Yet Another Value Podcast - Kerrisdale Capital's Sahm Adrangi on $ACMR's price dislocation between Shanghai and NASDAQ listings

Episode Date: February 26, 2025

Sahm Adrangi, Chief Investment Officer at Kerrisdale Capital, joins the podcast to share his thesis on ACM Research, Inc. (NASDAQ: ACMR), develops, manufactures and sells semiconductor process equipment spanning cleaning, electroplating, stress-free polishing, vertical furnace processes, track, PECVD, and wafer- and panel-level packaging tools, enabling advanced and semi-critical semiconductor device manufacturing.Kerrisdale Capital's $ACMR write-up: https://www.kerrisdalecap.com/investments/acm-research-acmr/For more information about Kerrisdale Capital, please visit: https://www.kerrisdalecap.com/Chapters:[0:00] Introduction + Episode sponsor: Alphasense[3:28] What is ACM Research and why are they so interesting to Sahm[7:27] Chinese competitors[10:24] What is Sahm seeing with $ACMR that the market is missing[12:54] Discounts[15:34] $ACMR business vs. politics/regulatory risks[22:48] China risk / listing in Asian market / US-listed company with operations in China, CEO being US citizen[29:54] Is there a lack of urgency from management? (Capital Allocation strategy)[33:54] $ACMR valuation[37:33] Technical sophistication of the cleaning tools[41:19] How exposed to slow down in AI spending and business growth prospects[48:10] $ACMR final thoughts[50:39] What could go wrong / what could break $ACMR thesis for SahmToday's sponsor: AlphasenseIf you’re unfamiliar with AlphaSense, it’s a market intelligence platform with the world’s premier library of proprietary expert insight. For years now, I’ve used Tegus for their expert call transcript library, and with AlphaSense’s acquisition, the depth and breadth of market research content available has expanded significantly.Why I chose AlphaSense?Unparalleled expert insights—access 150,000+ proprietary expert transcripts, growing by 6,000 per month, covering 24,000+ public and private companies.Comprehensive market intelligence—search 450M+ documents, including company filings, analyst research, expert interviews, and more, all connected for deeper analysis.AI-powered research at scale—complete qualitative research 5-10x faster with advanced generative AI, delivering instant, high-confidence insights.Start your free trial now at: https://www.alpha-sense.com/yavp/

This podcast is sponsored by Alpha Sense. Let me tell you a story. A few years ago, I was looking at a company that offered discounted coupons. And I couldn't figure out they had a really good product, and I couldn't figure out why it wasn't taken off. And then I was doing an expert call, and I was talking to someone, and I said, I can't figure out why this company's products isn't taken off. And he said, are you aware of the loophole issues? And theoretically, you could use this company's coupon plus, like, three other coupons. And if you really search and put them all in the right order at the right time, you can get products for, like,

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If you like this podcast, it would mean a lot if you can rate, subscribe, review wherever you're watching or listening to it. With me today, I'm happy to have on Sam Adrangi, right? Is that how you say it? That is, yep. Nailed it. From founder of Carisdale Capital, Salam, how's it going? Good, good. Long time viewer, first time guests.

Yeah, I mean, I love the work we do on some of the names. It's just great to have a podcast that's focused on specific names as opposed to. you know, just sort of more general stuff. Well, I really appreciate that. I don't know and it doesn't matter. You probably don't remember. I interviewed with you like 12 years ago when I was a fresh-faced McKenzie consultant and stuff.

So this is the first time I've ever had someone on who I interviewed with, actually, which is just kind of funny background. It was like that was my strategy back in the day. I think I interviewed everyone. I think it was like a post-consulting like you were clear. It was like one year deep dive consulting into an. industry. It would have been fun. I don't think it would have been good fit. You definitely passed on me, but it's a funny history. Anyway, start this podcast, same way, start every

podcast. Nothing on this podcast is investing advice. Always true, particularly true today. When you have Sama, sometimes you might have to say that because it might be a short idea, but this is actually a long idea. But it is an international stock, U.S. listed, but their main subsidiary, I'm sorry, is international. So keep in mind, carries extra risk, heightened risk, not financial advice consult a financial advisor do your own work uh some the company is acr research the ticker is acmr you have put a lot of stuff into the public domain which as somebody prepping for a podcast i appreciate i think it's a fascinating thesis and i'll just toss it over to you what is acmr and why are they so interesting sure so um so acmr is a way for a fabrication equipment

company these are businesses that make the tools that semiconductor fabrication plants or fabs used to make chips. So, TSM operates fab, Samsung operates fabs, global foundries, operates fabs. And the tools they purchase to make the chips in these fabs are sold by WFE companies. And the largest of the global WFE companies are applied materials, lamb research. Those are starting to become household names, you know, KLA. ASML in the Netherlands is a big one. And then there's a bunch in Japan, so Tokyo, Electron, Hitachi, Nikon, Screen. And then there are smaller cap, W fee makers like Acellus, Camtec, Nova,

onto, Vico, and so on. And then, you know, one thing I want to mention before we talk about ACM in particular is just, you know, these bigger platform companies are great businesses. These are stocks you can buy and hold for the next

30 years, and I'm pretty sure you can be confident you'll generate an attractive IRA over the long term. Lamb 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. And so the stocks got to pretty low valuations.

