Soitec Company Independent Report WSL .pdf


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Soitec
Ready for takeoff

12th November 2014

Fair Value EUR2.6 (price EUR1.97) BUY
Coverage initiated

Technology
Bloomberg

SOI FP

Reuters

SOIT.PA

12-month High/Low (EUR)

2.9 / 1.2

Market capitalisation (EURm)

443

Enterprise Value (BG estimates EURm)

576

Avg. 6m daily volume ('000 shares)

2,525

Free Float

79.0%

3y EPS CAGR

NM

Gearing (03/14)

96%

Dividend yields (03/15e)
YE March

NM
03/14

03/15e

03/16e

03/17e

247.14

263.67

538.30

566.65

-219.64

-111.82

41.12

50.44

Basic EPS (EUR)

-1.45

-0.63

0.10

0.15

Diluted EPS (EUR)

-1.26

-0.61

0.10

0.15

Revenue (EURm)
EBIT(EURm)

EV/Sales

2.7x

2.2x

1.0x

0.9x

EV/EBITDA

NS

NS

5.1x

3.9x

EV/EBIT

NS

NS

13.5x

9.8x

P/E

NS

NS

19.4x

13.3x

-31.7

-36.0

15.3

20.6

ROCE

Price and data as at close of 7th
10/11/14

178

We are initiating coverage of Soitec with a Buy recommendation
and a FV of EUR2.6. Growing interest in FD-SOI and solar
products confirm that the group is on track to restoring profitable
growth. We expect positive momentum in EPS growth over
coming years with the level set to rise from -EUR1.45 in 2013/14e
to EUR0.15 in 2016/17e. The share is trading on a discount of 50%
relative to historical average 12m forward EV/sales multiples (1.0x
vs. 2.1x over 2003-2014). The current valuation seems to be a good
opportunity to revisit the share.

 The adoption of FD-SOI should enable a return to growth and a
significant improvement in margins. With yield problems on
FinFET production and its costly roll-out, Soitec's FD-SOI
technology should benefit from an advantageous backdrop.
Historically positioned in high-performance semiconductor materials,
Soitec now offers a solution that also helps to reduce production
costs. The ecosystem surrounding FD-SOI, necessary for its
uptake, is now in place. We therefore expect high and profitable
growth in the electronics division as of 2015/16e.

 Sales

158

138

118

98

78

Source Thomson Reuters

SOITEC

STOXX EUROPE 600

finally diversified thanks to solar business. The solar
division was launched in 2010 and had so far not played its intended
role. In 2013, the business finally emerged, posting sales of EUR79m.
The recently announced sale of US power purchase agreements
should help post sales of more than EUR250m spread over the next
two years. We are forecasting sales of EUR92m in the solar
business in 2014/15e and EUR273m in 2015/16e, with breakeven point likely to be exceeded as of 2015/16e.

 Buying momentum.

Investors are waiting for confirmation of the
dynamic growth announced for the electronics business. In our view,
the ecosystem is in place and FD-SOI now has all the assets necessary
to be adopted by the industry. We believe the time is now right to
take positions on the share in order to make the most of a return
to growth and a hike in EPS.
BG originating Analyst:
Dorian Terral
33(0) 1.56.68.75.92
dterral@bryangarnier.com

WSL Head of Research
Joanna Parsons
44 (0)20 7601 6133
Joanna.parsons@westhousesecurities.
com

Soitec

Simplified Profit & Loss Account (EURm)
Revenues
Change (%)
Change LFL (%)
Adjusted EBITDA
Depreciation & amortisation
Adjusted EBIT
EBIT
Change (%)
Financial results
Pre-Tax profits
Exceptionals
Tax
Profits from associates
Minority interests
Net profit
Restated net profit
Change (%)
Cash Flow Statement (EURm)
Operating cash flows
Change in working capital
Capex, net
Financial investments, net
Dividends
Issuance of shares
Issuance of debt
Other
Net debt
Free Cash flow

Company description
Founded in 1992, and listed on
Euronext Paris since 1999, Soitec is a
specialist
of
high-performance
semiconductor
materials.
The
company
develops
proprietary
technologies used to produce and sell
wafers for the semiconductor industry,
more
particularly
to
produce
Integrated Circuits (68% of 2013/14
sales). Soitec is the world leader on the
SOI market with 80% of market share.
On behalf of the electronic activity,
Soitec develops a photovoltaic
modules
manufacturing
activity
triggered by the acquisition of
Concentrix Solar in 2010 (32% of
2013/14 sales).
Shareholders (%)
André-J. Auberton-Hervé
Auberton-Hervé Family
Shin Etsu Handotaï Co. Ltd.
BPI France Participations
CDC
Free Float

3.7%
1.0%
2.6%
9.8%
3.9%
79.0%

Balance Sheet (€m)
Tangible fixed assets
Intangibles assets & goodwill
Investments
Deferred tax assets
Current assets
Cash & equivalents
Total assets
Shareholders' equity
Provisions
Deferred tax liabilities
L & ST Debt
Current liabilities
Total Liabilities
Capital employed
Ratios
Operating margin
Tax rate
Net margin
ROE (after tax)
ROCE (after tax)
Gearing
Pay out ratio
Number of shares, diluted
Data per Share (EUR)
EPS
Restated EPS
% change
EPS bef. GDW
BVPS
Operating cash flows
FCF
Net dividend

31/03/12
323
15.1%
19.5%
14.8
58.8
(45.9)
(47.2)
-%
(8.9)
(56.1)
NM
0.03
(0.14)
0.0
(56.3)
(55.0)
-%

31/03/13
263
-18.7%
-23.7%
(61.7)
65.2
(123)
(197)
-%
(11.8)
(209)
NM
0.03
(0.93)
0.19
(209)
(137)
-%

31/03/14
247
-6.0%
-3.5%
(79.1)
141
(137)
(220)
-%
(16.7)
(236)
NM
0.06
(0.64)
0.33
(237)
(186)
-%

31/03/15e
264
6.7%
-0.7%
(48.2)
63.7
(112)
(112)
-%
(13.2)
(125)
NM
0.0
(0.16)
0.0
(125)
(122)
-%

31/03/16e
538
104%
104%
108
66.6
41.1
41.1
-%
(13.5)
27.7
NM
4.5
(0.16)
0.0
23.0
22.8
-%

31/03/17e
567
5.3%
5.3%
127
76.4
50.4
50.4
22.7%
(10.2)
40.2
NM
6.7
(0.16)
0.0
33.4
33.2
45.8%

18.1
(27.0)
(100)
(9.9)
0.0
152
(11.3)
(17.7)
(96.4)
(109)

(60.1)
22.7
(118)
10.7
0.0
0.89
30.9
(8.1)
66.5
(156)

(39.1)
(99.8)
(44.8)
(37.8)
0.0
67.9
131
(21.4)
212
(184)

(61.5)
45.2
13.0
0.0
0.0
83.1
(81.1)
(7.1)
132
(3.3)

89.6
(36.5)
(31.8)
0.0
0.0
0.0
0.0
(10.0)
111
21.3

110
(4.7)
(45.0)
0.0
0.0
0.0
0.0
(10.0)
51.0
60.2

329
66.6
20.3
0.0
179
260
861
593
10.2
0.0
163
95.2
861
496

341
75.3
17.8
0.0
137
130
719
391
13.1
0.0
197
118
719
458

281
35.1
8.9
0.0
186
44.7
585
221
18.4
0.0
257
88.9
585
433

204
35.1
8.8
0.0
139
44.7
461
178
18.4
0.0
177
86.8
461
311

169
35.1
8.6
0.0
266
56.0
564
201
18.4
0.0
167
177
564
312

138
35.1
8.5
0.0
280
106
596
234
18.4
0.0
157
186
596
285

NM
0.05
NM
(9.50)
(9.24)
(16.27)
NM
105

NM
0.01
NM
(53.58)
(26.88)
17.02
NM
124

NM
0.03
NM
(107)
(31.71)
96.21
NM
149

NM
0.0
NM
(70.18)
(35.99)
74.22
NM
220

7.64
(16.39)
4.27
11.42
15.33
55.24
0.0
266

8.90
(16.58)
5.90
14.25
20.61
21.74
0.0
265

(0.54)
(0.53)
159%
(0.53)
5.62
0.17
(1.04)
0.0

(1.70)
(1.12)
113%
(1.12)
3.16
(0.49)
(1.26)
0.0

(1.45)
(1.26)
12.8%
(1.26)
1.48
(0.26)
(1.23)
0.0

(0.63)
(0.61)
-51.4%
(0.61)
0.81
(0.28)
(0.01)
0.0

0.10
0.10
-117%
0.10
0.76
0.34
0.08
0.0

0.15
0.15
45.8%
0.15
0.88
0.41
0.23
0.0

Source: Company Data
Source: Company Data; Bryan, Garnier & Co ests.

