Kerrisdale Capital's Sahm Adrangi on $ACMR's price dislocation between Shanghai and NASDAQ listings
Sahm Adrangi’s core call is that $ACMR offers a Chinese wafer-fabrication-equipment growth company at a 60%-75% discount created by a mismatch between its U.S. listing and China-centered operations. At roughly $23, ACMR sat below a DCF near $70, comparable-company values of $60-$110, and the approximately $73 per-share value implied by its 82% stake in Shanghai-listed ACM Shanghai. “It’s just way below any valuation methodology you come up with.”
China’s localization mandate gives ACMR a protected route into an industry whose qualification costs normally entrench a handful of suppliers. Revenue grew from $30 million in 2016 to 2025 guidance of $850-$950 million because Chinese fabs are “mandated to go with a Chinese toolmaker if it’s remotely competitive.” Adrangi’s second leg is less certain: incubation at home might eventually let ACMR become a second or third source for international fabs.
Adrangi argues that tougher U.S. semiconductor restrictions are operationally bullish for ACMR even when the headlines hurt its stock. Its Entity List addition helped drive shares from roughly $19 to $15, yet January guidance was little changed from pre-list expectations; meanwhile, pressure on China increases Beijing’s incentive to support domestic suppliers. “The tougher the U.S. is on China…the more China is going to double down.”
Fraud and governance risks are central, but Kerrisdale’s conviction comes from channel checks rather than trusting the reported numbers alone. Those checks described ACMR as China’s leading cleaning-equipment supplier, credited its ECP tools, patents, and engineering team, and suggested its products are genuinely competitive. Even a more copycat-heavy reality could still support the thesis if fabs keep installing the tools and localization continues.
Walker identified management’s lack of urgency as a key challenge to the thesis. The valuation gap has several possible unlocks: Adrangi prefers a Hong Kong dual listing, a premium take-private and Asian relisting, or a strategic sale over shrinking a relatively illiquid U.S. float; he is reluctant to demand that a 30-year founder sell 20%-25% of his enterprise for a quick shareholder gain. Walker’s pushback was blunt: ACMR could monetize part of ACM Shanghai and repurchase the parent at an enormous discount, and “that does sound pretty nice.”
A slowing semiconductor-equipment cycle may be absorbed by localization-driven share gains. Adrangi cited forecasts for Chinese fabs’ domestic-tool penetration to rise from the mid-teens to the low 30s within roughly two years, potentially offsetting a 5%-10% decline—and perhaps even a 10%-20% decline—in overall spending. ACMR also has a land-and-expand opportunity from cleaning and electrochemical plating into advanced packaging, furnaces, PECVD, and track tools.
The ugliest financial signal is working capital, including inventory days above 500, but Adrangi offered a plausible business-model explanation rather than a clean exoneration. First tools require customization and evaluation periods of up to 24 months, with payment and revenue recognition delayed, while repeat tools are recognized on shipment and delivery. Adrangi expects conversion to improve as repeat tools rise; his best answer was that if the tools are competitive and entering fabs, “one way or another, they’re ultimately going to get paid.”
The risk Adrangi identifies most is an extreme U.S. ownership restriction, although he regards it as a remote tail risk that might paradoxically force the valuation unlock. A 365-day divestment window could accelerate a Hong Kong listing and share conversion; he thinks the present 68% jurisdictional discount might then narrow to 10%-25% relatively quickly. He acknowledges that restrictions could also strand U.S. holders from accessing value in the Chinese subsidiary.
1. China gives ACMR a route through an otherwise closed oligopoly
Adrangi framed wafer-fabrication equipment as a collection of “little oligopolies.” Applied Materials, Lam Research, KLA, ASML, and major Japanese suppliers sell the tools used inside semiconductor fabs; he considers the larger platform businesses companies one could plausibly own for 20 or 30 years because their competitive advantages are so durable.
The moat comes from joint development and qualification. Fabs pursuing more advanced chips work closely with incumbent toolmakers, while replacing a qualified tool imposes testing costs, operational disruption, staff retraining, and the inefficiency of supporting multiple systems for the same process step.
Walker’s pushback—worth keeping—was that ACMR’s own rise appears to prove these oligopolies can be breached. Adrangi’s answer: it could break in because Chinese fabs give domestic tools preferential treatment, whereas Intel or SK hynix must voluntarily accept the cost and risk of replacing an incumbent.
That distinction explains ACMR’s climb from $30 million of revenue in 2016 to 2025 guidance of $850-$950 million. China is effectively incubating domestic platforms; once their tools become competitive, they might pursue the harder second leg of becoming international second or third sources.
2. Every valuation route lands far above the U.S. share price
Asked what the market had missed for five years, Adrangi offered an “honest non-answer”: he does not usually try to inhabit the market’s psychology. He estimates future cash flows, discounts them, and buys when the quoted value is sufficiently below the result.
Here the explanation nevertheless looks straightforward: ACMR is a U.S.-listed company operating in a Chinese semiconductor sector that Washington is actively trying to constrain. Adrangi sees “the mismatch between the shareholder base and the listing and the underlying company” as the only discount explanation that really resonates.
The numerical gap was unusually wide. Kerrisdale’s DCF produced roughly $70 per share; peer analyses across U.S., Japanese, and Chinese equipment companies produced $60-$110; discounting a 2028 EPS estimate at a 30x P/E yielded about $63.
