UNISEM’s 1QFY23 results were a bombshell. Its net profit plunged 85% YoY on the back of a 17% decline in revenue. China’s reopening failed to lift orders at its plant in Chengdu, while its operations in Ipoh barely broke even with only 50% utilisation on weakening demand from the communication segment due to plunging global smartphone sales. We cut our FY23-24F earnings forecasts by 42% and 19% respectively, lower our TP by 11% to RM2.75 (from RM3.10) but maintain our MARKET PERFORM call.

Below expectations. Its 1QFY23 core net profit of RM9.9m (-80.6% YoY) came in way below expectations, accounting for only 4% of both our full-year forecast and the full-year consensus estimate.

Results highlight. YoY, its 1QFY23 revenue decreased 16.6% on lower order volume from customers, partly influenced by the seasonality factor of the Chinese New Year break as well as the cautious order replenishment trend from customers despite the reopening of China’s borders. As such, utilisation rate in Chengdu trended slightly lower to 70% (vs. 80-85% during its peak). Meanwhile, the operations of its assembly and test services in Ipoh barely broke even with a utilisation rate 50% due to the slowdown in the communication segment which is in line with the decline in global smartphone sales. As a result, core net profit fell by a larger quantum of 85% due to unfavourable operating leverage.

An uphill battle. Moving into 2QFY23, the group guided for an uptick in revenue of 10-12% QoQ on improving order forecast from customers and a shimmer of light in terms of die support for its wafer bumping facility in Ipoh which was weighing on the group. However, we remain cautious on the group’s path to recovery as there will be new capacity coming online in 2HFY23 which may further increase its operating cost. In Chengdu, its Phase 3 plant (which doubles the capacity of Phases 1 and 2 combined) has been completed and is in the midst of qualifying customers in phases. Meanwhile, its new plant in Gopeng is expected to be completed by November 2023 with the onboarding of customers to only take place in 1QFY24.

Investment thesis. We like UNISEM for: (i) its healthy exposure in the power module business, (ii) it being able to command pricing and retain customer stickiness given its quality packaging services, and (iii) a strong balance sheet to support its expansion plans. However, there is still looming uncertainty in the immediate term which has resulted in cautious order replenishment among customers.

Forecasts. We cut our FY23-24F earnings forecasts by 42% and 19% respectively.

Maintain MARKET PERFORM but with a lower TP of RM2.75 (previously RM3.10) on a rolled-forward FY24F, pegged to an unchanged PER of 20x which is in line with peers’ forward mean. There is no adjustment to TP based on ESG given a 3-star ESG rating as appraised by us (see Page 4).

Risks to our call include: (i) weaker-than-expected USD/MYR, (ii) further delays in the ramp-up of new capacity, and (iii) worsening SinoUS relations.

Source: Kenanga Research - 28 Apr 2023