ACM Research (ACMR) looks interesting

Investment Analysis Clubs Saul’s Investing Discussions
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I’m sharing some info on ACM Research (ACMR) that I find interesting, and am curious what others here think. This is a semiconductor company that makes and sells single-wafer wet cleaning equipment to improve yield. Chip manufacturers use their products to remove particles, contaminants, and other defects from silicon wafers during the manufacturing process.

What’s notable is that this company grew revenue 105% YoY, grew earnings per share 136%, and yet trades at a trailing P/E of only 15.3. The market has not been kind to the stock lately, though, most likely due to concerns about China. Could this be a buying opportunity? They’re expected to earn $1.60 per share this year, and at today’s price ($20.11), ACMR has a forward P/E ratio of only 12.5.

The growth is being driven by the demand for semiconductors and GPUs for AI applications.

Now, this is not the type of company I normally buy. The chart doesn’t look that great. But I find the above numbers pretty compelling, so decided to do a bit more research into the company.

Financial results

Here are the financial results ACMR reported for Q1 2024 compared to the prior year quarter on both a GAAP and non-GAAP basis.

ACMR GAAP Non-GAAP
Q1 2024 2024 2023 2024 2023
Revenue $152.2M $74.3M $152.2M $74.3M
Gross margin 52.00% 53.80% 52.50% 54.00%
Net income $25.2M $8.9M $39.8M $10.9M
Diluted EPS $0.26 $0.11 $0.52 $0.15

Revenue grew 105% to $152.2M last quarter. Their gross margin of 52% looks great for this industry. The GAAP earnings growth of 142% is impressive enough, but take a look at non-GAAP. They earned 52 cents per share on a non-GAAP basis which is more than triple what they earned last year.

They expect full year revenue between $650M and $725M this year.

Note that the global market for semiconductor wafer cleaning equipment is projected to reach $16.5 billion by 2028, growing from $10.1 billion in 2023 at a CAGR of 10.4%.

Institutional ownership
Vanguard owns 7% of the company
Blackrock owns 6.95%
Invesco and JP Morgan own about 2% each

Analyst ratings
All 5 analysts covering the company rate it as Buy, with an average price target of $37.51. That’s an 88% upside from the current price.

Conference call statements
From David Wang, CEO.
"Revenue from the single wafer cleaning, Tahoe and a semi-critical cleaning product grew 199% in Q1 and represent 72% of the total revenue. ACM offers what we believe is the industry’s most comprehensive cleaning portfolio. We support nearly 90% of all cleaning process SAPS for memory and logic devices.

At the high end, we believe our flagship SAPS Tahoe and TEBO single wafer cleaning products deliver technical feature not available from any of our competitors.

Risks
Some risks I see in investing in this company.

  • The semiconductor industry is a cyclical business
  • Although the company is headquartered in the US, much of their revenue comes from China. They also have signification operations and R&D centers in Shanghai. Therefore, there is some risk associated with US trade policy with China, and the growth of the Chinese economy.
  • This is a small cap company competing with bigger players like Lam Research

Further reading
https://seekingalpha.com/article/4702684-acm-research-outsized-growth-potential-in-an-undervalued-small-cap

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I have not looked into this company any further than what you have provided in your note. But, just looking at that, it reminds very much of Aehr Test Systems, a company which burned many investors on this board. Full year revenue under $1B is tiny. I’m not saying that this company and it’s stock won’t do well. I am saying that it is laden with risk. You wrote that their process is not available from any competitor. OK, why? Do they have patent protection? Are the patents air tight? If not, what else contributes to their moat, if anything? I’m on the sidelines. But let us know if they perform well.

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Thanks for your feedback. Yes, I outlined 3 risks of investing in ACMR in my original post. Full disclosure: I have a small position in the company, and even after today’s 6% rise in the stock, I am overall down about 2% from my cost basis. I also have a 10% stop loss set. Everyone should do their own due diligence.

I was quoting what the CEO said on the earnings call. And, yes, they have multiple patents on SAPS (Single-wafer Atomic Particle Stream).

  • SAPS Tahoe - Reduced Sulfuric Acid and Eco-friendly: Compared to traditional single wafer Sulfuric-Peroxide Mix (SPM) cleaning, Tahoe achieves high performance cleaning while using at least 80% less sulfuric acid. This translates to lower chemical costs and reduced post-process waste treatment requirements [ACM Research].
  • TEBO - Precise Megasonic Cleaning for Delicate Structures: TEBO utilizes Timely Energized Bubble Oscillation (TEBO) technology. This offers precise control over cavitation during the megasonic cleaning process. This meticulous cleaning is crucial for protecting delicate, stacked structures found in advanced chips like FinFETs, 3D NAND, and other 3D memory architectures.

SAPS combines megasonic and chemical cleaning for a more effective and efficient approach compared to conventional methods

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To be clear, while this company claims their HQ is in California, they are a Chinese company so treat it with any geo-political valuation risks that you may apply.

It’s not like Western companies won’t buy their product because of that. But generally, valuation gets factored.
One of the key inventors of FINFET tech at TSMC is a board mameber.

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That isn’t true. It is an American company doing business in China. It’s stock is listed on the Nasdaq and isn’t a VIE so you actually own shares directly in the company. From the 10Q.

