Astra & Renesas - JP Morgan

• No need to be overly pessimistic about the restart of production: An April 13 report in the Nihon Keizai Shimbun indicated that production at Renesas’s Naka plant will resume in June. However, Renesas later indicated that it was targeting a July restart but has not said anything else about the future outlook. For this reason the stock market has been rife with conjecture. However, if one calmly assesses the situation, we see no need to be so pessimistic about when production will restart, considering that (1) before the earthquake production volume for automotive micro-control units (MCUs) at the Naka plant was equivalent to around 21,000 8-inch wafers/month, a relatively small scale for the semiconductor industry; (2) the MCUs are produced on 8-inch wafers, a very mature process technology compared with cutting-edge logic; (3) the Naka plant is in the earthquake-stricken area, which will probably be given priority for electric power; and (4) the wafers used are 8-inch, not the 12-inch variety that has been affected by a supply bottleneck due to the damage to Shin-Etsu Handotai’s Shirakawa plant. We think it is difficult for the company to make specific comments publicly because if it were to say it will give priority to the auto industry, it would face a backlash from users in other industries.

• What has caused the confusion? One reason for the confusion is that Renesas has not been clear about when production of automotive MCUs will resume. That said, we think it is wrong to expect Renesas to make clear comments on the topic. If the company seemed to give priority to certain users or certain customers, there might be a major backlash from other users. Given that Renesas has not commented in detail, we think it is also incorrect to assume the company has not acknowledged the importance of the automotive supply-chain. One should also recognize the tendencies of top management (President Yasushi Akao tends to discuss only what is feasible).

• Not the same as the damage Sanyo Electric suffered in the 2004 Niigata Chuetsu Earthquake: The 2004 quake was just 10km from Sanyo’s semiconductor plant, shaking the ground from directly below. The recent quake was offshore in the Pacific, mostly shaking the ground side to side. For this reason lithographic process equipment—used in the most critical phase of semiconductor processing—on the first floor was only slightly damaged. As of April 12 electricity had been restored to the cleanroom. Because production often starts within a few months of cleanroom completion even for new lines, we think the probability of production resuming in June is relatively high.

• Maintaining our Overweight rating: We reiterate our ¥1,000 price target with a time horizon of December 2011. Our price target is based on our FY2012 EPS forecast and a P/E of 8x. Given that this valuation is based on earnings two years forward, we apply a 3-point discount to the industrial electronics sector’s average P/E of 11x since the financial crisis. Risk factors that could prevent the share price from reaching our target include the production recovery being delayed by unforeseen disruptions in the sourcing of semiconductor materials (e.g., wafers and CMP slurry), delays in executing integration plans, yen appreciation, and an economic slowdown causing sales to miss our forecast. We will review our forecasts after obtaining more detailed information.