Founder & CIO
With the world hunkering down at home and online, there are growing needs for the semiconductor companies who supply all of our smart devices. CIO Scott Morrison discusses one of these companies and why they are a pick to watch.
While communities around the world are amidst new lockdowns such as the one here in Toronto, most of us are increasing our usage of smart devices to connect to the outside world. More so than ever, our investment thesis on the chip-making supply chain is playing out.
Siltronic AG, a Munich-based German company, manufactures silicon wafers that are in turn used in computers, data center servers, smartphones, flat panel displays, automotive systems, robotics, and many other applications. These semiconductor end products are advancing rapidly on the back of digitization accelerated by the COVID-19 crisis.
I first met the Siltronic managment team on a trip to Germany, after they were spun-out of German chemical company Wacker Chemie. Recently, I had a follow-up conversation with the CEO of Siltronic, as well as a productive meeting with their largest competitor in the world, Shin Etsu of Japan. These tête-à-têtes confirmed why we invested on the thesis: we believe demand for their products will outstrip supply in the years to come. It takes a minimum of 2-3 years to bring on new fabrication shops (called “fabs”) like the one Siltronic has; and there are none under construction at present. Meanwhile, demand is accelerating as global economies recover.
Luckily for our thesis, the semiconductor industry is oligopolistic and dominated by Siltronic and a few large Asian players in China, Japan and Taiwan, all of which I have personally visited on my many trips to Asia. We have based our investment in Siltronic on this bottom-up research across the end markets mentioned above: they all serve and move the competitive landscape.
We love to invest in companies where the demand for their products is on pace to outstrip supply. For example, we believe investors are underestimating the recovery coming in the automobile industry and subsequent growth of semiconductors usage in cars moving forward, as governments look to subsidize electric vehicle adoption around the world. While more and more vehicles add safety and entertainment features to cars and trucks, the demand for semiconductor parts such as silicon wafers will skyrocket. According to a recent article on equities.com, “…these trends act as drivers for the global automotive semiconductor industry, which was valued at $48.13 billion in 2019 and is expected to reach $129.17 billion by 2025, equaling a CAGR of 17.9%.”
We recognize that Siltronic is a cyclical business and in the long run, they face potential threats from China’s desire to become a larger player in semiconductors. However, it is also a cyclical company with many secular tailwinds that will allow them to grow earnings and free cash flow above the last peak of cycle in 2018. Going forward we anticipate they will gain pricing power, grow production and lower costs long before new competition arrives.