Most strikingly, ACMR’s 82% holding in Shanghai-listed ACM Shanghai implied approximately $73 per ACMR share when the U.S. parent traded near $23. Walker summarized the special situation as a roughly $1 billion parent controlling an operating company valued near $6 billion: “You can drive a truck through that valuation.”
3. U.S. restrictions may strengthen the operating thesis
Kerrisdale wants to reverse the market’s geopolitical reflex. ACMR fell from about $19 to $15 after an Entity List addition, but Adrangi argued that “all of these headlines…are actually good for ACMR” because restrictions accelerate China’s substitution of foreign semiconductor tools.
He did not claim the rules are harmless. Rather, the observed workarounds and China’s continued progress suggest they have not achieved their stated purpose, while ACMR’s January guidance remained broadly consistent with expectations formed before the listing.
Walker initially viewed ACMR’s exposure to the Chinese semiconductor industry as a negative. His change of mind captured the thesis: exposure to that industry becomes attractive when the government is actively encouraging every feasible piece of the supply chain to be sourced locally.
The non-China opportunity remains more speculative. Management historically envisioned a global supplier, and Adrangi heard encouraging indications from prospective overseas customers—he was most optimistic about SK hynix—but acknowledged that qualification outside China has moved slowly.
4. Channel checks carry more weight than reported profits
Walker raised the history of fraudulent U.S.-listed Chinese companies. Adrangi said Kerrisdale’s conviction in this name comes from channel checks, recalling that when the firm exposed Chinese frauds in 2011 and 2012, it checked facilities and spoke with customers.
The checks identified ACMR as China’s number-one cleaning player, described its electrochemical-plating product as innovative, and pointed to novel patents and a strong engineering core.
Some checks also suggested ACMR was “less of a copycat” than other domestic suppliers. Adrangi stressed that the thesis does not require technological purity: even reverse-engineered tools can take substantial Chinese share and eventually qualify internationally outside the most sophisticated process categories.
The load-bearing evidence is that competitive tools are entering real fabs. Profit leakage or agents “skimming some profit off the top” would matter, but less than whether ACMR is building an installed base capable of supporting revenue and attractive steady-state margins five, ten, or 15 years from now.
5. Governance protects holders imperfectly—and management is in no hurry
ACMR directly owns its Chinese operating company rather than relying on a VIE, and the parent is incorporated in Delaware. Adrangi described the CEO as holding voting control through Class B shares but only about 10% of the economics, so a low-priced take-private would expose him to the value gap on the 90% he does not own.
Adrangi thinks an M&A adviser would likely caution against a lowball take-private without a majority-of-the-minority vote, especially given ACM Shanghai’s visible valuation benchmark. A Delaware court could potentially view such a transaction as taking the company private at a significant discount; approval by the minority would make the fair-value argument easier.
Walker highlighted the unresolved challenge: management is aware of the large listing discrepancy yet has shown little urgency to exploit it. Adrangi’s “hope is just it’s a slow process,” a notably softer answer than his confidence in the operating business.
Selling 20%-25% of ACM Shanghai could fund a parent buyback or distribution, but Adrangi resisted telling a founder with a decades-long horizon to sell “a quarter of your business” for his own 12-month return. Walker conceded the horizon mismatch while reminding him: “You are a shareholder, and that does sound pretty nice.”
6. A Hong Kong listing looks cleaner than shrinking the float
Adrangi prefers aligning the shareholder base with the underlying business through a Hong Kong dual listing, premium take-private and relisting, or outright sale. A large buyback could make an already small, roughly $1 billion company less liquid and might take years to close the discount.
A strategic sale of ACM Shanghai to a larger Chinese equipment company could, by his estimate at the time, generate something like a “600% return overnight.” A 30% premium may not excite a founder, but the jurisdictional gap could make surrendering control potentially transformative.
Large capital transfers from China may also require government approval, which could be difficult if the purpose is merely returning cash to U.S. holders while Beijing wants the company reinvesting to become more competitive. That constraint reinforces the case for changing the listing venue rather than extracting the subsidiary’s capital.
Walker floated a more creative route: ACM Shanghai could offer its own shares for ACMR, letting the child acquire the parent at a premium while creating value for remaining Shanghai holders. Adrangi did not validate the regulatory feasibility, but reiterated that any bidder should need to pay an attractive premium.
7. Localization can outrun both a cycle downturn and new competition
Adrangi defended ACM Shanghai’s six-to-eight-times-revenue valuation with revenue growth above 40% for about six years and roughly 20% EBITDA margins, in an industry structure unlike Chinese EVs or solar panels. A fab will not efficiently support six different cleaning tools, limiting the number of viable competitors.
Cleaning is less sophisticated than lithography, but that does not make it a commodity. ACMR’s pole position and installed base still matter because fabs dislike ripping out qualified tools, while China’s enormous localization “white space” lets domestic suppliers pursue different categories without immediately stepping on one another.
Beyond leadership in cleaning and electrochemical plating, ACMR is expanding into advanced packaging, furnace tools, PECVD deposition, and track tools. The model is “land and expand”: secure a fab with one system, then qualify adjacent products.
Chinese WFE spending may slow after foreign-tool pre-buying ahead of restrictions, with cited forecasts around 5%-10%. But domestic tools were not similarly pulled forward, and localization was projected to rise from the mid-teens to the low 30s within two years; Adrangi thinks those share gains could offset even a 10%-20% market contraction.