2

Westhouse Securities

Soitec

Table of contents
1. Snapshot of semiconductor industry .......................................................................................................4
2. Investment Case ...........................................................................................................................................5
3. Return to growth-stock status ...................................................................................................................6
3.1.

The AMD period is over! ..................................................................................................................6

3.2.

Soitec should make the most of the cycle ......................................................................................7

3.3.

Valuing conversion of growth into margins ..................................................................................8

3.4.

Simulation of valuation using historical average 12m forward multiples .............................. 10

3.5.

Short selling purchases on the cards ............................................................................................ 10

4. FD-SOI: "3 – 2 – 1 – Ignition!" ............................................................................................................... 11
4.1.

4.2.

FD-SOI: a genuine solution for the industry ............................................................................. 11
4.1.1.

FinFET: high-performing but costly.............................................................................. 12

4.1.2.

FD-SOI: the best suited solution .................................................................................... 12

The FD-SOI ecosystem is taking shape ...................................................................................... 15

5. Margins back on track? ............................................................................................................................ 17
5.1.

Heading for a surge in electronics activity .................................................................................. 17

5.2.

Solar: CPV bet beginning to pay off ............................................................................................ 19

5.3.

Lighting division struggling to find its market ........................................................................... 21

6. A sufficiently solid financial structure? ................................................................................................. 22
6.1.

Armed for growth! .......................................................................................................................... 22

6.2.

Financial structure on the test bench ........................................................................................... 24

7. Appendices ................................................................................................................................................ 26
7.1.

The industry value chain ................................................................................................................ 26

7.2.

Moore's law....................................................................................................................................... 27

7.3.

How a transistor works and explanation of leakages ................................................................ 28

7.4.

Glossary............................................................................................................................................. 29

3

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Soitec

1.
Growth in the
semiconductor market is
estimated at 8% for 2014
and 7% for 2015

It’s a fixed costs industry
benefiting large-scale
players

Soitec is positioned as a
silicon wafer supplier

Snapshot of semiconductor industry

The value chain in the semiconductor industry is made up of a large number of players, the
main ones being Integrated Device Manufacturers (IDM) such as Intel, Infineon and
STMicroelectronics and Fabless, integrated circuit designers, such as Qualcomm. The market to
design and sell integrated circuits was estimated at almost USD300bn in 2013, and is set to
grow by more than 8% in 2014, followed by 7% 1 in 2015. These players are at the heart of the
industry and set the trend for the rest of the chain. The difference between an IDM and a Fabless
is that an IDM has production plants whereas a Fabless outsources production to foundries
(TSMC, GlobalFoundries, UMC, Samsung and SMIC). The five largest foundries alone generate more
than 80% of independent production, a market worth more than USD36bn.
In the industry, production volumes are very volatile since they are generally not secured by
contracts and double sourcing practices are generally used. However, semiconductors
production is a high fixed costs activity requiring maintaining a high level loads in order to
maintain comfortable margins. The best defence against competition is innovation, which helps
attract clients thanks to better performing products that are cheaper to produce. For small players, it
is difficult to conciliate innovation and investment spending in plants that could cost up to
USD15bn, especially due to specific and costly production tools. Companies such as Applied
Materials or ASML have specialised in production of this equipment (market valued at
USD35bn). Commodities consumed are generally silicon wafers (on which integrated circuits are
produced), gas, water and chemicals products. The silicon wafer market alone is estimated at
USD7bn and is controlled by five players, including Shin Etsu Handotaï, Sumco and SunEdison.

The semiconductor
industry primarily bills in
dollars

In order to assess the health of the industry, we will keep a close eye on: 1/ the macroeconomy, especially forecasts for global GDP growth and consumer and industries confidence
indices; 2/ fluctuations in the dollar against the euro for European companies (since the industry
primarily bills in dollars); 3/ the main trends in the electronics market in order to analyse the value
chain on successful products; and 4/ publications by certain players which are leading indicators
(Microchip and Intel especially).

In order to remain
competitive, players must
adopt a new production
method

In its constant search for innovation, the industry is facing another challenge to improve its
performance in integrated circuits. Two solutions are available: the FD-SOI wafers (Soitec) and 3D
transistor production (Intel). Contrary to Intel's technology, Soitec's causes no increase in
production costs and is therefore more likely to be adopted.

We believe that FD-SOI
by Soitec provides a
genuine solution

Focus on Soitec: The ecosystem concerning FD-SOI is taking shape and Soitec should
benefit from this as of 2015. We are forecasting a volume of more than 830,000 SOI 300mm
wafers a year as of 2017, or 2016/17e sales of more than EUR330m. In addition, the group's
second electronics business (200mm, destined for radiofrequency applications) should
continue to fare well, and we are forecasting sales of EUR119m from this business in 2016/17e.

Sources: average estimates of World Semiconductor Trade Statistics (June 2014), Gartner (July 2014), IC Insight (September 2014), Market
Intelligence & Consulting (September 2014), Semiconductor Intelligence (September 2014), Future Horizon (September 2014) and Mike Cowan
(September 2014).
1

4

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Soitec

2.

Investment Case

The reason for writing now
In our view, Soitec is restoring its status as a growth stock. We expect business to be boosted by the
wide-scale adoption of FD-SOI and momentum in the solar business which already helped
generate EUR80m last year and which should continue to perform well. More activity should go handin-hand with an automatic improvement in margins (fixed-costs business). In our view, the share
price does not reflect the margin improvement or the significant hike in EPS from -EUR1.45 in
2013/14e to EUR0.15 for 2016/17e. The share's current valuation seems to be a good opportunity
to revisit the share.

Valuation
We are initiating coverage of Soitec with a Buy recommendation and FV of EUR2.6, obtained
using a DCF valuation. Based on a share price of EUR2, our FV points to upside potential of more
than 30%. Our valuation reflects a 12m forward EV/sales multiple of 1.6x vs. 2.1x for the
historical average.

Catalysts
Encouraging announcements have been made about Soitec's FD-SOI recently, especially that
concerning production of the 28nm at Samsung and its addition to the GlobalFoundries roadmap. We
believe this is merely a first stage before a wide-scale take-up of the technology by the industry.
In addition, the solar business is beginning to pay off and recent US Power Purchase Agreements
sales should underpin the sharp momentum in the solar business started last year.

Difference from consensus
Our scenario shifts some of the solar sales expected for 2014/15e by the consensus to
2015/16e. Despite this shift, we agree with the consensus in terms of significant upside potential.

Risks to our investment case
Our scenario could be threatened if: 1/ production of FD-SOI at major foundries expected for H2
2014 was delayed and 2/ deliveries for US PPAs were postponed whereas we expect them to start
by the end-2014.

5

Westhouse Securities

Soitec

3.

Return to growth-stock status

3.1.

The AMD period is over!

Historically, change in the Soitec share price has been closely tied to news concerning AMD,
given that the group had been the main client for Soitec since 2004 and even generated 60% of
Soitec's sales in 2010.
Fig. 1:

Share price history: Soitec, AMD and the SOX index

1,200

The “AMD period”

Business diversification

1,000

800

600

400

200

0
2003

2004

2005

2006

2007

2008
SOITEC

2009

2010

AMD

SOX

2011

2012

2013

2014

Sources: Thomson Reuters; Bryan, Garnier & Co.; Base 100 on 01/01/2003

During the AMD period, the share price topped EUR20 since Soitec was partner to the most
dynamic player of the time. Orders for PD-SOI, the group's flagship product, grew at the same
pace as market share gains for the US group. In 2006, AMD accounted for almost 50% of market
share in consumer CPU. However, as AMD lost market share, it was obliged to reduce its volumes
in the second half of the period, thereby prompting a knock-on plunge in sales at Soitec (visible on
the share price).
This historical correlation weakened in 2010. Aware of the risk of having just one client generating
the majority of its sales, Soitec began to set up fresh sources of growth, investing in the solar and
lighting segments, although the benefits of these two new divisions were not visible before
2014. In 2012, AMD announced it was abandoning PD-SOI in favour of a 28nm production on bulk
silicon due to start in 2014. Today, the client represents less than 10% of Soitec's sales. Since then,
sources of fresh growth have partly stemmed from products destined for radiofrequency
applications (RF). Unfortunately, sales of these products have not managed to make up for
the PD-SOI business.
We are now at the start of a new period with a diversification that is beginning to pay off and
healthy prospects in electronics. FD-SOI, which replaced PD-SOI, is currently in a take-up phase
for a number of players in the industry. As such, if the market maintains a similar logic, a correlation
between the Soitec share price and those of STMicroelectronics, Samsung and
GlobalFoundries should emerge. We will pay close attention to sales growth at these companies in
coming months.
6

Westhouse Securities

Soitec

3.2.

