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Semis have corrected with little differentiation in performance ytd, which is typical for mid-cycle inventory and share price corrections such as in 2004, 2006, late 2007/early 2008 (ex GFC), 2010, 2011 and 2012. The magnitude of EPS downward revisions could be approaching a bottom – in the past, the current level of revisions has often coincided with pending troughs for share prices. The sector’s peak to trough decline since May is now 25%, close to the historic average since 2004 (28%), although it has happened a lot quicker compared to previous corrections (88 days vs average 184). While BAML’s Semis team has highlighted the risk of further estimate cuts for 4Q, stocks may be approaching a floor assuming this remains a modest de-stocking cycle and does not turn into a global macro shock. At the least, we would expect the relative underperformance of Semis vs markets (which have been ‘catching down’ in the last few days) beginning to subside. We highlight ASML & ARM as quality compounders in European Semis that long-term investors should consider buying.

At ~EUR78, we believe the stock is discounting a scenario of 16x our 2019 EUV bear case EPS of EUR6 (EUR96/share discounted at 7% WACC). ASML could return all FCF generated between now and then via dividends & buybacks, which we estimate have a cumulative yield of ~40% at the current share price. Buying and holding the stock now

and ASML only delivering along our EUV bear case scenario would still imply a 4-year TSR of 65%. In a more likely EUV base case scenario (EUR9 in 2019 EPS at 16x), the 4- year TSR would rise to 128%. Based on recent meetings with TSMC, the risk of shortterm order cuts from foundries seems low, while we highlighted last week that rising

capex announced by #2 & 3 memory players Hynix and Micron improves visibility of a ‘longer-for-stronger’ memory capex cycle. Net net, we view the risk-reward as attractive for long-term investors wanting to buy a likely monopoly franchise in Tech.

As we highlight in our accompanying note, investor concerns about a growth slowdown in mobile have driven a de-rating to the stock’s 10-year trough P/E (ex GFC). We believe ARM’s share price is now discounting a pessimistic ~2% 2016-20E PD royalty revenue CAGR, implying an unlikely industry revenue decline of >10% p.a for the next few years.

For Infineon & STMicro (both Neutral), risks to industrial automation and more late– cycle Auto demand plus the now weakening $ could prolong the impact of a cyclical downtrend. For Infineon, we view the risk-reward as neutral with the stock 10% below our base case scenario and ~20% above our bear case. For STMicro, we believe its current share price at FY16e EV/sales of 0.8x is discounting c.6% operating margins, broadly inline with our estimate of 6.8%. While the dividend yield at 5.7% is attractive, we consider 1) Lack of clarity on DPG demand/restructuring, 2) Downside concerns in China autos (where STM has #1 market share), and 3) FX now turning into a headwind at $/EUR 1.15.