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IQE is a leading global supplier of advanced semiconductor wafers that are used in various applications ranging from mobile communications to industrial power. The company boasts a diversified global customer base and a unique IP portfolio with over 150 patents that enables the firm to provide a unique service to its customers. Headquartered in Cardiff, Wales, IQE shares were often misunderstood or underappreciated by investors in the past. However, as the company continued to deliver healthy growth winning volume contracts for new technologies (e.g. VCSEL), the share price nearly tripled in 2017 and the company successfully placed new shares raising £95m in November. Recent reports published by funds with short positions questioning IQE’s accounting with regard to profit and cash flow contribution from its joint ventures sent the stock price down by 45% from its November high. That said, the company rejected the allegation with the statement saying that the information in the short sellers report is “either factually inaccurate or has previously been disclosed in IQE’s annual reports and financial statements”. The company also appointed KPMG as a new auditor replacing PwC as of 12th February saying “the company holds itself to the highest standards of transparency, governance and integrity”. We find the management responses were timely and expect the share price to be stabilised going forward.
High growth potential in various addressable markets – IQE has secured a unique and competitive position in the semiconductor supply chain by specialising in complex epitaxy processes. With increasing demand for compound semiconductors within expanding applications, contract wafer manufacturing has become a key strategy for semiconductor device manufacturers. The epitaxy process is one of the most critical parts of the value chain and requires a high-level of expertise. IQE is well positioned to benefit from an a) increased wafer outsourcing with higher standards; and b) expanding end markets along with the fast development of IoT.
Solid customer relationship with a unique IP portfolio – Albeit a widely implemented strategy in the industry, IQE has developed a combination of various advanced materials technology IP via acquisitions as well as partnering with reputable research institutions. The company owns over 150 IPs and provides bespoke R&D services to deliver customised materials for specific applications. Due to high complexity and operational risks, customers tend to employ limited numbers of vendors: usually one or two. This means IQE can take 50% or more of market share in each customer or product, which strengthens the relationship and leads to a possibility of leveraging various IPs for further product development with the customer.
Solid execution track record with technology leadership – IQE has proved its ability of identifying and commercialising cutting edge technologies in epitaxial growth processes. The company processes the largest independent manufacturing capacity globally, hence is capable of achieving enhanced economy of scale. IQE boasts 30 years of process know-how and has achieved volume production of emerging technologies including recently launched VCSEL wafers.