8. Working capital is explainable, while U.S. policy remains the true tail risk
ACMR’s inventory days above 500 understandably trigger fraud alarms. Adrangi explained that first tools are customized for each logic or memory fab, can undergo evaluation for up to 24 months, and may not produce payment or recognized revenue until that process ends.
Repeat tools receive revenue recognition on shipment and delivery. Because ACMR grew roughly 40% annually from almost nothing, first-tool deployments consumed substantial cash; Adrangi expects—“hopefully”—cash conversion to improve as repeat systems become a larger share.
Channel checks make him comfortable that fabs want the tools, but he preserved the uncertainty: “One way or another, ultimately they’re going to get paid.” He called that his best answer on the working-capital issue.
The risk Adrangi cannot diligence away is extreme U.S. action against ownership. Yet a rule providing 365 days to divest could accelerate a Hong Kong conversion, where he believes the roughly 68% discount could narrow to 10%-25% quickly; thus the feared restriction “actually could be a catalyst for the upside,” though he still calls it an unlikely tail risk.
Full transcript
Hello and welcome to the Yet Another Value Podcast. I’m your host, Andrew Walker. With me today, I’m happy to have Sahm Adrangi. Did I say that right?
That is right. You nailed it.
From Kerrisdale Capital. Sahm, how’s it going?
Good. Good. Long-time viewer, first-time guest. I love the work that you do on some of these names. It’s great to have a podcast that focuses on specific names, as opposed to just more general stuff.
I really appreciate that. I don’t know if you remember this, but I interviewed with you about 12 years ago, when I was a fresh-faced McKinsey consultant. This is the first time I’ve had someone on the podcast whom I previously interviewed with, which is kind of funny.
That was my strategy back in the day. I think I interviewed everyone. It was something like a post-consulting, one-year deep dive into an industry. It would have been fun, but I don’t think it would have been a good fit. You definitely passed on me.
Anyway, we’ll start this podcast the same way I start every podcast. Nothing on this podcast is investing advice. That’s particularly true today, because ACM Research is an international stock. It’s U.S.-listed, but its main subsidiary is in China, so it carries extra risk. Do your own work and consult a financial adviser.
The company is ACM Research, ticker ACMR. You’ve put a lot of information into the public domain, which I appreciate as somebody preparing for a podcast. I think it’s a fascinating thesis, so I’ll toss it over to you. What is ACMR, and why is it so interesting?
ACMR is a wafer-fabrication-equipment company. These are businesses that make the tools that semiconductor fabrication plants, or fabs, use to make chips. TSMC operates fabs, Samsung operates fabs, and GlobalFoundries operates fabs. The tools that they purchase to make chips in those fabs are sold by wafer-fabrication-equipment companies.
The largest global WFE companies are Applied Materials and Lam Research. Those are starting to become household names. ASML in the Netherlands is a big one, and then there are a bunch in Japan: Tokyo Electron, Hitachi High-Tech, Nikon, and SCREEN. There are also smaller-cap WFE makers like Axcelis, Camtek, Nova, Onto Innovation, Veeco, and so on.
One thing I want to mention before we talk about ACM in particular is that these bigger platform companies are great businesses. These are stocks you can buy and hold for the next 30 years, and I’m pretty confident you’ll generate an attractive return over the long term.
Lam was actually our largest holding at the bottom of the market in October 2022. The sector was getting hit hard because of concerns around cyclicality and the U.S. government’s attempts to restrict sales to China. The stocks got to pretty low valuations, but one reason you could have the confidence to own something like that when the market was panicking is that the sector lends itself to a small number of players and oligopolies across each individual tool.
The companies have great competitive advantages. There are a limited number of fabs out there, and there’s a limited number of operators of bleeding-edge fabs. These fabs are always working hard to build more advanced, more cutting-edge chips. To make more advanced chips, they need to operate more advanced tools, so the fabs work hand in hand with the toolmakers to advance the tools.
There’s a very symbiotic relationship between the fabs and the WFE makers. That makes it hard for new entrants to break into the field, because there are real costs for a company like TSMC to qualify a new tool, rip out an incumbent tool, and replace it with a new one.
Instead, making the tools more cutting-edge is the priority. Taking the risks associated with bringing in a new tool is often not worth it. It makes the fabs less efficient to have multiple tools for the same process step, and you have to train staff, among other things.
When you look across each of these tools, they’re like little oligopolies. Through consolidation, the platform companies have consolidated a number of them. When you look at Lam Research, Applied Materials, and KLA, you’ll see that they trade at pretty attractive multiples. That’s because you can be confident that these companies will be around 20 or 30 years from now and will have attractive steady-state margins down the line.
That’s pertinent for ACM because I think the Chinese WFE players benefit from some of the same competitive advantages as the international companies. There’s also a really good write-up on VIC from October 2021 on Lam Research and SOXX that breaks down why semiconductor-capital-equipment companies are attractive. I’d encourage anyone who’s newer to the industry to read those write-ups.
At the end of the day, it has to do with the WFE industry being naturally oligopolistic.
Can I ask you a question on that? For those who don’t know, Kerrisdale has published a report on ACMR, which is comprehensive and which I liked. I’ll include a link to it in the show notes. On Value Investors Club, I don’t want to embarrass Sahm, but I think you’d find both of our handles on there pretty quickly. That’s what he’s referring to with the write-up.
You said that if you could have invested in Lam Research or Applied Materials back in 1995, you obviously would have done that. Those stocks are something like 50-baggers over the past 25 to 30 years, and I love that thesis.
