ASE Technology Holding Co., Ltd.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

A global leader in semiconductor packaging and testing, offering a comprehensive suite of manufacturing services to a diverse range of end markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview ASE Technology Holding Co., Ltd. (ASX) is a global powerhouse in the semiconductor industry, specializing in outsourced semiconductor manufacturing services (OSAT). The company doesn’t fabricate chips but rather provides essential packaging and testing services after chips are produced by foundries. This positions ASE as a critical partner in the semiconductor supply chain.

  • Revenue Streams: ASE’s revenue is broadly segmented into two main categories:
    1. Packaging: This segment is responsible for a significant portion of revenue. It involves a comprehensive set of packaging solutions.
    2. Testing: This segment is critical for verifying the functionality and performance of the packaged semiconductors.

While ASE’s business is typically described as back-end manufacturing, these processes are integral in enhancing and enabling the chip’s functionality for its end applications.

  • Industry Trends:
    • The semiconductor industry is characterized by strong growth fueled by increasing demand for electronic devices.
    • Technological advancements drive an increasing need for complex, high-performance packaging and testing services.
    • The rise of advanced packaging technologies, such as 2.5D and 3D packaging, is becoming more prevalent.
    • Geopolitical influences and supply chain disruptions have led to a desire for diversification of suppliers.
    • The increased complexity of chip designs is pushing demand for testing solutions.

Margins: While net margins at just under 7% aren’t particularly high, it is consistent for this industry. It should be noted that gross margin is fairly healthy at 17% showing that the underlying business is very profitable once costs are covered.

  • Competitive Landscape: The semiconductor packaging and testing market is competitive, but consolidation is happening quickly. Key players include Amkor, ASE, and JCET. Competition is primarily based on:
    • Technical expertise
    • Customer relationships
    • Geographic footprint
    • Pricing
    • Capacity and technological capabilities.

With a move to advanced packaging it is more and more difficult for small companies to compete, giving more competitive advantage to large companies.

  • What Makes ASE Unique? ASE’s distinctive characteristics lie in the breadth of its service offerings and their ability to serve a very diverse range of end markets. However, the company also has:
    • Global Presence: ASE has significant presence throughout the world.
    • Technological Breadth: It invests heavily in R&D to adopt and develop new packing tech.
    • Customer Base: Its diverse customer base in communications, computing, consumer, industrial and automotive industries, mitigates risk by diversifying revenue across markets.

A recent 2024 report released by Morgan Stanley calls economic moats the sustainable value created by companies, naming switching costs, network effects, cost advantages and intangible assets as the main drivers. ASE has a good network effect by the sheer size of its facilities and operations, but there is still a limited moat of 3/5.

Financials In-Depth

  • Revenue Growth:
    • 2021 revenue was $20.52 billion USD, and the company has had steady revenue growth over the last decade.
    • The company’s performance is quite strong despite the geopolitical environment, with YoY revenue growth of 4.5% in December 2023 results.
    • Net Revenue was $5,598 million in 4Q23, representing a year-over-year increase of 7.3%.
  • Profitability:
    • The consolidated gross margin for Q4 was 17.2%, up 1.5 percentage points sequentially, reflecting an improvement in profitability.
    • The operating profit for 2023 was $1.97B USD. The company’s net profit for 2023 totaled $1.49 billion USD, showing the profitability of the overall business.
  • Balance Sheet:
    • ASE has $9.4 billion in cash and short term investments compared to $7.4 billion in long-term debt at year-end 2023. This leaves the company in a relatively good position to navigate downturns.
    • Shareholders equity was $18.9 billion vs $31.4 billion in total liabilities leaving a healthy debt-to-equity ratio, while also showing a willingness to invest into the company.

The latest financial reports highlight good performance by the company, as they have continued to grow profits while keeping the balance sheet healthy.

  • Capital Expenditures: ASE’s strategy is capital intensive and the company needs to invest significant amounts into R&D and expansion of capacity in existing facilities. Due to the capital intensive nature of the business, free cash flow may vary wildly, however the overall fundamentals remain.

Legitimate Risks and Business Resilience

  • Macroeconomic Downturns: As a cyclical industry, semiconductor demand is closely tied to economic activity. A global downturn would reduce electronic sales and subsequently reduce demand for ASE’s services. The company has already faced headwinds due to decreased demand from its customers in recent quarters.
    • The company however has proven it can grow through downturns as well as rebound quickly.
  • Technological Obsolescence: Rapid technological shifts can make the company’s current solutions obsolete or less desirable. The company must continually invest in R&D to combat these trends, and this can prove to be costly and may not necessarily work.
  • Geopolitical Risk: The geographical and political tensions have recently increased and are likely to persist. ASE has operations in multiple regions, which can create supply chain risks, trade disputes, and instability in production.
    • Currently, Taiwan, where a large portion of operations are located, are facing threats from China, which has created a lot of uncertainty and may lead to reduced demand if there is conflict in the region.
  • Customer Concentration: Although the company has a wide range of customers, over-reliance on a few large clients can expose it to risk.
    • The company has shown that the top ten clients comprise 42.2% of total revenues in 2023 showing that there is an element of reliance on a select few companies.
  • Intense competition: The industry is extremely competitive, with both larger and smaller competitors trying to take away market share. Competitive pricing may harm profit margins.
    • The company’s history indicates that it has been able to capture a considerable portion of the market, but new technologies from other competitors may affect that in the future.

ASE is a resilient company that is well positioned in its industry due to its large scale and diverse client base. The company’s financials show that it can remain profitable even during an economic downturn, while investing heavily in new technology.

Understandability: The company has a fairly simple business model. It offers packaging and testing services for semiconductors to a global client base. That is the core of the business, however the technical details and the financial statements can be complicated. The company also has a complex relationship with its many subsidiaries in Asia. For these reasons, its rating is 4/5.

Balance Sheet Health: ASE has a healthy balance sheet. Its cash and short-term investments are higher than its long-term debt, and it has shown to use that capital wisely in R&D and future-growth projects. This leaves the company with a very strong financial position and the flexibility to make acquisitions when opportunities arise. As such, its rating is 4/5

Recent Concerns and Management’s Response

  • Geopolitical Environment:
    • In the latest earnings calls the management acknowledged geopolitical risks in Taiwan but said they can continue to mitigate these risks.
  • Decrease in demand:
    • The company has faced challenges from macroeconomic conditions, impacting their order book in some parts of the world.
    • The management has stated that the long-term structural trends for growth still support them, and are focusing on efficiency and cost control.
  • Impact of Inflation:
    • They have implemented strategies to optimize resource utilization in order to counter the effects of inflation and maintain profit margins.

ASE’s management has a good handle on the current macro environment and are implementing effective steps to mitigate the risks, while still growing the company effectively.