Soitec should make the most of the cycle

The semiconductor industry is cyclical and Soitec, as a supplier, is situated upstream. Change in the
group's share price is therefore especially correlated with growth in the industry.
Correlation between growth in cycle and share price

70.0%

First period

Second period

Third period

250%
200%

Industry growth

50.0%

150%

30.0%

100%

10.0%

50%

-10.0%

-50%

-30.0%

-100%

0%

-150%

-50.0%

Soitec share price growth

Fig. 2:

-200%

-70.0%

-250%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Q1
Q2
Q3
Q4
Soitec share price

Sources: WSTS; Thomson Reuters; Bryan, Garnier & Co.

Analysis of cycles and changes in the Soitec share price highlights three periods: 1/ 2000–2006,
where the market was slightly lagging the cycles, 2/ 2007, with a low point due to the difficult
situation at AMD, and 3/ 2008 until today, where investors are anticipating cycles.
Historically speaking, cycles last between four and eight years. In our view, the current cycle should be
a long cycle since the return to growth has so far happened fairly gradually. We are currently in the
fifth year of the current cycle and still in the up-phase. On average, forecasts for growth in
semiconductors sales are for more than 8% in 2014 and more than 7% in 2015.
Fig. 3:

Forecasts for semiconductors sales growth

WSTS, June
Gartner, July

Average Growth
- 2014 : 8.3%
- 2015 : 7.1%

IC Insight (IC), Sept.
2014

Market Intelligence & Consulting, Sept.

2015

Semiconductor Intelligence, Sept.
Future Horizons, Sept.
Mike Cowan, Sept.
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
Sources: World Semiconductor Trade Statistics; Gartner; IC Insight; Market Intelligence & Consulting;
Semiconductor Intelligence; Future Horizon; Mike Cowan

7

Westhouse Securities

Soitec

3.3.

Valuing conversion of growth into margins

Soitec generates its sales via two businesses, namely the sale of silicon-on-insulator (SOI) wafers
(destined for electronics) and sales of photovoltaic solar modules ("CPV").
Soitec enjoyed a string of good news at the beginning of the year, including two major events:
validation of a solar project in South Africa,
support from Samsung for the FD-SOI technology.
This good news concerned the group's two main divisions and boosted the share price to EUR2.93
(adjusted of issuance of shares), implying a performance of 127% between January and June 2014.
The share then nosedived again after the capital increase launched over the summer with a
subscription rate of 239% at EUR1.59 per share, causing 23% dilution. Whereas investors are
usually very reactive, they now seem to have a wait-and-see attitude, despite more
announcements confirming healthy prospects:
interest from GlobalFoundries in FD-SOI, confirmed at the Semicon Europa 2014 exhibition,
recent execution of a sales agreement for the sale of 150 MWp in power purchase agreements
in the US.
Our DCF valuation is based on the following assumptions:
 A CAGR in like-for-like sales over 2014-2023 of 22%, justified by Soitec's product
positioning in electronics (which fits with market trends and responds to current issues in the
industry: increase in unit costs of transistors). We expect a take-off in FD-SOI wafer sales as
of 2015/16e with growth of 55% (+76% for 2016/17e). Momentum should also stem from
the solar business with the start of deliveries in the US, prompting growth of 196% in sales
over 2015/16e. In contrast, our scenario does not factor in sales that are not currently in the
order book. This implies a decline in solar sales of 63% over 2016/17e and growth of just 5.3%
for the group's sales over this year.
 EBIT margin heading towards a peak of 14% in 2019/20e. Since Soitec has high fixed
costs, margin levels improve automatically with growth in sales. We have therefore stabilised
EBIT margin at 7% over the long term. On average, similar companies generate a peak cycle
margin of 20%.
 Change in WCR in line with sales growth and stabilised at 16.5% of sales (historical
average) as of 2015/16e after cash generation of EUR45m over 2014/15e due to a decline in
WCR prompted by the South-African solar project in 2013/14.
 Net investments undertaken in association with an increase in production capacity or
6% of sales in 2014/15e, 8% in 2016/17e, then maintained stable at 13% (historical average) for
the rest of our scenario.
 A reduced corporate tax rate until 2020/21e in view of the use of tax loss carry forwards. A
stable normal average tax rate of 34.0% thereafter.

8

Westhouse Securities

Soitec
 No change in tax credits. In 2013/14, Soitec benefited from a research tax credit of
EUR7.7m and a competitiveness and employment tax credit (CICE) of EUR1m. We have
assumed the current tax credit rates are maintained in coming years.

Fig. 4:

Calculation of discount rate

European risk-free interest rate

2.8%

Equity risk premium

6.0%

Beta

1.5

Return expected on equity

11.8%

Interest rate on debt

5.0%

Market Capitalization (EURm)

443

Net debt on 31/03/2014 (EURm)

212

Enterprise value (EURm)

656

WACC

9.6%

Source: Bryan, Garnier & Co ests.

Fig. 5:

Discounted cash flows and sensitivity table

in EURm (FYE 31/03)
Sales
% chg yoy
Operating profit
As a % of sales
Tax

03/2015e 03/2016e 03/2017e 03/2018e

03/2019e 03/2020e 03/2021e 03/2022e 03/2023e 03/2024e 03/2025e

264

538

567

680

809

955

1117

1285

1452

1597

1645

6.7%

104.2%

5.3%

20.0%

19.0%

18.0%

17.0%

15.0%

13.0%

10.0%

3.0%

-112

41

50

82

105

134

145

154

160

160

115

-42.4%

7.6%

8.9%

12.0%

13.0%

14.0%

13.0%

12.0%

11.0%

10.0%

7.0%

0

-7

-8

-14

-18

-23

-45

-52

-54

-54

-39

Tax rate

0.0%

16.6%

16.7%

16.8%

16.8%

16.9%

31.3%

34.0%

34.0%

34.0%

34.0%

NOPAT

-112

34

42

68

87

111

100

102

105

105

76

64

67

76

88

105

124

145

167

189

208

214

24.1%

12.4%

13.5%

13.0%

13.0%

13.0%

13.0%

13.0%

13.0%

13.0%

13.0%

-15

-32

-45

-88

-105

-124

-145

-167

-189

-208

-214

5.7%

5.9%

7.9%

13.0%

13.0%

13.0%

13.0%

13.0%

13.0%

13.0%

13.0%

Depreciation
As a % of sales
Capex
As a % of sales

52

89

93

112

134

158

184

212

240

263

272

19.8%

16.5%

16.5%

16.5%

16.5%

16.5%

16.5%

16.5%

16.5%

16.5%

16.5%

Change in WCR

45

-37

-5

-19

-21

-24

-27

-28

-28

-24

-8

Free cash flows

-18

33

69

49

66

87

73

74

78

81

68

Discounted free cash flows

-18

30

57

37

46

55

42

39

37

35

27

Total discounted FCF - 2015-2023e

359

Discounted Terminal value - 2025e+

356

Enterprise value

714

As a % of sales

+ Fair value of associates

7

+ Fair value of financial assets

2

+ Fair value of dilution

103

- Net debt on 31/03/2015e

132

Equity value

694

Nbr of diluted shares (m)

266

Valuation per share (EUR)

2.6

WACC

Op. margin

WCR

8.6%

9.1%

9.6%

10.1%

10.6%

5.0%

2.5

2.3

2.2

2.1

1.9

6.0%

2.8

2.6

2.4

2.2

2.1

7.0%

3.0

2.8

2.6

2.4

2.3

8.0%

3.3

3.0

2.8

2.6

2.5

9.0%

3.6

3.3

3.0

2.8

2.6

Source: Bryan, Garnier & Co ests.

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Soitec

3.4.

Simulation of valuation using historical average
12m forward multiples

The historical average 12m forward EV/sales multiple for Soitec over 2003-2014 works out to 2.1x.
At the current share price, this multiple stands at 1.0x implying that the market has applied a
discount of 50%, which we consider overly harsh.
Fig. 6:

Soitec historical 12m forward EV/sales multiple

6.0
5.0
4.0
3.0
2.0
1.0

EV/SALES

10/14

04/14

10/13

04/13

10/12

04/12

10/11

04/11

10/10

04/10

10/09

04/09

10/08

04/08

10/07

04/07

10/06

04/06

10/05

04/05

10/04

04/04

10/03

0.0

Average

Source: Thomson Reuters

If we apply the historical average multiple of 2003-2014 over our estimates (12m forward), we
obtain a valuation of EUR3.1 per share. Taking the 12m forward average multiple from the "AMD
period", namely 2.6x, which corresponds more to the profile we are assuming for Soitec, we obtain a
valuation of EUR3.9 per share. We are only using this method as an illustration and not in the
calculation of our FV, given the fact that this sales multiple alone is not a means of assessing
margin growth.
On our FV of EUR2.6, the share would be trading on a multiple of 1.6x.

3.5.

