ON Semiconductor: Fulfilling The EV Market's Demand (NASDAQ:ON) | Seeking Alpha

2022-05-14 14:37:20 By : Mr. Benjamin Ma

golibtolibov/iStock via Getty Images onsemi

golibtolibov/iStock via Getty Images

In this analysis of ON Semiconductor (NASDAQ:ON ), we examined the company's automotive segment which is the largest contributor to its revenue (34%). As the company had a relationship with key automaker customers, we determined the CAGR of their EV sales based on their targets by 2030.

Moreover, we then looked into the company's power discrete product portfolio and compared it against competitors to determine whether the company has a competitive advantage in terms of performance and product breadth.

Lastly, we analyzed its acquisition of GTAT for the supply of SiC materials. We compared its SiC portfolio against competitors to determine its advantage and projected its SiC revenue growth based on the market forecast.

Automotive is ON Semiconductor's largest end market representing 34% of its total revenues based on its annual report. According to the company, EV/BHEV is among one of its targeted applications in automotive. We believe the growth of EVs could be driven by factors such as government regulations and the implementation of government subsidies and tax reliefs. For example, favorable government policies such as the proposed ban on traditional combustion vehicles by the United Kingdom government by 2035, the requirement of Chinese car manufacturers to achieve a certain level of NEV credits and EU carmakers to cut carbon emissions by 15% between 2021 to 2025. Moreover, there are also financial incentives such as tax breaks and financial aid given by the Chinese, German, French and US governments to encourage the general public to opt for electric cars.

The company supplies automotive chips to some of the leading automakers and Tier 1 manufacturers in the world. We expect ON Semiconductor's relationships with these leading automaker customers to benefit it as these manufacturers have announced their plans and targets for EV sales allowing the company to capitalize on the EV trend.

In the table below, we compiled the vehicle sales data of its leading automaker customers in 2021 and projected their unit vehicle sales by 2030 based on previous analysis. Also, we compiled these automakers targeted EV sales by 2030 except for SAIC due to limited data available and instead applied our market forecast of 46.8% based on our previous analysis. Then, we calculated each company's expected EV sales in 2030 by multiplying the forecasted vehicle sales by their respective targets.

Targeted Share of EV as a % of Total Vehicles in 2030

Source: Company Data, InsideEV, Khaveen Investments

Overall, based on the table above, we obtained a CAGR of 31% through 2030 for the automakers' EV sales reaching 38.12 mln by 2030 from 3.4 mln in 2021. We view the company's strong customer base of leading automakers and Tier 1 manufacturers to provide significant opportunities for the company. Moreover, it deals with 5 of the top automakers in the world including Toyota, Volkswagen, Ford, SAIC and Honda. Thus, we believe that it is poised to capitalize on the EV growth based on our projected EV sales to its customer base.

By the company's annual report, its PSG segment is its largest segment and its fastest-growing segment by sales at an average of 18% in the past 5 years. The company has a broad portfolio of power discrete and modules such as power MOSFETs, IGBTs, and diodes.

Power discrete and modules are essential power semiconductors in vehicles. According to Fuji Electric (FELTF), these chips are used across a broad range of automotive applications in areas such as engine control, headlight and interior lighting control and a variety of powertrain devices like motor, steering, brake and transmission control. With the advent of EV, IDTechEx estimates the average semiconductor content in EV powertrains to be 2.3x greater than traditional combustion engines driven by increasing demand for power electronic chips. In an EV, modules such as an on-board charger ('OBC'), battery management systems ('BMS'), dc-dc converters, traction inverters, engine control and more are some of the key systems which for power conversion, charging and power management of the vehicle as seen in the chart below by onsemi.

In these automotive systems, chips such as Metal oxide semiconductor field-effect transistors (MOSFETs) and insulated-gate bipolar transistors (IGBTs) are commonly used. The function of a MOSFET is to "control the flow of voltage and current between the source and the discharge". In contrast, IGBTs "combine an isolated-gate FET for the control input and a bipolar power transistor as a switch in a single device" resulting in a more powerful device. However, it comes at a trade-off of higher switching losses which generate more heat and a frequency limit is imposed. MOSFETs are generally more suitable for high frequency and low voltage applications whereas IGBTs are high-voltage high current switches and have lower frequencies. Due to these differences, MOSFETs may be more suited for charging systems and DC/DC conversion while IGBTs are more suited for more power-intensive applications such as the motor inverter and AC/DC motor drives due to their high efficiency and fast switching properties.

Offering a wide range of power discrete and module products including MOSFETs and IGBTs as well as BWG MOSFETs, onsemi held the second spot in the power discrete and modules market with a market share of 8.4% according to Omdia. The market consists of leading power semiconductor companies such as Infineon and also other suppliers based in Japan including Mitsubishi, Toshiba and Fuji Electric. Based on Allied Market Research, the market was projected to grow at a CAGR of 6.4% through 2026.

In terms of the company's competitiveness, we compared its MOSFET portfolio breadth by the number of products as well as performance and efficiency. The higher the volt rating of the MOSFET chip, the greater the power performance.

The company's MOSFET portfolio breadth is only beaten by market leader Infineon with the largest number of products offered. Its volt rating ranges between 40V and tops out at 100V similar to STMicro while Infineon has the highest at 800V. Moreover, we also analyzed the IGBT portfolio of the company and its top competitors.

Based on the number of IGBT products available, the company only trails Infineon with the largest portfolio. However, its product Volts are considerably lower than competitors except for Fuji Electric. Therefore, with a robust product portfolio, we believe onsemi has a competitive advantage over its competitors and expect to benefit from the market growth. Notwithstanding, we believe Infineon has the strongest advantage over other competitors and expect it to remain the market leader.

