China: One of Applied Materials’ Key Revenue Drivers



Applied Materials’ worldwide exposure

Applied Materials (AMAT) supplies SME (semiconductor manufacturing equipment) to chip makers all over the world. As the world’s semiconductor manufacturing is concentrated in the APAC (Asia-Pacific) region, it’s the largest market for AMAT and its peers Lam Research (LRCX) and KLA-Tencor (KLAC).

All three of these companies earn more than 80% of their revenues from the APAC region. South Korea (EWY) is their largest market, providing 30% of their revenues. Japan is their second-largest market, but China (FXI) is growing fast and is slowly taking over the second-place spot.

LRCX and KLAC have already reported their earnings for 1Q18. Looking at their earnings, we can make a rough assumption that AMAT’s upcoming earnings will meet investors’ expectations.

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China is making efforts to boost semiconductor production in its nation and is, therefore, offering attractive incentives to foreign chip makers to open factories in China. This initiative by China has increased Lam Research’s exposure in the country.

Lam Research reported a 73% sequential rise in revenue in China in 1Q18. This increased the company’s exposure in the nation from 11% in 4Q17 to 14% in 1Q18. KLA-Tencor doesn’t provide a revenue breakup by geography, but it does provide a shipment breakup by geography. The company reported a 10% sequential rise in shipments to China in the quarter.

Among the three companies, AMAT has the highest exposure to China, as it earned 22% of its revenue from the country in fiscal 4Q17, a rise of 53% sequentially. Like its peers, AMAT’s revenue from China is expected to grow in the double digits sequentially to over $1 billion in fiscal 2Q18 from $925 million in fiscal 1Q18.

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South Korea

South Korea’s semiconductor industry is largely made up of memory chips. It houses the world’s top two memory chip makers, Samsung and SK Hynix. Memory makers have increased their capital spending as they transition to third-generation 3D NAND and expand their DRAM (dynamic random-access memory) capacities.

LRCX reported a 34% sequential rise in revenue from South Korea in 1Q18. AMAT’s revenue from South Korea is expected to grow in the double digits sequentially from $1.2 billion in fiscal 1Q18 to over $1.3 billion in fiscal 2Q18.

SME suppliers exposed to economic risk

As the above three SME suppliers are largely dependent on the APAC region for revenue, they have high exposure to economic risk. The trade tensions between the United States and China triggered by President Donald Trump’s March 22 announcement of the imposition of tariffs on Chinese imports sent the three companies’ stocks down more than 8%.

These trade tensions are still just fears and haven’t yet affected the earnings of the three SME suppliers. Until that time, the three companies should report strong earnings, as industry demand is strong.

Next, we’ll look at AMAT’s profitability.


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