- Together with our US partner Raymond James, we hosted a group of US-based fund managers for the Singapore leg of their Asian Tech Tour over 13-15 June 2022.
- The visit covered 6 companies in our universe (ISDN, AEM, Venture, Nanofilm, Grand Venture & UMS), where these investors had a chance to learn about the companies and the current industry dynamics.
- Venture Corporation is our large-cap alpha pick for 2022F with an Add recommendation and a TP of S$23.32 as earnings normalise in a post-Covid-19 world.
ISDN Holdings (ISDN SP, Add, TP S$0.70, CP: S$0.47)
- ISDN sees automation as the solution in China to combat rising wage cost and labour shortage. The company noted that the younger generation in China was less keen to work in factories compared to their predecessors.
- On sales approach, ISDN’s engineers offer value-added solutions to clients instead of just pushing products. The company is also looking to offer software solutions (in addition to hardware) to customers, which, in our view, could help defend/improve its gross profit margin in the current challenging environment.
- ISDN noted that US-China trade tensions and the Covid-19 pandemic have created opportunities for the group outside China. The company cited as evidence its Vietnam operations’ revenue growth of 26.5% yoy in FY21.
- On the demand outlook, ISDN noted the improving situation regarding Covid-19-related lockdowns in China, which, if sustained, could lead to recovery in business activities into the second-half.
- ISDN guided that its foray into mini-hydropower plants in Indonesia was part of its strategy to generate recurring revenue from the provision of electricity to the national grid in Indonesia. ISDN guided that, as at end Dec-2021, two (Sisira, 4.6MW, and Angocci, 10.0MW) of its three minihydropower plants were successfully commissioned in early-September 2021 and are expected to contribute to the group’s revenue in FY22F. Construction of the third mini-hydropower plant (Lau Biang, 10.0MW) is still ongoing. ISDN will explore various monetisation options as this business matures.
- We see downside risks from a prolonged Covid-19 outbreak leading to travel restrictions, which could affect ISDN’s ability to service its customers.
- Potential re-rating catalysts include earlier profit contribution from its mini-hydropower segment.
- We reiterate our Add call on ISDN with a TP of S$0.70 as the company continues to benefit from the automation trend. This is based on a 10.1x P/E multiple (1 s.d. above the Jan 17 to May 22 forward P/E) on our FY23F EPS forecast.
- We also note that, at the closing price of S$0.47 on 17 June 2022, ISDN was trading at 6.8x our FY23F EPS forecast, pricing in a mean reversion to its historical average forward P/E valuation. Over Jan 17 to May 22, the historical average forward P/E multiple was 8.0x.
AEM Holdings (AEM SP, Add, TP S$6.85, CP: S$4.18)
- AEM reiterated the growing opportunity in System Level Test (SLT), driven by the increasing complexity of chips and the emerging trend of mixing different semiconductor chips (logic, memory, graphics, etc.) as a package in end applications by customers. Whereas incumbents may worry about product cannibalisation, AEM has no legacy tester business as it was mainly a Test Handler supplier previously.
- We note that AEM is strong in thermal dynamics and its Test Handlers are able to handle various temperature ranges through the use of fluid dynamics. AEM is also willing to customise products to suit customers needs.
- According to its 2021 Annual Report, AEM has developed its own new high-power SLT platform, “Trident”. Trident leverages AEM’s strength in advanced thermal control and will be positioned to capitalise on solving daunting test challenges stemming from the new and rapidly growing heterogeneous package industry.
- On customer diversification, AEM will focus on a few key semiconductor companies rather than aim to be a supplier to every player.
- The company also noted that hiring engineers is a challenge currently.
- On 16 June 2022, AEM also announced expansion plans for US, Singapore and Malaysia that involved expanded Research & Development (R&D) activities and the doubling of its current manufacturing space in these three countries. The expansion is slated to come online by the end of 3Q22F.
- Downside risks are delivery delays, aggressive competitive response and loss of sole supplier status or the emergence of a new supplier.
- Potential re-rating catalysts are stronger-than-expected orders from its major customer and earlier-than-expected success in securing orders from other potential customers.
- We reiterate our Add call with a TP of S$6.85 based on 15.62x P/E (10% premium over AEM’s 2 s.d. above its FY17-21 historical average forward P/E multiple of 14.2x) on our FY23F EPS forecast of S$0.4384.