But one of the reasons that, you know, when the market was panicking, you could get the confidence to own something like that is because the sector lends itself to just a small number of players. And all these oligopolis across each individual tools. So basically the companies have great. competitive advantages. And the reason is because there's a limited number of fabs out there, and then there's a really limited number of operators of bleeding edge fabs. And these fabs are always working hard to try to build more advanced, more cutting-edge chips.

And to make more advanced chips, they need to operate more advanced tools. And so the fabs are working hand in hand with the tool makers to progress the tools. So there's a very symbiotic relationships between the fabs and the WFU. makers. And that makes it hard for a new entrance to break into the field because there's real costs to a TSNC to qualify a new tool, rip out an incumbent tool, replace the incumbent with a new tool. So instead, you know, making the tools more cutting edge is the priority. And taking the risks with like bringing a new tool is just not worth it. And it makes the FAVs less efficient to have multiple tools for the same process step and you have to train staff,

etc. And so when you look at across each of these tools, they're like little oligopolis. And through consolidation, the platform companies have consolidated a number of them. And so when you look at LRCX and AMAT and KLA, you'll see they trade at pretty attractive multiples. And that's just because you can be confident that these companies are going to be around 20, 30 years from now, and they'll have attractive steady-state margins down the line, you know, at the end of the growth. And so that's pertinent for ACM because I think the Chinese W-FU players benefit from some of these same competitive advantages that the international guys do. And there's actually a really good write-up on Vic in October 2021 on LRCX and S-O-X,

that breaks down why semi-cap companies are attractive. So I'd encourage any of the anyone newer to the industry to read those two write-ups. But at the end of the day, it has to do with the W-D-FEE industry being naturally oligopolistic. Can I ask you a question on that? For those who don't know, A, Carersdale has published a report on ACMR, which is great. I'll include a link to that in the show notes. And Vic, Value Investors Club.com, where I don't want to brace you denimony, but I think you'd find both of our handles on there pretty quickly, but that's what is referring to on the

write-up. Just a quick question on there, you end your report, which is comprehensive and I liked, and you say, hey, if you can invest in lamb research or applied materials back in 1995, this is effectively doing that, right? You'd obviously do that. I mean, the stocks are like 50 baggers over the past 25 to 30 years. And I love that thesis, but I guess one quick question on ACMR, they have managed to kind of from a standing start over the past 15 years, take significant share on the Chinese market. And obviously, you think they have got some chance. of taking share in even the domestic international markets, isn't the fact that, yes, with some government support, but isn't the fact that they're managing to break in here from a standing start over 10, 15 years, proof that you can break into these oligopolistic markets? Well, they're able to break into it.

So if you look at their sales, all their sales come from China. And they have viable products, and they're trying to sell into Intel and SK-Hinex, but that ramp up has been slower. And it's because Intel and SK-Hinex have to make that decision on are they going to want to replace their cleaning tool or their electrochemical plating tool, the incumbent with ACMRs.

And so the hurdle that ACMR needs to jump to be able to break into those tabs is much higher. Whereas in China, the Chinese tabs are mandated to go with a Chinese toolmaker if it's remotely competitive. And so they've been able to go from $30 million of revenue in 2016 to 2025 guidance of $850 to $950 million, and basically a billion dollars of revenue, because they're getting preferential treatment. And that's why the Chinese players are trading at eight times revenue because this preferential treatment is allowing new tool makers to develop basically incubated within China.

And then the second leg of the thesis after all the white space is grown into in China is that these guys are going to be able to become a second source and third source, internet. nationally, and their ability to, you know, develop tools that are competitive is because of sort of this incubation that they're receiving in China that really can't happen very easily outside of China. And so, you know, today it would be hard for an applied materials or a land research to develop, you know, outside of like individual tools here and there, outside of China. But in China, you're sort of seeing, you know, platform WFB companies develop, you know,

because of the preferential treatment they're getting? There's a lot to talk about here. There's a special situation angle, an event angle, political angles, all sorts of stuff. But I just want to start the podcast the same way I try to start every podcast. The market's a competitive place. It's not lost on people that lamb, applied materials, all these are great businesses.

And ACMR, I mean, we've got Vic Access. It's been a popular pitch for several years on a lot of the things, the Chinese support, the great business, all this. It's kind of been flat over the past five years. So I guess I'd ask, what are you seeing that the market is kind of missing and has ignored for the past five years? Yeah, I never really know how to answer that question. I mean, ultimately, I just try to look at companies, just understand the valuation to value them, the present value of the future discounted cash flows, and when they're trading at a discount to that,

you know, just own them based on that discounted valuation. Getting into the market's head around why something trades. I mean, sometimes things trade low just because a few people are liquidating it. In this instance, it is a little bit more straightforward. You know, the company is U.S. listed operating a Chinese semi-cap company. I'm sort of of the view that, you know, most Chinese companies shouldn't be listed in the U.S. just generally. I mean, I think it's better if your operations are in a given country to be listed in a jurisdiction that, you know, reflects those operations. And so, but I think in this specific instance, you've got the U.S. government that's taking actions to try to restrict the growth of China's semiconductor industry, and by virtue of that, the WFE sector within China.

