Investment Highlights

• Mixed results for 1QCY22. Earnings results for technology counters under our coverage were mixed for 1QCY22 with 2 within and 3 below expectations.
  ViTrox Corporation and Inari Amertron’s earnings came in within our expectations. Despite the ongoing supply chain disruption and material shortages, both companies improved their PBT margin YoY with Inari up 3.3% points to 29% while ViTrox climbed 1.7% points to 26%. Consequently, core profits of ViTrox surged by 54% YoY and Inari by 18% YoY.
  On the other hand, Malaysian Pacific Industries (MPI), Globetronics Technology and Pentamaster Corp’s results were below our expectations, with MPI earnings dragged by a 1-week seasonal shutdown for machine maintenance and rising staff cost. Meanwhile, Globetronics continued to be impacted by lower volume loadings from key customers in the sensor business, while Pentamaster’s electro-optical segment, which contributed 30% of the group’s 1QFY22 revenue, declined by 32% YoY to RM44mil due to lacklustre smart sensor development. However, this was partially offset by its automotive segment, which grew 4.6x YoY.

• Upbeat on automated test equipment (ATE) maker 2QCY22 outlook. During the recent investors’ briefing, we note that Pentamaster’s order book commendably escalated 2.5x YoY, reaching an all-time high of RM500mil as of May 2022, of which 40% of the order book was contributed by the automotive division.
  Meanwhile, we believe that ViTrox’s slower growth in China will be offset by other regions, particularly for the group’s automated board inspection (ABI) segment. In addition, we are optimistic on the group’s strategy and ability to increase its selling prices to combat margin erosion, as the group places strong focus on adding desirable features such as AI and IR 4.0 capabilities to its products, complemented by its V-One data analytic platform.

• Softer 2QCY22 expected for outsourced semiconductor assembly and test (OSAT) players. We expect MPI’s bottom-line growth to be flattish QoQ as management guided persistently higher operational cost coming from increased minimal wage and energy cost. Furthermore, the group will face higher depreciation charges from machineries bought in advance amid factory expansions in Suzhou and Ipoh.
  As for Inari, we think that its effort to diversify from smartphone components (64% of revenue as of 9MFY22) will only see fruitful results by 2HCY22. Coupled with seasonally weaker performance due to a tepid new product launch cycle in 1HCY22, we do not expect significant QoQ growth for 2QCY22.

• Global semiconductor sales continue to be robust, with April 2022 sales increasing 21% YoY to US$51bil, compared to US$42bil in April 2021. This also marked the 27th month of an uninterrupted growth streak. On a YTD basis, sales grew 24% to US$202bil, on track to meet World Semiconductor Trade Statistics’ (WSTS) 2022 global sales projection of US$614bil (Exhibit 4).

• We maintain our OVERWEIGHT call on the sector, favouring companies with sales mix that tilts toward automotive segment given the ongoing critical supply-demand imbalance for automotive chip. Our top BUY continues to be MPI (fair value RM45.16), due to its focus to be the globally preferred OSAT partner for the automotive segment. Recall that in 3QFY22, automotive accounted for 38% of MPI’s revenue.

• Headwinds to the sector stem from:
  • Persistent supply chain disruptions;
  • Regional lockdowns on more contagious Covid-19 variants and the efficacy of existing vaccines towards the variants; and
  • Critical talent shortages which lead to higher cost of labour and margin erosion.

Source: AmInvest Research - 9 Jun 2022