Investment Highlights

• We maintain our SELL recommendation on Unisem with a lower fair value of RM1.87/share (previously RM1.90/share). We slash our FY19–FY21 earnings forecast by 15%–23% to account for worsening trade tension between US and China, leading to lower demand for chip packaging. We roll over our valuation period to FY20F, pegged to an unchanged PE of 14x.

• Unisem’s 1HFY19 core net profit of RM19mil (-48% YoY) came in below expectation, accounting for only 19% of our full-year forecast and 17% of consensus estimate.

• For 2QFY19, the company registered core net profit of RM10.4mil (+20% QoQ, -50% YoY), while recording a revenue of RM312mil (+2.9% QoQ, -9.1% YoY). The QoQ improvements were mainly due to higher orders in the month of April 2019 alone, while the following months suffered from the Huawei ban that was implemented in May 2019.

• Although the ban on Huawei was lifted in July 2019, Huawei is still not removed from the restricted list. The uncertainty has pushed Huawei to source power amplifiers modules from local Chinese radio frequency (RF) companies such as RDA, Airoha and Huntersun, in an attempt to reduce reliance on US companies. Chinese RF players will likely pass on packaging jobs to Chinese OSATs, which will negatively impact Unisem, whose packaging jobs are dependent on RF players in the US.

• The automotive front remains gloomy as China car sales continue to plunge in June (-9.6% YoY), marking its 12th straight month of decline. Europe car sales turned negative again in June (-7.8% YoY), after a static month in May. Regulators in both regions are implementing stricter carbon emission rules which rendered some models noncompliant with the new ruling. Manufacturers are facing difficulties in clearing out existing inventories.

• Moving into 3Q, the group guided for a flat QoQ revenue growth. While 3Q is seasonally stronger due to increased orders for the upcoming US smartphone launch, the company remains cautious amid unresolved US-China trade tension. We expect a flat revenue growth for FY19 as declines in the smartphone and automotive segment may be partially mitigated by increasing orders for its Micro-Electro-Mechanical Systems (MEMS) microphone packaging in the 2H, from 3mil/month to 5–10mil/month.

• The company is in the midst of finalising the qualification process for its bumping facility in Chengdu and expects to commence operation for several new customers by 4Q.

• At the current price, we believe the stock is expensive. Unisem is currently trading at FY20F forward PE of 16x, a premium to its 3-year average of 14x.

Source: AmInvest Research - 7 Aug 2019