- Scenario analysis (TP based on FY23F EPS forecast):
- TP of S$6.23 if valuation is based on +2 s.d above the FY17-21 historical average forward P/E multiple of 14.2x.
- TP of S$4.73 if valuation is based on +1 s.d above the FY17-21 historical average forward P/E multiple of 10.8x.
- TP of S$3.24 if valuation is based on mean reversion to the FY17-21 historical average forward P/E multiple of 7.4x.
Venture Corporation (VMS SP, Add, TP S$23.32, CP: S$16.83)
- Venture highlighted that it has a diversified business with more than 100 customers and is involved in the manufacture of more than 5,000 different products for customers. The company also commented that its top 10 customers accounted for 40-50% of revenue.
- Management opined that the current component shortage issue is not likely to ease and that the situation may only improve in FY23F.
- In management’s view, the Life Science area (such as Next Generation Sequencing, Single cell Analysis amongst others) continues to offer growth opportunities.
- The company also noted that it has not experienced any order cancellation despite fears of a slowdown in demand and recession chatter in the media.
- Venture remains keen on acquiring companies for technology capabilities that the group currently does not possess.
- Venture will strive to maintain its current ~9% net profit margin despite inflationary cost pressures.
- Unlike some of its US-listed peers, Venture has historically not issued any revenue guidance.
- The key downside risk to earnings is the ongoing supply chain disruptions, which affect the availability of parts and components. Other potential headwinds include the emergence of new Covid-19 variants, which may impact macro economic activities and potential disruptions/impact from the current Ukraine-Russia conflict.
- Potential re-rating catalysts are new product launches by customers and improvements in component availability.
- We reiterate our Add call (as earnings growth is likely to resume) on Venture with a TP of S$23.32, based on a target P/E multiple of 17.3x (0.5 s.d. above its 20-year average of 15.1x) on FY23F forecast EPS.
- A mean reversion scenario to its 20-year average P/E of 15.1x translates into a TP of S$20.25.
Nanofilm Technologies (NANO SP, Add, TP S$3.50, CP: S$2.37 )
- Nanofilm elaborated on the advantages of its proprietary coating technology and the wide range of products that can benefit from its coating technology. With the appropriate pricing model and partners, management opines that the Total Addressable Market for Nanofilm will be sizeable. The company also highlighted entry barriers in the form of already filed patents and ongoing patent filings. We note that Nanofilm’s coating technology is environmentally friendly as the process does not use any chemical solutions and hence there is no chemical discharge issue.
- Nanofilm also commented that it remains positive on the outlook for its Nanofabrication Business Unit, which already contributed 6.0% of its 1Q22 revenue, driven by mass production of micro-lens array for wearables’ sensors and a Fresnel lens project for a customer. The company believes that its nanofabrication processes provide superior functional performance and is cost competitive. Nanofilm also guided that it has a strong pipeline of projects for sensory components and lens from its customers.
- For Sydrogen (joint venture with Temasek for hydrogen fuel cells), its production lines in the group’s Shanghai Plant 2 have been qualified by an automotive original equipment manufacturer and the schedule for initial production remains on track. Nanofilm expects maiden revenue
contribution in 2H22F. Management noted the possibility of a spin-off if this joint venture grows sizeable in time to come. - We see downside risks from high customer concentration, persistent component shortages and increase in Covid-19 cases in China leading to extended lockdowns.
- Potential re-rating catalysts include new order wins from customers and market share gains.
- We reiterate our Add call with a TP of S$3.50 for Nanofilm given its earnings growth prospects. Our FY21-24F EPS CAGR is 22.54%. At a P/E multiple of 22.54x, the implied P/E-to-growth (PEG) ratio is 1.00x. Although Nanofilm is optimistic on its FY22F outlook, we apply a 10.0% discount to this PEG ratio to factor in earnings risks from disruptions related to the Covid-19 pandemic and possible negative impact on consumer demand arising from inflation. This results in a P/E of 20.29x and we ascribe a 15.0% premium over this multiple (for its potential growth prospects and proprietary technology) and value the company at 23.33x FY23F forecast EPS.
- In a scenario where the 15.0% premium is removed, the target P/E multiple will be 20.29x and the potential TP (based on FY23F EPS forecast) will be S$3.04.
