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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Tue, 24 Nov 2020, 10:33 AM

 

Technology - Ride The Automotive Market Recovery

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Reiterate our OVERWEIGHT stance on the technology sector with the outlook of the automotive sector turning more encouraging. In Europe, passenger car registrations for September have turned positive, recording a strong growth of +14.5 YoY. This is an encouraging sign of recovery for the region’s automotive market. Moving forward, we expect passenger car registrations to continue to pick up, especially considering the low bases in September-December 2018. While China’s passenger car sales for September remained on a decline (-6.3% YoY), we zero in on the fact that the decline is narrowing (August 2019: -7.7% YoY). Backed by friendly initiatives such as tax cuts for rural consumers and lifting of licence plate quota in Guangzhou and Shenzhen, we expect passenger car sales in China to pick up and return to the growth trajectory. Overall, with a turn in the tide for the technology sector, we opine it is time to revisit. Our top pick: MPI (OP; TP: RM12.10).

EU passenger car registrations for September rose 14.5% YoY. In Europe, passenger car registrations have turned positive (+14.5% YoY), an encouraging sign of recovery for the region’s automotive market. Note that the decline in August 2019 (-8.4% YoY) was owing to a high base in August 2018 (+31.2% YoY) as the month saw exceptional growth ahead of the introduction of the Worldwide Light Vehicles Test Procedure (WLTP) on 1 September 2018. In any case, the growth in September’s numbers was unsurprising and we believe moving forward, passenger car registrations will continue to pick up, especially considering the low bases in September-December 2018.

Narrower decline YoY in China’s passenger car sales. While China’s passenger car sales for September remained on a decline (-6.3% YoY), we zero in on the fact that the decline is narrowing (vs. August 2019: -7.7% YoY). Additionally, passenger car sales in China are expected to pick up and return to the growth trajectory post-conclusion of the VI emission standards in July 2019, further boosted by a series of friendly policies such as tax cut for rural consumers and lifting of licence plate quota in Guangzhou and Shenzhen.

D&O and KESM are prime proxies for the automotive market recovery. Among our coverage, D&O (MP; TP: RM0.720) and KESM (OP; TP: RM8.70) have automotive-centric portfolio (>90% and >80% of revenue, respectively). Apart from the duo, our outsourced semiconductor assembly and test (OSAT) players (MPI and Unisem) have also been realigning their portfolios in the past 1-2 years with capex skewing towards the automotive segment (e.g. sensors packaging, advanced vehicle safety systems), providing them opportunities to also capitalise on the automotive market recovery and its exciting long-term prospects. MPI (OP; TP: RM12.10) has shown increased contribution from automotive sensor-related packaging products with 32% share in 2QCY19 vs. 24-25% in FY17, and it targets to grow this to 50% in 2-3 years. Furthermore, its prospect is more closely tied to the automotive players in Europe which has already seen positive passenger car registrations for September 2019.

Reiterate OVERWEIGHT stance on the technology sector. Overall, with a turn of the tide in the technology sector, we reckon it is time to revisit the technology sector. Our top pick:

 MPI (OUTPERFORM, TP: RM12.10) based on CY20E PER of 14x, reflecting mid-cycle valuation. Earnings momentum is looking positive with 1Q20 potentially posting QoQ growth on the back of a full pipeline of new product introductions (NPIs) earlier, while 2Q20 is likely to be further boosted by contributions from multiple newly acquired customers for Suzhou plant, which is already running at 93% capacity and is currently undergoing major expansion (Suzhou currently contributes c.30% of group revenue and is expected to climb to 50% later). Potential re-inclusion into the Shariah-compliant list in November is also a catalyst. These positive prospects are juxtaposed with a low ex-cash PE of 8x.

Meanwhile, we reviewed calls and target prices of stocks under our coverage:

(i) Maintain OUTPERFORM on SKPRES with a higher target price of RM1.35 based on a rollover FY21 PER of 13x. At current price, SKPRES is trading at Fwd. PER of only 12.0x (vs. its closest peers’ average of c.13x) which we believe is unjustified. Moving forward, subsequent quarters’ earnings are expected to pick up on (i) contributions of its new model variant under its conventional electrical appliances, and (ii) its customers’ seasonal ramp-up ahead of the festive season. Additionally, among its closest peers, SKPRES pays the highest quantum of dividend (50% payout) translating into decent FY20-21E dividend yield of 3.6-4.2%, which should cushion share price.

(ii) Maintain MARKET PERFORM on PIE with a higher target price of RM1.40 based on a rollover FY20 PER of 12x (vs. peers’ average of 13x) which we believe is justified given the minor setback from its new low-end telecommunication device. Nevertheless, seasonal earnings recovery in 2H19 and decent dividend yields of 3.7- 4.4% for FY19-20, could serve as attractive points for investors.

(iii) Maintain MARKET PERFORM on UNISEM with a higher target price of RM2.40 (from RM2.05) based on a higher FY20 PER of 18.7x (previously 16x), implying mean valuation. We believe the stock deserves to trade at mean valuation (vs. -0.5SD previously) on the back of the recovery in the automotive industry. Furthermore, contribution from its automotive segment is set to grow larger going forward given its ties with one of the key players in tyre pressure monitoring system (TPMS). Note that China has made it compulsory for all new M1 vehicles to carry TPMS by 2019. 

(iv)Downgrade to D&O to MARKET PERFORM (from OUTPERFORM) but with a higher target price of RM0.720 (from RM0.625) based on a higher FY20 PER of 20.9x (previously 18x), implying mean valuation. Our valuation multiple upgrade is grounded on our view of: (i) subsiding risk in the automotive space as passenger car registrations/sales for EU and China are showing signs of recovery, and (ii) pick-up in 2H19 earnings on seasonality. Nonetheless, at current price, we believe valuation may be less attractive and positives have been largely priced in.

 

Source: Kenanga Research - 18 Oct 2019

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Labels: MPI, UNISEM, KESM, D&O

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