Latest / The Dutch Investors / #9 | ASML | Fundamental Analysis Part 1

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#9 | ASML | Fundamental Analysis Part 1 · The Dutch Investors

• 0:00
  SPEAKER_00: Ho ho ho! Merry Investment! Okay my god, that was a horrible start.
• 0:08
  SPEAKER_00: Anyway, welcome back to this special Christmas Day episode.
• 0:12
  SPEAKER_00: Today, as we celebrate Christmas and share love and gifts with each other, we wanted to share some of our appreciation and love by giving you a gift.
• 0:22
  SPEAKER_00: So today we're sharing part 1 of our fundamental analysis of ASML, which is indescribably important to the global economy as we know it.
• 0:31
  SPEAKER_00: Bauke and Matthijs, our co-founders and fellow analysts, have spent months analyzing ASML together and have created this beautiful in-depth piece on this Dutch semiconductor company, located in Veldhoven in the Netherlands.
• 0:47
  SPEAKER_00: We have a pretty good feeling and understanding of the business.
• 0:51
  SPEAKER_00: This free analysis is just a taste of the high-quality content our premium members get every Friday.
• 0:57
  SPEAKER_00: Our in-depth reports aim to help you fully understand the company.
• 1:01
  SPEAKER_00: We tell you what we like, what we don't like, and whether it's a company we would like to own or not.
• 1:06
  SPEAKER_00: All based on the principles of many successful investors.
• 1:10
  SPEAKER_00: Now, enjoy this free premium fundamental analysis of ASML by Bauke and Matthijs.
• 1:19
  SPEAKER_02: Today we are discussing one of the most powerful companies in the world.
• 1:24
  SPEAKER_02: We are diving into semi-monopoly ASML.
• 1:28
  SPEAKER_02: And with semi, I mean semiconductors.
• 1:31
  SPEAKER_02: It is a worldwide leader in lithography systems.
• 1:35
  SPEAKER_02: I'm here with Bauke.
• 1:36
  SPEAKER_02: And Bauke, I have a question for you.
• 1:38
  SPEAKER_02: What is the most interesting fact about ASML?
• 1:42
  SPEAKER_01: The most interesting fact that stood out most to me was that yeah, the laser of ASML can hit a coin on the moon.
• 1:49
  SPEAKER_01: So precise it is.
• 1:51
  SPEAKER_02: Yeah, that's crazy.
• 1:52
  SPEAKER_02: And I think the whole machine of ASML is full of surprises for you and me and also for the listeners, I think.
• 2:01
  SPEAKER_02: It's just beyond imagination what this machine is capable of.
• 2:06
  SPEAKER_02: If you would ask me the same question, I would probably say that the distance between two transistors can be two nanometers.
• 2:14
  SPEAKER_02: Then you have to realize that a human hair is 90,000 nanometers.
• 2:20
  SPEAKER_01: Yeah, 90,000 nanometers thick.
• 2:23
  SPEAKER_01: That's incredible.
• 2:24
  SPEAKER_01: And some things about this company, yeah, it just looks like magic.
• 2:29
  SPEAKER_01: So uh let's deep dive in.
• 2:38
  SPEAKER_02: This analysis is for educational purposes only.
• 2:42
  SPEAKER_02: Always do your own research, and it's likely that one of us holds or will hold a position in the companies discussed.
• 2:54
  SPEAKER_02: This podcast was recorded on the 7th of October 2024.
• 2:59
  SPEAKER_01: Yeah, and Matthijs, I think we can jump right into it.
• 3:04
  SPEAKER_01: Uh, we both do have a position in ASML ride.
• 3:07
  SPEAKER_02: Yeah, we do.
• 3:08
  SPEAKER_02: I have a position since I think almost two and a half years now.
• 3:12
  SPEAKER_02: What about you?
• 3:14
  SPEAKER_01: Yeah, I think also I've been in ASML for two years now, and uh it's been a pretty nice ride, but also quite bumpy sometimes.
• 3:23
  SPEAKER_02: Yeah.
• 3:23
  SPEAKER_02: And for members from the Dutch investors, uh, you probably are hearing two new voices now.
• 3:30
  SPEAKER_02: It's because, as you might have known, we first had two platforms, the Dutch one and an international one on the Dutch investors.
• 3:39
  SPEAKER_02: Uh, Siem and Luc are probably familiar to you.
• 3:42
  SPEAKER_02: Uh, they both did the English podcast.
• 3:46
  SPEAKER_02: And since we acquitted with the Dutch part, Balke and I will join as well two weekly guests, I would say.
• 3:53
  SPEAKER_01: Yeah, we have decided to focus completely on the English platform of to the international on the international platform.
• 4:00
  SPEAKER_01: So uh yeah, you will uh also hear us from time to time.
• 4:04
  SPEAKER_02: So we hope you can get used to us, and uh we hope it doesn't bother you too much that you will not hear Luke and Seam so much from now on.
• 4:14
  SPEAKER_02: But let's delve into the analysis, and um, this one is a bit different than what you are used from us, probably.
• 4:22
  SPEAKER_02: Um ASML consists of two parts, at least the analysis consists of two parts.
• 4:28
  SPEAKER_02: That is because we thought that ASML is such a complex and interesting company that we had to divide it and we had to put two analysts on it to make the analysis um worth reading and worth listening.
• 4:42
  SPEAKER_01: If I may add to that, Matthijs, uh Ismail is one of the largest European companies, and it has such a rich history, such a it's really enormous how complex this machine is.
• 4:56
  SPEAKER_01: So we also felt uh we had to do it with two persons to yeah, bring most value to you as a customer.
• 5:03
  SPEAKER_02: Exactly.
• 5:04
  SPEAKER_02: So can you explain to the listener why we picked ASML?
• 5:08
  SPEAKER_01: Yeah, ASML is maybe if I can speak for myself, one of the uh one of my favorite companies in Europe or in the Netherlands.
• 5:18
  SPEAKER_01: It's just fascinating how the machine works, and I think we are also quite proud of it as as Dutch people, that we have such a yeah, big yeah, such a company that brings enormous value to the whole world.
• 5:33
  SPEAKER_01: That is for me why I have picked this company.
• 5:36
  SPEAKER_01: What about you, Mathijs?
• 5:37
  SPEAKER_02: Yeah, same for me.
• 5:38
  SPEAKER_02: It's crazy to realize how dependent the world is upon ASML.
• 5:42
  SPEAKER_02: Uh, think about your mobile phone.
• 5:44
  SPEAKER_02: If you have an iPhone 15, for example, the the newest logic chip uh couldn't be produced without the UV machines of ASML.
• 5:53
  SPEAKER_02: And that's the case for many other devices.
• 5:56
  SPEAKER_02: Um, ASML is having 90% market share in lithography systems to make advanced chips or semiconductors.
• 6:08
  SPEAKER_02: So that's just a crazy fact.
• 6:09
  SPEAKER_02: And I think you don't see monopolies that often on the stock market, do you?
• 6:14
  SPEAKER_01: No, I think ASML is one of the only companies with so much market share, and also it brings not only value to the semiconductor value chain, but also to shareholders with very good net margins, enormous growth in the past, but also I think, yeah, a really long runway to still grow.
• 6:35
  SPEAKER_01: So it's really interesting, really a good company, I think.
• 6:39
  SPEAKER_01: Exactly.
• 6:39
  SPEAKER_02: And we both read two books about ASML and the industry as well.
• 6:45
  SPEAKER_02: So we've read uh Focus by Mark Hayenk, a Dutch journalist from uh NRC, and we both read Chip War from Chris Miller.
• 6:55
  SPEAKER_02: Did you enjoy those books?
• 6:57
  SPEAKER_01: Yeah, I think both were really, really good books, and also Focus.