Grand Venture Technology (GVTL SP, Add, TP S$1.29, CP: S$0.76)
- Grand Venture Technology (GVT) provided an introduction on its capabilities and customers as well an update on its recent developments, such as M&As and capacity expansion. The company is currently serving customers in the back end of the semicon industry but plans to prospect for customers involved in the front end of the semicon industry.
- GVT remains interested in machining capabilities for materials such as quartz and ceramics. GVT also has ambitions to eventually offer its own branded modules that current customers can use for their products.
- The company noted that its 1Q22 performance was affected by the Covid-19 lockdown in China as customers slowed their orders. Unfortunately, this slowdown coincided with GVT’s expanded capacity in China (both organically and from its acquisition of J-Dragon), leading to unabsorbed overheads, which lowered the gross profit margin.
- GVT has also started to pass on some of the inflationary cost pressures in new orders being received/renewed from customers.
- According to management, GVT typically reserves 10-15% of its manufacturing capacity for potential new customers.
- The company is facing challenges hiring labour but the re-opening of Singapore/Malaysia is expected to alleviate some of the labour shortage.
- GVT remains committed to growing the company and remains keen on plans for further capacity expansion and/or M&As.
- According to GVT’s public disclosure, over 13-15 June 2022, both the Executive Chairman and the Chief Executive Officer bought shares of GVT from the open market at a price range of S$0.765-0.770.
- We see downside risks from operational disruptions (such as workers being possibly infected by Covid-19, power restrictions in its China plant, higher-than-expected spending for long-term growth affecting our FY22-23F net profit expectations).
- Potential re-rating catalysts include stronger-than-expected results, potential new customer wins and more accretive M&A.
- We reiterate our Add call (give its growth prospects) with a TP of S$1.29 . This is based on 1 s.d. above the average P/E multiple of 13.1x (Dec 19 to Apr 22) on our FY23F EPS forecast.
- In a mean reversion scenario where the target P/E multiple ascribed is the average forward P/E (Dec 19 to Apr 22) of 9.5x, our TP would move to S$0.94.
UMS Holdings (UMSH SP, Add, TP S$1.63, CP: S$1.10)
- UMS explained its business model of system assembly of a product module and the manufacture of components for its key customer. UMS’s business does not involve R&D as the components are produced based on customers’ specifications. The company believes the aerospace industry offers opportunities and will recover in time to come. This explains the decision to launch a takeover of JEP Holdings Ltd (JEP SP, Unrated) last year.
- UMS is also not immune to the supply chain challenges (such as labour shortage) facing its peers and customers. In management’s view, orders remain strong and the limiting factor in executing these orders (both assembly and components) is the ability to secure enough labour.
- The company also has a new 300,000 square feet plant scheduled for completion by end Dec-2022 that will target producing components for new customers.
- On its taxation issue (higher tax provision due to inability to meet Pioneer Tax status requirements), negotiations (via an appointed tax consultant) with various Malaysian ministries involved are still ongoing.
- We see downside risks from higher raw material prices (aluminium) arising from the Russia/ Ukraine conflict and failure to renew its contract with its key customer.
- Potential re-rating catalysts include stronger-than-expected orders for its semiconductor business, securing new customers for its new Penang plant and faster-than-expected earnings recovery for JEP’s aviation business segment.
- We reiterate our Add call (as UMS continues to benefit from still continued strong orders from its key customer) with a TP of S$1.63, based on a target P/E of 14.45x (forward peak P/E multiple of 14.45x achieved in the FY16-18 net profit upcycle) on our FY23F EPS forecast. We retain the use of the forward peak P/E multiple as we currently still see earnings in an upcycle over FY22-24F. In its recent update (13 June 2022), Semiconductor Equipment and Materials International (SEMI) projected that the global fab equipment spending for front end facilities will grow 20.0% yoy to an all-time high of US$109.0bn in 2022F, marking a third consecutive year of growth following a 42.0% rise in 2021. However, we note that SEMI expects global fab equipment spend to remain flat at US$109.0bn in 2023F.
- Over Jan 17 to May 22, the average forward P/E multiple was 10.8x. Hence, in a mean reversion scenario, our TP based on 10.8x of our FY23F EPS forecast will fall to S$1.21.