One quick question on ACMR: They’ve managed, from a standing start over the past 15 years, to take significant share in the Chinese market. You obviously think they have some chance of taking share in international markets as well. Isn’t the fact that they’re managing to break in from a standing start over 10 to 15 years proof that you can break into these oligopolistic markets?
They’re able to break into it. All of their sales come from China, and they have viable products that they’re trying to sell into Intel and SK hynix. But that ramp-up has been slower because Intel and SK hynix have to decide whether they want to replace an incumbent cleaning tool or electrochemical-plating tool with ACMR’s tool.
The hurdle ACMR needs to clear to break into those fabs is much higher. In China, by contrast, Chinese fabs are mandated to go with a Chinese toolmaker if the tool is remotely competitive.
They’ve been able to go from $30 million of revenue in 2016 to 2025 guidance of $850 million to $950 million—basically $1 billion of revenue—because they’re getting preferential treatment.
That’s why the Chinese players are trading at 8 times revenue. This preferential treatment is allowing new toolmakers to develop, essentially incubated within China. After all the white space in China has been filled, the second leg of the thesis is that these companies will be able to become second and third sources internationally.
Their ability to develop competitive tools comes from the incubation they’re receiving in China. That really can’t happen very easily outside of China. Today, it would be hard for Applied Materials or Lam Research to develop a platform WFE company outside of China, although they can develop individual tools here and there.
In China, though, you’re seeing platform WFE companies develop because of the preferential treatment they’re receiving.
There’s a lot to talk about here: a special-situation angle, an event angle, political angles, and all sorts of other things. But I want to start the podcast the same way I try to start every podcast. The market’s competitive, and it’s not lost on people that Lam Research, Applied Materials, and all these other companies are great businesses.
ACMR has been a popular pitch on VIC for several years. The stock has been basically flat over the past 5 years, so what are you seeing that the market is missing and has ignored for the past 5 years?
I never really know how to answer that question. Ultimately, I try to look at companies, understand the valuation, value them based on the present value of their future discounted cash flows, and own them when they’re trading at a discount to that valuation.
Getting into the market’s head about why something trades low is sometimes difficult. Some things trade low because a few people are liquidating them.
In this instance, it’s a little more straightforward. The company is a U.S.-listed Chinese semiconductor-capital-equipment company. I’m generally of the view that most Chinese companies shouldn’t be listed in the United States. If your operations are in a given country, I think it’s better to be listed in a jurisdiction that reflects those operations.
In this specific instance, you have the U.S. government taking actions to restrict the growth of China’s semiconductor industry and, by virtue of that, the WFE sector within China. It doesn’t really make sense for a company operating in that sector to be listed in the United States.
Ultimately, I think the shareholder base of ACMR will be in Hong Kong, the company will go private and relist in Asia, or something similar. I think you’ll ultimately have a shareholder base that aligns with the underlying operations, and this discount won’t have a justification to exist anymore.
The only real argument that resonates with me for why the discount exists is the mismatch between the shareholder base, the listing, and the underlying company. But that can be fixed. In advance of it being fixed, I think the dramatic discount that currently exists will correct to some degree in anticipation of that.
There are actually 2 discounts you could talk about. There’s the discount ACMR trades at relative to most of its peers. If I’m remembering correctly, ACMR would be pretty top-tier in terms of margins and growth, but it trades near the bottom in terms of its multiple.
The other discount is one reason a lot of event-driven investors find this interesting. ACMR is the U.S.-listed company, and it owns 82% of ACM Shanghai, which is the Shanghai-listed company. The Shanghai-listed shares that ACMR owns would be worth about 5 times ACMR’s market cap at fair value.
So I’m not sure which discount you’re talking about, but I’m sure we’ll discuss both of them.
In the report, we have a chart that lays out 5 valuation methodologies. When we did a DCF, the revenue growth and attractive margins on a steady-state basis got us to around $70 per share.
With a comparable-company analysis, whether you compare it with U.S.-listed WFE companies, large-cap or small-cap, Japanese companies, or Chinese companies, you get a range anywhere from $60 to $110 per share.
ACM Shanghai’s valuation implies around $75 to $73 per share for ACMR, so it’s trading at a discount of more than 50%, and more like 60% to 75%, across whatever valuation methodology you use.
I think all of these valuation methodologies are pretty reasonable. We also took a 2028 EPS estimate, applied a 30-times P/E multiple—which I think is reasonable given the growth and margins—and discounted that to today. You get about $63 per share there.
At $23, it’s just way below any valuation methodology you come up with.
I know I’m not breaking new ground with this question because I listened to about 75% of the Twitter Space you guys did, which I thought was excellent. If I can kiss your butt for a second, I loved how you came out right at the front and said, “This is a big position for us. If you have different views, I want to know. Here’s my cell phone number and my email address.”
I have people come on here and, when I ask how people can contact them, they say, “The plebeians can’t contact me about this position.” I love that you said, “Reach out to me,” because you clearly want to learn more. I really appreciate that.
I’m not breaking new ground with this question. How much of ACMR is a business question, and how much of it is politics? You’re no stranger to Chinese U.S.-listed companies.
There are 2 risks. First, everybody knows there are a lot of fraudulent U.S.-listed Chinese companies. I don’t use that term lightly, but it has been proven. Second, there’s the geopolitical risk. What happens if China changes its support for the WFE sector or its national-industry policy?
How much should we really be thinking about the business versus politics, market trends, and regulatory issues?