• 7:02
  SPEAKER_01: Personally, the book I like most was Focus because deep dives on a company that's so complex.
• 7:08
  SPEAKER_01: I did enjoy reading that book so much.
• 7:11
  SPEAKER_01: So, focus was the was the top one for me.
• 7:13
  SPEAKER_02: And I think there's also some Dutch proudness in it as well, why we like it so much.
• 7:19
  SPEAKER_01: Yeah, yeah, yeah.
• 7:21
  SPEAKER_02: Right.
• 7:21
  SPEAKER_02: In this first part, we will analyze ASML's business model, the industry competition, based on the five fourths of Porter, and ASML's competitive advantage.
• 7:34
  SPEAKER_02: You might encounter some new words today that have to do with semiconductors or the industry.
• 7:40
  SPEAKER_02: We will explain these words when discussing them.
• 7:43
  SPEAKER_02: Uh, Bauk is an expert, he says, so high expectations about that.
• 7:49
  SPEAKER_02: And also you can take a look at the written glossary from the written analysis.
• 7:59
  SPEAKER_02: Alright, let's really get started with the analysis.
• 8:02
  SPEAKER_02: To start with the history of ASML.
• 8:05
  SPEAKER_02: Bauke, can you kick off this topic?
• 8:07
  SPEAKER_01: Yeah, ASML started in the shadows of Philips.
• 8:11
  SPEAKER_01: Philips has been working since nine since the 1970s by working on lithography, technology, and wafersteppers.
• 8:19
  SPEAKER_01: But the mark was very immature and uh also insecure.
• 8:23
  SPEAKER_01: So ASML was often called a deadborn child.
• 8:27
  SPEAKER_01: Can you expect that for a company that is now like 350 billion euros market value?
• 8:34
  SPEAKER_01: They called it a deadborn child.
• 8:37
  SPEAKER_02: No, that's crazy.
• 8:38
  SPEAKER_02: But at the time, of course, ASML was not even called ASML, by the way, but it was just a team of a few engineers.
• 8:46
  SPEAKER_02: Yeah.
• 8:47
  SPEAKER_02: I recon and well, I can understand if the the market is very insecure that you would call it this way.
• 8:54
  SPEAKER_02: But well, they made it.
• 8:56
  SPEAKER_01: Yeah, they they they very much made it, yeah.
• 9:00
  SPEAKER_01: So in 1984, Philips wanted to get rid of the lithography part together with ASMI, another uh Dutch company, they both invested 7.5 million gulden, it's the it's the coin for the euro.
• 9:15
  SPEAKER_01: ASML was formed.
• 9:17
  SPEAKER_01: And yeah, since then it has been really thriving because you can also expect if you are part of a large conglomerate like Philips, yeah, they just don't focus on lithography systems, and to survive in this market, you have to focus on that.
• 9:33
  SPEAKER_02: Yeah, and to grab a first word that might be a little bit fake for listeners.
• 9:41
  SPEAKER_02: Can you explain to listener what lithography exactly entails?
• 9:45
  SPEAKER_01: Yes, of course.
• 9:47
  SPEAKER_01: So lithography is just shooting with really powerful lightning lightning beams just with uh with a laser, they shoot a pattern on the wafer, and the pattern is created by companies like Nvidia, AMD, sometimes even Intel.
• 10:06
  SPEAKER_01: They create a pattern, and companies like TSMC, Samsung, or also Intel makes those chips, and ASML is the company that provides the most important machines to make the chips.
• 10:19
  SPEAKER_01: So that is basically what lithography is about.
• 10:22
  SPEAKER_01: Have you something to add there, Matthäus?
• 10:25
  SPEAKER_02: Nothing to add, as Charlie Merkel would say.
• 10:27
  SPEAKER_02: Yeah, the first product of ASML was the BAS 2500 stepper.
• 10:34
  SPEAKER_02: It's actually kind of the same technology because a waiver stepper is also used like a stamp, actually, to make a pattern on a waiver.
• 10:45
  SPEAKER_02: But in this times it was at a much larger scale, so the distance between transistors were way uh more widened than it's now.
• 10:57
  SPEAKER_02: And ASML back then was known for its innovation, so rapidly introducing new and better machines.
• 11:04
  SPEAKER_02: They had a lot of engineers working on it.
• 11:07
  SPEAKER_02: I think still today, uh, the majority of ASML employees consist or are working in the RD department, right?
• 11:16
  SPEAKER_02: That's right.
• 11:17
  SPEAKER_02: Um and then in the 1980s they produced well a next generation version of that first product called the PAS 5500.
• 11:26
  SPEAKER_02: And an interesting fact is that that machine is still in use by customers.
• 11:31
  SPEAKER_01: Yeah, the machines of ASML are really uh durable and sustainable because 95% of the machines that are sold by ASML are still in use.
• 11:42
  SPEAKER_02: And that's very interesting because ASML is also making money because of service contracts, and you should see this percentage rising over time when there are relatively and absolutely more machines in operation.
• 11:58
  SPEAKER_02: And then in 1990, that was a big breakthrough, right?
• 12:02
  SPEAKER_01: Yes, in the 1990s, ASML started to research EUV technology, and EUV stands for extreme ultra-feolet technology, and today this is the part where they are monopolist.
• 12:15
  SPEAKER_01: No other company in the world can make chips with EUV light, and that is something they have invested a lot of money in, invested a lot of time in, but that seems to work out really well right now.
• 12:29
  SPEAKER_01: And just to take a step back in the 1990s and uh in the 1980s and 1990s, the market was basically dominated by Canon and Nikon.
• 12:40
  SPEAKER_01: But we also see by those companies they have other segments they are also focused on, basically uh cameras.
• 12:49
  SPEAKER_01: But ESML is just the only company that I know that is focused only on making lithography systems, and that is really uh an advantage they have, I think.
• 13:01
  SPEAKER_02: Yeah, I agree.
• 13:02
  SPEAKER_02: And if you look at the time it took from starting to research EUV technology and really getting it fully operational with clients, it took almost 30 years.
• 13:16
  SPEAKER_02: Yeah, and it's it's it's really really a lot of time and energy and money, and yeah, and some other competitors like Nikon, they quit it in 2008.
• 13:27
  SPEAKER_02: Uh, while ASML was investing more and more, so there you see, I think a difference maybe in long-term perspective.
• 13:35
  SPEAKER_02: ASML has always had that long-term view.
• 13:37
  SPEAKER_02: Sometimes they needed extra investments from the Dutch government, but yeah, Bauk is holding up the book focus right now.
• 13:44
  SPEAKER_02: That's one of the key elements of ASML.
• 13:47
  SPEAKER_01: Yeah, they are the only one that's completely focused at making lithography machines, and that's I think where the edge has come from that they have uh right now.
• 13:58
  SPEAKER_02: Yeah, and to stay ahead of all the competition, ASML IPO'd in 1995 in Amsterdam and New York.
• 14:07
  SPEAKER_02: So that way they could even invest more in the technologies, employ more employees, and um yeah, the decision worked out very well.
• 14:18
  SPEAKER_01: Yeah, because ASML also needs money to grow, right?
• 14:22
  SPEAKER_01: They need money to uh especially then they needed money to in fact to invest in research and development of uh the EUV systems, and uh I'm not sure if they had not IPO'd they would survive and thrive like they do now.
• 14:38
  SPEAKER_02: Yeah.
• 14:39
  SPEAKER_02: Maybe uh a little bit uh fast forward to to now.
• 14:44
  SPEAKER_02: What happened between 95 and now?
• 14:48
  SPEAKER_01: Yeah, basically what they what they did the last uh the last decade is constantly bringing new machines to the market, better machines to the market.
• 14:57
  SPEAKER_01: Uh the machines that they most sell are still DUV machines, deep ultraviolet machines, and those machines are used for making the less complex chips, like uh I think below 20 nanometers.
