Malaysia Tech Tour
- In conjunction with our US partner, Raymond James, we hosted a group of US-based and domestic institutional investors on 16-20 June 2022 as part of Raymond James Asia Tech Tour.
- We visited 12 companies, of which seven are covered in our universe (namely, Aemulus, Dagang NeXchange, Inari-Amertron, Malaysian Pacific Industries, Mi Technovation, Pentamaster and Unisem).
- We gather demand for automotive and industrial applications remains healthy, while we see some
slowdown in the mobile segment amid overall concerns over the global economy. - We prefer MPI and Pentamaster for their long-term growth prospects riding on electrification trend and
growing adoption of compound semis, like SiC and GaN.
Aemulus (AMLS MK, Add, TP:RM1.20, CP:RM0.59)
- Aemulus is bullish about replacement market opportunity for semiconductor equipment in China as part of the Made in China 2025 strategy amidst concerns over softening demand in the consumer electronics market.
- The group believes it stands to benefit from the structural shift in the domestic semiconductor industry towards localised equipment ecosystem following the success of its maiden CMOS image sensor (CIS) tester solution that was introduced in 2022.
- For example, Aemulus is exploring the opportunity to participate in the second localised tester program targeting the display driver market in China, replacing an incumbent supplier.
- We estimate the new display driver testers program potentially offering 4-5x higher average selling prices (ASP) compared to its first localized CIS tester. We see the new display driver tester as becoming a major contributor to Aemulus from FY9/24F onwards.
- In addition, the group is also expanding its testers portfolio targeting high performance computing chips and automotive applications. This is part of the group’s strategy to grow its mixed-signal tester solutions.
- Meanwhile, Aemulus is also not spared from the negative impact from the recent lockdowns in China as some customers decided to defer equipment delivery into 2HCY22F. Despite this, the group is still optimistic for healthy sales and earnings growth in FY9/22F.
- In addition, the group aims to expand its engineering team headcount by 20% in 2022F to support new product development and existing customers portfolio.
- The stock has fallen 52% YTD mainly due to weakening sentiment in the tech sector amid concerns over inflationary pressures in the rising interest rate environment.
- We keep our Add rating on the stock with a RM1.20 TP, still based on 30x CY23F P/E, in line with Malaysian Automated Test Equipment (ATE) sector 5-year historical mean P/E.
- Higher-than-expected tester shipment volumes from mobile, tablet and CIS segments, successful expansion into new segments and potential transfer to the Bursa Main market are potential re-rating catalysts, while softer demand for mobile device applications, delays in commissioning production for its associate company in China, and disruptions in supply chains due to the impact of Covid-19 are key downside risks.
Dagang NeXchange (DNEX MK, Add, TP:RM1.70, CP:RM0.78)
- The group highlighted that SilTerra’s foundry continues to run at optimal capacity utilisation, despite the negative impact from the extended lockdown in China in Apr-May 2022. The group managed to backfill the lower loading from its long-term agreement (LTA) customers with spot orders to maintain its high utilisation. Hence, we expect SilTerra’s qoq growth prospects in 4QFY6/22F to be intact.
- Aside from SilTerra, management is also upbeat about its new joint-venture project with Foxconn to set up a new 12 inch (300mm) fab in Malaysia, with an estimated production capacity of up to 40k wafers/month in the 28nm and 40nm technology.
- DNeX is in discussion with prospective partners interested in funding the project. At the same time, the group is also looking to secure government incentives in the form of financial assistance and tax breaks to fund the project.
- The group expects to finalise the funding, fab location and JV company structure by 2HCY22F. We estimate the new 300mm wafer fab may require an investment of around US$5bn (RM22bn).
- We think it is premature to forecast any revenue and earnings potential at this juncture; however, we estimate that once the new fab is fully operational, it will exceed the annual revenue contribution from SilTerra due to 1) higher production capacity of 40k wafers/month (vs. SilTerra: 36-37k wafers/month), 2) higher average selling prices for newer technology nodes from 28nm to 40nm (vs. SilTerra: 90nm to 110nm), and 3) higher number of dies per wafer for the new 300mm fab (vs. SilTera: 200mm fab). We currently project SilTerra delivering annual revenue of RM1bn-1.2bn in FY23-24F.