Short selling purchases on the cards

At present, the sell positions declared to the French market regulator AMF exceed 3.5% of
Soitec's capital. Given the positive newsflow likely in the future, we believe that these short
positions should gradually be repurchased and therefore have a positive impact on the share price.
Fig. 7:

History of Soitec short sales positions*

8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
10/2014

9/2014

8/2014

7/2014

6/2014

5/2014

4/2014

3/2014

2/2014

1/2014

12/2013

11/2013

10/2013

9/2013

8/2013

7/2013

6/2013

5/2013

4/2013

3/2013

2/2013

1/2013

12/2012

11/2012

0.0%

Source: AMF; *short positions declared to the AMF only (positions >0.5% of capital)

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Soitec

4.
See appendix 7.2 for more
details on the Moore’s
law, nodes and current
issues in the
semiconductor industry

FD-SOI: "3 – 2 – 1 – Ignition!"

At present, the size of transistors has been reduced to such a point that continuing their
miniaturisation is no longer possible without: 1/ making production more complex
(lithography, tests,…) and prompting a significant increase in unit costs (accentuated by a plunge
in yields) and 2/ causing performance problems: at 20nm, the size of the transistor no longer
allows total control of electron flows, thereby prompting excessive energy consumption and
overheating which affects the performances of integrated circuits (re. Appendix 7.3).
Fig. 8:

Comparison of investment spending necessary for two node types
Comments

Fab costs ($)

Costs of building plant

Process R&D ($)

Costs of setting up production process

Mask Costs ($)

Costs of IC masks development (used for lithography process)

Design Costs ($)

Costs of designing IC

Breakeven (units)

28nm

20nm

3bn

4bn – 7bn

1.2bn

2.1bn – 3bn

2M - 3M

5M - 8M

50M – 90M

120M - 500M

30-40M

60-100M

Source: IBS

The industry is currently looking for solutions that would enable it to continue its technological
evolution while maintaining a decline in unit costs.

4.1.

FD-SOI: a genuine solution for the industry

The industry needs to modify its current production methods "2D-Bulk" (planar structure on bulk
silicon). It has two options for this: FinFET and FD-SOI.
Fig. 9:

The three main transistor structures possible

Traditional structure
Planar design (2D) on bulk silicon

New structures
Planar design on FD-SOI

3D design on bulk silicon

Created jointly by Soitec and
STMicroelectronics

Created by Intel

Adopted by STMicroelectronics, Samsung and
GlobalFoundries

Adopted by Intel, TSMC, Samsung

Sources: Institute of Electrical and Electronics Engineers; Bryan, Garnier & Co.

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4.1.1.

FinFET: high-performing but costly

The industry leader, Intel regularly innovates and its innovations are generally adopted by other
players with a one/two year lag. In order to get around the problems caused by die shrink beyond
20nm, in 2011, Intel presented its solution (dubbed FinFET by the industry), which consists of
producing the transistors in 3D (see. Fig. 9).
However, the switch to 3D compared with the traditional planar architecture implies numerous
additional production stages and a modification in production chains, while slashing yields. Although
the solution does provide performance gains, it is far more costly than the current process.
Fig. 10: Change in cost per transistor with adoption of FinFET
0.0450
0.0401

The 20nm node shows an
inflexion in the Moore’s Law.

0.0350

14nm FinFET confirms!

0.0282

0.0300
0.0250

0.0194

0.0200

0.0140

0.0150

0.0142

0.0100

0.0162

FinFET

Intel's proposal offers the
performance gains hoped
for but is complex and
costly

Cost per milion gates (USD)

0.0400

0.0050
0.0000
90nm

65nm

40nm

28nm

20nm

16/14nm

Source: IBS

The FinFET
manufacturing process
looks difficult to apply to
the rest of the sector

This solution can only be viable for Intel, which boasts: 1/ an integrated business model (IDM),
and 2/ a product line enabling it to declass certain partially faulty high end products into entry-level
products and thereby to partly get round the problem of a plunge in yields).
While the performance gains offered by FinFET are encouraging, its costly and complex
adoption has led to hesitation in the industry. Intel has been obliged to delay its mass production
to the end of 2014 vs. end-2013 initially, while TSMC and Samsung, as early-adopters, are also having
problems with its launch, although the two companies estimate a huge amount of capex at around
USD10bn for 2014.
In our view, given its particularly high cost and complexity, this production method is likely
to be reserved for high-performance applications.

4.1.2.

FD-SOI: the best suited solution

The only solution the sector has to not increase production costs is Soitec's FD-SOI.

SOI wafers are made up
of a layer of single
crystalline silicon,
insulated from a support
by a layer of amorphous
silicon oxide.

The materials making up the wafers are key in terms of the final performances and characteristics of
the integrated circuits. Soitec's historical speciality is the Silicon-On-Insulator (SOI) wafer
architecture, which is particularly efficient but which has so far also been more costly compared with
traditional production on bulk wafers.
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However, beyond the technical advantages, which have always been the strength of SOI, this
technology is now delivering financial advantages relative to the traditional method for the first time
(re. Fig. 8 and 10), thanks to higher yields as of 28nm.
Fig. 11:

Albeit more expensive, an
SOI wafer helps reduce
production costs as of
28nm

Price of a chip on solid silicon (traditional) vs. FD-SOI in 28nm

Wafer technology

Bulk

FD-SOI

Wafer cost ($)

2867

3067

Gross die/wafer

651

651

Yield (%)

56.8

68.2

Net die/wafer

369.6

443.8

Die cost ($)

7.76

6.91

Source: IBS

Production tests at 28nm undertaken by STMicroelectronics have also shown that the final product
delivers the same performances as a 20nm production with a simpler manufacturing process
(especially thanks to a reduction in the lithography and test stages).
Fig. 12:

FD-SOI enables continuity of the Moore law

Source: STMicroelectronics

Above 20nm, FD-SOI that does not requires major modifications in the integrated circuit designs
(contrary to FinFET), provides a significant advantage in terms of production costs.

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Fig. 13:

Comparison of transistor costs produced by FD-SOI vs Bulk
0.0450

0.0401

0.0350
0.0282

0.0300
0.0250

0.0194

0.0100

0.0142
0.0120

FD-SOI

0.0050

0.0162
0.0122

FinFET

0.0140
0.0136

0.0150

FD-SOI

0.0200

FD-SOI

Cost per milion gates (USD)

0.0400

0.0000
90nm

65nm

40nm

28nm

20nm

16/14nm

Source: IBS

In addition, FD-SOI helps reduce energy consumption of integrated circuits, thereby suggesting that
this technology is particularly well-suited to new trends in electronic consumption.
Indeed, the emergence of the Cloud and momentum in mobile equipment is totally changing the way
in which digital and electronic products are consumed and modifying demand for electronic products:
Fig. 14: New uses and consequences

Consumers: search for better comfort
Old Trend

New trend

Need for more power

Search for mobility

OEM: search for a shorter "time to market"
Building more powerful devices, irrespective of their
energy consumption

Building low power devices suitable for multimedia and
entertainment

Semiconductor Industry: search for reducing production costs
Moore's Law continuation, irrespective of energy
consumption of integrated circuits

Moore's Law continuation with a strong focus on energy
consumption

Source: Bryan, Garnier & Co.

FD-SOI helps reduce
current leakages and
hence energy
consumption (re.
Appendix 7.3)

The current challenge for the industry is to produce integrated circuits that not only perform
increasingly well, but that also consume less energy (a rising number of these are battery driven). FDSOI boasts an architecture enabling it to considerably reduce energy consumption while
improving the performance of integrated circuits.

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We also back the theory that the industry could maintain 28nm production in order to meet demand
concerning connected objects since this node boasts an excellent cost/performance duo, especially
with FD-SOI technology. However, as good as it is, any technology needs a strong ecosystem to be
adopted by the industry.

4.2.

The FD-SOI ecosystem is taking shape

The ecosystem based on the new technology is important for the industry. The choice of
whether or not to adopt an FD-SOI substrate is made when the design of the integrated
circuits is started.
Several factors influence this choice:

IP blocks

 Compatibility of EDA: developing an integrated circuit is a complicated task undertaken with
the help of specific electronic CAD software. The most commonly used are those produced by
Cadence, Synopsys, Jasper and Mentor Graphics. If these tools do not support of a
technology, it has little chance of being adopted.
 Availability of IP blocks: during the design of integrated circuits, designers regularly use
licensed blocks. The more IP blocks there are for a technology, the more chances the
technology has of rapidly spreading. ARM, Cadence and Synopsys are examples of
influential IP block sellers.

Source: nVidia

 Double sourcing of wafers: in the sector, double sourcing practices are common. In order to
limit the risks of shortfalls, foundries and IDMs avoid launching production based on a
substrate that is available in limited quantities and from only one manufacturer.
 Double sourcing of production: OEM and fabless clients aim to reduce manufacturing risks.
Fig. 15: The virtuous circle of FD-SOI
More design
tools (EDA)

More interest
from IDM and
Fabless

Lower cost per
gate

More IP blocks

More
production
capacity

Source: Bryan, Garnier & Co.

