Delay in front-end customer acquisition
Semiconductor shipments at inflection point; likely to fall further. The year started strong with y-o-y growth rates for semiconductor shipments above the 20% range. As of the latest reported figure in August 2022, it stood at a paltry 0.1%, in accordance with the decelerating growth rates. We expect semiconductor shipments to fall further in the next few months due to the ongoing macro headwinds.
Semiconductor capex is forecasted to decline by 10% in 2023. Semiconductor capital spending is expected to peak at US$169bn in 2022, followed by a 10% decline to US$152bn in 2023. Semiconductor companies seem to be bracing for the chip glut, with companies such as TSMC and Micron reportedly slashing capital expenditure by 10% and 30%, respectively. The end market weaknesses and abating chip shortage are likely contributing to the capex decline in 2023.
The chip industry appears to be on a cusp of a downturn with shipments and capex likely to shrink in the following year. This will be a headwind for GVT’s semiconductor segment as it navigates the semiconductor market glut. Capex cuts by semiconductor players will likely lead to a lower demand of semiconductor equipment. Moving through the value chain, players like GVT that supplies the components and key modules for the equipment will experience some softness in demand.
Our Thoughts
Delays in potential key front-end customer acquisition. We believe that the ongoing macroeconomic headwinds could be a key reason for the delay.
Diversification another mitigation factor, with resilience in the life sciences and medical segments. Compared to the semiconductor segment, we expect the life sciences and medical segments to remain relatively stable, as these sectors are typically less cyclical. Moreover, product lifecycles are generally long in the life sciences segment, which should alleviate overall near to mid-term weaknesses in the semiconductor segment.
Improvement in margins expected in FY23. Though the supply chain situation is improving, our checks show that the utilisation rates have not picked up significantly at this moment, so gross margins are likely to stay flat at c.27% in FY22. In FY23, however, there are expectations that margins will improve, owing to easing supply chain disruptions and higher utilisation rates. We estimate that gross margins will tread higher at 29% in FY23 on the back of easing supply chain disruptions and higher contributions from the life sciences segment, which has a higher margin.
Still a promising, grand venture in the long run; potential key front-end customer acquisition a crucial catalyst. Notwithstanding near-term volatility, we continue to see a secular long-term uptrend in the semiconductor segment, which makes up around 70% of GVT’s revenue in FY21. McKinsey projects that the semiconductor industry will become a trillion-dollar industry by 2030 and Gartner estimates that semiconductor revenue by end use industry will grow a further 11.2% and 11.1% in 2024 and 2025, amounting to US$663bn and US$737bn, respectively – all of which point to a bright long-term semiconductor market outlook that GVT will benefit from.
Maintain BUY with lower TP of S$0.57. We have revised our FY22/FY23 revenue downwards by 4% and 19%, respectively, on account of the weaker semiconductor market and deterioration of the overall macroeconomic outlook. Our earnings estimates have also been adjusted downwards by 14% and 29%. Our target price is based on 12.0x FY23 earnings, slightly below the historical mean (vs. 16x, +0.5SD previously).
