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SEMI - SunEdison Semiconductor


spartansaver
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SunEdison Semiconductor produces the wafers that are an input to creating a semiconductor. This is a business that is for the most part a commodity with 5 players (85% of market share) and 2 with the majority of market share. The prices of these wafers have steadily decreased since 08/09 and are now stabilizing. The top two players recently have stated that in order to further increase capex and capacity, price increases of 30% would need to take place. Demand is nearly at the point of outpacing supply and these price increases will likely take place at some point in the nearish future.

 

SunEdison is in a good position for 3 reasons.

 

-They have a 35% interest in SMP Ltd. a company that manufactures polysilicon the main input in the manufacture of a wafer. They recently (June 24th )signed a contract with SMP where they will supply their polysilicon for the next 10.5 years at a decreasing fixed price schedule. 2015 will be at 30$ and decrease each year going forward. I have not been able to verify, but an article on Seeking Alpha stated that it will be in the 24-25$ range in 2016 after speaking to IR.

 

-Secondly the market is prime for price increases as the top players recently announced they need to increase prices by 30% in order to increase capacity.

 

-Last SunEdison has stated that they are one of two fully integrated manufacturers capable of producing SOI and have also stated that this market is expected to grow at a compound rate of 17% until 2020. This wafer is typically used in low energy products related to Radio Frequency devices. In the most recent conference call, management said that SOI will have a run rate of roughly 10% of revenues by the end of 2015.

 

They are in a nice position of a consolidated industry and are trading at slighlty less than 10x EV/EBITDA. Management in the most recent prospectus claimed that fixed assets at the end of 2013 had a replacement value of roughly 3.5x net fixed assets. This implies that the company is trading at close to 1/3 of it's replacement value.

 

There has been heavy selling pressure recently due to being a spinoff of SunEdison Inc. who has dumped a large portion of their shares onto the market.

 

You also have the chance to invest in the company at prices below what Einhorn & Klarman invested at. Klarman has a sizable stake at roughly 20% of the company.

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(1)In 1Q2015 the price has been lower at times compared to now. How do you know what Einhorn & Klarman paid for their last purchases?

 

(2) If input cost drop why should ASP stay constant or rise? How long would supply/demand imbalance last if demand would indeed rise above supply?

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1. In Q1 2015 Einhorn established his position with 2.7M shares and Klarman added to his with 3.7M shares. There was a brief period in early 2015 when the share price was below its' current levels. Roughly 3M shares were traded during that time, implying even if they were the only two that purchased during that time they also had to purchase at prices above current levels.

-Also the SunEdison Inc. CEO Ahmad Chatila took $1,000,000 in stock in lieu of cash as part of his 2013 bonus.

 

2. Input prices should only be dropping for SEMI and SUNE. The JV is 51% owned by SUNE and will thus only likely be able to supply SUNE and SEMI. I am unsure if the technology is proprietary although SEMI is contributing all dividends and distributions from the JV to SUNE as part of the agreement. Based off of this information it is hard to see any competitors receiving as low of a price of polysilicon any time soon.

-The front end of the semiconductor industry is the most capital intensive part of the semiconductor process. I cannot forecast how long the imbalance will last although it is good to know that it is extremely capital intensive and will likely not be an overnight fix.

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  • 3 weeks later...

After thinking through this position more, I think that the thesis remains too heavily dependent on whether or now ASP can increase which is outside of SEMI's control.

 

+1. I looked into the company and reached the exact same conclusion. They may do very well, but I lack the detailed industry specific knowledge required to handicap their odds of success.

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  • 1 year later...

Merger Arbitrage available in SEMI with cash offer of $12 and stock trading at 11:53. It was down a bit during yesterday to almost 11:35 but quickly recovered to 11:45.

 

There is discussion about LNKD-MSFT arbitrage on the other trade. This is a smaller market cap and hence spread is little higher.

 

Read the fine print on this one.  Requires affirmative vote of 75% of non-GW shares.  Also requires approval from the Singapore courts.

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