- In addition, the partnership with Foxconn will also address investors’ concerns over unutilised capacity as we estimate the new fab will be mainly dedicated to support Foxconn’s semiconductor vertical integration strategy.
- To recap, DNeX’s management highlighted in Jun 21 that Foxconn’s entry in the group will provide opportunities to unlock and create value across the technology sector value chain that could include collaborations in semiconductor and downstream products, such as electric vehicles and businesses related to the electric vehicle value chain. We believe this could bring exciting growth opportunities for DNeX to participate in Foxconn’s ecosystem.
- Finally, the group does not rule out the possibility of separating its oil & gas and IT services portfolio away from DNeX as the group aims to become a pure play technology service provider.
- Reiterate Add on DNex with an unchanged RM1.70 SOP-based TP. DNeX trades at an attractive 9x CY23F P/E, a 48-59% discount to Malaysian outsourced semiconductor assembly & testing (OSAT) and automated test equipment (ATE) sectors’ 5-year mean P/E multiples.
- Potential re-rating catalysts: 1) stronger earnings in the coming quarters, 2) rise in institutional fund holdings (20% at end-Mar 2022), 3) narrowing discount relative to Malaysian ATE and OSAT sectors, and 4) higher crude oil prices. Downside risks: 1) weakening sentiment in the global tech sector, 2) delays in new capacity expansion at SilTerra and capex programme at Ping, and 3) lower crude oil prices
Inari-Amertron (INRI MK, Add, TP:RM3.40, CP:RM2.58)
- Inari is in the midst of a production ramp-up for next generation mobile devices for a North American smartphone manufacturer. The group expects to run full production for its RF division from Jul until Oct 2022.
- The group is also seeing a higher take-up for specialty processes, such as electromagnetic interference (EMI) shield process to prevent interference signal for RF chips going into 5G smartphone.
- This will translate to a longer testing and probing time, which offers higher revenue generating potential for Inari. The group expects a higher 70% of RF chips to undergo the EMI shield coating process in 2022F and it expects 100% of RF chips to undergo the process by 2023F.
- In addition, Inari is also investing US$5.8m (RM24.4m) in a new double-sided molding packaging platform that could be utilised in the next generation RF chips in 2023F.
- In addition, we gather that the group has also commence operations of the first two assembly lines for its newly-created system on module (SOM) division at P13. We see SOM division as a new growth driver for Inari to diversify and grow its exposure in the automotive and data storage applications.
- In the meantime, we are encouraged to learn that Inari has also secured a new US-based memory customer that will help to partially fill up its capacity at P34. The group expects to start the qualification process by Jun 22 and targets volume production in Jan 23.
- Overall, the group reiterated its targets of at least 5% and 15% sales contribution from new initiatives to the group’s FY22F and FY23F revenue, respectively.
- The stock has fallen 36% YTD, in line with Bursa Malaysia Technology Index, which fell by 38% YTD mainly due to concerns over inflationary pressures in the rising interest rate environment.
- 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 4.1-4.5%. Reiterate Add with an unchanged RM3.40 TP, still based on 27x CY23F, its 5-year historical mean P/E.
Malaysian Pacific Industries (MPI MK, Add, TP:RM48.60, CP:RM27.52)
- MPI is preparing its production facility at Carsem S-site, Ipoh to receive a new batch of wafer burn-in and testers in order to support its production ramp for Wolfspeed’s silicon carbide (SiC) program in 2HCY22F. We understand that there have been slight delays in equipment delivery partly due to component shortages.
- Nevertheless, we expect the group to maintain a strong double-digit growth for Wolfspeed’s program over the next 3-5 years. The group expects a hockey stick production ramp up from FY24/25F onwards.
- Meanwhile, the group is also constructing an additional level to expand its testing area production floor by 35k sq ft, mainly to cater for SiC back-end program expansion at Carsem S-site in Ipoh.
- We learnt from management that SiC wafers testing offers higher revenue generating potential for OSATs like MPI – i.e. longer test time. 1 silicon wafer test time can be up to 2hrs, but a single SiC wafer could be over 30 hrs.
- Aside from the flagship SiC program, Carsem S-site also provides assembly and test service for power management chips for data centers application. The group expects to maintain high-single-digit to low-teens sales CAGR over the next 2-3 years driven by hyperscale data center providers.
