Kerrisdale Capital is long shares of ACM Research Inc (NASDAQ:ACMR).
We are long shares of ACM Research (NASDAQ: ACMR), an emerging, high-growth semiconductor wafer fabrication equipment (WFE) company. ACMR, domiciled in the U.S. but with its main operations in Shanghai, is the leading Chinese supplier of wafer cleaning tools. The company is a direct beneficiary of China’s massive crusade to build out its domestic semiconductor manufacturing industry. As the United States increasingly attempts to restrict China’s ability to manufacture advanced semiconductors, China is pulling every lever possible to funnel business to its small collection of WFE national champions. ACMR is one of those national champions. We predict that ACMR will continue to rapidly grow within the Chinese market, supplying an expanding array of tools to China’s fast-growing base of fabs. Then over time, as the company builds out its capabilities supplying an advancing Chinese market, it will become a powerful competitor to the global WFE players and gain market share outside of China as it penetrates international tier-one customers. Billions of dollars in revenue and a $10+ billion market capitalization is our base case forecast, and the company’s depressed valuation today offers asymmetric upside. At a $1.2 billion market capitalization and trading at just 1x 2025E revenue, we think investors in ACMR are buying into an ultimate 10-bagger.
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The Biden Administration enacted multiple rounds of export restrictions to cut off semiconductor technology transfer to China. Trump will likely double down on those efforts. China’s response has been predictable – it has accelerated its push to build up its own WFE sector so that domestic fab capacity can expand unabated. For ACMR, that has translated into 10x revenue growth over the past six years. But this is only the beginning. As one of a handful of Chinese WFE companies with meaningful revenue scale and a foothold in the major Chinese chip customers, ACMR is positioned to continue growing its dominance in cleaning equipment while also expanding into numerous complimentary tool markets. Each new U.S. law that tightens the noose around China’s access to imported WFE equipment only increases the strategic importance of ACMR and adds fuel to its explosive growth, as the company has become a critical pawn in China’s efforts to win the high stakes battle for global semiconductor leadership.
Given ACMR’s amazing long-term growth prospects, the company should be trading at 5x-10x revenue. And in fact, it is… in China. Headquartered in Fremont, California and listed in the U.S., ACM Research’s main operations are in China, where it generates virtually all its revenue through its subsidiary ACM Research (Shanghai) Inc. (“ACMS”). ACMS went public in China in 2021, and ACMR owns 82% of ACMS. These Shanghai-listed shares currently sport a $5.9 billion market capitalization and trade at 6x 2025E revenue. That implies a valuation for ACMR of $4.9 billion, over 300% higher than ACM Research’s current trading levels. Wild. ACMR helps customers make chips for logic and memory, but its NASDAQ valuation defies logic, and as investors better diligence this small-cap dislocation, its extreme valuation discount will become a distant memory.
I. Investment Highlights
The Little Company That Could. As exciting as ACMR’s future prospects are, its journey thus far is an equally inspiring story. Founded by CEO David Wang twenty-six years ago and run by him and his brother Jian who manages ACMS out of China, ACMR has grown revenue from less than $30 million in 2016 to $730 million over the last twelve months ended September 30, 2024. In the mid-2000s, China sought to spur domestic WFE development by directing research grants to companies targeting specific wafer fabrication process steps, and ACMR was a beneficiary of such grants in cleaning. ACMR made early progress in the lower end of the cleaning market, but the company’s share gains have accelerated as it has developed more advanced solutions and broadened its product portfolio to include nearly all steps in the cleaning process.
Today, it is the leading domestic supplier of wafer cleaning tools in China. Cleaning accounts for the most front end process steps, gets harder as line widths shrink, and directly impacts yields. At this point, ACMR has delivered over 925 tools, generated nearly $1.5 billion of revenue over the past five years, and compiled nearly 500 patents. We think ACMR has shipped tools into at least 12 of the world’s top 20 largest semiconductor capital spenders. The company has penetrated virtually every top-tier Chinese fab, including those employing more advanced process technologies. For example, at YMTC, China’s largest memory chip company, ACMR has won ~40% share of the cleaning opportunity versus just ~35% share for global and China share leader Screen. And while many investors overly focus on the latest technologies, there is a massive runway for ACMR supplying tools for trailing edge process technologies in China, which still provides exposure to several technology themes de jour, such as devices for EVs (silicon carbide), IoT, and mobile.
China’s All-In Bet on Its Homegrown Semiconductor Sector. The opportunity ahead for ACMR is staggering. Chinese brands account for 35% of global chip demand, yet Chinese companies produce only 7% of global chip supply, according to a 2023 Goldman report. The government desperately wants to bridge that gap and is aggressively pursuing self-sufficiency, or the goal of producing chips domestically rather than importing from abroad. To do that, it needs capital equipment, and Goldman estimates that it may cost China between $3-14 trillion to expand its fab capacity to fulfill domestic demand over the next 10 to 30 years. We believe the growth of China’s semiconductor manufacturing capability is virtually guaranteed, and the strategic imperative of WFE self-sufficiency (ie, sourcing chipmaking equipment from domestic rather than foreign suppliers) ensures that ACMR will continue to take share from U.S. and Japanese suppliers.
The Biden Administration has spearheaded a campaign to cut off capital equipment sales to China in an effort to slow the country’s progress in making leading edge chips. In response, China has focused on building out its own WFE sector, recognizing that to reduce reliance on imported chips, it also needs to reduce reliance on imported chip-making equipment. As U.S. export restrictions and other policies have choked off capital equipment sales to China, the CCP has relentlessly launched initiatives and incentives to spur the growth of a homegrown WFE industry. Investors fretting about the December 2024 addition of ACM Research (Shanghai) to the Export Administration Regulations’ Entity List are completely missing the point – these actions only enhance the strategic importance of and the bull case for ACMR. The more aggressively the U.S. seeks to limit access to foreign WFE, the brighter the future for China’s homegrown WFE national champions, including ACMR, China’s cleaning equipment leader.
This transition from foreign chipmaking equipment to domestic tools remains in its early stages. Bernstein calculates that Chinese WFE self-sufficiency grew from just 4% in 2019 to 17% in 2024, and, more importantly, they see the pace of localization only accelerating, forecasting an expansion to 36% in 2026. Chinese fabs seek to achieve at least 50% self-sufficiency by 2028. As these fabs redirect spend away from foreign vendors, domestic WFE suppliers will continue to experience outsized revenue growth. By both choice and necessity, China – through public, quasi-public, and private foundries – has been and will continue to be spending an enormous amount of money to build its own national versions of Lam Research, Applied Materials, and Tokyo Electron.
Read the full report here by Kerrisdale Capital.
