Has China bitten off more than it can chew when it comes to making chips? That is where Orbotech Ltd comes in: To make sure the billions are well spent.
Orbotech makes inspection and repair tools that help factories avoid errors as they pump out increasingly complex chips for smartphones and tablets. Its market capitalization surpassed US$1 billion in March, a level not seen since the dotcom era: It has rallied 18 percent this year, compared with a 5.7 percent gain in the Philadelphia Stock Exchange Semiconductor Index and a 1 percent drop in the NASDAQ Composite Index.
Orbotech’s business is booming in China, where the government is trying to build a homegrown industry that can make chips and screens — components of the smartphones and tablets it already exports to the world. That would allow it to replace costly imports and lessen its reliance on US companies.
China has said it plans to invest as much as 1 trillion yuan (US$149 billion) over 10 years to develop chips. Israel, whose own semiconductor industry began to flourish in the 1990s, is using its tech know-how to cultivate closer trade ties with the world’s second-largest economy, which accounted for US$3.2 billion of its exports last year.
“This drive to build up China’s tech manufacturing base is going to be a huge windfall to companies like Applied Materials and Orbotech,” said Tim Call, who manages US$350 million, including Orbotech shares, as chief investment officer at Capital Management Corp in Glen Allen, Virginia. “It doesn’t matter if the tech plants already exist, they want them to exist in China.”
Orbotech, whose revenue jumped 29 percent to US$809 million last year, makes capital equipment that allows manufacturers of chips, printed circuit boards and flat panel displays to avoid costly defects during production.
Most of its China business is tied to flat-panel displays for smartphones, tablets and televisions. It is also getting orders from factories using organic light-emitting diode technology, which is poised to displace the LCD technology used in most TV’s because of better picture quality.
Chief Executive Officer Asher Levy expects much of the revenue from flat-panel bookings to show up in the second half of this year, he told investors in a May 4 conference call.
Rami Rozen, director of investor relations at Yavne, Israel-based Orbotech, declined to comment, citing a regulatory quiet period. Orbotech reports second-quarter earnings on Aug. 3. The shares rose 4 percent to US$26.19 in New York on Friday.
Applied Materials Inc, which makes machinery to produce semiconductors, has rallied 34 percent this year, buoyed by chipmakers upgrading production technology.
While’s China’s investment is driving demand for Orbotech’s products, analysts are most bullish about its 2014 acquisition of UK-based SPTS Technologies, which specializes in advanced packaging for semiconductors. The technology allows chipmakers to closely connect different chips so that they take up less space inside electronic devices. Innovation to create flexible printed circuit boards is also stimulating new demand, said Wayne Loeb, an analyst with SG Cowen & Co in San Francisco.
“It’s now a growth story, not a boring or cyclical business,” Loeb said by telephone.
Some see risks in China’s chip campaign: The investments could create a deluge of supply and drag down prices if exported to global markets, a repeat of what happened with China’s solar industry, said Jagadish Iyer, an analyst at Summit Redstone Partners in Summit, New Jersey.
The SPTS Technologies acquisition helped Orbotech diversify away from China by adding business in Europe and the rest of Asia, said Dafna Yagur, an analyst with Makor Capital Ltd in Tel Aviv.
Trading at about 10 times next year’s earnings, its also cheap, Yagur said.
“Of course it can be hit if there is a major slowdown in China, but it’s not an immediate threat,” she said. “There are drivers for long-term growth.”
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