ACM Research cut to Hold at Needham on units being added to U.S. Entity List

Needham downgraded ACM Research (NASDAQ:ACMR) to Hold from Buy, citing several ACM subsidiaries being added to the U.S. Entity List.

Shares of ACM were up about 1% on Wednesday.

Analysts led by Charles Shi noted that after the addition of ACM Shanghai and ACM Korea to the U.S. Entity List, they were downgrading ACMR to Hold. While the stock has pulled back, they think uncertainty around ACM’s ability to source components to sustain the business, and the business relationship between ACM, a U.S. entity, and its banned subsidiaries in China and Korea, will remain an overhang for the stock, according to the analysts.

The analysts added that nearly all of ACM’s business is within China, the Entity Listing, at least on the first order, should not affect the vast majority of its demand.

While the Entity List only regulates exports, ACM’s U.S. customers, such as Intel (INTC) and European customers, such as Infineon, in theory, could continue to do business with ACM but might become more cautious to maintain ties, the analysts noted. Still, the financial impact in such a worst-case scenario will be immaterial, they added.

The analysts said that on the supply side, they think ACM still relies on the outside world, including the U.S., to source certain components. They think the company will struggle to maintain the relationship with its U.S. suppliers. Relationships with non-U.S., non-China suppliers may also be impacted if certain foreign direct product, or FDP, rules apply.

Overall, the analysts believe that the Entity Listing could affect ACM’s ability to maintain supply even if demand is unaffected.

In addition, Shi and his team said that ACM, as a U.S. entity, in theory, is not banned from having business dealings with ACM units that are on the Entity List. However, the Entity Listing does create uncertainty around ACM as a parent company to ACM Shanghai and other sanctioned units. After all, ACM has no operating units of its own and must operate through ACM Shanghai and others, according to the analysts.

The analysts think this situation has created another layer of uncertainty for ACM, not only regarding the demand/supply issues but also for ACM shareholders.