Post MPI’s 1QFY24 investors briefing, we maintain our Buy recommendation, albeit with a lower TP of RM30.00 (previously RM32.15) following an earnings cut to reflect cautiousness on the nearterm outlook. Key takeaways include: i) 1QFY24’s QoQ recovery was driven by China operations, ii) revenue guidance withheld due to customers’ fluid forecasts, iii) MPI has maintained a healthy order book and investments in emerging technologies (e.g., silicon carbide & gallium nitride), iv) MPI remains committed to its large-scale expansion plans in Ipoh, Malaysia and Suxiang, China.

Cautious on Near-Term Outlook, Customers’ Forecasts Fluid

To recap, 1QFY24 marked a consecutive quarter of QoQ recovery for MPI as it reported a net profit of RM16.5mn (+103.0% QoQ, -68.7% YoY) on revenue of RM513.2mn (+6.4% QoQ, -9.0% YoY). According to management, the quarter’s sequential growth was driven by the continued recovery of the group’s loss-making China operations.

That said, management has remained cautious on MPI’s near-term outlook, citing that improving consumer demand from China is being countered by weaker demand from Europe, while customers’ forecasts are fluid amid ongoing market uncertainty. Against this backdrop, management had continued to withhold revenue guidance, as well as extended the breakeven timeline for the group’s China operations from November 2023 to 4QFY24. As we consider the latest cue, we have cut our FY24F earnings forecast by 16.5% from RM191.4mn to RM159.7mn. Nevertheless, we foresee earnings picking up in 2HFY24 alongside an anticipated recovery in global semiconductor demand.

Remain Optimistic on Medium-to-Long Term Prospects

Beyond the cloudy near-term outlook, we remain optimistic on MPI’s medium-to-long term prospects as it has remained guided by its: i) automotivecentric strategy – with automotive segment to contribute ~50% of group revenue (versus ~43% in 1QFY24), and ii) strategic focus on capturing the next wave of opportunities via ongoing investments in silicon carbide and gallium nitride technologies, 5G testing, and MEMS sensors, among others. Attesting to this, management highlighted that while recessionary risks have pushed projects to future quarters, the group has maintained a healthy order book with major projects coming from the automotive segment. Of note, the automotive segment is poised for robust growth in the coming years, driven by electrification, advanced driver-assistance systems, autonomous driving, safety, and connectivity trends.

Committed to Large-Scale Expansion Plans

Meanwhile, we note that MPI remains committed to its large-scale expansion plans in Ipoh, Malaysia and Suxiang, China. In Ipoh, this includes: i) completed expansion of a new 4-story factory (76k sq ft) at M-Site, and ii) construction of additional floor space (110k sq ft) at S-Site to commence in November 2023. Elsewhere in Suxiang, construction of a new plant is underway, with targeted commencement in 2025. Management highlighted plans for the new Suxiang plant to focus on the automotive segment to capitalise on China’s fast-growing electric vehicle market. In the lead-up to this, the group is currently working on over 100 automotive projects and intends to transfer some technology and manpower from Ipoh.

Valuation & Recommendation

Corresponding to our earnings downgrade, our TP for MPI is lowered to RM30.00 (previously RM32.15) based on an unchanged PE multiple of 26.0x CY24F EPS. Maintain Buy. We continue to like MPI for its automotive-centric strategy as it seeks to capitalise on the promising prospects for content gains within vehicles, catalysed by the global transition to electric vehicles, among others.

Key downside risks include weaker-than-expected loadings, geopolitical tensions weighing on economic growth and disrupting supply chains, a strengthening of the Ringgit against the USD, and a surge in commodity prices.

Source: TA Research - 17 Nov 2023