In 2011, when the foundries built their roadmaps for nodes of 20nm or under, the FD-SOI ecosystem
was not developed enough. TSMC and Samsung followed Intel and invested massively in FinFET. In

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the meantime, other players took interest in FD-SOI and the ecosystem began to take shape
and for this reason, we believe volumes should rapidly take off.
Fig. 16:

Creation of ecosystem surrounding FD-SOI
October 2012: Wafer double sourcing

Soitec signs a new agreement with Shin Etsu, leading supplier of silicon wafer and historical shareholder (3% of shares).
In Novembre 2013, SunEdison and Soitec sign a licence agreement based on SOI

January 2013: STM's proof of concept generates industry interest
At the CES Las Vegas event, STMicroelectronics presents an IC at 2.8 Ghz named NovaThor and built on FD-SOI. A
month later, at the Mobile World Congress, the NovaThor is runing at 3 Ghz with an ultra low power consumption.

July 2013: IP block designers endorse FD-SOI
The CEO of ARM states his confidence in the Soitec technology and launches new FD-SOI design developments

May 2014: Production double sourcing
STMicroelectronics signs an agreement with Samsung for 28nm FD-SOI production.
Samsung announces that production will start in early 2015 and adds the technology to its product portfolio

July 2014: major EDAs officially support FD-SOI design capabilities
Cadence and Synopsys tools support FD-SOI design
They also release FD-SOI IP blocks

October 2014: Major foundries to adopt FD-SOI
GlobalFoundries, the second biggest foundry, announces an FD-SOI roadmap at Semicon Europa 2014
Source: Bryan, Garnier & Co.

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PD-SOI is currently used
by IBM for the Xbox 360
and the WiiU, and by
AMD for its server CPUs

20,000 WSPM
corresponds to the
production capacity of
STM's Crolles 2 plant

5.

Margins back on track?

5.1.

Heading for a surge in electronics activity

The electronics division is currently suffering a decline in orders for Soitec's historical
flagship product, the PD-SOI 300mm (-57% vs n-1, EUR60m, 35% of electronics sales). AMD has
announced it is to halt production in SOI for its future CPUs and now only orders a small amount for
its server CPUs. IBM, the second-largest PD-SOI client, has also reduced its orders. The group used
SOI wafers to produce integrated circuits for Microsoft's Xbox 360, which was replaced when the
XBox1 came out a year ago, as well as for integrated circuits for Nintendo's Wii U, which proved
unsuccessful. For 2014/15e, we are forecasting sales of around EUR46m for this product. We expect
the last orders for PD-SOI during H1 2015/16e.
FD-SOI is to take over as of 2015/16e. STMicroelectronics is to use FD-SOI for future generations
of integrated circuits, mainly for digital uses and the automotive sector. We estimate that FD-SOI
production at STM could genuinely kick off as of calendar H2 2015. We expect volumes of
around 20,000 wafers start per month (WSPM) over nine months, or a total of 195,000 wafers during
2015/16e. For the following year, we are forecasting similar monthly volume levels, i.e. 260,000
wafers over the full year.
If we reason in the same way for Samsung, we forecast volumes of 104,000 wafers for 2015/16e
(production start deferred by six months relative to STMicroelectronics) and on the basis of 32,000
WSPM. Finally, we have taken into account orders from GlobalFoundries at the end of 2016, which
we estimate at slightly more than 156,000 wafers over 2016/17e (on a 24,000 WSPM basis).
Fig. 17:

300mm volume estimates
03/2015e

03/2016e

100,225

40,000

0

3,000

195,000

260,000

Samsung FD-SOI (units)

0

104,000

416,000

GlobalFoundries FD-SOI (units)

0

0

156,000

103,225

339,000

832,000

43.5

137.3

337.0

Total PD-SOI (units)
STMicroelectronics FD-SOI (units)

Total 300mm (units)
Sales 300mm (EURm)

03/2017e

Source: Bryan, Garnier & Co ests.

We have applied a price of USD500/wafer and a EUR/USD exchange rate of 1.24, both stable
over the entire period of our estimates. In our model, a negative change of 10% in the EUR/USD
exchange rate has a positive impact of 4% on the current operating income. A 10% decrease in the
EUR/USD exchange rate would have a positive impact of 4% on the current operating income.
The 200mm RF-SOI is continuing to perform well. After a slight air pocket in Q1 2014/15,
due to stock rundowns by clients, we expect full capacity production of 200mm wafers until
2016/17e. Sales are underpinned by orders from GlobalFoundries (incl. IBM), Towerjazz and TSMC
especially for Peregrine and Qualcomm (RF360). In our scenario, the Bernin 1 plant (200mm) is
close to its maximum production capacity over the end of the current year (around 80% before
yield) and maintains this load until 2016/17e. We believe the partnership with Simgui should help
rapidly respond to demand from the Chinese market. We find this growth in the form of royalties in
Soitec's accounts with sales up 17% over 2014/15e, followed by growth of 40% and 20% in the

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Soitec
following two years. The agreement with Simgui also includes a possibility of production
capacity allocation that we have not included in our scenario.
Fig. 18: Estimate of 200mm volumes
03/2015e

03/2016e

03/2017e

TSMC (units)

110,000

120,000

120,000

GlobalFoundries (incl. IBM and Peregrine) (units)

320,000

330,000

330,000

NXP (units)

90,000

100,000

100,000

Towerjazz (units)

55,000

55,000

55,000

4,585

35,000

35,000

579,585

640,000

640,000

108.7

115.8

115.8

Others (units)
Total 200mm (units)
Sales 200mm (EURm)

Source: Bryan, Garnier & Co ests.

For 2017, our model shows gross margin of close to 30% and EBIT margin of 17% for the
electronics division.
Fig. 19:

Electronics division – Simplified P&L account

EURm (FYE 31/03)
Sales
% change
COGS

03/2011

03/2012

03/2013

03/2014

03/2015e

03/2016e

275.2

316.6

257.1

167.5

169.8

263.3

03/2017e
464.2

-

15.1%

-18.8%

-34.8%

1.4%

55.1%

76.3%

-199.5

-249.6

-229.8

-167.0

-156.7

-203.3

-323.0
141.2

Gross Margin

75.6

67.0

27.3

0.5

13.1

60.0

% of sales

27%

21%

11%

0%

8%

23%

30%

-12.6

-22.9

-16.6

-7.1

-4.4

-13.8

-24.4

-5%

-7%

-6%

-4%

-3%

-5%

-5%

-6.9

-8.9

-9.0

-6.6

-4.8

-7.4

-13.0

R&D
% of sales
Sales & Marketing
% of sales
General & Administration
% of sales
Operating Income
% of sales

-3%

-3%

-4%

-4%

-3%

-3%

-3%

-11.8

-12.0

-15.2

-13.2

-8.6

-14.5

-25.5

-4%

-4%

-6%

-8%

-5%

-6%

-6%

44.3

23.1

-13.5

-26.4

-4.7

24.3

78.3

16%

7%

-5%

-16%

-3%

9%

17%

Other operating income

0.0

0.0

0.0

2.7

0.0

0.0

0.0

Other operating expense

0.0

0.0

-59.7

-35.2

0.0

0.0

0.0

44.3

23.1

-73.2

-59.0

-4.7

24.3

78.3

16%

7%

-28%

-35%

-3%

9%

17%

EBIT
Operating margin

Source: Bryan, Garnier & Co ests.

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Soitec

5.2.
Soitec holds the world
record with a 46% yield in
laboratories.

Change in solar sales
100
80
60
40

Solar: CPV bet beginning to pay off

Soitec produces Concentrated PhotoVoltaic (CPV) solar panels, which are a combination of optical
technologies (mirrors and Fresnel lenses) and semiconductors. CPV is particularly efficient in regions
with strong direct sunlight and is destined for industrial power production. In this field, the group
values its expertise in semiconductors material and epitaxy. Soitec sells solar panels (sometimes
accompanied by power purchase agreements) to farm construction companies (Engineering,
Procurement and Construction). In contrast, the group does not aim to take part in the
construction of the farms.
Launched in 2010 after the acquisition of Concentrix Solar, this business had so far proved to
be fairly unprofitable despite the massive investments made. The business cost the group
EUR44m together with R&D spending estimated at more than EUR53m, plus the construction of a
specific plant in San Diego. More recently, the group halted production at the historical Concentrix
Solar plant in Germany. Soitec has also launched various solar plant projects (South Africa, Saudi
Arabia, Chile, Egypt, the US etc.). Combined sales over 2010-14 stand at EUR97m whereas the
division has remained significantly loss-making at the operating level.