Mainland China-based companies that seek to list their shares in the United States but are subject to mainland China restrictions on investments by non-mainland China investors sometimes use a special purpose vehicle known as a VIE created in an off-shore jurisdiction such as the Cayman Islands. In these structures, a VIE enters into a series of contractual arrangements with mainland China-based operating company and its mainland China-based shareholders that afford those shareholders, rather than the shareholders of the VIE, effective control over the finances and operations of the operating company. The VIE, effectively a shell company, issues share that are listed for trading on a U.S. exchange, but the enterprise is controlled by the legacy mainland China-based shareholders and is subject to mainland China laws and regulations. ACM Research is not a VIE or other special purpose, or shell, company, and its relationship with ACM Shanghai does not involve the types of contractual arrangements existing between a VIE and a mainland China-based operating company. ACM Research is a Delaware corporation founded in California in 1998 that formed ACM Shanghai to conduct business operations in mainland China. ACM Research controls the operations of ACM Shanghai through its direct ownership of ACM Shanghai shares, and it also conducts sales and marketing activities focused on sales of ACM Shanghai products in North America, Europe and certain regions in Asia outside mainland China.

And

We do not believe that our corporate structure or any other matters relating to our business operations currently require that ACM Shanghai obtain any permissions or approvals from the China Securities Regulatory Commission, or CSRC, or any other mainland China central government authority in connection with ACM’s listing, or offering for sale in the future, shares of our Class A common stock in the United States. We, including ACM Shanghai, therefore have never solicited any permission or approval from any mainland China central government authority, and thus no such permissions or approvals have been received or denied, in connection with ACM Research’s seeking and maintaining the listing of our Class A common stock in the United States. In the event that we inadvertently conclude that permissions or approvals are not required, or either the CSRC or another mainland China central government authority were to determine that existing mainland China laws or regulations require that ACM Shanghai obtain the authority’s permission or approval to continue ACM Research’s listing of Class A common stock in the United States or if those existing mainland China laws and regulations, or interpretations thereof, were to change to require such permission or approval, ACM Shanghai could be unable to obtain any such permission or approval or could be able to obtain such permission or approval only on terms and conditions that impose material new operating or other restrictions and limitations on ACM Shanghai. In such circumstances, it would materially and adversely affect the value of our Class A common stock, which may decline in value or become worthless. In addition, ACM Shanghai could face sanctions by the CSRC or other mainland China central government authorities or pressure from the mainland China government in various business matters for failure to obtain such permission or approval. Such potential sanctions or pressure may include fines and penalties on ACM Shanghai’s operations in mainland China, limitations on its operating privileges in mainland China, delays in or restrictions on the transfer of proceeds from a public offering of ACM Research securities in the United States to ACM Shanghai, restrictions on or prohibition of the payments or remittance of dividends by ACM Shanghai to ACM Research, or other actions that

Andy

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This is all legal and formal stuff. I am not talking about where the stock is listed, where incorporation is etc.
This is all hand waving.

Investors should note that there is a discount put on the valuation of this stock because it’s what us in the industry associate with this being a Chinese company at heart. Hand waving aside.

The majority of it’s business is done in China. That is uncommon in the Semiconductor world because the majority of wafers are not processed in China at this point in time. They have had better success to date in China…

So all hand waving and legal mumbo-jumbo aside, this is considered a Chinese company by many, and thus it suffers a bit of a valuation discount. Fact. Investors should know this.

Also, I have a small investment. I just don’t expect that it will achieve full value because of geopolitical issues. Eyes wide open.

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That is all that matters. I am not going to go back into a VIE structure. I will allow you to look that up. Maybe you are talking about this.

If ACMR is a Chinese company than so is Tesla or any other company that provides service in China. What makes a company a Chinese company, and one I won’t invest in, being based in China, having a VIE structure that doesn’t allow investors a legal right into the structure of the company.

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ACMR has 19 employees listed on LinkedIn that are in the US.
Telsa has many thousands.
I will not respond further as we are wasting the boards’ time.

ACMR is perceived to be a Chinese controlled company and thus it’s valuation is considerably discounted. The board needed to know this after the O.P. My point has been made, the perception is a fact. And I deal with these things everyday in this industry in my day job and I believe the perception is somewhat warranted. But that is a personal belief. It’s worth a penny perhaps to someone. Point has been made.

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It’s never a waste when you get the facts. I have no problem with you saying they are perceived to be a Chinese company, any more then if you would have said that TSMC is perceived to be a Chinese company. But that is much more different then saying that they are a Chinese company, especially when it comes down to how the shares are structured.

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They are a Chinese company who has gone thru many hoops to “register as a US company”. Does that verbage work?

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Chip giants like AMD are now down 20%+ from the peak. The semiconductor ETF SMH has corrected 11%, and a small cap like ACMR has been dragged down by this tide. I may be wrong in thinking that this company is worth more than $35/sh and will reach that price some time within the next 2 to 3 years. But if I am wrong, then the 5 other analysts covering the company would all be wrong as well, and Black Rock would be foolish to own 7% of the company. I’ve decided that since ACMR is such a small percentage of my portfolio (about 2%), I’ll hold on to my shares.

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