On the political side, we’re trying to trigger a narrative change. The stock traded down from around $19 to $15 in November and December, on the back of the company being added to the Entity List. That’s a negative headline in terms of the company’s positioning vis-à-vis U.S.-China tensions around the growth of China’s semiconductor industry.
The narrative change we’re trying to trigger is that all of these headlines about the United States trying to restrict China’s growth in semiconductors are actually good for ACMR. This is a direct beneficiary of the Entity List existing.
It’s also a direct beneficiary of Trump. If you think Trump is going to be tougher on China, the tougher the United States is on China and the semiconductor sector, the more China will double down on incubating and developing its domestic toolmakers. ACMR is the third-largest one.
Historically, before our report, when some of these rules came out, you’d see ACMR trade down. In reality, it shouldn’t. Being added to the Entity List ultimately isn’t going to affect its operations very much, and we can talk more about that later.
A lot of the rules that Biden has passed to prevent the growth of China’s semiconductor sector simply haven’t worked when you look at the numbers. There are a number of workarounds, and China is progressing. When ACMR gave its guidance in mid-January, it wasn’t all that different from consensus estimates before the company was added to the Entity List.
On the fraud side, what has given us conviction in this name is our channel checks. When we were exposing Chinese frauds back in 2011 and 2012, a lot of what we did was through channel checks: checking facilities and talking to customers.
We’ve gotten channel checks indicating that these guys are the number-one player in cleaning in China, that their ECP product is innovative, and that they’re less of a copycat WFE player than some of the other companies. They’ve had novel patents come out, and there’s a strong core team of engineers coming up with new technology.
Ultimately, even if they are very much on the copycat side, it’s still very bullish for the overall story. These companies can reverse-engineer tools from foreign players—not necessarily in lithography or the most sophisticated tools within the semiconductor value chain, but perhaps the bottom half of less-sophisticated tools.
They can reverse-engineer those tools, make competitive products, gain market share in China, and ultimately become a second and third source internationally. There’s just so much growth available to these companies. ACMR is the third-largest one, so it’s exciting.
We’re focused on the top line. If they’re selling tools into the fabs and our channel checks indicate that those tools are competitive, the revenue is going to grow. Intuitively, businesses like this should have attractive cash margins down the line.
That takes some of the fraud risk out of it. If they have sales agents skimming some profit off the top today, the profit today isn’t as important as whether they’re building competitive tools and where they’re going to be 5, 10, or 15 years from now.
What about the other risk? I don’t know if it’s political or regulatory, but when I think about Chinese companies, there are 2 risks.
One is the risk that a legitimate Chinese company gets Alipay-ed. The government comes to you and says, “That’s a really valuable asset. It probably belongs to us, not the shareholders.” That’s a dated example, but there have been instances of it happening.
The second risk, which I actually think is more relevant here, is the possibility of a take-private transaction. I’ve seen a lot of companies—usually much smaller companies—with a U.S. listing and a Hong Kong listing. Their peers trade in Hong Kong at 5 times the multiple at which they trade in the United States.
The controlling shareholder says to the U.S. shareholders, “Our stock trades at $10. Here’s $12 per share.” They own enough of it to force the transaction through. Six months later, you see it IPO in an Asian market at $50 or $60. You think, “Gosh darn it, it happened again.”
As a minority U.S. investor, will I ultimately receive the cash flows and be able to make a profit here?
ACMR has a dual-class share structure in which the CEO has voting control through the Class B shares, but he owns only 10% of the economic stake in the business.
If he were to try to do a take-private transaction at a low price, the penalties could potentially be significant on the 90% that he doesn’t own, accounting for the gap between the discounted valuation and fair value.
The M&A adviser he’d probably hire in this instance—if he teamed up with a private-equity firm to take the company private and ultimately relist it—would strongly advise against taking the company private without pursuing a majority-of-the-minority vote.
In a number of instances where U.S.-listed Chinese companies have gone private at a low valuation, the CEO owned 70% to 80% of the company. Here, because his economic ownership is only 10% and there are such clear valuation benchmarks, it would be a different situation.
You have the exact same company listed in another jurisdiction at a valuation implying $73 per share, compared with the roughly $23 at which it trades today. There’s a decent chance that Delaware courts would rule that this was done at a significant value discount. If you don’t pursue a majority-of-the-minority vote, you’d be at risk of the courts ruling against you.
If you do pursue that vote, it becomes much easier to argue that you took the company private at a fair value. The discount relative to the China-listed shares is acceptable because the majority of the minority voted for it.
The stock is trading in the mid-20s, or mid-to-low 20s. If they come out with a $30-per-share offer, everyone will push back and say it’s $70 over in Shanghai. Then you’ve got an interesting question: how many people can we clip if we go to $33 or $36? You’re never going to get the whole $72, but if it were $71 when it was $72, everyone would go for it. It becomes an interesting negotiation.
Just real quickly, when I first saw you write this up, I thought it was a Chinese-listed U.S. company and a VIE. This is actually a Delaware-incorporated company, and I believe the CEO isn’t a U.S. citizen but lives in the U.S. Could you briefly touch on that? I think it’s important from a corporate-governance angle and a few other standpoints.
You directly own the Chinese OpCo in this instance, which is good. You’ve seen capital returns on some of these VIEs; the Ouya and Doan come to mind. But here you don’t have to deal with that theoretical obstacle because it’s direct ownership.
