AMAT cuts 4Q22 sales guidance
- On 7 Oct 2022, the US government announced new export rules affecting the sale of semiconductor-related products to China.
- Consequently, Applied Materials, a major customer of UMS, lowered its 4Q22 sales guidance.
- We cut our FY22-24F EPS forecasts. Our TP decline to S$1.37 is mainly due to mean reversion on worries over a semicon industry slowdown.
New US chip-related rules
On 7 Oct 2022, the US Commerce Department announced new export controls for
semiconductors that cuts China from obtaining or manufacturing key chips and
components for supercomputers. US companies will require licences to export highperformance chips, usually designed for artificial intelligence (AI) applications, to China.
The restrictions will extend to foreign-made chips related to AI and supercomputing, that
use American tools and software in the design and manufacturing process.
AMAT (major customer of UMS) quantifies impact
According to Applied Materials (AMAT US, Not Rated, CP US$76.01), the new
regulations will reduce its 4Q10/22F sales by US$400m +/- US$150m. AMAT also
revised its 4Q22 sales guidance to approximately US$6.40bn +/- US$250m compared
with the previous US$6.65bn +/-US$400m. Its new 4Q22 sales guidance of US$6.40bn is
3.76% lower than the US$6.65bn guided previously. AMAT also expects the new
regulations to impact its sales in 1Q23 by the same quantum as in 4Q22.
Model changes
We think the FY23-24F sales impact for UMS could be minimal for now. We use AMAT’s
sales cut as a proxy and lower our FY23-24F sales forecasts for UMS by 3.7-3.8%,
leading to 5.8-6.7% cuts in our EPS forecasts. China accounted for 33% of AMAT’s FY21
sales and the restriction from selling to China will reduce AMAT’s total addressable
market. However, in our view, UMS’s FY23-24F net profit could still be driven by nonChina domiciled fabs being built and success in onboarding new front end semicon customer(s).
Mean reversion
If the semicon industry is headed for a 2023F decline, we believe, UMS’s valuations
could revert to its 6-year (FY17-22F) average P/E multiple of 10.1x; this leads us to lower
our TP to S$1.37 on our reduced FY23F EPS forecast. In the previously more bullish
market environment, our TP of S$2.17 was based on 15.0x P/E (2 s.d. above its Jan
2017-Aug 2022 P/E multiple). The +2 s.d. valuation then was backed by 25.9% FY21-
24F EPS CAGR. We reiterate our Add call given its EPS growth potential and customer
diversification. Re-rating catalyst: securing new customers for its new Penang plant.
Downside risk include negative impact to UMS on AMAT’s loss of sales to China and
UMS’s failure to secure new customers for its new Penang plant.