Therefore, as a leading power discrete and module player, we expect the company to be well-positioned with a comprehensive portfolio of MOSFETs and IGBTs only behind market leader Infineon. We projected the company's PSG segment revenues in 2022 based on its 5-year average but tapering down to the market forecast beyond that.

ON Semiconductor PSG Revenue Projections

Source: Onsemi, Allied Market Research, Khaveen Investments

In addition, the company announced its completion of the GT Advanced Technologies acquisition in November 2021 for $415 mln. According to the company, one of the reasons for the deal is to enhance its supply of Silicon Carbide ('SiC') materials to produce its SiC-based power devices which it expects to start shipping products utilizing GTAT's materials. Not to mention, it has previously partnered with the company for the supply of SiC boules. Overall, we believe management is optimistic about its SiC-based products highlighting $2 bln in committed revenues from customers and expects to reach a run-rate of $1 bln in 2023.

The significance of the incorporation of SiC in power semiconductors is attributed to the unique performance increase in SiC-based products such as SiC MOSFETs. Compared to traditional silicon, SiC has several advantages over Si in terms of a "higher critical breakdown field, a wider bandgap and higher thermal conductivity and lower energy loss" according to Wolfspeed. SiC has 3 times wider bandgap compared to Si, therefore SiC can withstand around 5-10 times the amount of electric fields as Si.

Due to its unique properties, SiC is suited to be adopted in automotive applications such as the inverter and potentially displacing IGBTs due to the greater efficiency and power density enabled by SiC-based devices. This is significant as the inverters are critical in EVs as it converts the DC to AC to power the vehicle motor. Several companies have introduced 1200V SiC MOSFETs for 800V rated EVs with at least 10 automakers planning to launch models within the next 5 years.

In terms of the company's SiC-based power device portfolio, it recently introduced SiC power MOSFETs with volt ratings of 1,200V. We compared the company's SiC power MOFSETs against competitors in the table below.

Overall, we believe its SiC power MOSFETs are at a disadvantage with volt ratings of 1,200V which is below its competitors which have 1,700V products. That said, its products have a lower RDS('on') range of 12-160mΩ which we believe indicates its greater product efficiency. Though, we believe STMicro edges out all competitors with the lowest RDS('on') indicating superior efficiency.

The Industry Arc forecasted the SiC power devices market to grow at a CAGR of 41.8% through 2026 from only $0.541 bln in 2020 and we estimate it to be around 2.6% of the $20.9 bln power discrete and modules market. Assuming ON Semiconductor's SiC revenues to be 2.6% of its PSG segment revenues, we forecasted its SiC power device revenues to grow to 10.5% of its total segment revenue.

Source: IndustryARC, onsemi, Khaveen Investments

All in all, we view the company's advancements in power semiconductors leveraging SiC materials as a strategic position to further capitalize on the EV trend with the acquisition of GT Advanced Technologies supplying SiC materials. We believe that the deal is also significant in the current market landscape with supply shortages and constraints as competitors also try to secure their supply of materials.

While the company has a relatively strong power semiconductor business, its imaging sensor division has lagged in its total revenue growth. In the past 5 years, its ISG segment had an average revenue growth rate of 5.06%. According to Yole Development, the CMOS Imaging Sensor market is forecasted to grow at a CAGR of 7.2%.

In terms of market share, the CIS market is dominated by larger suppliers such as Sony and Samsung which account for 62% of the market. We believe that this is attributed to their strength in the mobile market as 72% of the CIS market is from the mobile communications end market. Sony (SONY) is a supplier to Apple (AAPL) for CIS used in iPhones while Samsung (OTC:SSNLF) supplies are the market leader with an 18% market share of the smartphone market and also supplies to Chinese smartphone makers including Xiaomi and Oppo.

To summarize, we projected its segmental revenues based on its 5-year average growth rate in 2022 followed by the market forecast CAGR for PSG and ASG in the table below.

ON Semiconductor Revenue Projections ($ mln)

Source: onsemi, IndustryARC, Market Research, Khaveen Investments

The average revenue growth for the past 5 years is 13.06%. Its gross and net margins have been growing with an average of 36.7% and 9.7% respectively in the past 5 years.

The company has a 5-year free cash flow margin of 5.84%. In 2016, it acquired Fairchild Semiconductor for $2.4 bln and Quantenna Communications in 2019 for $1 bln.

We valued the company based on a DCF valuation as we expect the company to continue generating positive cash flows. We based our terminal value on the semicon chipmaker industry average EV/EBITDA of 23.87x.

Based on a discount rate of 12.8% (company's WACC), our model shows its shares are undervalued by 31%.

In conclusion, as the company has customer relationships with major automakers, we determined a CAGR of 31% based on their EV targets by 2030, we expect the company to capitalize on this opportunity with its automotive segment which is its largest segment at 34% of revenues. Moreover, we determined that the company has a robust product portfolio of power discrete devices trailing only behind market leader Infineon and we projected its PSG segment to grow by 18% in 2022 based on its 5-year historical average growth. Lastly, we analyzed its SiC portfolio following its acquisition of GTAT which we expect to benefit the company and projected its SiC revenues to reach 10.5% of its PSG revenues by 2026 at a CAGR of 41.8%. Overall, we rate the company as a Strong Buy with a target price of $68.06.

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Disclosure: I/we have a beneficial long position in the shares of ON either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: No information in this publication is intended as investment, tax, accounting, or legal advice, or as an offer/solicitation to sell or buy. Material provided in this publication is for educational purposes only, and was prepared from sources and data believed to be reliable, but we do not guarantee its accuracy or completeness.