20

Source: Company

The Touwsriver project in South Africa was made official in December 2011 and aimed at installing a
44MW solar plant. After a number of months of waiting, the project is now paying off with sales in
the division standing at EUR79m at end-March 2014. However, note that Touwsrivier is a specific
project since the group was obliged to financially provide for construction of the farm up to
22 MWp (50% of the project) due to the rules imposed by the South-African energy ministry.
As such, the group now has a shop window for attacking the photovoltaic market, which
boasts healthy prospects, especially in the CPV segment.
Fig. 20:

Change in concentrated photovoltaic market

300
MegaWatt Peak installed

0

263

250
CAGR: 13.9%
200
150

120

100

62

50
1

10

3

5

69

11

0
2006 2007 2008 2009 2010 2011 2012 2013 2014e 2015e 2016e 2017e 2018e 2019e
Sources: MarketsandMarkets; Bryan, Garnier & Co ests.

In order to create a model for Soitec's solar business, we have taken account of:
 Forthcoming sales thanks to US contracts (EUR250m estimated). Contrary to the
Touwsrivier project, Soitec is not due to carry out the construction phases of the solar farms in
the US. The group has announced the sale of Power Purchase Agreements (PPA) with San
Diego Gas & Electric to a solar plant builder. We have built our scenario on the basis of a
price of USD1.5/Wp (Watt peak). The first deliveries are due to take place before the end
of the year and continue until H2 2015/16e.
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 We have taken into account the recent announcement of the construction of a solar
plant in Hami, in China, a 20 MWp project built by Focusic. The project is divided into three
phases, one of which was already delivered and invoiced at the start of the year. We have
assumed invoicing of the second wave, which we estimated at 6MWp at the end of 2014 and the
third wave in Q4 of this financial year. This project represents EUR25m in sales in our
model.
 For 2015/16e and 2016/17e, we have also included the French contract "CRE 2"
(Commission de Régulation de l’Energie - the French energy regulation commission)
estimated at 57 MWp as well as a contract in Saudi Arabia of 41 MWp. These projects
represent respectively EUR67m and EUR49m in our model.

Fig. 21:

Production of solar cells

[MWp production]

03/2015e

03/2016e

USA – Total PPA

25

185

03/2017e
0

France – CRE 2

0

10

47

China - Hami

21

0

0

Saudi Arabia

0

15

26

Others

11

15

10

Total

57

225

83

Source: Bryan, Garnier & Co ests.

In the Touwsrivier
project, the group's
guidance is for gross
margin of around 30%

Once the operating ramp-up of the San Diego plant is complete and production is close to its
maximum level, we are forecasting gross margin of 30% and EBIT margin of more than 11%
vs. guidance for 15%. We have not factored into our model significant projects that have not yet
been signed. Any new announcement would therefore have a positive impact on EPS.
Fig. 22: Solar division – simplified P&L account
EURm (FYE 31/03)
Sales
% change
COGS
Gross Margin
% of sales
R&D
% of sales
Sales & Marketing
% of sales
General & Administration
% of sales
Solar plant
% of sales
Operating Income

03/2011

03/2012

03/2013

03/2014

03/2015e

03/2016e

5.8

6.8

5.8

78.9

92.3

273.4

03/2017e
100.8

-

16.8%

-15.6%

1270.4%

17.0%

196.2%

-63.1%

-14.4

-23.4

-48.6

-135.5

-153.0

-191.4

-90.8

-8.6

-16.6

-42.9

-56.6

-60.7

82.0

10.1

-147%

-243%

-745%

-72%

-66%

30%

10%

-6.7

-10.2

-20.2

-16.2

-17.0

-21.4

-13.1

-115%

-149%

-352%

-21%

-18%

-8%

-13%

-0.3

-4.8

-6.0

-9.6

-8.1

-13.7

-5.0

-5%

-70%

-105%

-12%

-9%

-5%

-5%

-4.1

-10.2

-9.5

-8.2

-6.9

-16.4

-6.1

-69%

-149%

-165%

-10%

-8%

-6%

-6%

-5.3

-4.6

-3.6

-3.1

0.0

0.0

0.0

-91%

-67%

-63%

-4%

0%

0%

0%

-25.0

-46.3

-82.3

-93.6

-92.7

30.5

-14.1

-428%

-679%

-1429%

-119%

-100%

11%

-14%

Other operating income

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other operating expense

0.0

0.0

-14.2

-49.8

0.0

0.0

0.0

-25.0

-46.3

-96.5

-143.4

-92.7

30.5

-14.1

-428%

-679%

-1676%

-182%

-100%

11%

-14%

% of sales

EBIT
Operating margin

Source: Bryan, Garnier & Co ests.

20

Westhouse Securities

Soitec

5.3.

Lighting division struggling to find its market

Soitec's lighting division was launched at the end of 2010 in order to diversify its businesses.
In this activity, the company is also capitalising on its expertise in semiconductor materials and epitaxy
and is targeting various applications including lighting for car parks, shopping centres, railway stations,
offices and even street lighting. The product range includes LED panels and tubes as well as spot
lighting.
Whereas the business is volume-based, Soitec has so far had very few contracts. The largest of these
was signed with the RATP in 2013 and aimed at providing low energy consumption lighting solutions
for the Paris metro network (EUR11m project divided into six batches). Nothing indicates at present
whether Soitec could win another contract in this division. In our model, we have assumed no new
growth in this business model over the next three years. We believe the company could become
more active in this market once signs of a boom in volumes emerge, which is not the case at
present.
Since the division was launched in 2010, Soitec has invested more than EUR25m in R&D whereas
combined sales have totalled EUR3m.
Fig. 23:

Lighting division – Simplified P&L account

EURm (FYE 31/03)
Sales
% change
COGS

03/2011

03/2012

03/2013

03/2014

03/2015e

03/2016e

0.0

0.0

0.0

0.7

1.6

1.6

03/2017e
1.6

n.s.

n.s.

n.s.

n.s.

114.5%

0.0%

0.0%

0.0

0.0

0.0

-0.4

-0.8

-0.8

-0.8

Gross Margin

0.0

0.0

0.0

0.4

0.8

0.8

0.8

% of sales

0%

0%

0%

0%

1%

0%

1%

R&D
% of sales
Sales & Marketing
% of sales
General & Administration
% of sales
Operating Income

-4.6

-8.5

-11.3

-4.6

-5.0

-5.0

-5.0

-79%

-124%

-197%

-6%

-5%

-2%

-5%

0.0

-0.1

-0.6

-1.4

-2.9

-2.9

-2.9

0%

-1%

-10%

-2%

-3%

-1%

-3%

0.0

-0.1

-0.1

-0.2

-0.6

-0.6

-0.6

0%

-1%

-1%

0%

-1%

0%

-1%

-4.6

-8.6

-12.0

-5.8

-7.7

-7.7

-7.7

-79%

-126%

-209%

-7%

-8%

-3%

-8%

Other operating income

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other operating expense

0.0

0.0

0.0

0.0

0.0

0.0

0.0

-4.6

-8.6

-12.0

-5.8

-7.7

-7.7

-7.7

-79%

-126%

-209%

-7%

-8%

-3%

-8%

% of sales

EBIT
Operating margin

Source: Bryan, Garnier & Co ests.

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Westhouse Securities

Soitec

6.

A sufficiently solid financial
structure?

6.1.

Armed for growth!

Soitec's financial situation has deteriorated in recent years for two reasons: investment spending in
solar activities and a slowdown in business. The capital increase during the summer together
with the return to growth expected over the year point to a significant improvement in the
group's financial situation.
Fig. 24: Close to a net cash position in 2016/17e
150.0

-60%

100.0

-40%
96

50.0

-20%

0.0

0%

-50.0

20%
-67

-100.0

-111

-51

-132

-150.0

Gearing

Net cash position (EURm)

100

40%
60%

-212

-200.0

80%

-250.0

100%
03/2011

03/2012

03/2013

03/2014

Net Debt

03/2015

03/2016

03/2017

Gearing

Source: Bryan, Garnier & Co ests.

