ASML Holding NV (ASML) | Imminent China Export Restrictions Expanding Beyond Expected NXT: 2000i?

Reuters is reporting the Dutch government plans to announce its well anticipated China export restrictions on 6/30. We think likely viewed as a surprise negative, the article notes that the U.S. is expected to also announce further restrictions to limit Dutch equipment from ~6 specific Chinese fabs. We would expect these U.S. restrictions to focus particularly on ASML's Cymer lasers. Our previous industry checks had suggested Gigaphoton lasers as a sub; albeit prior to Japan restrictions.

ASML had previously expected new restrictions to cover its most advanced Immersion tools (NXT: 2000i) and require licenses, which it viewed as having no material impact to its 2023 outlook. However, the article notes ASML’s older ArFi tools, specifically noting NXT: 1980Di that was expected to be a substitute for customers, could be restricted from the 6 Chinese fabs by the U.S. ASML’s NXT: 1965Ci enables double & multiple patterning requirements for a cost-effective solution for sub-20nm nodes.

While China is expected to be 20% of ASML’s revenue in 2023, the company has noted China’s focus on mature nodes drives limited immersion demand. As a reminder, immersion tools are used beginning at 45nm for foundry / logic with the number of tools required per 45k wspm peaking at 10nm. As noted below, over 50% of China's 2022 equip spend was >45nm.

• SEMI est the mix of 2022 China’s ex-memory equip spend as 80/90nm at 30%, 55/65/72nm at 24% & 22/28/32nm at 19%.

• Domestic China ex-memory capacity exiting 2022 includes >350nm at 34%, followed by 80/90nm at 25% and 350nm at 17%; 22nm-32nm at 9% and 12/16nm at 2%.

• Domestic China’s share of ex-memory wafer capacity by node includes: 24% for 22nm-32nm, 15% for 35/40/45nm, 24% for 55/65/72nm, 21% for 350nm, and 32% for >350nm.

With market adoption in the early innings, we are positive on Overweight-rated ASML’s positioning as the sole provider of EUV technology, as the semiconductor industry is expected to require advanced technology to enable ongoing transistor shrink. We expect shares to be driven by faster / higher-than-expected adoption of next generation lithography technology driving upside to estimates.

$775.00 from NC Our $775 price target is 32x P/E and 26x EV/EBITDA on our C2024 estimates as we believe ASML positioning as sole provider of EUV technology and 90%+ share in the lithography market deserves a premium multiple to peers.

(1) execution/market adoption of new technology—particularly the company's next generation EUV and High-NA systems;

(2) Market/Customer Concentration—60% of revenue from foundry/logic with a few key customers;

(3) ability to secure supply of components to assemble systems and adequate manufacturing capacity;

(4) weaker-than-expected demand for trailing-edge tools.