China’s bid for tech dominance making Israeli company Orbotech very wealthy

NEW YORK — Has China bitten off more than it can chew when it comes to making chips? That is where Orbotech comes in: To make sure the billions are well spent.

Orbotech makes inspection and repair tools that help factories avoid errors as they pump out increasingly complex chips for smartphones and tablets. Its market capitalisation surpassed US$1 billion (S$1.3 billion) in March, a level not seen since the dot-com era: It has rallied 18 per cent this year, compared with a 5.7 per cent gain in the Philadelphia Stock Exchange Semiconductor Index and a 1 per cent drop in the Nasdaq Composite Index.

Orbotech’s business is booming in China, where the government is trying to build a homegrown industry that can make chips and screens — components of the phones and tablets it already exports to the world. That would allow it to replace costly imports and lessen its reliance on US companies.

China has said it plans to invest as much as 1 trillion yuan (S$201 billion) over 10 years to develop chips.

Israel, whose own semiconductor industry began to flourish in the 1990s, is using its tech know-how to cultivate closer trade ties with the world’s second-largest economy, which accounted for US$3.2 billion of its exports last year.

“This drive to build up China’s tech manufacturing base is going to be a huge windfall to companies like Applied Materials and Orbotech,” said Mr Tim Call, who manages US$350 million, including Orbotech shares, as chief investment officer at Capital Management Corp in Glen Allen, Virginia. “It doesn’t matter if the tech plants already exist, they want them to exist in China.”

Orbotech, whose revenue jumped 29 per cent to US$809 million last year, makes capital equipment that allows manufacturers of chips, printed circuit boards, and flat-panel displays to avoid costly defects during production.

Most of its China business is tied to flat-panel displays for smartphones, tablets and televisions. It is also getting orders from factories using OLED (organic light-emitting diode) technology, which is poised to displace the LCD technology used in most televisions because of better picture quality.

Orbotech CEO Asher Levy expects much of the revenue from flat-panel bookings to show up in the second half of 2016, he told investors in a May 4 conference call. Orbotech declined to comment, citing a regulatory quiet period. Orbotech reports second-quarter earnings on Aug 3. The shares rose 4 per cent to US$26.19 in New York on July 8.

Applied Materials, which makes machinery to produce semiconductors, has rallied 34 per cent this year, buoyed by chipmakers upgrading production technology.

While China’s investment is driving demand for Orbotech’s products, analysts are most bullish about its 2014 acquisition of UK-based SPTS Technologies, which specialises in advanced packaging for semiconductors. The technology allows chipmakers to closely connect different chips so they take up less space inside electronic devices. Innovation to create flexible printed circuit boards is also stimulating new demand, said Mr Wayne Loeb, an analyst with SG Cowen & Co in San Francisco. “It’s now a growth story, not a boring or cyclical business,” said Mr Loeb by phone.

Some see risks in China’s chip campaign: The investments could create a deluge of supply and drag down prices if exported to global markets, a repeat of what happened with China’s solar industry, said an analyst at Summit Redstone Partners, Jagadish Iyer.

The SPTS acquisition helped Orbotech diversify away from China by adding business in Europe and the rest of Asia, said Ms Dafna Yagur, an analyst with Makor Capital in Tel Aviv. Trading at about 10 times 2017 earnings, it is also cheap, said Ms Yagur.

“Of course it can be hit if there is a major slowdown in China, but it’s not an immediate threat,” she said. “There are drivers for long-term growth.” BLOOMBERG