N+ Market Corporate Analysis Series | Vol. 10 Shin-Etsu Chemical Co., Ltd. <4063>

Semiconductor materials are strong. However, expectations are too high. How should we view the king of materials?

Shin-Etsu Chemical is a leading Japanese chemical manufacturer.

However, it is not just a simple chemical company.

Polyvinyl chloride.
Silicone.
Functional materials.
Semiconductor materials.
Silicon wafers.
Photoresists.
Mask blanks.

It is a global materials company that handles these products.

When people talk about AI semiconductors, many focus on NVIDIA, TSMC, Tokyo Electron, Advantest, and Disco.

However, semiconductors cannot be made without materials.

No matter how high-performance a GPU is designed,
no matter how high-performance the manufacturing equipment is,
no matter how precise the inspection equipment is,
what is needed first is high-quality material.

Shin-Etsu Chemical is the company that supports those semiconductor materials.

Especially important is the silicon wafer.

Semiconductors are made by creating circuits on a round substrate called a silicon wafer.

In other words, silicon wafers are the foundation of semiconductors.

Whether it is AI semiconductors, logic semiconductors, or memory, nothing starts without high-quality wafers.

That is why I think Shin-Etsu Chemical is a
materials infrastructure company for the AI semiconductor era
.

1. What kind of company is Shin-Etsu Chemical?

To explain Shin-Etsu Chemical simply for beginners, it is a
company that makes materials that support semiconductors and daily life infrastructure
.

Shin-Etsu Chemical has several major business segments.

The first is the electronics materials business.

This is the most important part regarding AI semiconductors.

Silicon wafers.
Photoresists.
Mask blanks.
Semiconductor materials.

These are essential materials for manufacturing semiconductors.

The second is the Living Environment Materials Business.

This segment handles products such as vinyl chloride.

Vinyl chloride is a material used in housing, construction materials, piping, and infrastructure.

Unlike semiconductors, this business is more susceptible to global economic conditions, construction demand, raw material prices, energy prices, and market trends.

The third is the Functional Materials Business.

It handles high-value-added functional materials such as silicone.

These are used in a wide range of fields, including automobiles, electronic components, medical care, cosmetics, and industrial products.

In other words, Shin-Etsu Chemical is
both a semiconductor materials company and a comprehensive chemical manufacturer
.

You must look at these separately.

2. Increased revenue and profit in the first quarter. The financial results themselves are not bad.

Looking only at the numbers, Shin-Etsu Chemical's first quarter of the fiscal year ending March 2027 is not a bad financial result.

Net sales were 662.4 billion yen.
A 5.4% increase year-on-year.

Operating profit was 173.7 billion yen.
A 4.2% increase year-on-year.

Ordinary profit was 192.1 billion yen.
A 5.8% increase year-on-year.

Quarterly net profit attributable to owners of the parent was 130.8 billion yen.
A 3.5% increase year-on-year.

The operating profit margin was 26.2%.

For a chemical manufacturer of this scale, maintaining an operating profit margin in the 26% range is quite strong in itself.

Generally speaking, Shin-Etsu Chemical is a very stable company.

It is not in the red.
It is not experiencing a decline in revenue or profit.
The operating profit margin is high.
The financial position is also strong.

Even so, the stock price was sold off.

This is an important point to consider when looking at Shin-Etsu Chemical.

I believe we should view Shin-Etsu Chemical not as having been sold off due to poor earnings, but rather as having been sold off because it
failed to meet market expectations
.

3. Electronic materials are quite strong

The strongest performer in this earnings report was the electronics materials business.

Sales for the electronics materials business were 279.2 billion yen. This is a
16% increase year-on-year.

Operating profit was 101.9 billion yen. This is a
23% increase year-on-year.

These are clearly strong figures.

Against the backdrop of the expanding AI-related market, semiconductor materials such as silicon wafers, photoresists, and mask blanks are growing.

If you view Shin-Etsu Chemical as an AI semiconductor-related stock, this electronics materials business is the star.

Furthermore, the company explained that regarding electronic materials, the advanced fields driven by the expansion of the AI-related market are performing well, and they are receiving supply requests exceeding current production capacity for many items, not just wafers.

This is quite strong content.

AI semiconductors are growing. Advanced logic is growing. HBM and memory demand are increasing. Data center investment continues. Semiconductor miniaturization and high-performance trends are advancing.

In this flow, Shin-Etsu Chemical's semiconductor materials are necessary.

In other words, looking only at electronic materials, Shin-Etsu Chemical is quite strong.

4. The problem is the PVC market. The living environment infrastructure materials segment is a drag

On the other hand, the segment that held back the results in this earnings report was the living environment infrastructure materials business.

Sales for the living environment infrastructure materials business were 227.7 billion yen. This is a
7% decrease year-on-year.

Operating profit was 34.8 billion yen. This is a
34% decrease year-on-year.

This area is quite weak.

The company explained that while it proceeded with price increases for polyvinyl chloride in response to rising raw material and energy costs, market conditions trended downward in the latter half of May due to overstocking and declining demand in Asia and surrounding regions.