And so it sort of doesn't really make sense for our company operating in that sector to be listed in the U.S. And I think ultimately one day, this shareholder base of ACMR will ultimately be, you know, whether it's in Hong Kong, whether the company goes private and we lists in Asia, I think ultimately you'll have a shareholder base that aligns with the underlying operations. And sort of this discount won't really have a justification to existing. I mean, the only real argument that resonates with me on why. that this discount exists is just because of the mismatch between the shareholder base in the listing and the underlying company. But, you know, that can be fixed. And in advance of that being

fixed, you know, I think the dramatic discount that currently exists will correct to some degree anticipating that. And the discount, there are actually two discounts you could talk about, right? There's one, the discount ACMR trades at to most peers. You know, ACMR, if I'm remembering correctly, would be like pretty top tier in terms of margins, growth, a lot of things, but they trade pretty bottom tier in terms of multiple. That's one discount you can be talking about. The other discount you can be talking about, and one of the reason I think a lot of event people find this interesting is

ACMR owns 80. AMR is the U.S. listed company that we're talking about. They own 82% of ACMS, which is Shanghai listed, I believe, or is it Hong Kong? I can't remember which one. Shanghai listed, no. Shanghai listed, China A shares. That's a big part of the story that it's A shares versus Hong Kong. And the Shanghai listed shares of ACMS that ACMR owns, they own.

82% of them, if you kind of did a fair value of them, it'd be worth about five times ACMR's market cap. So I'm not sure which discount you're talking about. I'm sure we'll talk about them. But just so listeners, though, there are two discounts that we're talking about when you talk about ACMR. Yeah. And, you know, we, in the report, we have this chart like page six or seven that lays out five valuation methodologies. So like when we did a DCF, because of the revenue growth and the attractive margins of the state-state basis, that spat out around 70 bucks. On a comparable company's analysis, whether you compare it to the U.S. list of WFE

companies, large cap or small cap, the Japanese guys or the Chinese guys, you get a range from anywhere from like 60 bucks to 110 bucks. And then the China, the ACMS valuation implies around $75, $73 per share for ACMR. So it's trading at, you know, a north of a 50% discount, more like 60 to 75% discount across whatever valuation methodology you use. And I think all these right evaluation methodologies are pretty reasonable. We also took like a 2028 EPS estimate, applied a 30 times PE multiple, which I think is reasonable given the growth in margins here, discounted that to today and you get like $63 per share there. So, you know, $23, it's just way below any sort of valuation methodology you come up with. Look, I know I'm not breaking new ground because I listen to, I'm going to say 75% of the, you guys did a Twitter space, which I thought was excellent.

And if I can kiss your butt for a second, I love how you came out and right at the front. You said, hey, this is a big position for us. I want to know if you have different views. Here's my cell phone. Here's my email, like all this. Because I have people who come on here and I'm like, hey, how can people contact you? And they're like, oh, the plebeians can't contact me about this position. I love how you're just like, reach out to me because you clearly want to learn more.

And I really appreciate that. But I'm not breaking new ground with this question here. How much of ACMR looking at it? We've been talking business, fundamentals, multiples, lamb research correlations. How much of it is a business question versus Carousdale is no stranger to Chinese, U.S. listed Chinese companies? How much should we be talking about politics in two forms? A, everybody knows that U.S.-Chinese listed companies, there is a lot of fraud among them, you know, and I don't use that word lightly, but that has been proven out. That's one risk.

And B, the second risk would be, hey, geopolitics in terms of what if China changes their support for the WFE, you know, national industry and that sort of stuff. So how much should we really be thinking about business versus I think those are kind of the two headline politics, market trends, regulatory stuff? Sure. So on the politics side of things, we're trying to trigger a narrative change here. So this stock traded down from, I think, around the $19 range, down to $15 in November and December. And it was on the back of the company getting added to the entity list, which is sort of just a, you know, negative headline in terms of this company's positioning vis-a-vis U.S.-China tensions around the growth of China semiconductor industry. And the narrative trying to change we're trying to trigger is that all of these headlines that you see around the U.S. trying to restrict China's growth in the semiconductor sector is actually good for ACMR. This is a direct beneficiary of the entity list existing.

This is a direct beneficiary of Trump, if you think Trump's going to be tougher on China. The tougher the U.S. is on China and the semiconductor sector, the more China is going to double down on incubating. and developing its domestic tool makers, of which ACMR is the third largest one. And so, historically, I mean, at least before our report, when you sort of saw some of these rules come out, you know, you'd see ACMR trade down. In reality, it really shouldn't. And, you know, getting added to the entity list ultimately isn't going to impact its operations that much.

And we can talk a little bit more about that later on. But, you know, a lot of the rules that the U.S. that Biden has been passing to try to prevent the growth of China's semi-sector, if you look at the numbers, they just haven't really worked. There's a number of workarounds and, you know, China is progressing. And when ACMR gave its guidance in January, middle of January, you know, it wasn't all that different from what consensus had before they got added to the entity list. So that's on the politics side, on the fraud side of things. You know, it's given us conviction on this name is channel checks. And back when we were exposing Chinese frauds back in 2011, 2012, a lot of the ways in which we were doing that was through channel checks back then,

checking facilities, talking to customers. I mean, back when you had U.S. list of Chinese reverse mergers, there were some, you know, pretty obvious signs of fraud. Like I remember, Orient Paper would change its top 10 customers. every year, like every year it'd be a new top 10 customers, and you're like in the real world that can't exist. But my favorite was

the John Hempton one where he's like, hey, if you read this 10K or 20F correctly, they would own like all of the all of the forests in the entire world to match with the kind of the numbers they were doing. I mean, do you think back to those days and think, man, it was like shooting fish in the barrel then? Yeah, I remember