In terms of the CEO being a U.S. citizen, his vision historically was to be a global WFE player, not just a China player. We’ve heard good signs in terms of traction with non-Chinese semiconductor-company customers they’re trying to sell into, and we’re most optimistic about SK hynix. Five or 10 years ago, given the patents and technology they were producing, that vision of being a global player within the WFE landscape was legitimate. Things have changed in terms of U.S.-China relations around the semiconductor industry, so transitioning from a U.S. company with global ambitions to perhaps an Asian company with global ambitions makes sense in a way it didn’t 10 or 15 years ago, when management pursued a U.S. listing. You just didn’t have those intentions back then.
One thing I think is interesting is that the CFO spoke at the UBS conference in December. It’s not lost on the management team that there’s a huge value discrepancy. ACM Shanghai is trading at about 5 times the price of ACMR.
He was asked in a bunch of different ways, “Why don’t you do something to take advantage of this?” He basically demurred and said, “We’re a growth company. We want to grow.”
That makes some sense to me. The returns and growth here are really good. But at the same time, when you’re telling me this is a great company and you see the vision and the outlook, it’s strange that you can buy it at an 80% discount in the U.S. market.
It does strike me that management sees the discrepancy. It’s not lost on them, but they’re not doing anything to address it. Management could buy shares on the open market, or the company could buy back shares. There are lots of things they could do.
Why don’t you think there’s any urgency on their end? Is that a red flag? Is this just a non-economic management team? How do you think about it when something seems economically rational, management seems to acknowledge it, and yet they aren’t doing anything?
My hope is that it’s just a slow process in terms of pursuing the value unlock. The capital-return ideas that are out there don’t resonate with me as much. Maybe they’ll resonate with other shareholders, and we would support them.
One obvious way they could unlock value would be to sell 25% of ACM Shanghai, use the proceeds to buy back the entire float of ACMR, or distribute all of that back to ACMR shareholders through a dividend.
But it’s hard for me, as a shareholder, to tell a CEO who has been running this business for 30 years, “Sell 20% or 25% of your company.” His time horizon is probably much longer than mine. If he wants to run it for the next 20 or 30 years, who am I to tell him to sell a quarter of his business so I can generate an attractive return over the next 12 months?
There are other paths that don’t require him to give up any more control over his company than he currently has. I tend to favor pursuing a dual listing in Hong Kong and aligning the shareholder base with the underlying company.
There has been talk about selling a large chunk of the ACM Shanghai shares and buying back ACMR shares, distributing a dividend, or selling a small amount and paying a small token dividend or buying back a small amount of stock.
The problem with the share-buyback idea is that this is a $1 billion company and not the most liquid stock out there. With share buybacks at very small companies, they often don’t work immediately. It’s frequently a multiyear process.
Making the shares even less liquid isn’t as attractive to me as finding a way to align the shareholder base with the underlying company. That could be a take-private transaction at a premium followed by a relisting abroad, a Hong Kong listing, or a sale of the company.
What’s interesting is that founder-CEOs often don’t want to sell their companies because making a 30% gain and selling at a premium isn’t that exciting to them. But if the company were to sell ACM Shanghai to AMEC or NAURA and allow the buyer to continue consolidating the sector and gain the number-one cleaning business in China, shareholders could make something like a 600% return overnight.
We’d obviously be in favor of that as well.
The other thing about capital returns is that, in many of these instances, if the amount is relatively significant, you need approval from the Chinese government. It’s questionable whether the government would approve a transaction if it were merely intended to return a chunk of cash to shareholders, especially given how focused the government is on having this company and sector grow and become as competitive as possible.
I do hear that. But at the same time, you are a shareholder, and that does sound pretty nice.
There are other paths here that don’t require him to give up any more control over his company than he currently has. I’m a fan of pursuing the dual listing in Hong Kong and aligning the shareholder base with the underlying company.
As for whoever tries to take ACMR private—whether it’s the operating company through some sort of creative acquisition, management teamed up with private equity, or one of the Chinese strategic companies trying to bid for ACMR shares—we’d probably receive an attractive premium. You simply can’t have a take-under here.
If it’s purely a strategic buyer and the CEO is selling all of his shares, you should be pretty well aligned.
There’s another aspect. ACM Shanghai, the Shanghai subsidiary, is controlled 82% by ACMR, so the float is pretty thin and illiquid.
There are a lot of possible answers here. ACMR can be undervalued, and ACM Shanghai can be overvalued. The valuation gap is so wide that both things can be true.
How much do you think ACM Shanghai is overvalued, fairly valued, or undervalued when you look at that company? It trades at a full multiple, but it’s pretty illiquid.
I just think there’s so much growth available for these companies. ACMR has grown revenue at more than 40% since 2018—about 6 years in a row. The growth is significant, and it’s generating EBITDA margins of around 20%.
I care less about EBITDA margins today than I do about understanding that this isn’t one of those sectors, like electric vehicles or solar panels in China, where suddenly there can be 20 players eroding everyone’s margins.
You simply can’t have 20 cleaning-tool companies or 20 electrochemical-plating-tool companies. You’re not going to have YMTC or SMIC with 6 different cleaning tools within a fab.
There are attractive steady-state margins and significant growth. A 6-times or 8-times revenue multiple seems very reasonable to me.
The argument that those valuations are too high operates only in the context of saying that everything in China needs to be cheap, regardless of business quality. Because it’s a Chinese asset, people say it shouldn’t trade at 6 to 8 times revenue.
If you take a step back from that and apply a DCF, the multiples at which the Chinese peers and ACM Shanghai are trading are defensible, in my opinion. ACM Shanghai trades in line with, and actually at a small discount to, its Chinese peers.
