Gross margin expansion to persist in 2022
- 2Q22 bookings declined 37% y-o-y to HK$4.6bn, missing the market consensus due to weak end-market demand
- Adjusted net profit was flat at HK$740m, largely in line with the market consensus
- Cut FY22/23/24F net profit by 5%/12%/ 13% to reflect the cut in the revenue forecast
- TP lowered to HK$118; maintain BUY, as negatives are priced in, and on an undemanding valuation of 8x PE
Investment Thesis
Global foundries continue to grow CAPEX.
Due to underinvestment, especially in legacy process nodes, leading foundries are expected to undertake massive investments to upgrade equipment until 2023 with the industry-wide capital intensity ratio (CAPEX to sales) exceeding 20%. This will boost ASM Pacific’s (ASMPT) revenue growth in the coming one to two years.
SMT’s margin expansion to support overall margins.
The advanced packaging (AP) market offers strong revenue growth potential, expanding at a 11% CAGR in 2021-26. Surfacemount technology (SMT) demand, especially for AP and automotive applications, should increase, and thus we expect gross margins from 40.6% to expand to 41.8% in FY24.
C.6% dividend yield with c.8% dividend CAGR.
ASMPT offers an attractive dividend yield of c.6.0%/5.8% for FY22/23, based on an average dividend payout ratio of over 50% (as in the past five years) and a DPS CAGR of c.8% in FY21-24
Valuation:
Our TP of HK$118 is based on an expected mean reversion to its three-year average forward PE of 15.5x, pegged to the valuation in the industrial downcycle. We like ASMPT for its cheap valuation, as a beneficiary of sustainable growth in semiconductor players’ CAPEX and margin expansion.
Where we differ:
The market expects ASMPT sales to decline due to negative growth from smartphone shipments. However, we believe semiconductor manufacturers’ CAPEX will maintain high single-digit growth due to underinvestment and margin expansion, to continue to be supported by the growth in AP and automotive applications. Our FY22-23F earnings are 11%/30% higher than the market.
Key Risks to Our View:
1) Slower-than-expected global semiconductor growth due to economic downturn and 2) prolonged lockdown in production area due to COVID-19 outbreaks.