Investment Highlights

• Revolutions in automotive industry driving semiconductor growth. Enabled by semiconductor advancements, the automotive industry is currently undergoing tectonic shifts in 3 areas: (i) electrification, (ii) autonomous and connected vehicles; and (iii) mobility as a service. A shift towards vehicle electrification is expected to double automotive semiconductor needs as an electric vehicle (EV) requires at least twice as much semiconductor content compared to an internal combustion engine (ICE) model. Furthermore, if autonomous driving is enabled, semiconductor content per vehicle could reach up to 10x more than vehicle with only driver support.

• Demand for automotive chips remain robust. Based on an annual survey conducted by Ernst & Young (EY), 45% of consumers intend to buy a car, of which 63% have desire to purchase over the next 12 months. China is expected to lead the car buying trend with 75% of respondents expressing such interest. The outcome of the survey is in line with major automakers’ huge backlogs and their current ability to sell every manufactured vehicles.

• EV wins the heart of consumers. 52% of consumers have expressed interest in owning an EV, significantly higher than 30% in 2020. As of 2021, there an estimated 16.5mil EVs on the road, tripling over the span of 3 years, of which 41% or 6.6mil was sold in 2021. While EV represented only 9% of total vehicle sales in 2021, this is expected to grow exponentially to more than 50% by 2030. As vehicle powertrains move from ICE to electric, this will no doubt provide a strong boost for automotive semiconductor demand.

• Automotive semiconductors remain in tight constraints. Automotive demand is also high for trailing edge semiconductors, in which underinvestment have persisted for the longest time within the industry. Chipmakers are hesitant to invest in trailing edge foundries due to high capital outlay and long return of investment as trailing edge chips are typically priced cheaper than the leading edge segment.
  Most chipmakers are more incentivised to stick to their backlogs, worsening the supply-demand imbalances. Nonetheless, larger foundries are committed to resolve the under capacity and have announced plans for trailing edge expansions. However, these efforts will likely have a lead time of 1 to 2 years, and we view that the shortages will persist at least until 2023.

• Notwithstanding robust demand from consumers, policymakers and automakers have also made their push for vehicle electrification. As of March 2022, 17 national and sub-national governments have set goals to phase out new sale or registration of ICE vehicles by 2025 to 2040. In addition, major automakers are also accelerating electrification plans to comply with policy regulations as well as an opportunity to capture market share. In future, we expect a wider range of EV models with more competitive pricing to entice customers on different price points.

• We maintain OVERWEIGHT call on the sector favouring companies with sales mix that tilt towards the automotive segment given the ongoing critical supply-demand imbalance for automotive chips. Our top BUY continues to be MPI (fair value: RM45.16) given its focus to be the globally preferred outsourced semiconductor assembly and test partner for the automotive segment. Recall that the automotive segment accounted for 38% of MPI’s 3QFY22 revenue.

Source: AmInvest Research - 20 Jul 2022