Capacity at the Bernin 2
plant (300mm wafers)
totals 720,000 wafers a
year

Our growth forecasts prompt us to factor in capex spending, especially in the historical PDSOI production lines, which need to be adapted for FD-SOI. We are forecasting EUR6m per
batch of 100,000 wafers/year. Once the Bernin 2 (300mm) plant is entirely filled, we have assumed
the Singapore plant is re-opened with capex of EUR15m per new line of 100,000 wafers/year.
We have not factored in capex for the Bernin 1 plant (RF-SOI 200mm). Indeed, this plant is fully
equipped and the group is likely to call on its Chinese partner Simgui, if it needs additional capacity
for the 200mm. Further out, the group may have to invest in order to meet demand for the RF-SOI
in 300mm. However, this scenario is unlikely to take place for four/five years.
Finally, the San Diego plant, which has capacity of 280 MWp/year should see its production
capacity increase thanks to an improvement in yields on CPV cells. We have factored in no capex
for this plant.
In all, given the volumes we have factored in, we are forecasting EUR12m in capex for 2014/15e
followed by EUR29m and EUR42m for the following two years. After adding in maintenance capex

22

Westhouse Securities

Soitec
of EUR3m, the EUR22M sale and lease back operation for production assets at Bernin, and the sale
of the disposal of the epitaxy business, we have factored in the following net capex amounts:
Fig. 25: Change in annual production capacity and capex
03/2015e

03/2016e

03/2017e

720,000

720,000

1,000,000

240,000

720,000

1,000,000

800,000

800,000

800,000

Total Solar unyielded capacity (MWp)

280

280

280

Acq. of tangible fixed assets (M EUR)

12.0

28.8

42.0

3.0

3.0

3.0

Total 300mm unyielded capacity (wafers)
Therein FD-SOI unyielded capacity (wafers)
Total 200mm unyielded capacity (wafers)

Maintenance capex (M EUR)
Disposal of fixed assets (M EUR)

-28.0

0.0

0.0

Net capex

-13.0

31.8

45.0

Source: Bryan, Garnier & Co ests.

In June 2014, Soitec undertook a capital increase enabling it to raise EUR83m. The operation
aimed to ensure the rising momentum of the electronics and solar activities whereas a massive debt
maturity was looming. This debt of a nominal amount of EUR81m (EUR88m in all) was reimbursed
in September 2014.
WCR increased significantly in 2013/14 due to the Touwsriver solar project. This unusual situation
should inverse this year and prompt cash generation of EUR45m. Free cash flow is set to stand
EUR3m in the red in 2014/15e.

Cash (EURm)

Fig. 26:

Change in net financial debt over 2014/15e
150
100

83

50
0

88

128

45

5

40

45

-50
Debt (EURm)

-257
-100
-150

-169
-129

-257

-177
-129

-132
-8

-200

-88

-212

-250
-300
31/03/2014

Capital
Increase

Cash & cash equivalents

31/07/2014e

Debt
31/09/2014e
Cash
31/03/2015e
repayment
Generation

Gross Debt

Net Debt evolution

Net Financial Debt

Source: Bryan, Garnier & Co ests.

In the following years, the improvement in net profit and investments in line with sales
growth should help generate positive free cash flow (2016/17e gearing of 22%). The group is
now equipped to face forthcoming growth while improving its financial situation at the same time.

23

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Soitec

6.2.

Financial structure on the test bench

We have imagined various scenarios aimed at testing the solidity of the group's financial
structure.
For this test, we are making no change to the scenario in the solar division since all the contracts that
we have factored in are currently in the order backlog.
 Scenario 1 – Slow uptake of FD-SOI:
Weak FD-SOI volumes at Samsung (8,000 WSPM vs 32,000 in our model).
No orders from GlobalFoundries.
A plunge in sales of 200mm wafers of -10% and -5% over 2015/16e and 2016/17e.
Investments in production facilities in line with growth.
Fig. 27:

Balance sheet capable of sustaining modest growth

[EURm]

03/2015e

03/2016e

03/2017e

Sales

263

479

353

EBIT

-112

15

10

Net result

-125

1

3

-15

-7

-15
56

Capex
FCF
Net Financial Debt
Gearing

-3

26

133

106

50

74.3%

59.5%

27.8%

Source: Bryan, Garnier & Co ests.

 Scenario 2 – High growth implying investment spending:
Growth in the electronics division of 94% in 2015/16e and 106% in 2016/17e.
High volumes in FD-SOI with production capacities 100% used.
Investments in production facilities in line with growth (capacity of 240,000 wafers a year in
March 2015, followed by 1,000,000 and 1,720,000 for 2016 and 2017).
Fig. 28:

Balance sheet capable of sustaining high growth

[EURm]

03/2015e

03/2016e

03/2017e

Sales

263

599

787

EBIT

-112

53

96

Net result

-125

29

67

-15

-32

-153

-3

18

-11

Capex
FCF
Net Financial Debt
Gearing

133

107

126

74.3%

51.7%

47.6%

Source: Company Data; Bryan, Garnier & Co ests.

24

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Soitec
 Scenario 3 – High growth out to 2015/16e followed by sudden halt in FD-SOI
Growth in the electronics division of 94% in 2015/16e followed by -22% in 2016/17e due
to a sudden halt in FD-SOI orders.
Production capacity turning at 100% in 2015/16e.
Investment spending in 2016/17e does not take account of deterioration.
Fig. 29:

Balance sheet not capable of sustaining sudden halt in orders

[EURm]

03/2015e

03/2016e

03/2017e

Sales

263

599

362

EBIT

-112

53

-38

Net result

-125

29

-46

-15

-32

-153

-3

25

-111

Capex
FCF
Net Financial Debt
Gearing

133

107

218

74.3%

51.7%

135.2%

Source: Company Data; Bryan, Garnier & Co ests.

Whereas Soitec's balance sheet is capable of sustaining growth, whether high or low, it
is not capable of adapting to a plunge in sales without a rapid downward adjustment to
capex. We do not expect this scenario to materialise since it implies that: 1/ management does
not anticipate the sharp plunge in demand in our scenario; 2/ management does not react and
continues to invest massively in order to increase production capacity in 2016/17e; 3/ there is a
sudden disinterest in FD-SOI whereas several clients would also have invested for production
lines of FD-SOI integrated circuits, and 4/ a substitute product would have been developed in
the meantime and that its ecosystem is sufficiently well developed in the space of 18 months.

25

Westhouse Securities

Soitec

7.

Appendices

7.1.

The industry value chain

The semiconductor industry is made up of three main categories of player.
Fig. 30:

IDM, fabless and foundries, the three main categories of player






IDM
"Integrated Device
Manufacturers"

Traditional manufacturers of integrated circuits
Desgin ICs
Make (own fabs)
Sell
Examples: Intel, Texas Instruments, STMicroelectronics, Infineon, Renesas

• Design ICs
• Sell
• Examples: AMD, Broadcomm, nVidia, Qualcomm, Xilinx

Fabless
Wafer supplier

• Make only (for Fabless)
• Do not design or sell ICs
• Examples: TSMC (Taiwan Semiconductor Manufacturing Co.), UMC (United
Microelectronics Corp.),Global Foundries (AMD's spin-off) and SMIC
(Semiconductor Manufacturing International Corporation).

Founderies

Source: Bryan, Garnier & Co.

The industry is a fixed-costs industry, which means all players in the production chain need to handle
high volumes, or if not take the risk of seeing their margins narrow and thereby their innovative
capacity drying up.
Fig. 31:

The industry favours large players!

Market share gain

Better product
portfolio

Increase in sales

Better innovation
capabilities(R&D)

Dilution of high
fixed-costs

Higher margin

Source: Bryan, Garnier & Co.

26

Westhouse Securities

Soitec

7.2.
"The number of transistors
incorporated in a chip will
approximately double every 24
months."

Moore's law

In 1965, Intel's co-founder, Gordon Moore, noted that the industry was managing to double the
number of transistors incorporated in a chip every two years and estimated that this momentum
would continue over coming decades. This statement was the basis for the famous Moore's laws,
which can still be proved true today, with a degree of flexibility.

- Gordon Moore, Intel co-founder, 1954

Despite the high investment spending needed to reduce transistor sizes further (up to
USD15bn in a new plant), two factors are motivating the industry to pursue a reduction in the
size of transistors:
 Costs: The smaller they are in size, the higher the number of transistors that can be engraved
on each wafer and the lower the unit cost of a transistor.
 Performance: Reducing the size of the transistors helps 1/ reduce the time it takes to transfer
electrons and hence improves their performance, 2/ reduces their energy consumption, and 3/
reduces the heat they generate.
Fig. 32:

Change in semiconductor sales and technological node size

Semiconductor billing (USD B)

400
350
300
250
200
150
100
50
0

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e 2015e 2016e

1000

800

600

250

180

130

90

45

32

22

14

10

Technological node (nm)
Sources: World Semiconductor Trade Statistics, Intel

The 20nm transistor nevertheless implies doubling lithographical stages (double patterning) and a
strengthening of test stages.
Fig. 33: Comparison of manufacturing costs between two technological nodes

Reducing the size of the
transistors prompts an
increase in unit costs as of
20nm. The industry is
heading to a
discontinuation of the
Moore's law.

Node
Fab costs ($): Costs of building plant
Process R&D ($): Costs of setting up production process
Mask Costs ($): Costs of IC masks development (used for lithography process)
Design Costs ($): Costs of designing IC
Breakeven (units)

28nm

20nm

3bn

4bn – 7bn

1.2bn

2.1bn – 3bn

2M - 3M

5M - 8M

50M – 90M

120M - 500M

30-40M

60-100M

Source: IBS

27

Westhouse Securities

Soitec

7.3.

