ASML: backlog will help chip kit kingpin weather east-west fight

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Gore Vidal once remarked: “Every time a friend succeeds, I die a little.” This must be how the US state department feels towards the Netherlands. It is a key ally in America’s scrap with China because high-tech group ASML is based there.

Second-quarter results show ASML is doing disturbingly well.

The Netherlands has longstanding national security restrictions on the export of high-end chipmaking equipment, which it tightened in June. ASML’s machines dominate the industry and are accordingly coveted in China.

Seemingly insatiable demand from China nevertheless helped ASML to beat sales and profit forecasts. That was despite customers in other countries delaying orders owing to macroeconomic jitters. ASML also upgraded its guidance for 2023.

So what is going on? 

Chinese customers were already barred from buying ASML’s most advanced chipmaking machines. These use its extreme ultra-violet (EUV) technology. Controls announced in June apply to sophisticated versions of an older technology, deep ultra-violet (DUV) equipment. 

Chinese customers have been happily snapping up DUV machines that customers elsewhere do not want. That helped ASML to second-quarter sales of €6.9bn and net income of €1.9bn, surpassing consensus estimates of €6.74bn and €1.82bn.

Boss Peter Wennink now expects 2023 sales growth of about 30 per cent, versus his previous 25 per cent-plus guidance. That would be more than double last year’s net sales growth.

ASML’s shares have rallied more than 67 per cent since the US first introduced its own chip export curbs. Their recovery means they trade on a forward multiple of about 34 times, a hefty premium to companies such as Taiwan’s TSMC on 18 times.

Wennink has consistently argued that export controls will not undermine long-term demand for its equipment. Chip growth globally will be driven by everything from electric vehicles to generative AI.

By way of validation, ASML has an order backlog of €38bn — more than one-and-a-half times last year’s annual sales of €21.2bn. The company should continue to prosper despite the trade war.