I was talking with one short activist back then and we're like, there's no way this can last. This is just too easy. And then, you know, it didn't last. And, you know, there are still reports out there that come out on, you know, Hong Kong listed companies. But we started doing some Hong Kong listed companies in 2012 and 2013. And after a while, we just sort of came to the conclusion that, yes, there is fraud around the edges, but you just sort of didn't see as much of the totally obvious fraud as you saw back with the U.S.

reverse merger frauds. And so when we think about ACMR, our channel checks have just come back that these guys are the number one player in cleaning within China, that their ECP product also is innovative. And there's been a lot of color that's come back that sort of has indicated that they're less of a copycat WP player versus some of the other companies, that they've had some novel patents. come out and that there is a strong core team of engineers coming up with new technology. But ultimately, even if they are very much on the copycat side, it's still very bullish for the overall story. The ability of these companies to reverse engineer tools from foreign players in maybe not in litho are the most sophisticated tools within the semi-value chain within the WP sector.

you know, maybe sort of the bottom half of less sophisticated tools and reverse engineer them, make competitive tools, and be able to just get market share within China and then ultimately become a second source and a third source internationally. There's just so much growth available to these companies, and ACMR, the third largest one. You know, it's exciting. And so we're just focused really on the top line. And if they're selling their tools into the fabs, and you're sort of getting good color

that these tools are competitive. You know, the revenue is going to grow. And then intuitively, as sort of as we were discussing about these types of businesses, they should have attractive cash flow margins down the line. And so that takes some of the fraud risk out there because, you know, for instance, if they've got sales agents,

their agents that are skimming some profit off the top, you know, today, well, the profit today just isn't as important as are they building competitive tools and where are they going to be 5, 10, 15 years from now? And that part of the story is really checked out. This podcast is sponsored by AlphaSense. If you're unfamiliar with AlphaSense, it's a market intelligence platform with the world's premier library of proprietary expert insights. For years now, I've used TECIS for their expert call transcript and library. And with Alpha Sense acquisition, the depth and breadth of market research content available has expanded significantly.

With unparalleled expert insights across 150,000 proprietary expert transcripts and growing by 6,000 per month, covering 24,000 public and private companies, comprehensive market intelligence on 450 million plus documents, including company filings, analyst research, expert interviews, and more, and AI-powered research at scale, complete with qualitative research for 5 to 10x faster with advanced generative AI. Take a free trial and see the difference for yourself. Just go to alpha sense.com slash yavp. That's alpha dash sense.com slash yavp or see the link in the show notes. What about the other risk in terms of, I don't know if this is political regulatory, but when I think about Chinese companies, there's two risks. There's one legitimate Chinese companies. There's one kind of getting alley paid where the government comes to you and says,

hey, that's a really valuable asset. It's probably going to belong to us, not shareholders. And obviously that's a dated example. but I think there are ones that happen. And then the second one, which I actually think is the more relevant one here is, I have seen a lot, and these are much smaller companies, but I have seen a lot of companies that kind of have the dual listing, a U.S. listing, a Hong Kong listing,

or they see all of their peers trade in Hong Kong for five times the multiple that they trade at. So you get the controlling shareholder says, hey, U.S. shareholders, our stock trades for 10. Here's $12 per share. We own enough of it to force this through. Thank you so much for your service. And then six months later, you see an IPO over in Asian market. And if they took it out for 12, it IPOs for 50 or 60.

And you say, gosh, darn it did it again. So I guess it just as, you know, the worry of every investor when they invest in a company that has Chinese assets, like, as a minority U.S. investor, will I ultimately be able to, will I ultimately get the cash flow make a profit here? Right. So, ACMR has a dual share class. structure where the CEO is voting control through the class B shares, but he actually owns only 10% of the economic stake of the business.

And so if he were to try to do a take private at a low discount, the color that we've gotten here is that the penalties would potentially be so significant on the 90% that he doesn't own, accounting for sort of the gap between the discount evaluation and what fair value would come up with, that the M&A advisors that he'd probably hire in this instance to say, team up with a private equity firm to take the company private and ultimately relist, would strongly advise against taking the company private without pursuing a majority of the minority vote. So I think in a number of the instances where these U.S. listed Chinese companies have

taken private at a low valuation, the CEO owns. 70, 50 to 80% of the company. In this instance, because his economic ownership is only 10%. And there's such clear valuation benchmarks here that get a higher value. I mean, you've got the exact same company listed in another jurisdiction at a valuation of 73 bucks per share compared to the sort of the $23 is trading today. There's just a pretty decent chance that the Delaware courts would rule that. that, you know, this is taken at a significant value discount.