How a transistor works and explanation of
leakages

The way a transistor works can be compared to the way a switch works and can be resumed in three
points: allowing the maximum amount of current possible to flow when switched on, allowing the
least amount of current to flow when switched off, switching from one state to the other as fast as
possible.
A transistor is made up of three parts, the source, the drain and the gate. The transfer of electrons
between the source and the drain is controlled by the gate (see Fig. 34).
With the switch to 20nm, the very short distance between the source and the drain prompts a
movement of electrons between the two thresholds without the gate (which is supposed to
control the flow of electrons) being switched on. This phenomenon is called leakage.
Fig. 34: Transistor leakage – cross section of a transistor

Transistor On

The small size of the
transistors leads to
leakages that generate
useless consumption, limit
the maximum frequencies
that can be reached and
cause heating in the
circuit.

Transistor Off
Gate On

Source

Drain

Electrons flow as expected
Electrons should not flow but leaks appear
The shorter the distance between the source and
the drain, the higher the risk of leakage
Source: STMicroelectronics

Leakage causes deterioration in performance of integrated circuits and excessive energy
consumption.

Reducing leakage is a
major challenge for the
industry

With the success of smartphones, tablets and other wearables, this is a particularly worrying problem.
Leakages have a significant impact on the autonomy of these devices.

28

Westhouse Securities

Soitec

7.4.

Glossary

Block of intellectual property: Design of logical unity that can be reused under licence.
Bulk: wafer of solid silicon generally used by the semiconductor industry.
CPV (Concentrated Photovoltaic): Combination of optical technologies (mirrors and Fresnel
lenses) and semiconductors to form photovoltaic solar panels.
Electronic Design Automation: Software enabling the development of complex integrated circuits.
FD-SOI (Fully Depleted Silicon On Insulator): re. SOI. FD-SOI wafers differ from PD-SOI
wafers by a layer of single crystalline silicon, un-doped (vs weakly doped) and thinner. Can also be
used to designate the transistor manufacturing process on FD-SOI wafers.
FinFET (Fin Field Effect Transistor): A transistor architecture, which requires 3D production.
The distinguishing characteristic of the FinFET is that the conducting channel is wrapped by a thin
silicon "fin", which forms the body of the device. Can also be used to designate the FinFET transistor
manufacturing process.
IC (Integrated Circuit): an electronic component, which reproduces and unites several electronic
components within a reduced volume.
Lithography: Combination of light exposure and masks to engrave or print the integrated circuits
onto a wafer.
Node: The miniaturisation of transistors takes place in stages, known as nodes corresponding to a
width of engraving expressed in nanometres (nm). While this measurement is no longer representative
of a precise measurement of a transistor element, it provides an indicator of progress in the industry
concerning the performance of integrated circuits.
PD-SOI (Partly Depleted Silicon On Insulator): re. SOI. PD-SOI wafers differ from FD-SOI
wafers by a layer of single crystalline silicon that is weakly doped (vs. un-doped) and thicker. This can
also be used to designate the transistor manufacturing process on PD-SOI wafers.
RF/RFIC (Radio Frequency Integrated Circuit): A generic term to designate integrated circuits
destined for wireless communication.
SoC (System on Chip): A group of components brought together on a same chip and enabling the
end-to-end execution of a task.
SOI (Silicon On Insulator): designates a category of wafers made up of a layer of single crystalline
silicon, insulated from a support by a layer of amorphous silicon oxide. This can also be used to
designate the transistor manufacturing process on SOI wafers.
Wafer: A thin slice of semiconductor material on which transistors are produced. In order to improve
transistor performances, the industry generally uses doped silicon wafers, namely to which impurities
have been deliberately added. The size of a wafer is expressed in mm and refers to its diameter. The
maximum sized used for industrial production is currently 300mm.

29

Westhouse Securities

Soitec

Research Disclosure Legend
BG

WSL

1

Bryan Garnier or
Westhouse shareholding in
Issuer -5% or more

Bryan Garnier & Co Limited or another company in its group (together, the “Bryan Garnier Group”) or
Westhouse has a shareholding that, individually or combined, exceeds 5% of the paid up and issued share
capital of a company that is the subject of this Report (the “Issuer”).

No

No

2

Issuer shareholding in
Bryan Garnier or
Westhouse

The Issuer has a shareholding that exceeds 5% of the paid up and issued share capital of one or more
members of the Bryan Garnier Group or Westhouse.

No

No

3

Financial interest

A member of the Bryan Garnier Group or Westhouse holds one or more financial interests in relation to the
Issuer which are significant in relation to this report

No

No

4

Market maker or liquidity
provider

A member of the Bryan Garnier Group or Westhouse is a market maker or liquidity provider in the
securities of the Issuer or in any related derivatives.

No

No

5

Lead/co-lead manager

In the past twelve months, a member of the Bryan Garnier Group or Westhouse has been lead manager or
co-lead manager of one or more publicly disclosed offers of securities of the Issuer or in any related
derivatives.

No

No

6

Investment banking
agreement

A member of the Bryan Garnier Group or Westhouse is or has in the past twelve months been party to an
agreement with the Issuer relating to the provision of investment banking services, or has in that period
received payment or been promised payment in respect of such services.

No

No

7

Research agreement

A member of the Bryan Garnier Group or Westhouse is party to an agreement with the Issuer relating to the
production of this Report.

No

No

8

Analyst receipt or purchase
of shares in Issuer

The investment analyst or another person involved in the preparation of this Report has received or
purchased shares of the Issuer prior to a public offering of those shares.

No

No

9

Remuneration of analyst

The remuneration of the investment analyst or other persons involved in the preparation of this Report is
tied to investment banking transactions performed by the Bryan Garnier Group or Westhouse.

No

No

10

Corporate finance client

In the past twelve months a member of the Bryan Garnier Group or Westhouse rhas been remunerated for
providing corporate finance services to the issuer or may expect to receive or intend to seek remuneration
for corporate finance services from the Issuer in the next six months.

No

No

11

Analyst has short position

The investment analyst or another person involved in the preparation of this Report has a short position in
the securities or derivatives of the Issuer.

No

No

12

Analyst has long position

The investment analyst or another person involved in the preparation of this Report has a long position in
the securities or derivatives of the Issuer.

No

No

13

Bryan Garnier executive is
an officer

A partner, director, officer, employee or agent of the Bryan Garnier Group or Westhouse, or a member of
such person’s household, is a partner, director, officer or an employee of, or adviser to, the Issuer or one of
its parents or subsidiaries. The name of such person or persons is disclosed above.

No

No

14

Analyst disclosure

The analyst hereby certifies that neither the views expressed in the research, nor the timing of the
publication of the research has been influenced by any knowledge of clients positions and that the views
expressed in the report accurately reflect his/her personal views about the investment and issuer to which
the report relates and that no part of his/her remuneration was, is or will be, directly or indirectly, related to
the specific recommendations or views expressed in the report.

Yes

No

15

Bryan Garnier or
Westhouse shareholding in
subject company of Report

Bryan Garnier Securities, LLC and/or its affiliate, Bryan Garnier & Co. Ltd or Westhouse Securities Limited
may own more than 1% of the securities of the company(ies) which is (are) the subject matter of this Report

No

No

A copy of the Bryan Garnier & Co Limited conflicts policy in relation to the production of research is available at www.bryangarnier.com
A summary of Westhouse Securities Limited conflicts of interest policy is available at www.westhousesecurities.com

30

Westhouse Securities

Soitec

For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows:
Explanation of recommendations
BUY

Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a
recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of
elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on
the stock will feature an introduction outlining the key reasons behind the opinion.

NEUTRAL

Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is
intended to be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where
an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an
introduction outlining the key reasons behind the opinion.

SELL

Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication
of a recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a
number of elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published
update on the stock will feature an introduction outlining the key reasons behind the opinion.

Distribution of stock ratings
BUY ratings 58.3%

NEUTRAL ratings 33.3%

SELL ratings 8.3%

Explanation of recommendations
Westhouse Securities Limited has a different recommendation structure from Bryan Garnier & Co for research originating from their research department
(including cobranded research.) Westhouse’s research department does not cover the subject company(ies) in this report and therefore its recommendation
structure and price target history are not relevant. The proportions referred to above relate to Bryan Garnier recommendations only

31

Westhouse Securities

Chief executive
Important information
Bryan Garnier & Co Limited and Westhouse Securities Ltd (together “parties”) have agreed to enter into a collaboration to work closely together in their investment banking and other
activities. This will enable the institutional and corporate clients of both firms to benefit from the combined resources of the two firms. As part of this collaboration, the parties have
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Westhouse Securities Ltd

London
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(0) 207
332 2500
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