• 15:13
  SPEAKER_01: Yeah, around that.
• 15:14
  SPEAKER_01: Yeah, yeah, okay.
• 15:16
  SPEAKER_01: And in 2023, ASML delivered its newest high NA AUV machine, and the price tag of this machine is 380 million.
• 15:26
  SPEAKER_01: Um, and I've looked into the annual reports of ASML and it's first white about the high NA UV machine in around 2016-2017.
• 15:39
  SPEAKER_01: So they started development of the high and of the high NAOV machine also quite early, and we can also see the the long-term view that they have in the management.
• 15:51
  SPEAKER_01: They are willing to take risks, they are willing to invest a lot of time and money into projects that are not certainly that are going to make money.
• 16:02
  SPEAKER_02: Yes, and if you think that 380 million is a lot of money, ASML is already working on its newest machine, which is which is called Hyper NAEUV, and the price tag of that machine will be probably twice as much as that 380 million.
• 16:21
  SPEAKER_02: Oh my god, talked about pricing power, right?
• 16:26
  SPEAKER_02: They could they could make it well they do not have unlimited pricing power, in my opinion, because you have some substitutes, right?
• 16:36
  SPEAKER_02: But we will get on that later.
• 16:38
  SPEAKER_01: Yeah, okay, okay, that that's right, that's right.
• 16:40
  SPEAKER_01: And just for the few of our listeners, uh AUV machine is yeah, a high NAUV machine is larger than a school bus.
• 16:49
  SPEAKER_01: So the machines are really enormous.
• 16:52
  SPEAKER_01: And I think in the book, uh Focus, I went um they have to bring down a wall, they did bring down a wall uh at a customer's place because the machine didn't fit in, so they they broke down the wall and and it just goes through with the machine and uh put it on its place.
• 17:11
  SPEAKER_02: Yeah, was it uh with Intel?
• 17:13
  SPEAKER_02: Why Intel?
• 17:14
  SPEAKER_02: Because I think it was the first uh customer that received the high-NA EUV machine.
• 17:20
  SPEAKER_01: Okay, yeah, I'm not sure if it was the EUV or the high-NA EUV machine, but uh it's the the machines are enormous and they are also growing in size.
• 17:29
  SPEAKER_02: To give you an image, you need seven Boeing 747s to transport the newest machine of ASML.
• 17:37
  SPEAKER_02: Okay, okay.
• 17:38
  SPEAKER_02: We are spending facts here, Matthijs.
• 17:41
  SPEAKER_02: Yeah.
• 17:41
  SPEAKER_02: I uh I hope the I think we hope that the listeners like those facts because they will follow more.
• 17:49
  SPEAKER_01: Yeah, yeah, yeah.
• 17:51
  SPEAKER_01: Okay, let's go to some acquisitions, Matthijs.
• 17:54
  SPEAKER_01: Um ASML is not has not been built up from the ground completely organic, uh, because they did some really important acquisitions.
• 18:03
  SPEAKER_01: Can you can you explain this to the listener and to me?
• 18:07
  SPEAKER_02: Yes.
• 18:08
  SPEAKER_02: Uh I will take two, then you can two take the last two.
• 18:12
  SPEAKER_02: Okay.
• 18:12
  SPEAKER_02: So in 2001, ASML made a very important acquisition.
• 18:17
  SPEAKER_02: Um they were a little bit stuck with the EUV development, they needed some uh patents to continue developing it.
• 18:26
  SPEAKER_02: And there was a business in the US called Silicon Valley Group that well was in possession of those patents, so they acquired them for around 1.6 billion.
• 18:38
  SPEAKER_02: And then I think at this moment the most important company or supplier for ASML is Karl Zeiss Semicon.
• 18:48
  SPEAKER_02: It's a German company that produces lenses and mirrors, and they make the smoothest mirrors on earth, and it's used by ASML to guide the light to its target, which is the waiver.
• 19:04
  SPEAKER_02: Um, there's a high amount of mutual dependency between both of them, and it's good to know that ASML does not own uh carzyze fully because they just own 49%, and the other half is owned by the mother company, which is Carlze clear.
• 19:23
  SPEAKER_01: Yeah, and in 2013 they acquired Simer.
• 19:27
  SPEAKER_01: Uh Simer is a company located in the US, and what Simer basically does is they are making the light source for uh the EUV and the DUV machines for ASML.
• 19:39
  SPEAKER_01: And in 2013, they decided they wanted to develop faster.
• 19:44
  SPEAKER_01: Uh, they wanted to develop a more powerful light source, so they decided we are going to acquire them.
• 19:50
  SPEAKER_01: And Marter van der Brenk, the chief technology officer for more than 30 years by ASML, he said, Do I have to trust all these people?
• 19:59
  SPEAKER_01: Because the machine of ASML cannot work without without Simer, but also not without uh the mirrors from call size, by example.
• 20:08
  SPEAKER_01: And the last acquisition we will tell we will tell you about is in 2020 Berliner Glass.
• 20:14
  SPEAKER_01: Um, they are making the platform on which the waiver moves uh to catch light.
• 20:19
  SPEAKER_01: And the platform is actually quite fast, it moves with around 160 miles per hour or around 250 kilometers per hour.
• 20:28
  SPEAKER_01: Also, here some really bizarre facts about ASML.
• 20:33
  SPEAKER_01: Yeah, and all those acquisitions are made to ensure the competitive position and protecting critical technology.
• 20:41
  SPEAKER_01: And also, uh, if you are a smaller supplier of ASML and you can't grow with the speed that ASML wants, they will also invest in you, sometimes even acquire you to make sure you can deliver at the right time, at the right moment, at the speed that ASML demands of you.
• 20:58
  SPEAKER_02: Yeah, that's a great characteristic of this industry, in my opinion, is that you see that all businesses they invest in each other.
• 21:09
  SPEAKER_02: So TSMC and Samsung, the customers of ASML, invest in the newest uh lithography technology with ASML together.
• 21:19
  SPEAKER_02: ASML on its turn is investing in suppliers so they can uh well ramp up the development, uh starting to catch by.
• 21:29
  SPEAKER_02: Yeah, and you don't see that in many other industries.
• 21:33
  SPEAKER_01: No, no, certainly not, and also the customers of ASML like Samsung and TSMC are now benefiting from the newest machines from uh from ASML.
• 21:43
  SPEAKER_01: They can make the most advanced chips with the highest uh uh on which are the highest yeah margins, the most revenue come from uh from those chips per capita.
• 21:55
  SPEAKER_01: So uh I think it I think it's very good that they do this, yeah.
• 22:00
  SPEAKER_02: Alright, I think we can wrap up the history now and let's dive into the business model.
• 22:10
  SPEAKER_01: Yeah, first of all, can you start with what is Moore's Law?
• 22:15
  SPEAKER_02: Yeah, sure.
• 22:16
  SPEAKER_02: So Moore's Law, uh he was I think a former Intel CEO and one of the main characters in the semiconductor history.
• 22:26
  SPEAKER_02: His theory said that the number of transistors on a waiver would double every two years.
• 22:34
  SPEAKER_02: And if we look at the the graph, it worked so far.
• 22:38
  SPEAKER_02: So every two years the number of transistors nearly doubled.
• 22:44
  SPEAKER_02: And the cost to build a semiconductor FAB is now$25 billion.
• 22:52
  SPEAKER_02: That's what the new FAB of Samsung is costing.
• 22:55
  SPEAKER_02: Because what's interesting about Moore's Law, a lot of people know the first theory, but there's actually a second one, which is that the the cost the costs to produce semiconductors would also double every few years.
• 23:13
  SPEAKER_02: And that's what we see also in the number of clients from ASML.
