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Kicking off a new cycle

Raised FY21E guidance; top pick for SG tech

3Q21 PATMI of SGD23.3m (-4.3% YoY, +42.7% QoQ) was ahead of our expectation but in line with consensus. The sequential recovery was driven the volume ramp of new generations of equipment for Intel. We raise our FY21E EPS by 5% to factor in the increased FY21E revenue guidance, but keep FY22-23E largely unchanged pending FY22E guidance in early 2022. Maintain TP of SGD5.77 (16x FY22E P/E). AEM is our top pick for Singapore tech as we see many quality tailwinds and the least supply side risks. BUY.

Volume ramp of new generations of equipment

Revenue fell 9.7% YoY but was up 30.5% QoQ. The sequential growth was from the volume ramp of new generation of equipment for Intel (we believe these to be High Density Burn-in, or HDBI; and HDMx System Test, or HST). This ramp will continue in 4Q21 through FY22E. This is in turn driven by robust demand growth for mission critical chips as well as the increased adoption of advanced heterogeneous chips (which we believe refers primarily to Intel’s Sapphire Rapids and Alder Lake products). FY21E revenue guidance was raised to SGD525-550m from SGD460-520m.

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Several tailwinds driving FY22E upcycle

We see several tailwinds in FY22E and beyond, incl. i) front-end capex leading to back-end expansion (e.g. AEM may benefit from Intel’s cUSD1.6b expansion plans in Costa Rica and Penang); ii) meaningful revenue from 10 out of top 20 semiconductor companies globally in 2H22 (incl. from a large memory IDM). Following the SGD103m placement to Temasek, we believe M&A may also be accretive to earnings. Intel’s node migration to Intel 4 (products planned for 2023) may also spur greater testing needs, which could benefit AEM.

No expected shipment delays

Management is mindful of supply side challenges, but they presently do not expect these to cause shipment delays. AEM’s supply chain team overcomes these challenges by planning with suppliers and distribution channels ahead of time, as well as in certain instances design alternate parts. Another risk to bear in mind is margin pressure as input costs rise, as we believe costs may not be fully passed along to customers.