We set our Advantest target price at ¥12,200 (equivalent to an FY3/26E PER of 35x). In phases in which Advantest momentum has been improving, the shares have often traded on a PER of 15x-35x, while they tend to undershoot on the valuation front to a PER of c10x when concerns about earnings are intensifying. Conversely, when positive newsflow is amassing, the shares can overshoot on the upside to a forward FY (FY2) PER of c45x. Taking the foregoing into account and also referencing the trading range of peer comparator Disco, we adopt a PER of 35x, the level at which the shares traded in 2024 H2, reflecting the resilience of earnings relative to other front-end processing firms.

Downside risks to our target price include 1) a contraction in tester demand as HPC/AI-related test efficiency improves; 2) increasing competition leading to lower market share and margin deterioration; 3) testers, which are not currently targeted by restrictions on exports to China, becoming subject to the restrictions; 4) yen appreciation (most testers are sold in dollars); and 5) the market’s focus is concentrated on the launch of new products by industry peers and concerns about the loss of market share for Advantest-made testers emerges.        
Upside risks include 1) greater-than-expected growth in SoC tester demand on a sustained rise in test intensity; 2) a clear rise in demand for and profitability of DRAM testers, including for HBM, and other applications; 3) expansion in the system-level test business exceeding market expectations; 4) further clarity on enhancements to shareholder returns and the importance being attached to capital efficiency; and 5) yen depreciation.