"I think it might be a doughnut"

Written by Rowan Ewart-White

29 1月 2018


Doughnut

Point 10 of Charlie Munger's 10-point investing checklist is 'Filter out the minutiae & focus on the obvious'. Q: have technology investors recognised the obvious in today's market? 

Take silicon wafers, for example, specifically global #2 ranked supplier SUMCO (3436). Following its listing in Nov 2005 SUMCO entered the race to add wafer capacity versus key rival Shin Etsu in earnest. 

Plans to raise monthly wafer capacity from 300k to 400k by 2006 became 600k by 2008 & eventually 1m by 2010. Meanwhile Shin Etsu Handotai upped production from 300k to 400k in 2005, to 700k in 2006 & 1m in 2007. 

Despite demand projections that appeared entirely plausible, expansion plans were subsequently exposed as a peak of the cycle land grab. By 2012 SUMCO's stock had fallen –91%, prompting one client to suggest to me: 
 
"Ro, I think it might be a doughnut." 

It's a thought that probably crossed SUMCO's mind as well. After 3 consecutive net losses between 2010-2012 totalling -Y250bn, net debt in excess of Y200bn & an equity ratio in the low 20% region, the outlook was bleak. 

The obvious response to its 2012-13 predicament? Survive (& never let it happen again).  

This is what is governing SUMCO's current behaviour. On the one hand we see a long & growing list of silicon wafer demand drivers. It includes data storage, growing silicon per smartphone, IoT & auto related demand.  

On the other we have a supply response that could best be described as miserly, with announcements to date from SUMCO & Siltronic amounting to just over 3% of global capacity. 

Filtering out the minutiae, the following appears increasingly obvious: 

Rampant demand + minimal supply = huge price increases. 

Institutional & HF investors can read about it in our latest SUMCO report, 'Manifestly underestimated'.


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