The new chips on the block
? DNeX is a proxy to SilTerra’s turnaround and higher crude oil prices via Ping.
? We see exciting prospects for SilTerra leveraging on 1) semi chips shortages, 2) rising MtM adoption, and 3) ready access to China market through CGP.
? We initiate coverage on DNeX with an Add and SOP-based TP of RM1.60.
Transformation into a Malaysian semiconductor powerhouse
Following the appointment of a new management team led by Group Managing Director Tan Sri Syed Zainal Abidin since Oct 2020, Dagang NeXchange (DNeX) has completed multiple corporate exercises that transformed the group into one of the semiconductor powerhouses in Malaysia through the joint-acquisition of pure-play foundry SilTerra in Jul 2021.DNeX also consolidated its stake in Ping Petroleum (Ping) with an additional 60% stake acquisition in Jun 2021. We expect both SilTerra and Ping to be the major growth drivers for the group, making up 87-88% of DNeX’s core net profits in FY22-24F.
Riding on SilTerra’s turnaround strategy, new capacity expansion
DNeX is well positioned to benefit from SilTerra’s turnaround, underpinned by on-going semi chips shortages and structural shift towards More-than-Moore (MtM) devices. SEMI projects global MtM wafers demand growing at a 10% CAGR in 2017-23F driven by megatrends such as wireless 5G infrastructure, electric vehicles, AI and machine learning. We project SilTerra to invest over RM900m capex in FY22-24F. The group plans to increase its mask layer (ML) capacity by 20% to 10m ML/annum by CY23F. We expect
SilTerra to secure two new LTAs in 1HCY22F that will take up 80% of its capacity.
Robust 3-year core net profit CAGR of 453% over FY21-24F
We project DNeX to post a 3-year core EPS CAGR of 453% (FY21-24F) driven by 1) higher wafers ASP, 2) higher wafers production volume on the back of new capacity expansion, 3) higher average crude oil prices for Ping, and 4) higher production volume at Ping on the back of its new capex programme. DNeX also enjoys a lower effective tax rate given that SilTerra has over RM12bn as of Jul-21 in unrecognised deferred tax assets that could be offset against its future profits. Note that we have yet to account for: 1) contributions from emerging technology platforms like silicon photonics that command premium ASP, and 2) commercialisation of Ping’s Avalon oilfield.
Initiate with an Add rating and RM1.60 target price
We initiate coverage on DNeX with an Add and SOP-based TP of RM1.60. We ascribed a 10% SOP- discount due to its conglomerate structure. The stock trades at undemanding P/E valuation of 13.7x CY23F P/E or 37-44% discounts to Malaysian OSAT and ATE means. We see 1) a stronger earnings delivery in coming quarters, 2) rise in institutional funds’ holdings (10% at end-Dec 21), 3) narrowing discount relative to Malaysian ATE and OSAT sectors, and 4) higher crude oil prices as potential re-rating catalysts; while 1) weakening sentiment in global tech sector, 2) delay in new capacity expansion at SilTerra and capex programme at Ping, and 3) lower crude oil prices are potential downside risks.