Ready for the system level testing wave
? We think AEM is prepared to partake in the growth opportunity presented by system level testing (SLT).
? In our view, AEM is able to offer prospective customers its own-brand comprehensive SLT solution.
? Reiterate Add, with a TP of S$7.90.
Opportunity knocks …
The push toward more complex integration in chips, advanced packaging, and the use of these chips for new applications is challenging the chip testing industry. SLT is the ability to test a chip, or multiple chips in a package, in the context of how it will be used. According to AEM Holdings’ 1H2020 results presentation slides, SLT spending is expected to grow at a CAGR of 21.6% between 2019 (US$1.2bn) and 2024F (US$3.2bn).
… and AEM is ready
In a 24 Jan 2022 interview with The Business Times, AEM’s Non-Executive Chairman Mr Loke Wai San shared that the semicon cycle has been ‘elongated’ due to demand from growing applications of semicon chips and the increasing complexity of chips. Product manufacturers are seeking more compact and more powerful semiconductor devices for 5G-related applications, and semicon chips usage in automobiles has risen as electrification of cars increase. In our view, as chips become more complex and packaging demands increase, there is room for SLT to play a bigger role, and AEM has a chance to be a meaningful player in the SLT space. In his interview, Mr. Loke also highlighted that AEM is gaining recognition from industry players for its SLT.
Reiterate Add call
We reiterate our Add call on AEM, and our TP of S$7.90 is based on a target P/E multiple of 17.94x (a 15% discount to the sector average as peers are larger companies) on its 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. Although we think AEM is managing its current supply chain challenges quite effectively, there will be margin pressure as the challenges persist, and we think AEM will have to share some of the cost increase with customers. We will revisit our forecasts when FY21F results are released.