• 23:17
  SPEAKER_02: It is shrinking year after year, so ASML is becoming more and more dependent on a few customers, you can say.
• 29:44
  SPEAKER_02: And when something happens, I think I read something uh in the analysis from you about that every machine has its own some sort of babysitter, right?
• 29:54
  SPEAKER_01: Yeah, yeah, that's what they what they call it, yeah.
• 29:59
  SPEAKER_01: Every machine just basically comes with a babysitter that makes sure the machine functions properly, and uh if something's wrong, they can react to it immediately so that person is always on the ground in the fab.
• 30:11
  SPEAKER_02: Alright, and let's talk about the different systems that ASML offers.
• 30:16
  SPEAKER_02: I think you can roughly say that it consists of two types: deep ultraviolet DUV and extreme ultraviolet EUV.
• 30:27
  SPEAKER_02: Can you briefly explain the difference?
• 30:30
  SPEAKER_01: DUV systems are for the less complex chips.
• 30:33
  SPEAKER_01: Um, yeah, we have already thought about when you work with transistors that are smaller than like 20 nanometers, you can better work with EUV machine machines because the yield will be better if you work with EUV machines to make DUV systems, uh, to make the more complex chips.
• 30:53
  SPEAKER_01: But DUV systems are the workhorses in this industry.
• 30:57
  SPEAKER_01: So ASML sells also a lot more of them to split out the DUV machines.
• 31:04
  SPEAKER_01: You can basically split them out between dry DUV machines, they are uh the least advanced but also the most sold machine.
• 31:12
  SPEAKER_01: Um think about when you need a chip in your uh fridge or chip in your uh a less advanced chip in your computer that are can be made with a dry DUV machine, and also part of the DUV family is the RV system are the RV systems, and it's a big leap in resolution to create a layer of water between the lens and a wafer.
• 31:37
  SPEAKER_01: This is also called immersion, and you can produce the same amount with higher precision.
• 31:42
  SPEAKER_01: So for the more advanced chips, uh you need at least uh RV, DUV machines.
• 31:50
  SPEAKER_01: Now we come to where ESML is most known for, the EUV machines.
• 31:55
  SPEAKER_01: In this family, you have the low NA EUV machines, they are for the multiple purpose advanced chips up to two nanometers, and now just announced is the high NA EUV machines.
• 32:07
  SPEAKER_01: Now they are already shipped to Intel and TSMC, but they are the most complex machines from ASML and they are optimized for at least two nanometer production.
• 32:20
  SPEAKER_01: And the less complex a machine is, the more waivers per hour can be produced.
• 32:25
  SPEAKER_01: A fun fact is that 80% of the system sold is still DUV machines.
• 32:30
  SPEAKER_02: Yeah, exactly.
• 32:31
  SPEAKER_02: 80% of the systems sold is DUV, but revenue-wise, or to bring it even further, profit-wise, this will be much closer than the 80% because DUV systems are being sold sometimes for 30 million, but at least way less than 100 million, and the EUV systems they start at way more than 100 million.
• 32:58
  SPEAKER_02: Do you know what is the biggest strength of ASML following uh former CEO Peter Vennick?
• 33:07
  SPEAKER_01: I think uh the huge network organization that they have.
• 33:13
  SPEAKER_02: You are a good reader.
• 33:16
  SPEAKER_02: Yeah, he often uh comes back to this point and about collaboration within the supply chain and having great stakeholder management, uh, working together with more than 5,000 suppliers to create the most complex machine on earth.
• 33:34
  SPEAKER_02: It takes just a lot of uh cooperation, determination, also trust, I think.
• 33:40
  SPEAKER_01: Yeah, also a lot of trust, uh, mutual trust, and yeah, I think ASML is just working on the most complex puzzle on earth, and they are succeeding big time, and it's also quite logical because if not one company on earth can be experts in more than 5,000 parts of a machine, but 5,000 different companies can be experts in all their little part of the machine.
• 34:07
  SPEAKER_01: But uh, so this is something that's you that you also don't see often at other companies, but is so imported and such a strength to ASML.
• 34:16
  SPEAKER_02: Yeah, a lot of suppliers that are not acquired by ASML they are solely operating to ASML.
• 34:25
  SPEAKER_02: And so if Nikon or Canon wants to produce its own DUV or EUV machine, then it has to make use of a whole different ecosystem of companies, and that's also a reason why it's so difficult to replicate for China, for example.
• 34:42
  SPEAKER_02: 80% of the suppliers are from Europe, and the the chance that China has access to all those suppliers is well close to zero, I would say.
• 34:54
  SPEAKER_02: Yeah, and as we said, the the perfectioning of the machines mainly happens um in the client sides.
• 35:02
  SPEAKER_02: So the EUV machine was shipped to clients earlier than was fully operational, so they just worked there on maximizing the yield, and when it reached full potential, they produced at a full scale.
• 35:17
  SPEAKER_02: To I think uh round off this part.
• 35:20
  SPEAKER_02: Um, what's the revenue division?
• 35:23
  SPEAKER_01: Around 60% of HML revenue is made for logic chips, 20% is for memory chips, uh, and memory chips speaks for itself.
• 35:34
  SPEAKER_01: I think they are to store um store memory on your device, and logic chips are mainly imported for the for the calculating power of uh of a device, and also the logic chips.
• 35:47
  SPEAKER_01: I I think logic chips are more expensive than memory chips, I'm actually sure of that.
• 35:54
  SPEAKER_01: Um and 20% is from like Matthew's already said, 20% is from service and option contracts.
• 36:01
  SPEAKER_01: Both the selling of the machines and the service contracts um grew at 17.5% kegger at the last five years.
• 36:09
  SPEAKER_01: So it is actually a growth company, ASML.
• 36:13
  SPEAKER_02: Yeah, a market cap of 320 million US dollars and still growing.
• 36:19
  SPEAKER_02: Billion.
• 36:20
  SPEAKER_02: Oh billion, yes.
• 36:24
  SPEAKER_01: Yeah, and what about uh geographically?
• 36:26
  SPEAKER_01: When you just look at 2023, you don't get a good view of the company where its money is coming from because China uh is speeding up orders, so around 50% of the revenue came from China in 2023.
• 36:40
  SPEAKER_01: Yeah, something like this, yeah.
• 36:42
  SPEAKER_01: But that was because because of other countries, other companies delayed their orders.
• 36:47
  SPEAKER_01: So if we look at 2022, around 40% of the revenue came from Taiwan, that's basically TSMC, and 30% came from South Korea, uh, that's basically Samsung, and then just 14% came from China, and around 10% came from the United States.
• 37:06
  SPEAKER_01: So ASML is really dependent for on a few geographies, a few companies, like we already told you.
• 37:14
  SPEAKER_02: Yeah, especially in Southeast Asia, especially in Southeast Asia.
• 37:19
  SPEAKER_02: Yeah, we know that 90% of the most advanced chips are being produced in Taiwan.
• 37:26
  SPEAKER_02: That's a pretty interesting fact if you realize that most EOV machines by far are being shipped to Taiwan.
• 37:34
  SPEAKER_01: Yeah, yeah, and that's TSMC that makes those uh those chips.
• 37:39
  SPEAKER_02: Yeah.
• 37:40
  SPEAKER_01: And uh just maybe good enough for the listener.
• 37:43
  SPEAKER_01: Um, I will analyze TSMC also in a few months because uh it's also it's also really just such a strong company with so much market share as you can hear.
• 37:55
  SPEAKER_01: If you are interested in that, yeah, please stay tuned.
• 37:59
  SPEAKER_01: Now let's move on to the culture of ASML because yeah, the culture of ASML is not the culture of a normal company, I think.
• 38:07
  SPEAKER_01: What can you tell us about that?
• 38:13
  SPEAKER_02: Yeah, normally it's very difficult to judge on the culture of a company.