And if you don't pursue a majority of the minority vote, you know, you're really at risk of the core schooling against you. If you do pursue a majority of the minority vote, that makes it a lot easier to ultimately argue that you took the company private at a fair value and sort of the discount that. You took it a private act relative to say that the China shares is okay because the majority of the minority voted for it. But I think, you know, if they have a majority of the minority vote, you know, I just don't see the shareholders, the public shareholders here voting in favor of, say, a $25 take private,

et cetera. Now, you know, what take private will induce a majority of the public shareholders outside of the CEO to vote in favor of this? I'm not sure, but I do think it'll be a decent premium to where it's trading. it becomes an interesting negotiation game theory right like stocks trading the mid to low 20s they come out with a 30 dollar per share offer and you know everybody's going to push back to say hey there's 70 dollars over in shanghai and then you've got an interesting like how many people can we clip if we go to 33 36 like they're you know you're not maybe but you're never going to get the whole

72 right but at 71 if it was 72 everyone goes for it becomes an interesting negotiation just real quickly, when I first saw you write this up, I thought, oh, Chinese listed U.S. Co. It's a VIE. This is actually a Delaware, a Delaware Incorporated company, and I believe the CEO, not a U.S. citizen, but lives in the U.S. if you just want to briefly touch on that, because I do think that is kind of important just from a corporate governance angle and a few other standpoints. Yeah, so you directly own the Chinese Opco in this instance, which is good. You know, I mean, you've seen capital return on some of these VIEs, you know, I think the UIA and Dillion come to mind. But here, you know, you don't have to sort of deal with that theoretical obstacle because it's direct ownership.

And then in terms of the CEO being a U.S. citizen, the interesting backstory here is that his vision for their company historically had been to try to be a global WIFE player, not just a China. not just a China player. And, you know, we've heard, you know, good signs from, you know, in terms of traction that they've had in some of their non-Chinese semi-companies customers that they're trying to sell into. And I think we're most optimistic about maybe S.K. Heinex there. But, you know, five, ten years ago, given the type of patents and technology they were coming out with, you know, that vision of being sort of a global player with a global player with a

and the WP landscape, you know, was legitimate. I think just things have changed just in terms of Chinese-West relations around the semiconductor industry. And so this idea of potentially transitioning from being a U.S. company, you know, with global ambitions to, you know, maybe being more of an Asian company with global ambitions starts to make sense in a way that it didn't necessarily, you know, 10 or 15 years ago, when management pursued a U.S. listing, you know, you just sort of didn't have those same tensions back then. CFOs at the UBS conference in December, and it's not lost on the management team that they've got this huge value discrepancy where ACMS is trading for, you know, 5X the price of ACMR.

And he's basically asked a bunch of different ways, hey, why don't you guys do something to take advantage of this? And he kind of demures. He basically says, no, hey, we're a growth company. we want to grow. And that all does make some sense to me. Like the returns and the growth here are really good. But at the same time, when you know, you're sitting here telling me, hey, this is a great company. I see the vision. I see that look. It's like you can buy it an 80% discount in the U.S. market. It does kind of strike you as he sees it. It's not lost on him. And they're not doing anything to address this. You know, getting greedy, right?

Management buying shares on the open market. The company buying back shares. There's lots of things they can do. And I just kind of wonder, like, it's just a strange incentive. It's a strange structure. It's strange to see. So I just want to ask you, like, why don't you think there's urgency on their end? Is that a red flag to you? Is this just a non-economic team? Like, how do you kind of think about that when somebody, there's something that seems economically rational? Somebody seems to acknowledge it and they're not doing it. Yeah, my hope is just, it's just a slow process in terms of them pursuing sort of the value in luck here. For me, personally, the capital return ideas out there around the value unlocked just don't really resonate with me as much.

You know, maybe they'll resonate with other shareholders and, you know, we'd be supportive of, for instance, the company's selling. Could you give one that doesn't resonate with you? Yeah. So, I mean, I think one obvious way they could unlock value is sell 25% of ACMS, buy back the whole float of ACMR or dividend, all of that back to ACMR. and try to sort of unlock a value that way. I mean, just it's hard for me as a shareholder to tell a CEO who's been running this for 30 years, you know, sell 20% of your enterprise because, you know, his time horizon is probably much longer than mine, you know, and if he wants to run it for the next 20 or 30

years, then, you know, who am I to go and tell him, you know, sell a quarter of your business just so I can generate an attractive return over the next 12 months, right? I do hear that, but at the same time, I'm like, well, you are a shareholder. That does sound pretty nice. Yeah, but I just do think that there are other paths here that don't require him to give up any more control over his company than he currently has. And, you know, so I tend to be a fan of pursuing the dual listing in Hong Kong

and aligning the shareholder base with, you know, the underlying company. Versus, you know, I think there has been talk about, all right, Well, they could sell a whole chunk of their ACMS shares and buyback shares or distribute a dividend, or they could sell a little bit and pay a small token dividend or buyback a little bit of shares. The problem with sort of the share buyback idea is that, you know, this is a billion dollar company. It's not the most liquid thing out there. And so sometimes when it comes to share buybacks of, you know, these very small companies, you know, share bybacks don't like work immediately, right? oftentimes, you know, it's a multi-year process. And so, you know, making the shares more illiquid.

Just, you know, it just, for me, it just isn't as attractive as finding a way to sort of align the shareholder base with the underlying company. Whether that's a sort of a take private at a premium and we list abroad or pursue a Hong Kong listing or sell the company. I mean, what's interesting here is that, you know, oftentimes founders, CEOs don't want to sell. sell their companies because, you know, to them making a 30% pop and selling it a premium isn't as exciting. But here, if the company were to sell ACM Shanghai to AMEC or NORA and allow AMECNORA to continue consolidating within that sector and gain the number one cleaning business within China, shareholders make, like, 600% returns overnight or some, you know, now it's less, but you're making a multi-bagger returns.