- To recap, the automotive and industrial (A&I) segments registered impressive 43% and 38% yoy sales growth, respectively, in 9MFY6/22. The segments contributed 69% to group sales in 9MFY6/22 (vs. 60% in 9MFY6/21). The group expects the resilient demand for hyperscale data centres and electrification solutions to continue driving demand for automotive and industrial power packages and sensor applications.
- The stock has fallen 44% YTD, wider than the 38% YTD drop of the Bursa KLTech Index. While near-term market volatility and weak sentiment on the global technology sector could be a drag on investor sentiment on the stock, we still like MPI’s long-term growth prospects riding on 1) accelerating electrification trend, and 2) growing adoption of SiC and GaN compound semiconductors.
- We retain our Add call with a RM48.60 TP, based on 26.6x CY23F P/E, 1 s.d. above the sector mean. We see growing exposure to Chinese semiconductor customers, higher contribution from A&I segments and higher contribution from newer technology platforms such as SiC and GaN as re-rating catalysts. Appreciation of RM/US$, longer wafer lead time and delays in equipment delivery are key downside risks.
Mi Technovation (MI MK, Add, TP:RM2.20, CP:RM1.46)
- The group sees a challenging outlook for semiconductor equipment business unit (SEBU) in FY22F due to cautious equipment spending from its customers amid uncertainty brought about by the Russia-Ukraine conflict, Covid-19 lockdowns in China, and inflationary cost pressures. However, the group is optimistic of a stronger demand recovery from 4Q22F onwards in view easing in quarantine travel periods to assist its qualification and final buyoff processes.
- Meanwhile, the group foresees robust demand in the semiconductor material business unit (SMBU) driven by multi-year growth in 5G mobile and network deployment, high-performance computing and Internet-of-Things (IoT).
- We expect most of the revenue contribution for SEBU to still be driven by the flagship Mi Series. The group recently launched the Mi Quantum series, which is paired together with automation solutions. The new solution offers higher average selling prices (ASP) by 20-30% compared to Mi40.
- Nevertheless, the group remains upbeat on the prospects for its laser assister bonder machine (ZLAB) under Ai Series model developed by its Korean team. We gather that Mi has secured recurring orders from its first ZLAB customer. The group is targeting to deliver at least 10-15 ZLAB systems in 2023F.
- Meanwhile, the group highlighted the qualification process with second and third customers are still on-going, albeit delayed in qualification process due to extended lockdowns and border closure restrictions in North Asia. We gather that the Ai series is mainly target the GPU and HPC segment utilising sub 7nm process node.
- Mi Technovation is also looking to expand market exposure in China, through its 22.6% equity stake investment in China-based Talentek Microlectronics (Talentek) in 2021. The group has started initial delivery of final test handler (Si Series) to Talentek and sees room for mass production volume once its Suzhou plant becomes fully operational.
- In addition, the group is also looking to set up its third division under semiconductor solutions business unit (SSBU) focusing on advanced packaging platform and a total manufacturing solution for semis customers utilising equipment and materials portfolio from SEBU and SMBU.
- Retain Add with a RM2.20 TP, based on 20x CY23F P/E, which is 1 s.d. below Malaysian Automated Test Equipment (ATE) sector 5-year mean P/E of 30x. We still like Mi Technovation’s long-term aspiration to be a multinational diversified semiconductor solutions provider.
- Earnings-accretive acquisitions, higher take-up from newer equipment launches and a weaker ringgit vs. US$ are potential rerating catalysts, while a decline in semiconductor industry capex, delays in components’ lead time, and lower smartphone demand are key downside risks.
Pentamaster (PENT MK, Add, TP:RM4.00, CP:RM3.56)
- Pentamaster continues to see healthy order book replenishment across automotive and industrial segments. To recap, the group’s order book stands above the RM500m level, of which nearly 40% is related to the automotive segment.
- We are encouraged to learn that Pentamaster’s sic wafer burn-in and testers are gaining good market traction given that it has added two new Chinese customers and one European customer going into EVs and industrial applications. Meanwhile the group is also scheduled to ship a higher number of sic wafer burn-in and testers in 2H22F (vs. 1H22) driven by capacity expansion for its existing American customer.
- We see stronger growth prospects in 2H22F driven by higher equipment volume going into automotive, industrial, and medical segments.
