than-expected supply-demand for silicon wafers, wafer price hikes, and stronger shareholder returns. Downside: a protracted slowdown in the semiconductor market and yen appreciation. Target Price and Rating Valuation Methodology and Risks: (12 months) for Siltronic (WAFGn.DE) Method: For our TP of 37, we apply an EV/EBITDA multiple of 6.5x on our 2018 estimates. This 2018 EV/EBITDA multiple compares to Japanese peers trading in the range of 7x to 9x, warranted in our view given Siltronic's lower EBITDA margin profile. The reason we remain Neutral as we wait for greater visibility on wafer market demand. Risk: Downside risks to our TP and Neutral rating include the following: i) a slowdown in the semiconductor industry (smartphones, PCs, tablets, consumer electronics, automotive & industrial products) impacting demand negatively for silicon wafers; ii) no improvement in the pricing environment for 300mm wafers despite us nearing a stage when demand may potentially outgrow installed capacity in the industry (for 300mm wafers); and iii) weak JPY vs. USD thereby allowing the two leading Japanese companies in this industry (SUMCO and Shin-Etsu Chemical) to continue to price aggressively as they can pass on cost advantage to their customers in the form of lower pricing. Upside risks to our TP include the following: i) more consolidation in the silicon wafer industry, which would result in a more rational pricing environment than what we have seen in the last 3-5 years; ii) a strong currency exchange rate for the JPY (JPY appreciating vs. USD) which would lead to margin pressure for Siltronic's two biggest competitors based in Japan; iii) a higher increase in prices for 300mm wafers in 2016 and beyond, if demand outstrips capacity production materially with no suppliers adding more capacity. Please refer to the firm's disclosure website at for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (WAFGn.DE) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (WAFGn.DE) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (WAFGn.DE) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (4063.T, WAFGn.DE) within the next 3 months. Semiconductor silicon industry 16

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