• 38:19
  SPEAKER_02: Uh, this time the book Focus teaches a lot about how it is to work for ASML and how the atmosphere is uh within that building.
• 38:29
  SPEAKER_02: I don't know what about you, but when I was reading the book, I just could see myself standing in the office with uh uh all ASML employees around me, standing face to face with huge as machine, yeah, exactly.
• 38:43
  SPEAKER_02: But what we made up from the book is that the culture is very typical Dutch, I would say, so very direct.
• 38:52
  SPEAKER_02: They want you to bump each other with uh presentations full of data, you have to convince each other with actual facts based on data.
• 39:03
  SPEAKER_02: What's also interesting is that every technician uh from the Netherlands, but I think also from a lot of different uh other countries they want to work for ASML because the techniques uh within the machine are so complex that it's challenging for almost everyone, no matter how smart you are.
• 39:24
  SPEAKER_01: Yeah, I I heard in a documentary from uh about ASML the interviewer asked why do so many people have to work, want to work for ASML?
• 39:33
  SPEAKER_01: And she responded, like, if we say that we shoot 50,000 times per second, two times on a Drupal of 10, uh most technological nerds are impressed and they want to work with us.
• 39:47
  SPEAKER_02: That's easy, yeah.
• 39:49
  SPEAKER_02: Yeah, they have they have employed people from 125 countries, of which most work for the RD department.
• 39:59
  SPEAKER_02: And ASML has had a lot of growth pain, maybe still today they have growth pain.
• 40:07
  SPEAKER_02: Uh, but I recently I think the plans came through for a new campus with more than 20,000 working places near Eindhoven Airport.
• 40:17
  SPEAKER_02: Uh, for the ones not loving living in the Netherlands, uh, the headquarters of ASML are located in a village called Veldhoven, which is quite close to Eindhoven in the south, and they did a lot to keep growing there in Veldhoven, but at one point they had to buy whole streets of houses and surrounding companies that were located on the same industry terrain, but there's one point where ASML becomes too big to grow at that place, so that's when they decided to expand somewhere else.
• 40:53
  SPEAKER_01: Yeah, and just to add on the growth pane, uh, I think the wider of focus, Mark Haeing, puts it really well.
• 41:01
  SPEAKER_01: He said that ASML is um is a company that that is a sprinter that runs the marathon, so yeah, they have they have a hard time keeping up with the demand, they have to go a long time very fast.
• 41:16
  SPEAKER_02: Yeah, that's maybe why some processes are quite inefficient, as also described in the book, I think, because they are they are too much worrying about the the new technologies and ramping up and scaling, uh, than about getting a structured organization, for example.
• 41:36
  SPEAKER_02: And that's where there is a fire uh brigade culture, as described in the book.
• 41:42
  SPEAKER_02: So people that jump in a plane and solve problems, they will get statues, they will get rewarded, and there's less attention for the prevention of problems.
• 41:53
  SPEAKER_02: Then um, I think there are two persons that have shaped the culture for ASML.
• 42:01
  SPEAKER_02: Can you tell us something about those persons?
• 42:05
  SPEAKER_01: Yeah, those persons are Martin van der Brink and Peter Venink.
• 42:09
  SPEAKER_01: Let's start off with Martin van der Brink.
• 42:12
  SPEAKER_01: Um, Martin van der Brink worked for more than 30 years at ASML.
• 42:17
  SPEAKER_01: Just from the start, when they were with Philips, he joined the the ASML team.
• 42:24
  SPEAKER_01: And he was just a genius.
• 42:27
  SPEAKER_01: If we read about it, if we hear him speak, he's just an enormously smart man.
• 42:34
  SPEAKER_01: Um, and he was also the CTO of ASML.
• 42:37
  SPEAKER_01: Van der Brink was highly involved in product development.
• 42:41
  SPEAKER_01: And if we move on to Peter Wenning, he was the CEO and more political and commercially orientated, and they supplemented each other really well because, like I told you, uh Maarten van der Brink was really the genius, the man working in the machines, and Peter Menning was more on yeah, on camera, uh talking to politicians.
• 43:04
  SPEAKER_01: Um, it was just a really good management team, I think.
• 43:07
  SPEAKER_01: But they left the company in 2024, just a few months ago.
• 43:12
  SPEAKER_01: There also are raised some questions about if it's smart that they leave the company at the same time.
• 43:17
  SPEAKER_01: And Van der Brink uh responded to that with We have worked here together for around 75 years.
• 43:24
  SPEAKER_01: Whether we quit now or next year, that doesn't matter.
• 43:27
  SPEAKER_01: Now, and the new CEO is Fauquette.
• 43:30
  SPEAKER_01: Uh, he's been with ASML since 2008.
• 43:33
  SPEAKER_01: But him, we will tell you more next week when we uh tell you more about the management team.
• 43:38
  SPEAKER_02: Yeah, good to know that van der Brink and Vening had quite a long time to to learn Fogget all the ins and outs of uh being the CEO of ASML, and he's been around for a long time, so that should give some trust to investors as well.
• 43:55
  SPEAKER_02: But like you said, uh more on that next week.
• 43:57
  SPEAKER_01: Yeah, um, I think we Covered most about the culture and about the business model of ASML.
• 44:04
  SPEAKER_01: Should we go to the sector and industry?
• 44:06
  SPEAKER_01: Let's go.
• 44:11
  SPEAKER_02: In our analysis, we posted a picture or actually a process about the advanced semiconductor supply chain or the value chain.
• 44:22
  SPEAKER_02: And you can see what the road is of a chip from designer towards it is a chip that you can actually use.
• 44:32
  SPEAKER_02: So we will take you briefly through this process to so you can get an understanding in what happens in this process.
• 44:41
  SPEAKER_02: And it usually starts with companies like Amazon, Nvidia, AMD, who are the designers of the chips.
• 44:51
  SPEAKER_02: So they decide what a chip should do and what it's capable of.
• 44:56
  SPEAKER_02: They cannot do this alone, they need the software to develop these chips, mostly provided by companies like Synopsys and Cadence.
• 45:06
  SPEAKER_02: And they also need companies with the uh patents for the architecture of the chips.
• 45:13
  SPEAKER_02: And then you can think of a company called ARM, also listed on the stock exchange.
• 45:20
  SPEAKER_02: The chip requirements are being sent to foundries like TSMC and Samsung, and they in their fabs they have to create one big machine of all kinds of other machines.
• 45:44
  SPEAKER_02: Because you also have companies like Applied Materials, which is the deposition, KLA, who is making sure that the process is going well and who gives constant feedback looks loops to the foundry.
• 45:58
  SPEAKER_02: And for example, LAM Research, they are etching the chips, so they are cutting the corners and making sure it actually works.
• 46:08
  SPEAKER_02: Then, of course, you have the less complex players who provide the waiver, the materials, that kind of things.
• 46:16
  SPEAKER_02: When this is done, the chips are being packaged, and this is done by a lot of companies.
• 46:23
  SPEAKER_02: It could be the foundry, it could be other businesses like Basie, who are doing these exercises in companies like Malaysia.
• 46:33
  SPEAKER_02: And when that's done, when the semiconductors are being packaged, they are being shipped back to the designers or to the end clients.
• 46:45
  SPEAKER_02: What we a lot of times see is that the designer of the chip who is giving the requirements to the foundries is also the end client.
• 46:54
  SPEAKER_01: Yeah, we see that with Apple, Microsoft, Google, Amazon, they are all making and designing their own chips.
• 47:02
  SPEAKER_01: So that's something we see at the at the large cap companies, I think.
• 47:08
  SPEAKER_02: Yeah.
• 47:08
  SPEAKER_02: And maybe that's different for the less complex chips.