In short, electronic materials are strong.

However, the PVC market is sluggish.

This is the composition of Shin-Etsu Chemical's financial results this time.

Shin-Etsu Chemical is not just a semiconductor materials company.

It is a comprehensive chemical manufacturer.

Therefore, while it benefits from the tailwinds of AI semiconductors, it is also affected by the PVC market, the global economy, energy prices, and Asian demand.

When looking at Shin-Etsu Chemical, it is necessary to separate the
strength of electronic materials
from the
weakness of the PVC market
.

5. Full-year forecast is for increased revenue and profit. But it fell short of market expectations.

Shin-Etsu Chemical had previously left its full-year earnings forecast undecided.

The reason was that it was difficult to forecast energy prices and the business environment due to factors such as the situation in the Middle East.

This time, the company announced its full-year forecast for the fiscal year ending March 2027.

Net sales are 2.7 trillion yen.
A 4.9% increase year-on-year.

Operating profit is 700 billion yen.
A 10.2% increase year-on-year.

Ordinary profit is 770 billion yen.
An 8.7% increase year-on-year.

Net income attributable to owners of the parent is 525 billion yen.
A 10.7% increase year-on-year.

Earnings per share is 286 yen.

The annual dividend is 116 yen forecast.

Looking at it normally, it is not a bad forecast.

It is an increase in revenue and profit.

The dividend is also forecast to increase from 106 yen in the previous fiscal year to 116 yen.

However, the market viewed this as underwhelming.

According to a Reuters report, the average net profit forecast by 18 analysts compiled by IBES was 566.8 billion yen.

The company's forecast of 525 billion yen is below that figure.

In other words, the market was expecting stronger numbers.

I believe investors, who viewed Shin-Etsu Chemical as an AI semiconductor-related stock, were expecting the strong performance of electronic materials to boost overall profits even more.

In response to those expectations, the company's forecast was conservative.

That is why it was sold off.

I believe this decline was
not so much a sell-off due to deteriorating performance, but rather a decline caused by a gap between expectations and reality
.

6. Shin-Etsu Chemical is also a stock that tends to be sold off on earnings results

Shin-Etsu Chemical is not sold off because its earnings are bad, but rather it is a
stock that is easily sold off if it does not exceed expectations
.

This is not because the company is weak.

It is actually the opposite.

Among Japanese stocks, Shin-Etsu Chemical has a strong balance sheet, high profit margins, and a growth sector in semiconductor materials.

Therefore, market expectations tend to build up even before the earnings announcement.

Investors think:
Won't there be a stronger full-year forecast?
Won't the growth in electronic materials boost overall profits even more?
Couldn't Shin-Etsu Chemical provide even more shareholder returns?

That is what they expect.

When those expectations become too high, the stock will be sold even on a normally good earnings report.

This time is the same.

The first quarter saw increased revenue and profit.
The electronic materials business saw a 23% increase in operating profit.
The full-year forecast also shows increased revenue and profit.
The annual dividend has also been increased.

Even so, it was sold.

The reason is not that the performance is poor, but because
it was not as strong as the market expected
.

Shin-Etsu Chemical is an excellent company.

However, precisely because it is an excellent company, investors' expectations are also high.

Therefore, in financial results,
just putting out good numbers is not enough. Can they put out numbers that exceed expectations?

This is what is being questioned.

I believe this decline is not a decline caused by Shin-Etsu Chemical breaking down, but rather
a reaction to expectations being too high
.

7. Financials are quite strong

A major strength of Shin-Etsu Chemical is its financial strength.

Total assets at the end of the first quarter of the fiscal year ending March 2027 were 5.7629 trillion yen.
Net assets were 4.7447 trillion yen.
The equity ratio is **79.0%**.

This is extremely high.

An equity ratio of 79% means that it is a company that can operate stably with its own capital without relying heavily on debt.

The balance of interest-bearing debt is 260.3 billion yen.

On the other hand, cash and deposits are 1.6542 trillion yen.

This financial depth is quite strong even among Japanese companies.

In other words, Shin-Etsu Chemical is
a company that not only has the power to earn, but is also strong in defense
.

Investment in semiconductor materials.
Capital investment.
Research and development.
Shareholder returns.
Durability against market deterioration.

Considering these, financial strength becomes a major weapon.

8. Operating cash flow is also strong

According to the figures provided, operating cash flow is,

2025: 881.9 billion yen
2026: 712.7 billion yen

.

The ability to actually generate cash from core business operations is extremely strong.

On the other hand, free cash flow has decreased to:

2024: 739.4 billion yen
2025: 167.8 billion yen

.

This should be viewed not as a decline in earning power, but as an effect of increased capital investment.

In the supplementary materials for this time as well, capital investment for the fiscal year ending March 2027 is projected at 350 billion yen, and depreciation is projected at 240 billion yen.

The company is currently in a phase of strengthening its supply system, centered on electronic materials, to support the formation of an AI economic sphere.

In other words, Shin-Etsu Chemical is not just a company that hoards cash.

It is a company that invests the money it earns into future supply capacity and high-value-added products.

