New China growth engine back on track
? Inari is entering into a JV with China Fortune Tech Capital (CFTC) to carry
out an OSAT business in China targeting China’s semiconductor market.
? Inari is injecting cash and 100% stake in ATK for a controlling stake in YSIC,
while CFTC will inject cash and existing investments in YSIC worth RM376m.
? Reiterate Add, with an unchanged RM3.40 TP, still based on 27x CY23F P/E.
Entered into a JV contract with CFTC for a 54.5% stake in YSIC
? Inari, via its wholly-owned subsidiary Amertron International Limited, has entered into a
joint venture (JV) contract with China Fortune Tech Capital’s (CFTC) subsidiary CFTC
(Yiwu) Equity Investment Fund Partnership to carry out outsourced semiconductor
assembly and test (OSAT) manufacturing services in the China market under a JV
company, Yiwu Semiconductor International Corporation (YSIC). YSIC has net book
value of Rmb314.7m (US$49.5m) as at 31 Dec 2021, which includes 11.5 acres of
industrial land located in Yiwu, Zhejiang, China with 50 years of land use rights
commencing from 12 Mar 2021. The board of the JV company will comprise five
directors, three of which will be nominated by Inari and two from CFTC.
? Under the JV contract, Inari will contribute 100% of its equity shares in Amertron
Technology Kunshan (ATK) valued at Rmb491m (RM323.5m) and new cash investment
of Rmb430m (RM283.3m) to subscribe shares capital in the JV company and become
a majority shareholder, representing a 54.5% stake in YSIC. Meanwhile, CFTC will
contribute a new cash investment of Rmb200m (RM131m) and the existing share capital
in YSIC valued at Rmb570m (RM375.6m) for a 45.5% stake.
? The JV contract is not subject to any shareholder or regulatory approvals, except for the
overseas remittances of the cash investment to the JV company from the Central Bank
of Malaysia, which was already obtained on 24 May 2022. Hence, the group expects the
cash investment to be carried out progressively starting in 3QCY22F and expects it to
be fully completed in 1QCY23F.
Injecting ATK at 3.3x higher than its NTA value
? ATK’s valuation is based on a willing-seller willing-buyer basis, which represents 3.3x
over ATK’s net tangible asset value of Rmb148.8m (RM95.6m) as at 30 Jun 2021. The
group plans to fund the cash injection via proceeds from the private placement exercise
completed in Jul 21. To recap, Inari raised RM1.03bn from the PP exercise and the new
cash investment will represent 27% of the total proceeds.
? The group indicates that the JV company will allow Inari to add new revenue and
earnings streams with potential expansion at ATK and an upcoming new manufacturing
plant in Yiwu. The group also stands to benefit from potential IPO in China at a later
stage. In addition, the group believes the JV company offers opportunities to partner
with a strong local fund that will help to open up the Chinese OSAT market. Overall, this
is a positive development in Inari’s expansion plan for the China market, in line with the
group’s strategy to grow its product portfolio and customer base.
Reiterate Add with an unchanged RM3.40 TP
? We keep our earnings forecasts as we expect potential contribution from the JV
company to offset the earnings dilution following the reduction in its equity stake in ATK.
The group expects ATK volume loading to improve over the next 12 months, driven by
new product qualifications from existing and new customers. The stock has fallen 34%
YTD, in line with Bursa Malaysia Technology Index, which fell by 34% YTD.
? While near-term market volatility and weak sentiment for the technology sector could be
a drag on the stock, we still like Inari as a proxy for 5G network proliferation, potential
for horizontal growth opportunities across its key customer’s product portfolio due to its
unique supplier-customer relationship with Broadcom (AVGO US, NR) and potential
earnings contribution from the new JV company and new customers portfolio. Inari offers
a decent CY22-23F yield of 4.0-4.3%. Reiterate Add with an unchanged RM3.40 TP,
still based on 27x CY23F, its 5-year historical mean P/E.