And so, you know, we would obviously be in favor of that as well. The other thing about the capital return is, I believe in many of those instances, if the capital return amount is relatively significant, you need approval from the Chinese government, and it's questionable whether they would receive that approval if it's merely to just return a chunk of cash back to holders, especially given that the government is so focused on having this company in this sector. grow and become as competitive as they can have it become. You know, there is also another thing where ACMS, the Shanghai sub, ACMR controls 82% of them. So it's pretty thin and illiquid. Like, how much do you think there can be a lot of answers, right? CMR can be undervalued and ACMS can be overvalued.

The bus is the bus on valuation is so wide that the two can be true. It's just how much do you think ACMS is like overvalued, fair valued versus undervalued when you're kind of looking at that company saying, hey, it's pretty liquid. It does trade for a full multiple. Yeah, I mean, I just think that, like, there's so much growth for these companies. I mean, ACMR has grown a north of 40% revenue growth,

I believe, since 2018. I think it's like six years in a row, right? I mean, the growth is just very significant and it's generating even on margins of 20%. And, you know, I care less about even margins today than just understanding that this, This is not one of those sectors, you know, like EVs in China or solar panels in China where suddenly there can be sort of 20 players eroding everyone's margins. Like you just sort of can't have 20 cleaning tool companies or 20 electrochemical plating tool companies because, you know, you're not going to have YMTC or SMIC have like, you know, six different cleaning tools, you know, within a fab.

And so you've got attractive steady state margins. You've got significant growth. And so six times revenue multiple, eight times revenue multiple seems very reasonable to me. So the arguments around those valuations being too high only sort of operate in the context that like, hey, it's China. Everything in China needs to be cheap regardless of the business quality just because it's an asset in China. You know, it shouldn't trade it six to eight times revenue. But, you know, if you sort of take a step away, take a step back from that and apply sort of a DCF, you know, the multiples that the Chinese peers are trading at and ACMS is trading at are very defensible, in my opinion. And ACMS trades in line and actually a small discount to as Chinese peers.

No, that's perfect. I mentioned it because I do think there would be, it's tough because it's a Shanghai listed company and you've got a U.S. listed company. But there are interesting, what if ACMS starts buying the parent co, right? Like, hey, we'll give you $30 worth of ACMS shares. You can tender your ACMR shares into that. That creates a huge premium for an ACMR shareholder, but it also creates huge value for the remaining ACMR shareholders. And, you know, you've kind of got the child buying the parent there is an interesting

thing. Don't know if regulatory that's possible, but that seems to be one way that you could create a lot of value without some of the, as you said, selling the baby, right? selling the baby to create a one-time pop, but missing it. You can comment on anything there, or I did have one or two last questions I wanted to ask you. Yeah, whoever tries to tender for or buy take private ACMR, whether it's the Opco and some sort of creative acquisition there, or management teamed up with private equity,

or even if it was one of the Chinese strategics trying to sort of bid for ACMR shares, ultimately just goes back to the fact that, you know, we probably receive an attractive premium because you sort of can't have a take underdone here based on my discussions with M&A lawyers by management. And then if it's purely a strategic and the CEO is selling all of the shares, and you should be pretty aligned. Yeah. Yeah.

Look, one of the things I think is interesting here, correct me if I'm wrong, But, you know, when I heard cleaning tools, it took me reading your report and, like, continue to read. For some reason, I just had in my hand, like, janitorial tools. And this is not that, but it's just really hard to get over cleaning tools being, like, not a commodity, low RIC, like, you can buy them off the shelf. But these are actually, I mean, they're cleaning things. I think the top line for ACMR cleans, like, things at the 19 nanometer level, and they're trying to get up to 15. So, like, that's, if I'm not mistaken, that's much smaller than your eye can see. So you just want to talk about how, like, technically sophisticated a lot of the things that

they do are because it's an interesting market. If I remember quickly, it's 5 to 8% of the cost of a fab is the cleaning tool. So it's a meaningful piece, but it's not so meaningful that the fabs want to take it in house and do all this. So it is kind of in a really interesting niche there. Yeah, so cleaning, so if you think of lithography as sort of at the one end of the spectrum in terms of sophistication and sort of difficulty for Chinese companies to replace foreign tools. Cleaning is more on the other side.

It's sort of one of the less sophisticated tools out there. And so part of the diligence that we've done is tried to get the sense that, all right, well, ACMR is the number one provider of cleaning tools within China. But given that, this is on the lesser sophisticated side, to what extent can you? can they be replaced by other players and can there be more competition in that space? And the sense that we've gotten is that even though, you know, it's not the most sophisticated, most advanced WFE sector or line of tools, that because they're in the poll position, it's still less likely that you're going to see a lot of competition there. And the competition would, you know, would come from Nora, say.

And the color we've gotten is just there's so much white space within. China and so many tools for them to you know try to um bring in house or bring to a sort of domestic supplier away from from foreign toolmakers that you're not seeing the multiple players sort of step on each other's toes and compete in the same the same area um rather than rather um you know within the chinese players there's not that much competition today or you know really in the near to intermediate term um and so you know the sense we've gotten from our channel checks is that they're likely to continue to be the number one player in cleaning, the number one player in ECP, electrical plating. And then they've got four other

product lines. So they've got their third tool lines is in advanced packaging. And then they've brought out a furnace tool over the past year. They've been making shipments over the past year. You're going to start seeing some of their revenue in 2025. And then they've got a deposition tool. on PECVD and a track tool. And within those other tools, again, they're not necessarily the most sophisticated tools, the most advanced tools, but there doesn't seem to be as much competition

for those tools. And so I think we're optimistic that they'll be able to put together a competitive tool, start gaining market share, and grow within that. And so, you know, I think that's sort of my answer to the idea that, hey, you know, cleaning isn't the most advanced process step should be concerned around that. And it just seems like, again, once you're in the fabs, you know, the fabs just don't really want to rip out your tools and replace it with others. You mentioned being long glam in 2022. Obviously, you are basically long semis, fabs here. About a few weeks ago, you have the deep research freak out where, you know, they come out and everybody says, oh, my God, these models, you know, way less energy efficient, all this sort of stuff.