9. Valuation is not too high, but it is not too low either

Based on the figures provided, the 2027 projected P/E ratio is 23.74x. The P/B ratio is
2.74x.

Compared to high P/E ratio stocks related to AI semiconductors such as Advantest, Disco, Tokyo Electron, and Ibiden, this valuation appears quite moderate.

Compared to stocks with P/E ratios of 50x, 60x, or 100x, Shin-Etsu Chemical does not show signs of being overly overheated.

However, when viewed as a materials stock, a P/E ratio in the 23x range and a P/B ratio in the 2.7x range are by no means cheap.

The market does not view Shin-Etsu Chemical as an ordinary chemical stock.

It is valued as a materials company with high profitability and strong finances that possesses semiconductor materials.

In short, Shin-Etsu Chemical's valuation is:

Not as overheated as major AI semiconductor stocks. However, it is valued more solidly than ordinary chemical stocks.

I believe this is the position.

10. A stock that long-term investors find easy to add to when it is sold off

Shin-Etsu Chemical is a stock that tends to be sold off during earnings announcements.

It is not sold because the earnings are bad, but rather it is
a stock that tends to be sold if it does not exceed market expectations
.

However, from the perspective of a long-term investor, this is precisely what is important.

There are not many companies as strong as Shin-Etsu Chemical in terms of financial health, high operating profit margins, presence in the growth sector of semiconductor materials, and the ability to generate stable profits over the long term.

This time as well, the first quarter saw an increase in both revenue and profit.

The electronics materials business is strong.
Silicon wafers, photoresists, and mask blanks are also growing.
The operating profit margin is in the 26% range.
The equity ratio is 79%.
Full-year forecasts also show increases in revenue and profit.
Dividends are also expected to increase.

Looking at it objectively, it is a very strong company.

However, the market expected more than that and sold it off.

Therefore, the decline in Shin-Etsu Chemical is a bit different from a decline like Yaskawa Electric's, which is
a decline caused by an inability to convert orders into profits
.

Shin-Etsu Chemical is not being sold because the essence of the company is broken.

Electronics materials are strong.
Finances are strong.
Profit margins are high.
It also has the power to earn from its core business.

However, expectations were too high.

That is why it was sold.

I think this is how it should be viewed.

For long-term investors, this kind of situation is a candidate for gradually adding to their holdings.

Of course, there is a possibility that it could be sold off further in the short term.

Clearing of margin buying.
Deterioration of the PVC market.
Discrepancies with market expectations.
Correction of semiconductor stocks as a whole.

If these factors overlap, the stock price could fall another level.

Therefore, there is no need to try to hit the bottom all at once.

For Shin-Etsu Chemical,
buy a little when it drops.
If it drops further, buy a little more.
Keep adding to your position within a range you can hold for the long term.

I think it is a stock that suits that kind of buying approach.

11. N+ Market Commentary and Summary

Shin-Etsu Chemical is not a flashy protagonist in the AI semiconductor industry.

It is not a company that makes GPUs like NVIDIA.
It is not a company that manufactures semiconductors like TSMC.
It is not a company that makes manufacturing equipment like Tokyo Electron.
It is not a company that makes inspection equipment like Advantest.

However, it is a company that supports the materials used to make semiconductors.

Silicon wafers.
Photoresists.
Mask blanks.

These are essential materials for semiconductor manufacturing.

Shin-Etsu Chemical is
a materials infrastructure company for the AI semiconductor era
.

In this earnings report, the electronics materials business was clearly strong.

Net sales increased by 16%.
Operating profit increased by 23%.

Against the backdrop of the expanding AI-related market, demand for semiconductor materials is strong.

On the other hand, the PVC market situation became a burden.

The living environment infrastructure materials business saw a 34% decrease in operating profit.

In short, this earnings report for Shin-Etsu Chemical showed that
electronics materials are strong, but PVC is a drag
.

And the biggest reason the stock price was sold off was not because the performance was poor.

It was because the full-year forecast did not meet market expectations.

The company's forecast is for increased revenue and profit.

However, the market was expecting more than that.

Because Shin-Etsu Chemical is an excellent company, expectations tend to build up before earnings announcements.

And if those expectations are not exceeded, it gets sold off.

I think this time is also a classic example of that.

However, if you look at it from a long-term perspective, there are few companies as stable as Shin-Etsu Chemical.

The operating profit margin is high.
The equity ratio is high.
Cash reserves are substantial.
It has a growth sector in semiconductor materials.
Full-year forecasts also project increased revenue and profit.
Dividends are also being increased.

Therefore, I believe Shin-Etsu Chemical is a stock that
tends to be a candidate for long-term investors to gradually add to their holdings when it is sold off due to earnings disappointment
.

In conclusion, Shin-Etsu Chemical is the
king of semiconductor materials
.

However, it is also a comprehensive chemical manufacturer that is influenced not only by semiconductor materials but also by the PVC market.

Look at the strength of electronic materials.
Look at the weakness of the PVC market.
Look at the gap between market expectations.
And look at whether you can buy it for the long term when it is sold off.

I believe this is the most important way of thinking when looking at Shin-Etsu Chemical.