• 47:12
  SPEAKER_02: I don't know what's your opinion about it, but if you produce uh, for example, chips for your laptop, I know AMD is very big, a big designer in uh designing logic chips for laptops.
• 47:27
  SPEAKER_02: And then the end client could be HP, name some other laptop brands, Asus, Lenovo, that kind of brands.
• 47:34
  SPEAKER_01: Yeah, and something I don't want to go too deep into the foundry business, but I think I just have to tell this.
• 47:41
  SPEAKER_01: Uh Samsung is uh active in the logic and memory chipmaking space.
• 47:49
  SPEAKER_01: Intel is active in the uh designing of the chips, and yeah, they also have a foundry business.
• 47:57
  SPEAKER_01: But TSMC also here, the the word focus comes to mind.
• 48:02
  SPEAKER_01: They are the only company that is just extremely focused on making the chips with the highest yield as possible for the customers, and uh yeah, I just wanted uh to add that.
• 48:12
  SPEAKER_02: So, do you then think that the player who's left if we believe that second theory of more that the number of fabs will uh decline?
• 48:23
  SPEAKER_02: Do you believe that TSMC will be the last player?
• 48:26
  SPEAKER_01: Yeah, yeah, yeah.
• 48:28
  SPEAKER_01: I'm uh quite convinced of that.
• 48:30
  SPEAKER_02: Yeah, will it come so far, in your opinion?
• 48:33
  SPEAKER_01: Uh yeah, we see the struggles that Intel has right now with uh producing the more advanced chips.
• 48:39
  SPEAKER_01: They also outsourcing work to TSMC for making the chips, and I also often read stories about Samsung having a having a hard time keeping up with TSMC, and yeah, TSMC also sometimes have some producing problems, but I think they are most capable of making the advanced chips.
• 48:58
  SPEAKER_01: Also, the culture in Taiwan is just really working hard, uh about working hard and making the making the best product.
• 49:07
  SPEAKER_01: So I think the the landscape in Taiwan and for TSMC is really good for them to survive.
• 49:15
  SPEAKER_02: That would be something that you have two players in the semiconductor industry who are both monopolies, yeah.
• 49:24
  SPEAKER_01: It wouldn't surprise me if that's the if that's the case in 10 years or something like that.
• 49:28
  SPEAKER_01: Interesting.
• 49:30
  SPEAKER_02: And how are the other players within this supply chain?
• 49:34
  SPEAKER_02: How are they positioned?
• 49:35
  SPEAKER_02: What do you think is remarkable about it?
• 49:38
  SPEAKER_01: Yeah, something that stood out to me is that they don't squeeze each other.
• 49:42
  SPEAKER_01: If you look at the margins of ASML, uh TSMC, uh the designers, they are all very high.
• 49:49
  SPEAKER_01: To name a few, NVIDIA has a gross margin of about 68% and a net margin of 36%.
• 49:57
  SPEAKER_01: TSMC gross margin of 54%, uh net margin of around 40%.
• 50:04
  SPEAKER_01: And now to name the last one, ASML gross margin of around 48% and a net margin of 28%.
• 50:14
  SPEAKER_01: So those are margins most companies just wanted to have, uh, and there is competition, but if you are if you bring the most value to your customers, that's something we see at Nvidia, but also DSMC and ASML.
• 50:29
  SPEAKER_01: You can ask very high prices, and you yeah, they just have to agree with that.
• 50:34
  SPEAKER_01: That's quite remarkable, I think.
• 50:36
  SPEAKER_02: You're completely you're completely right, there is competition, even ASML has competition, um, but but then the difference is who can produce semiconductors for the highest yield, uh, against the highest productivity.
• 50:51
  SPEAKER_02: And uh, if the differences are too big there, then there will always be one company who is well on top of the world, to put it that way.
• 51:01
  SPEAKER_01: Yeah, and something I did read in the annual report of ASML, I found it quite funny, but they said we we face intense competition, but just just so that that's just nonsense because oh they have such a high market share and just they are a monopoly, so they st they they state we have intense competition, but I think I think you also think that ASML doesn't have a lot of competition, do you?
• 51:27
  SPEAKER_02: No, I think they they just want to stay out of sight uh for other regulators and stuff.
• 51:33
  SPEAKER_02: Yeah, exactly.
• 51:34
  SPEAKER_02: Yeah, yeah.
• 51:35
  SPEAKER_02: What's interesting is that the the semiconductor market is quite cyclical.
• 51:40
  SPEAKER_02: Um it struggles quite a lot from under or over capacity in the short term, but in the long run, uh we do see so many trends that are in favor of um of more and more advanced chips.
• 51:55
  SPEAKER_02: Think about AI at data centers, robotization, uh 5G, uh full self-driving.
• 52:03
  SPEAKER_02: Those are all trends that will stimulate the demand for semiconductors.
• 52:09
  SPEAKER_02: The total growth uh between 2012 and 2022 is a 7% kegger, and until 2030, this growth will actually accelerate to 9% kegger.
• 52:24
  SPEAKER_02: McKinsey projects a total addressable market of 1.1 trillion in 2030, and this is almost double the size compared to 2021.
• 52:38
  SPEAKER_01: Yeah, and the ASML will really benefit from this market that is growing.
• 52:42
  SPEAKER_01: They also, if you look at the deglobalization trend, um, we see right now every uh geography wants its own semiconductor fab.
• 52:52
  SPEAKER_01: Uh, like TSMC is going to Germany, uh, Intel is going to Germany, and uh and the United Kingdom, America wants its own semiconductor fab.
• 53:02
  SPEAKER_01: Uh, I think Samsung and TSMC also go there.
• 53:06
  SPEAKER_01: All those fabrics, all those fabs need to be supplied with ASML machinery, and they will benefit just enormously from the trend.
• 53:15
  SPEAKER_02: Yeah, and I think there are those companies always seem too expensive on the stock market.
• 53:21
  SPEAKER_02: ASML always trades PE-wise for 35 times earnings.
• 53:28
  SPEAKER_02: But there are always, I think, at least once every two years, there are some opportunities where you can make uh where you can benefit from some short-term um happenings in the market.
• 53:43
  SPEAKER_02: And uh that's really interesting.
• 53:44
  SPEAKER_02: If you just look at the the end game, at the long picture, uh then I think you can be quite um that you can get quite juicy returns uh from HML juicy, yeah.
• 54:00
  SPEAKER_01: That's the word I was looking at.
• 54:01
  SPEAKER_01: Yeah, I thought I've had but no, I think if you play the long game with companies like this, uh this is really good quality, they are um serving on a really good wave.
• 54:14
  SPEAKER_01: Yeah, I think uh most investors don't do that, but if you understand that you you have uh you have some advantage, and this is just no advice to be completely clear.
• 54:25
  SPEAKER_01: No, no, you might even be a bit biased.
• 54:28
  SPEAKER_02: Yeah, we are and then the competition.
• 54:38
  SPEAKER_02: So we decided to use Porter's five forces, but because we think that there are a lot of moving parts in the external surrounding of ASML.
• 54:49
  SPEAKER_02: Can you kick off with describing the direct competitors of ASML?
• 54:54
  SPEAKER_01: Yeah, the main competitors for ASML are Nikon, but they quit it in 2009 with their with their EUV research, and also in the DUV market, they don't have the yeah, they don't bring the best value uh proposition to the to the fabs, I think.
• 55:13
  SPEAKER_01: Uh how how do you see that?
• 55:15
  SPEAKER_02: Uh yes, I agree, and I think that everything uh swings together with uh giving the highest yield to your clients.
• 55:25
  SPEAKER_02: And I think the difference between ASML, Nikon, between ASML and Nikon and Canon is getting bigger and bigger.