That’s perfect. I mention it because there are interesting possibilities. What if ACM Shanghai starts buying the parent company? It could say, “We’ll give you $30 worth of ACM Shanghai shares, and you can tender your ACMR shares into that.”
That would create a huge premium for ACMR shareholders, but it would also create significant value for the remaining ACM Shanghai shareholders. You’d have the subsidiary buying the parent, which is interesting. I don’t know whether it’s legally or regulatorily possible, but that seems like one way to create a lot of value without selling the business.
Whoever tries to tender for or buy ACMR—whether it’s the operating company through some sort of creative acquisition, management teamed up with private equity, or even one of the Chinese strategic companies trying to buy ACMR shares—ultimately goes back to the fact that we’d probably receive an attractive premium.
You can’t have a take-under here. If it’s purely a strategic buyer and the CEO is selling all of his shares, the incentives should be pretty well aligned.
One of the things I find interesting is that when I heard “cleaning tools,” I initially pictured janitorial tools. It took reading your report and continuing to read about the company to get past that.
These are actually extremely sophisticated tools. If I remember correctly, their top-of-the-line cleaning tools clean things at the 19-nanometer level, and they’re trying to get down to 15 nanometers. That’s much smaller than the human eye can see.
How technically sophisticated are the things they do? Cleaning tools represent 5% to 8% of the cost of a fab, if I’m not mistaken. They’re meaningful, but not so meaningful that the fabs want to take them in-house and do all this themselves. It’s a really interesting niche.
Cleaning is on the less-sophisticated side relative to other tools. If you think of lithography as one end of the spectrum in terms of sophistication and the difficulty for Chinese companies to replace foreign tools, cleaning is closer to the other end.
Part of our diligence was trying to understand the extent to which ACMR’s position as the number-one provider of cleaning tools in China could be challenged by other players. The sense we’ve gotten is that even though cleaning isn’t the most sophisticated WFE sector or line of tools, ACMR is in the pole position.
It’s still unlikely that you’re going to see a lot of competition there. The competition would come from NAURA, for example, but the color we’ve gotten is that there’s so much white space within China and so many tools for these companies to bring in-house or source from domestic suppliers instead of foreign toolmakers that they aren’t stepping on one another’s toes.
Within the Chinese players, there isn’t much competition today or in the near to intermediate term. Our channel checks suggest that ACMR is likely to continue to be the number-one player in cleaning and the number-one player in ECP, or electrochemical plating.
They have 4 other product lines. Their third tool line is advanced packaging. They’ve also brought out a furnace tool over the past year and have been making shipments. You’ll start seeing some of that revenue in 2025.
They also have a PECVD deposition tool and a track tool. Within those other tools, they aren’t necessarily the most sophisticated or advanced tools, but there doesn’t seem to be as much competition.
We’re optimistic that they’ll be able to put together competitive tools, start gaining market share, and grow in those areas. That’s my answer to the idea that cleaning isn’t the most advanced process step and that you should be concerned about it.
Once you’re in the fabs, the fabs don’t really want to rip out your tools and replace them with other tools.
You mentioned being long Lam in 2022. Obviously, you were long semiconductor fabs. A few weeks ago, there was the DeepSeek freakout. People said these models were much less energy-intensive and that all of the spending might not be necessary. The market seems to have self-corrected very quickly.
You’ve laid out that this is a secular winner because China is trying to insource and bring this supply chain in-house. How exposed are you to a pause in AI spending? If there were a pause and the fabs decided they didn’t need to spend hundreds of billions of dollars every year, how affected would companies like ACMR be?
There’s some color coming out that overall WFE spending in China is slowing down. It’s difficult to separate how much of that decline is due to foreign tools that were purchased, or advanced buying that took place over the past couple of years in anticipation of future restrictions, from the slowdown in tools being sold by Chinese toolmakers.
It seems like there wasn’t as much pre-buying of Chinese tools because there weren’t forthcoming restrictions on them. Offsetting a slowdown in WFE spending is the fact that these companies are taking market share from foreign tools.
There’s good Bernstein research on this and good Goldman research as well. Bernstein estimates that the rate of localization—the percentage of a fab’s tools that are Chinese rather than foreign—will grow from the mid-teens to the low 30s over the next 2 years.
There’s a lot of displacement of foreign tools going on. That’s driving growth despite overall declines in WFE spending. When we talk about declines, the forecasts are for declines of perhaps 5% to 10%.
Even if you had a 10% to 20% decline, the market-share gains these toolmakers are making would offset it. That growth would offset the decline at the overall market level.
I think there was a lot of bearish commentary around the company having built up a significant amount of working capital over the past 12 to 18 months. I wanted to discuss that because you had a differentiated take on it.
The first thing everyone looked for after you and so many other people exposed Chinese reverse-merger frauds was, “What does the working capital look like?” Why does this roughly $500 million company have $17 billion in inventory?
We’d love to see positive net income accompanied by positive cash flow, but this just isn’t that type of business because of the nature of what it does.
When they sell a tool to a fab, there’s customization that needs to go into that tool. Whether you’re selling a cleaning tool to a logic fab or a memory fab, a variety of customizations need to be made.
This is a fast-growing company, so they’re selling a lot of first tools into these fabs. That’s great for the long-term story. They’re getting a foothold in all of these fabs, and then there’s a land-and-expand model: You get in there with cleaning, and then you sell your furnace product, track tool, and other products.