And I think that's kind of really self-corrected and a really rapid base. But I guess how much are you exposed to kind of, you've laid out, hey, this is a secular winner because China is trying to insource and in-house all of this supply chain here. How much are you exposed to secular winner if there was a pause and AI spending or something? all these fabs kind of looked and said, hey, maybe we don't need to spend hundreds and hundreds of billions of dollars every year. Like, are these guys going to be affected by, I'm sure they'll be affected somewhat, but how affected by the bull what do kind of players like this become? Yeah.

So, you know, I mean, there is some color coming out that overall WFE spending in China is slowing down, but it's difficult to separate how much of that decline is owing to foreign tools that were pre-purchased or that were sort of where there was advanced buying over the past couple years in anticipation of future restrictions. How much of that slowdown in WP spend is owing to those versus tools being sold by the Chinese toolmakers? And it seems like the Chinese toolmakers, you know, there wasn't as much

pre-buying, you know, of those tools because, you know, there's no forthcoming restrictions there. And then, you know, offsetting sort of a slowdown in WP spend is just them taking market share away from the foreign tools. And so, you know, there's good Bernstein research out there on this. It's a good Goldman research as well. But, you know, Bernstein, I think, has that rate of localization, i.e., the percentage of a FAPS tools that are Chinese versus non-Chinese, growing from mid-teens to the low 30s. in like the next two years. And so there's just a lot of displacement of foreign tools going on.

And so that's driving growth even in the absence of overall declines in WP spend. And when we're talking about declines, I mean, I think the forecasts are like declines of 5, 10%. But I think even if you have 10 to 20%, the market share gains that the tool makers are making offsets. you know, that that growth offset sort of the top level decline. I think there was a lot of bear commentary around the company having a big build-up in particularly working capital over the past year to 18 months. And I think you guys had a different take on that. And I wanted to hit that, A, because you have a different take, and B, because, you know,

again, not accusing the company, but the first thing everyone looked for after you and so many people broke the ground on Chinese reverse merger projects, hey, what's the working capital look like? Why does this $500 million company have $17 billion in inventory or something? You know, so just wanted to address the working capital because I thought you had a very differentiated take on it. Yeah, I mean, look, we would love to have, you know, if there's positive net income, to have positive cash flow. But, you know, this just isn't one of those types of businesses because of just sort of the type of business it is. So, you know, when they're selling a tool into a fab, there's customization that needs to go into that tool. So whether you're selling a cleaning

tool to a logic fab or memory fab, there's a variety of customizations that need to be done. And this is a fast-growing company. So they're selling a lot of first tools into these fabs. And that's great. For the long-term store, you're getting a foothold into all of these SOE fabs. And then there's sort of a land and expand model where you're in there with cleaning, and then you go into your furnace product and your track product. But, you know, their disclosures in their K, which just sort of resonates with what you would think intuitively is that the first tools that they ship, there's a lengthy evaluation period that they say is, you know, anywhere up to 24 months.

And that they're not necessarily receiving payment until after those 24 months. And so if you're growing 40% a year for the past, you know, going from nothing to a billion dollars or revenue, you're selling a lot of first tools into a lot of. of fats, and you're not getting paid out on those first tools until, you know, two years later. And on the revenue recognition side, there's sort of this delayed revenue recognition, where they don't recognize the revenue of first tools for a while, whereas they recognize revenue of repeat tools on shipment and delivery. And so the result is when you look at the cash flow statement, you're seeing a lot of

of negative working capital on the inventory side, and you're seeing the inventory days outstanding north of 500 days, which is a big number. In the report, we talk about how ultimately you're going to see, you should see some of this cash flow coming in over the next few years as more of the tools that they're shipping are transitioning from first tools as a percentage of the total tools to repeat tools. hopefully, you know, that'll happen. But, you know, sort of, again, the big picture thing that's gotten us comfortable around the working capital here is the channel checks that are coming back on the competitiveness

of their tools. If the tools are going into the fads and you're seeing, you know, your channel checks are coming back saying that, you know, they're attractive to the customers, you know, one way or another, you know, ultimately they're going to get paid, I would think. And so that's sort of my best answer on the whole. working capital. Famous last words will ultimately get paid. We think.