• 55:35
  SPEAKER_02: Uh it's quite hard to find the actual differences between yield, but we can say with a lot of certainty that there is a big difference, otherwise the uh difference in market share wouldn't be so big.
• 55:47
  SPEAKER_01: The the market share of ASML in the DUV segment is around 80%, and Nikon and Canon share the other 20%.
• 55:56
  SPEAKER_01: So that's just such such a huge difference that uh between market share of the of the companies and and I agree, uh yield is everything in Summer Conductor Land.
• 56:09
  SPEAKER_01: So uh they are yeah, they are I think they are the best, they are giving the best yield the best uh efficiency.
• 56:15
  SPEAKER_01: Yeah, Nikon has battled ASML Nikon has actually battled ASML in lawsuits in 2001.
• 56:23
  SPEAKER_01: In 2001, they surprised ASML with an intellectual property case, and ASML would misuse them.
• 56:30
  SPEAKER_01: Uh if we may believe Nikon.
• 56:33
  SPEAKER_01: The Wissled is a cross-license agreement where both parties could use each other's intellectual property, and that's what we see right now.
• 56:42
  SPEAKER_01: Um yeah, so problems fixed, right?
• 56:47
  SPEAKER_02: Not really, because this arrangement was due in 2009 when ASML was asking Nikon to prolong the agreement.
• 56:57
  SPEAKER_02: Nikon stayed very silent, didn't respond to ASML.
• 57:01
  SPEAKER_02: So ASML decided to act on it back then.
• 57:05
  SPEAKER_02: They founded a new company called Tarsium with its headquarters in Amsterdam, so not in Eindhoven or Veldhoven, and they just bought a lot of patents for the use of cameras of new lenses and that kind of things.
• 57:21
  SPEAKER_02: Then in 2017, on the doorstep of ASML, were a lot of Nikon lawyers that wanted to benefit from that suspended cross-license arrangement, they wanted to get money from ASML for their damage.
• 57:38
  SPEAKER_02: And then at the same day, uh, all the patents from Tarsium were delivered to ASML and Carl Zeis, and together they they attacked Nikon back with all the camera patents, and then at the end, both parties settled.
• 57:54
  SPEAKER_02: Uh, and the current agreement is due in 2029.
• 57:58
  SPEAKER_02: Uh, what is very interesting is that Nikon still gets 0.8% of the DUV revenue of ASML.
• 58:07
  SPEAKER_01: Yeah.
• 58:08
  SPEAKER_01: Yeah.
• 58:09
  SPEAKER_01: And I I also did read in the book, uh, just the player with the most patents with the most intellectual property.
• 58:17
  SPEAKER_01: Um, that player wins in cases like this.
• 58:20
  SPEAKER_01: So if you have most intellectual property, most patents, you will probably win the case.
• 58:26
  SPEAKER_01: And uh, so did ASML with building up those uh those patents in the in those months or years.
• 58:33
  SPEAKER_01: And now and now they are still quite really focused on it, right?
• 58:37
  SPEAKER_01: They have around 60,000 patents.
• 58:39
  SPEAKER_01: Uh that's that's really enormous.
• 58:41
  SPEAKER_01: I don't think uh another company in the space could yeah charge ASML right now.
• 58:48
  SPEAKER_02: Exactly.
• 58:48
  SPEAKER_02: Six sixteen thousand, and that's excluding all the patents of suppliers.
• 58:54
  SPEAKER_02: Yeah.
• 58:56
  SPEAKER_02: Let's go to the power of customers and suppliers.
• 58:58
  SPEAKER_02: What can you say about that?
• 59:01
  SPEAKER_01: Because there are less and less customers active in yeah, the chip making space because the costs are too high.
• 59:08
  SPEAKER_01: The yeah, the power of the customers that remain, like TSMC, Samsung, and Intel, yeah, is increasing.
• 59:15
  SPEAKER_01: Um, when they have such a high such a high part of the revenue of ASML, they can demand better deals.
• 59:23
  SPEAKER_01: Um, and that's actually actually what you see happening right now.
• 59:26
  SPEAKER_01: Sometimes they don't discount the machines, but they give sometimes uh a customer like TSMC a discount because yeah, they are so dependent on each other, they want to please each other, maybe.
• 59:39
  SPEAKER_01: So that's how that's going.
• 59:41
  SPEAKER_01: But there's also some kind of mutual dependency.
• 59:44
  SPEAKER_01: Um, both players can't functionate without each other.
• 59:49
  SPEAKER_01: We also see a lot of cooperation to make machines more efficient, yeah.
• 59:54
  SPEAKER_02: So we see that the the dependency is very high, but it's mutual.
• 59:59
  SPEAKER_02: So that risk is uh not that much for ASML, I would say.
• 1:00:04
  SPEAKER_02: Yeah, no, but what what about the the power of suppliers?
• 1:00:09
  SPEAKER_02: That's a whole different story because this side is very fragmented, as we saw before, uh, with 5100 suppliers, 80% of those are from Europe, of which half is from the Netherlands, mostly uh companies in the south as well, so very close to the ASML fabrics where they make the machines.
• 1:00:32
  SPEAKER_02: Uh, but ASML also has some critical suppliers from Israel, uh, which could form an extra risk right now, of course.
• 1:00:41
  SPEAKER_02: Um, I don't know from head when this uh analysis is going to be online, but who knows what's happened uh in these times because it's quite tricky what's happening there.
• 1:00:53
  SPEAKER_02: Um, ASML is trying to simplify the supply chain because, as you may know, it's not ideal to have and to have to manage so many suppliers, but that's difficult because they are all in position of very specific uh parts and tools which cannot be replicated very easy.
• 1:01:16
  SPEAKER_01: No, every company, um every supplier of ASML has its own expertise, and just the ASML cannot just do everything in-house, it's just it's also their specialty to yeah, outsource so many of the challenging parts, and uh I think yeah, that's also where part of the mode lies.
• 1:01:36
  SPEAKER_02: Yeah, and what about the potential market entries?
• 1:01:42
  SPEAKER_01: How easy is it to oh god China is really hunting on ASML and lithography, so they are they have spies, they are hacking into ASML, at least they try to, and they are fist investing billions and billions to yeah make their own semiconductor value chain in China.
• 1:02:06
  SPEAKER_01: And yeah, it's so subsidized by the government, it's really hard, I think, to put a conclusion on where this is going to be in five years.
• 1:02:16
  SPEAKER_01: Do they have though their own DUV machine?
• 1:02:20
  SPEAKER_01: Do they have or can they already make their own EUV systems?
• 1:02:24
  SPEAKER_01: Nobody knows, but they are investing heavily in it.
• 1:02:27
  SPEAKER_01: So that's something yeah to keep a really close eye on.
• 1:02:31
  SPEAKER_01: But with some funny story about this, is that uh China bought a DUV machine of ASML and they uh reversed engineer it.
• 1:02:40
  SPEAKER_01: They wanted to know more about the machine, uh maybe yeah, to replicate it, and they reversed engineer it and they could not get it working, so that's yeah, also shows how enormously complex already the DUV machines of ASML are.
• 1:02:57
  SPEAKER_01: Yeah, that's such a funny story.
• 1:03:00
  SPEAKER_02: Yeah, you would think that if you are tearing down a machine and exactly build it the way it was, that it should work, but not the case with the DUV machine.
• 1:03:12
  SPEAKER_01: No, it's too complex.
• 1:03:14
  SPEAKER_01: If you yeah, it's so hard.
• 1:03:17
  SPEAKER_01: Um, another risk is photonics, and I think you did really good research about this part.
• 1:03:25
  SPEAKER_01: Um, but basically what it is, it's that information transmission goes with light instead of electricity.
• 1:03:33
  SPEAKER_01: And HML has a few investments in this area, like the company Smart Photonics, uh based in the Netherlands.
