Ultra Clean Technology: Unlocking the value upstream

Ultra Clean Technology: Unlocking the value upstream

By JD Hayward

While a spotlight has been cast on the carnage caused by the global semiconductor shortage, and the subsequent efforts of industry behemoths and governments to try and alleviate the problem, not a lot has been written or said about the smaller, upstream industry participants and the crucial role they play. Ultra Clean Technology (UCT) is one of these companies.

UCT is one of the key equipment providers to both Applied Materials and LAM Research, two of the industry’s biggest providers of semiconductor capital equipment. UCT supplies them with gas and fluid delivery systems, precision robotics and other subsystems. UCT has also expanded their offering to now include a servicing and analytics division, enabling their downstream partners to operate at higher yields, thereby increasing efficiency and profitability.

Chart 1: Ultra Clean Growth Rate versus Wafer Fabrication Equipment Market

A growing product offering, experienced management and an increasing demand for their products has enabled UCT to grow revenues at a CAGR of 25% since 2015, outgrowing the wafer fabrication equipment market by more than 10% over the same period. This strong performance has rewarded UCT shareholders, with the stock easily outperforming the MSCI All Country World Index over the past decade, returning 46% and 26% annualized over 5- and 10-year periods, respectively.

Chart 2: Ultra Clean Growth Rate versus Wafer Fabrication Equipment Market

Ultra Clean is an attractive investment opportunity

The semiconductor industry is poised to benefit from a number of secular drivers. The increased adoption of Artificial Intelligence, Internet of Things, Big Data, 5G and the general shift to all things online will drive higher semiconductor usage. The industry is shifting from traditionally being driven by consumer discretionary (i.e., smartphones and laptops) to what has now basically become an industrial staple.

This trend will drive higher adoption for decades to come. The increased amount of data generated means there will be an increase in the amount of processing power and memory capacity required in order for this to be effectively managed and monetized. This will be positive for both the larger logic/foundry segment of the market, as well as the traditionally more boom-bust memory segment of the market. Ultra Clean, through their two largest clients, is exposed to both of these segments, and subsequently poised to capitalize on any secular tailwinds.

On a more granular level, UCT is highly levered to both the deposition and etch segments of the industry.

In its simplest form, deposition basically refers to strategically applying layers onto a substrate, while etch refers to strategically removing selected sections of layers on substrate. Both of these processes are at the heart of creating a semiconductor – and both will play a crucial role in advancing the industry to better, faster microchips.

Deposition and etch has been steadily increasing in importance as node sizes decreased and complexity increased in the pursuit of keeping up with Moore’s Law. Not only is deposition and etch growing, but the capital intensity of the broader wafer fabrication equipment market is also increasing.

In short – UCT is highly levered to growing sub-segments (deposition in etch), in a growing segment (higher capital intensity) in a secular-growth industry – perfectly positioning them to capitalize on years of growth ahead.

Chart 3: Capital Intensity of WFE Market & Growing Importance of Deposition and Etch

In terms of execution, UCT’s management team has proven that they have the ability to deliver on their growth strategy, beating consensus revenue estimates for 20 consecutive quarters, while also improving their gross margin by more than 5% over the same period. This was achieved partly through strong execution, and partly though the strategic addition of the services segment, which operates at higher margins than the rest of the business.

A management team delivering on targets, expanding profit margins and the possibility of more strategic acquisitions to expand their offering all sets UCT up for outperformance over the long term.

JD is an equity analyst on the global team at Flagship. Prior to Flagship he worked as an engineer and also spent 2 years at an Edu-tech startup in Cape Town. JD graduated from Stellenbosch University with a B.Eng. (Civil) in 2016 and is currently a CFA level III Candidate.