This podcast is sponsored by Alpha Sense. If you're unfamiliar with Alpha Sense, it's a market intelligence platform with the world's premier library of proprietary expert insights. For years now, I've used Teaguez for their expert call transcript and library. And with Alpha Sense acquisition, the depth and breadth of market research content available has expanded significantly. With unparalleled expert insights across 150,000 proprietary expert transcripts and growing by 6,000 per month, covering 24,000 public.

and private companies, comprehensive market intelligence on 450 million plus documents, including company filings, analyst research, expert interviews, and more, and AI-powered research at scale, complete with qualitative research for 5 to 10X faster with advanced generative AI. Take a free trial and see the difference for yourself. Just go to AlphaSense.com slash YAVP, that's Alpha-Sense.com slash YAVP, or see the link in the show notes. we've hit most of the bull points from your research. Again, I'll include a link to the paper in the show notes if anybody wants to go to beaver. I think we've hit most of the bull points, but is there anything kind of you came on here wanting to talk about that you think we should

have hit a little harder? Yeah, I mean, I think this is a sort of a smaller cap company. And so the role that we can have here is, you know, educate the market that the business is actually operating. Well, I mean, people are going to look at the financial statement. and they can understand sort of the valuation and the growth. But, you know, because it's in China, because it's a semi-cap company and it's only a billion dollar market cap, you know, there's not as much color out there of sort of independent observers verifying that, you know, their tools are competitive.

And so we're hoping by sort of packaging that all in a report, we can get people a little bit more comfortable with the underlying operating story. And, you know, sometimes when you look at some of these smaller companies, you know, people are just like, oh, it's just too much work, you know, to sort of source experts that know about the semi-sector in China and sort of buy into this operating story. And hopefully sort of provides a call on that.

You published this and you published it before we decided to do the podcast. And it was like, what the fudge are these guys? guys looking at like a Chinese semiconductor and one of my friends said it's levered torque to the Chinese semiconductor industry and I thought that was a negative thing I was like these guys like this is a Yolo beta bet but as you laid out as some people have laid out like that's it yes there is risk there but that's a really nice place to be when the Chinese government is encouraging everything to be locally sourced like it's really nice to be levered torque on

that local sourcing so you know I am definitely with you and then And you marry, it's very difficult to do. If you're an outsider, a non-specialist, you hear that and you're like, oh, my God. But once you start, once you've laid it out or people, you really buy into it, I think. And then also I just, you know, you know me in a special situation. I love that you've got the U.S. parent co-trading in a billion and the hold co, or the operating co-trading at $6 billion there. There's a, you can drive a truck through that valuation.

That seems to give you a pretty large degree of safety if you can get comfy with a lot of stuff. Last question I wanted to ask you, look, there are certainly risks here. There are cycle risks, there's government risks. I think we've done a nice job discussing them all. But if I said, hey, you're invested in this thing for the next, your disclosures make very clear it could be the next 30 seconds or the next 30 months. But if I said, hey, you own this thing. What's the risk that keeps you up at night when you think about the stock?

Is it the governance, the angles, is it just the pure macroeconomics of it? What kind of keeps you up the most here? Yeah, I mean, I think it's the overhang. of, you know, what the U.S. government could potentially do. You know, I think this is a small name and it's hard to think of a company this small, you know, making it onto the radar of the U.S. government. But, you know, it's listed in a country that, you know, wants to limit the growth of its sector and its business. And so, you know, who knows, right?

Are you worried, like, about a Russia situation where the, whole firm gets sanctioned and even though they own, you know, the vast majority of the Chinese sub, they can't get any value for it because the U.S. government says, hey, even though you own that, let's cut off our nose to spite our face, you can't access that money or do anything with it? Yeah, I mean, sure. You know, any sort of like iteration of that. Okay.

One of the things that, you know, I sort of do address here and there is that, that, You know, the U.S. government does have a list where, you know, it can add certain companies to that list and restrict U.S. ownership of U.S. person's ownership of those companies. But what's interesting you hear is that you would have 365 days. So that regulation, I think the list is the NSCMIC list or whatever it is. U.S. hours of 365 days before they have to divest. And, you know, what I find interesting about that is it could. accelerate the listing in Hong Kong. And so then you sort of create a little listing in Hong Kong, and you organize a corporate action where U.S. shareholders convert their shares into Hong Kong.

And then once you've got all the shares in Hong Kong, I just don't think you're going to have the Hong Kong Coldhold trade at a 68% discount. You know, I think that discount narrows to 10 to 25% relatively quickly. So in a way, it actually could be a catalyst for the upside. But I think, you know, outside of that specific, list. And it's just, you know, you've never had a U.S. company owned by a U.S. passport holder be added to that list, especially one of this side. So, you know, I think it's a very

tail risk that's unlikely to happen. I think the government's also realized like with Venezuela bonds and stuff. It's like, hey, U.S. investors cannot own Venezuela bonds. Cool. You force U.S. investors to panic seal their Venezuelan bonds. So they take huge losses. The bonds still exist. It's not like you've stopped Venezuela from doing anything. Now, you could say U.S. investors can't buy a new issue Venezuelan bonds and stuff. Like, that's different. But going to U.S. company and saying, hey, you can't own this Chinese assets. Like, cool, you have harmed U.S. shareholders and the assets are still over there in China. Like, you've done absolutely nothing. So I think it's, but yeah, I think it's like China multiples at all time

highs now, CNOC is at all time highs. Those were companies that were added to the list. You know, ultimately there would be new buyers. So, yeah, to your point, sort of was never really an effective policy and I think it's bad policy as well as a tail risk well some this has been great again I'm going to include a link to carousel write up it's about 30 pages it's very well researched very in depth I think if people are interested in it they should do it and some anytime you have a long idea you're welcome to come on this podcast and fit you because they're well researched I know it's rare for you guys no short ideas I don't need any of that legal risk but any long ideas you have an open invite on here sounds great yeah thanks so much for having me on thanks again for coming on

A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.