• 1:03:40
  SPEAKER_01: But at the I've emailed them, Smart Photonics, and asked, Hey, do you use HML machines for to make those chips?
• 1:03:50
  SPEAKER_01: And I didn't get any answer, so they are they don't didn't respond.
• 1:03:56
  SPEAKER_01: Top secret.
• 1:03:57
  SPEAKER_01: Top secret.
• 1:03:58
  SPEAKER_01: But yeah, that's also something to keep an eye on because experts say this could be the next kind of stage in semiconductors.
• 1:04:08
  SPEAKER_01: Have you something to add on this?
• 1:04:10
  SPEAKER_02: Not really, apart from the fact that ASML also made some investments, so they are aware of the risk and of the potential of the technology, and it's good to see them also investing in this technology.
• 1:04:23
  SPEAKER_02: Yeah, yeah, that's right.
• 1:04:26
  SPEAKER_02: That's right.
• 1:04:27
  SPEAKER_02: And what about substitutes?
• 1:04:29
  SPEAKER_02: Yeah, there are some substitutes right now for the machines of ASML.
• 1:04:34
  SPEAKER_02: This is also the reason that China can produce 5 nanometer chips.
• 1:04:38
  SPEAKER_02: Um, one of the reasons is advanced packaging, and this actually is making use of the stacking of waivers on top of each other and connecting them.
• 1:04:49
  SPEAKER_02: So you can make um out of multiple less complex chips, you can make one complex chip.
• 1:04:56
  SPEAKER_02: Uh, a Dutch company which is doing this and is market leader, I think, is called Basie.
• 1:05:03
  SPEAKER_02: A second substitute could be multiple patterning, and this basically is projecting uh patterns on the waiver multiple times.
• 1:05:13
  SPEAKER_02: So instead of doing it one time with uh HSML's EUV machines, you can do it two or three times.
• 1:05:22
  SPEAKER_02: Um, this technique is not really cost-effective because you have to edge two times, and you have to you need the process tools from KLA, for example, to measure measure the chips.
• 1:05:36
  SPEAKER_02: So you need you at the end you need a lot of UV components to uh make use of multiple patterning.
• 1:05:43
  SPEAKER_02: And that's very easy or very difficult for for example China has a lot of export bands for um suppliers for the um foundry industry.
• 1:05:55
  SPEAKER_02: Do you think I need to discuss the the process of this multiple patterning?
• 1:06:00
  SPEAKER_01: technique or no let's let's skip that part I think the listeners would leave uh if we go to it if we go into it too deeply yeah yeah I think they rather go to the competitive advantage or the mode of ASML and I think we discussed a lot about what ASML makes so fantastic but what's your opinion what is the mode of ASML I think ASML does have different modes and the first mode yeah we called it process mode yeah it's actually a miracle that a comp that a machine like this can exist it's so so complex it's on such a small scale I think it's interesting to go to the YouTube channel of ASML and just watch and watch a short video about what ASML yeah what it looks like and how they actually the the process of a high NAUV machine how that works that would be yeah clear a lot I think that would be helpful um yeah just for example a CO2 laser of Trump that's yeah that has 45000 parts uh it's just such a complex puzzle and yeah the integration of the products also the software is yeah so enormously complex it's not for nothing that they have over 5,000 suppliers and also very specialized suppliers and following the author of architects of ASML even to build software it takes only fifty to six years yeah this it takes other companies such a long time to keep up with ASML and ASML already invests billions into RD to keep ahead of competition I think it's mission impossible for most companies yeah the the nice thing about this one and also the second one I guess is that the mode is widening as ASML continues to grow.
• 1:08:09
  SPEAKER_02: Yeah the second competitive advantage in our opinion is the intellectual property that ASML has so there's more than 16000 patents they are investing billions in RD on average they invest 15% of revenues to RD and this amount is like absolute wise is getting higher and higher every year and it's more and more difficult for competitors to do the same and as we said it's it's not even taking into account all the patents of suppliers like Zeiss like Trump they they also they also have thousands of patents which are not even included in this one.
• 1:08:58
  SPEAKER_01: I think most companies won't win uh the case if you charge them on if you charge ASML on patents yeah and the last mode it's just for a company for Fab is just they have so to switch from ASML they have so high switching costs.
• 1:09:15
  SPEAKER_01: Yeah they are they've been adapted to clients needs every machine is just a little different and and so yeah they changes in-house to the client's needs so and because of that it has it has really high switching costs and every machine like I already taught you has its own babysitter and escalation teams so yeah is ml serves them really well I think and every hour the machine doesn't work it costs millions so if you want to change the machine and you have to keep it out of the you have to get it out of the fab even if it takes two days to change the machine it's already yeah you already have lost millions and millions of euros or dollars so it's yeah as ml just has very high switching costs.
• 1:10:05
  SPEAKER_00: Yeah I agree and you also don't also don't forget the different integrations that the ASML machine has me with uh other machine uh makers think of KLA there are some processes within the ASML machine and those need to be adapted if ASML would be replaced by another party which is not existing of course no yeah you could say that the network effect as Peter Wenick always says is a mode because no one else can create the same ecosystem as ASML has there's no way they could get in between it and so that might be one as well but I think it's very much correlates with the process mode as we discussed yeah agree do you think we covered all the competitive advantages now yeah I think we can go to the conclusion Matthijs so you own the shares uh I own the shares um has your conclusion about ASML based on this first part because we didn't mention anything about financials or valuation but did it change for you no I even think my conviction is higher right now after doing the analysis about the business I yeah I'm convinced that no other company on earth can make the machine in like five in like five years I don't want to look too far in the future but Ismail is just uh especially the process mode is just so strong yeah I don't think a company can replicate that in five years and with that comes all the yeah beneficials of pricing power for example how do you think about it yeah the same way as you and I was just thinking there are some investors that say how can you invest in ASML if you because you would never get the technology what's actually a fun fact for me is that no one on earth uh understands the whole whole machine of ASML they do this on purpose they they're building the machines uh modular so you can uh divide various parts of the machine so there's a team working on one module there's a team working on another module and they are very specialized and I think uh we've read so much so much um uh reports from experts uh those two books I think we have just a big understanding in how complex it is to replicate what ASML does and that should give enough conviction um with the long term trends of course that are in fact they are here we can see them so I think it's not really a problem to not fully understand the technology is impossible and I was just wondering what your opinion is about that yeah I think uh even Martin van der Brink I think he's he comes closest to understanding the wall machine and he's now leaving uh sadly but um I think even he's not understanding every part of the machine is just so extremely complex it's just so divided in so many different suppliers so many different people that all have are specialized in just one piece of it like you said and uh that also mitigates the risks of um yeah like spionage or uh theft because even if you succeed in only a small part uh of stealing a small part of the machine or getting your hands on a small piece of software you uh you you can't make the whole machine so maybe it's even an advantage against theft exactly I agree and I think that we covered every topic from part one um and of course to create the full picture for ourselves and for you we have to wait and analyze uh the second part of ASML as well where we will cover the management finances uh the valuation and the risks and opportunities there are plenty of them and I think for now unless you want to add something we can close off no I've uh nothing to add but thank you so much for listening to us uh it could be quite complex even for us to hustle translate it to English it's quite complex but we we did our best and we really appreciate uh you listening to us thank you awesome this was part one of our premium analysis on ASML and what a fascinating company and story it is so complex that's why we would like to recommend taking a look at the written analysis of ASML it contains all the information you need with graphics to help you fully understand it even better perhaps some information is best remembered not through audio but through text head on over toDutchinvestors.com tomorrow you'll receive the second and final part of this year's Christmas gift including our valuation and conclusion of ASML do you want more reports like this one?
• 1:15:36
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• 1:15:51
  SPEAKER_00: Merry Christmas and we'll see you again tomorrow