Intel’s expansion plan bodes well for AEM

■ With Intel’s US$7.1bn investment to expand its test and assembly operations in Malaysia, we believe that FY23F net profit could hit a new record.
■ We also think that AEM will aim to be amongst the top 3 players in the backend test-related field; ence we now benchmark it against industry leaders.
■ Reiterate Add. We raise our TP by 35% to S$7.90 (previously $5.84).

Aggressive back-end capex by Intel

On 16 Dec 2021, Malaysia’s Ministry of International Trade and Industry announced that Intel Corporation (INTC US, NR) will invest US$7.1bn to expand its test and assembly operations in Malaysia. On 17 Dec 2021, Intel held its groundbreaking ceremony marking the construction of its new production facility at Free Trade Zone Phase 3, Bayan Lepas Industrial Park, Penang as part of its US$7.1bn expansion project in Malaysia. The multiphased expansion project consists of several buildings and according to investpenang.gov.my 17 Dec 2021 press release, is expected to begin production in early 2024. In Jan 21, Intel announced a US$475m expansion programme for its Vietnam test and assembly facility, bringing its cumulative investment in Vietnam to c.US$1.5bn.

Positive on AEM’s FY23F outlook …

In our view, Intel’s expansion plan in Penang is a positive for AEM. With production slated for early 2024, we believe order momentum for AEM’s test handlers will be robust in FY22F-23F. In FY20, AEM registered record revenue and net profit as Intel bought equipment for its Vietnam plant expansion (official announcement of the expansion was in Jan 21).

… leading to another potential record profit in FY23F

Hence, we raise our FY22F-23F revenue estimates by 12.6% to 17.7%, leading to a 10.7% to 12.2% increase in our FY22F-23F EPS estimates.

Potential re-rating catalysts and risks

Potential re-rating catalysts are stronger-than-expected orders from its major customer and earlier-than-expected success in securing orders from other prospective customers. Downside risks are delivery delays (AEM expects none currently) due to supply chain challenges and aggressive competitive response from its competitors. Loss of market share, more price competitive products from Intel’s competitors and unexpected increase in operating cost could affect AEM negatively. in our FY22F-23F EPS estimates.

Reiterate Add

Our new TP is S$7.90 due to the increase in our FY22-23F EPS forecasts and the higher target P/E multiple of 17.94x (15% discount to the sector average – see Figure 5) reflecting our optimism that there is a chance for AEM to be amongst the top 3 players globally. Previously, we used a 14.92x P/E multiple.