ACM Research (Pending:ACMR) is a very small maker of cleaning equipment for the semiconductor sector. Its IPO could not count on enthusiasm from investors. ACM is very small, relies heavily on a few large Asian customers, and its sales have not kept up with the pace of growth seen across the wider semiconductor sector.
These factors and losses make that investors avoid the shares despite some recent sales momentum in the first half of the year. Despite the challenges and risks related to ACM, I am anxious to learn about the Q3 and Q4 performance which appears to be a seasonally stronger period.
A Promising Cleaning Business?
ACM develops and produces single-wafer wet cleaning equipment which is used by semiconductor manufacturers in various steps of manufacturing. By removing particles and contaminants, these producers can improve their yields. The company has been pioneering this technology since its founding in 1998, but so far has not been hugely successful as it reported a cumulative loss of more than $12 million to date.
The so-called “Ultra C” equipment of ACM removes random defects without impacting the wafer, even at 22 nanometer or less, which ACM can do based on its “SAPS” and “TEBO” technology.
While the company is active in a niche of the semiconductor sector, this segment still totals $2.6 billion in sales in 2015, marking a lucrative global opportunity to pursue. To remain close to the developments, ACM has established a development and manufacturing facility in China a decade ago.
The company has been aggressive to buy out minority investors this year. After entering into agreements with three separate investors, it will own the entire facility by the end of the year.
The IPO, A Small One
ACM Research aimed to sell 2.0 million shares for $7.50-9.50 per share in an attempt to raise $17 million in gross proceeds at the midpoint of the range. Unfortunately demand has been very soft, as the IPO price has been cut to $5.60 per share, a 34% reduction from the midpoint of the preliminary offering range.
With 15.1 million shares outstanding, equity is valued at just $85 million at the offer price as ACM raised just $11 million in gross proceeds. Operating with $8 million in net cash ahead of the offering, the company will operate with a net cash position of $18 million, which implies that operating assets are valued at just $67 million. Following the dismal pricing, shares actually jumped to $6 per share on their opening day, as the valuation of operating assets has jumped to $72 million.
That is just a modest valuation, as ACM is actually a very small business. The company generated just $27.4 million in revenues in 2016, and while the market was incredibly hot, sales were actually down 12% on an annual basis. Operating earnings fell from $4.9 million in 2015 to $3.5 million as a result of the sales deleveraging.
Fortunately trends have improved a bit in the first six months of the year, which is an understatement. Revenues are up 77% for the period and came in at $14.4 million, as the second half of the year appears to be seasonally stronger. Despite the increase in sales, operating losses increased from $1.6 million to $1.8 million over the past six months. If the company can maintain this pace of growth, sales could approach $50 million this year. Unfortunately, management has not issued any comments about Q3 or the second half of the year.
If the $50 million sales number is realistic and the operating assets are valued at little over $70 million, the company trades at roughly 1.5 times sales. The company has many competitors (often local Chinese competitors) as well as Lam Research (NASDAQ:LRCX). This +$30 billion peer is on a huge run and trades at little over 3 times sales. In that sense the 1.5 times sales multiple looks modest, yet growth of ACM has been very disappointing in 2016, and ACM is actually posting losses at the moment while LAM is posting operating margins of nearly 30%.
Avoid Until More Is Known
For me it is very easy to avoid ACM Research. The company is not profitable, growth in 2016 has been disappointing despite new products/technologies and a very strong semiconductor sector, and no information is given about the expectations for the second half of 2017.
Technological change poses a real risk as well, as does customer concentration. The top three customers make up two thirds of sales in the first six months of the year. While SK Hynix (OTC:HXSCF) is still recognised by many Western investors, I doubt if they are familiar with Shanghai Huai and Yangtze Memory as well. The lack of earnings or substantial growth is worrying at a time when the sector is undergoing a huge boom.
I will anxiously await Q3 results before reconsidering my stance as more info will be given about the crucial second half of the year, but for now I am not trying to go bottom fishing yet.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.