- We gather that Pentamster is still facing component shortages, such as for motors, PCB and camera lenses; however, the group is managing the situation through alternative suppliers and re-designing some of the platform with standardised components.
- Pentamaster is also investing RM120m for a 500k-sq-ft third plant in Batu Kawan, which will house its Factory Automation Solution (FAS) division and Pentamaster MediQ, spearheading the group’s venture into the medical segment.
- The group expects the first phase with 300k sq ft of production floor area to be ready in 2Q23F.
- Meanwhile the group also showcased its warehouse automation solution (WAS) system targeting e-commerce platform providers. The group believes the market is ready for WAS system today in view of ongoing labour shortages across all industries.
- The group expects to secure its maiden WAS order in 2H22F. We understand a single WAS line could range from RM2m up to over RM20m depending on the area size and number of automated guided vehicle robots.
- Labour remains a major issue for the group to scale up its operations especially with growing competition for talent from MNCs investing in new facilities in Penang.
- The group plans to hire more engineers, both locally and from overseas. In the meantime, the group is also working with local universities and vocational colleges to provide a new pipeline of engineers.
- Reiterate Add on the stock, with an unchanged RM4.00 TP, still based on 25x CY23F P/E, 0.5 s.d. below the Malaysian Automated Test Equipment sector’s 5-year mean P/E of 30x.
- We see easing travel restrictions, stronger earnings contribution from the automotive and medical segments, US Food and Drug Administration (FDA) approval for new medical consumables, and new customer wins as potential rerating catalysts. Meanwhile, delays in FDA approval for new medical consumables and further deferment of order fulfillment due to a prolonged Covid-19 pandemic are key downside risks.
Unisem (UNI MK, Add, TP:RM3.70, CP:RM2.10)
- The group highlighted that demand for capacity remains strong despite some customers seeing pockets of slowdown in the mobile and communication segment.
- Unisem Chengdu is also not affected by the lockdowns in China, and that it qualified new suppliers and pulled in orders ahead of the lockdown.
- Unisem Chengdu is operating at optimal capacity utilisation, at approx. 90% levels, in view of resilient demand for its key data center customer. Meanwhile there has been minimal utilisation improvement at Unisem Ipoh mainly due to ongoing labour shortages.
- Labour shortage is a bigger issue for Unisem Ipoh than component shortages. Unisem Ipoh has lost about 700 workers, mostly foreign, through natural attrition since the start of Covid-19 pandemic, which it has not been able to replace due to border closures.
- The group expects to secure over 200 new foreign workers in 2H22F. Unisem have already started an online training program for these foreign workers to expedite the orientation and training process. We expect this to help drive Unisem Ipoh’s utilisation from end-3Q22F onwards.
- To recap, Unisem targets 8-10% qoq sales growth in 2Q22F (during 1Q22 briefing in Apr 22). The group seems optimistic of meeting the lower end of its guidance and also expects healthy volume loading to continue in 3Q22F.
- We do not expect any significant changes in terms of percentage revenue contribution between Unisem Chengdu and Unisem Ipoh in FY22F. To recap, we estimate Unisem Chengdu contributed 55% revenue to the group in FY21, while Unisem Ipoh contributed the balance 45%.
- Management highlighted that construction for Unisem Chengdu, Phase 3 is under way and on track for completion by 4Q22F. Unisem plans to build a new plant (Phase 3) in Chengdu that would raise its total production floor space in China from 520k to 996k sq ft by end-2022F. We understand the group has held preliminary discussions with existing customers of data centers and sensors applications to take a sizeable
proportion of the initial stage of Phase 3 expansion. - Apart from that, the group is also looking to construct a new plant in Gopeng, Perak. We gather from management that the upcoming Gopeng plant could increase its production capacity in Malaysia by 60-80% once it is fully occupied.
- Reiterate Add rating on the stock with a RM3.70 TP, still based on 22x CY23F P/E, which is in line with the Malaysian outsource semiconductor assembly and test sector’s 5-year historical mean.
- Potential rerating catalysts include the major capacity expansion drive in Malaysia and China capturing growing semiconductor industry demand, higher dividend payout, and a recovery in wafer-level chip-scale package (WLCSP) volume loadings.
- Meanwhile, we see appreciation in the RM against the US$ and a slowdown in end-demand applications, such as smartphones and data centres, as key downside risks to our Add call.