The outlook has never been this positive

■ Intel (INTC US, NR) has announced plans to build two new fabs (c.US$20bn) in Ohio, USA.
■ This is on the back of earlier US$20bn investment for two new fabs in Arizona, USA (announced 24 Sep 2021).
■ We think Intel’s robust expansion plans create a strong demand outlook for AEM over FY22-24F.

Intel continues its investment spree…

Intel has announced plans for an initial investment of more than US$20bn to build two new leading-edge chip factories in Ohio, USA. The investment is part of Intel’s plan to boost production to meet the surging demand for advanced semiconductors and the production of a new generation of innovative products from Intel. These facilities will also serve the needs of its foundry customers. According to Intel’s press release, the production site spans nearly 1,000 acres in Licking County and can accommodate a total of eight fabs as well as support operations and ecosystem partners. At full buildout, the total investment in the site could grow to as much as US$100bn over the next decade, making it one of the largest semiconductor manufacturing sites in the world. Intel plans to commence the construction of these fabs by late 2022 with production targeted to come online in 2025. These fabs will produce chips based on Intel’s most advanced technology.

…building on earlier announced capex

On 24 Sep 2021, Intel broke ground on two new leading-edge chip factories that will cost an estimated US$20bn at the company’s Ocotillo campus in Chandler, Arizona. The two new factories – to be named Fab 52 and Fab 62 – are targeted to be fully operational in 2024 and will manufacture Intel’s most advanced process technologies.

Strengthening AEM’s demand outlook over FY22-24F

In our view, Intel’s c.US$40bn capex plans paint a strong demand outlook for AEM. We think Intel’s aggressive fab capex and its US$7.1bn spend to expand its test and assembly operations in Malaysia proves that Intel continues to see its test and assembly capabilities as a key competitive advantage. Hence, we think AEM could continue to see strong demand given its sole supplier status, and may even have to expand capacity at its Penang plant and possibly add to its US presence to support Intel’s plans.

Market weakness opening up Add opportunities

In our view, overall market weakness due to concerns over interest rate hikes creates opportunities to Add AEM. We reiterate our Add call. TP of S$7.90 is based on target P/E multiple of 17.94x (15% discount to the sector average) on FY23F EPS. 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, aggressive competitive response and loss of sole supplier status or emergence of a new supplier.