Their disclosures in the 10-K resonate with what you’d intuitively expect. The first tools they ship have a lengthy evaluation period, which they say can be as long as 24 months. They’re not necessarily receiving payment until after those 24 months.
If you’re growing at 40% a year and going from nothing to $1 billion of revenue, you’re selling a lot of first tools into a lot of fabs. You’re not getting paid for those first tools until 2 years later.
On the revenue-recognition side, there’s also delayed recognition. They don’t recognize the revenue from a first tool for a while, whereas they recognize revenue from repeat tools upon shipment and delivery.
The result is that, when you look at the cash-flow statement, you’re seeing a lot of negative working capital tied to inventory. You’re seeing inventory days outstanding north of 500 days, which is a big number.
In the report, we discuss how some of that cash flow should ultimately come in over the next few years as more of the tools they ship transition from first tools to repeat tools as a percentage of total tools. Hopefully, that will happen.
The big-picture factor that has made us comfortable with the working capital is the channel checks coming back on the competitiveness of their tools. If the tools are going into the fabs and the channel checks indicate that they’re attractive to customers, one way or another, they’re ultimately going to get paid.
That’s my best answer on the working capital.
I think we’ve hit most of the bullish points from your research. I’ll include a link to the paper in the show notes. It’s about 30 pages, very well researched, and very in-depth. If people are interested, they should dig into it.
Is there anything you came on here wanting to talk about that you think we should have discussed more?
This is a smaller-cap company, so the role we can play is to educate the market that the business is actually operating well. People can look at the financial statements and understand the valuation and growth, but because it’s in China, because it’s a semiconductor-capital-equipment company, and because it’s only a $1 billion market-cap company, there isn’t as much color from independent observers verifying that its tools are competitive.
We’re hoping that by packaging all of that into a report, we can get people more comfortable with the underlying operating story. Sometimes, when you look at smaller companies, people say, “It’s just too much work to source experts who know about the semiconductor sector in China and buy into this operating story.”
Hopefully, you’ve published the report before we decided to do the podcast. When I first saw it, I thought, “What the fudge are these guys looking at? A Chinese semiconductor company?”
One of my friends said it was levered to the Chinese semiconductor industry, and I thought that was a negative. But as you laid out, and as other people have said, that’s a really nice place to be when the Chinese government is encouraging everything to be locally sourced.
It’s difficult to do if you’re an outsider or a nonspecialist. You hear that and think, “Oh my God.” But once you start to understand it and buy into the thesis, I think it makes a lot of sense.
I also love that you have the U.S. parent company at a $1 billion market cap and the holding company, or operating company, trading at $6 billion. There’s a valuation gap you could drive a truck through, and that seems to give you a pretty large degree of safety if you can get comfortable with the other risks.
There are certainly risks here. There are cycle risks, government risks, and other risks, and I think we’ve done a good job discussing them. But if I said you were invested in this for the next 30 seconds or the next 30 months—your disclosures make clear that either is possible—what risk keeps you up at night?
Is it the government, the various event-driven angles, or just the macroeconomics? What concerns you most about the stock?
I think it’s the overhang of what the U.S. government could potentially do. This is a small company, so it’s hard to imagine a company this small making it onto the radar of the U.S. government. But it’s listed in a country that wants to limit the growth of its sector and business.
Who knows? You’ve never had a U.S. company owned by a U.S. passport holder added to that list, especially one of this size. I think it’s a very low-probability tail risk.
Are you worried about a Russia-type situation, where the whole firm gets sanctioned? Even though ACMR owns the vast majority of the Chinese subsidiary, it can’t get any value for it because the U.S. government says, “Even though you own that asset, you can’t access the money or do anything with it”?
Sure, any iteration of that is a risk. One thing I’ve addressed here and there is that the U.S. government has a list on which it can place certain companies and restrict U.S. ownership of those companies.
What’s interesting is that, under that regulation—the NS-CMIC list, I believe—U.S. shareholders would have 365 days before they had to divest. That could actually accelerate a listing in Hong Kong.
You could create a dual listing in Hong Kong and organize a corporate action in which U.S. shareholders convert their shares into Hong Kong-listed shares. Once you have all the shares in Hong Kong, I just don’t think the Hong Kong company would trade at a 68% discount.
I think that discount would narrow to 10% to 25% relatively quickly. In a way, it could actually be a catalyst for the upside.
Outside of that specific list, you’ve never had a U.S. company owned by a U.S. passport holder added to it, especially one of this size. I think it’s a very low-probability event.
The government has also realized that, with Venezuela’s bonds, it’s not an effective policy. If you say U.S. investors can’t own Venezuela’s bonds, you force U.S. investors to panic-sell them and take huge losses, but the bonds still exist. You haven’t stopped Venezuela from doing anything.
You could say U.S. investors can’t buy new Venezuelan bonds, and that’s different. But telling a U.S. company it can’t own Chinese assets just harms U.S. shareholders. The assets are still in China, so you’ve accomplished absolutely nothing.
China Mobile and CNOOC are at all-time highs now. Those were companies that were added to the list.
Ultimately, there will be new buyers. So, yes, to your point, it was never really an effective policy, and I think it’s bad policy as well as a tail risk.
This has been great. I’m going to include a link to Kerrisdale’s write-up. Anytime you have a long idea, you’re welcome to come on this podcast and discuss it. Since your ideas are well researched, you have an open invitation.
Sounds great. Thanks so much for having me.