Investment Highlights

• Results largely in line for 2QCY22. With the exception of Globetronics Technology (GT), the results for technology counters under our coverage were largely within expectations for 2QCY22 (Exhibit 2). The disappointing GT results were primarily due to its softer sensor business as key customers continued to be caught in supply chain bottlenecks.

• Growth momentum to persist into 3QCY22, albeit at a slower pace. While Malaysian Pacific Industries (MPI) and ViTrox Corp’s (ViTrox) results were within our expectations, we lower our earnings forecasts in view of the slowing China market, particularly the mobile segment. Notably, the utilisation rate for MPI’s Suzhou plant fell to 52% as of August 2022, compared to 80% in 1QCY22. As of 2QCY22, the mobile segment contributed 22% of MPI’s top line and 17% of ViTrox’s.
  On the other hand, we are confident that Inari Amertron will see a stronger QoQ growth despite the fact that 63% of its revenue was contributed by the smartphone segment. This is because Inari is primarily exposed to a US smartphone maker which typically has a more loyal customer base and therefore will benefit from its launch cycles of new products.

• Smartphone shipments fell 8.8% YoY to 286mil units for 2Q2022 (Exhibit 4), marking its 4th quarter of consecutive decline, according to International Data Corporation (IDC). The drop was mainly driven by Chinese smartphone makers, particularly Xiaomi (-26%), OPPO (-25%) and VIVO (-22%), as economic uncertainties dampened consumer demand.

• Fundamentals still strong as Malaysia remains the preferred destination for outsourced semiconductor assembly and test (OSAT) services. We see that the aggressive expansions of front-end chip makers will ultimately benefit Malaysia given its neutral and strategic position against the backdrop of the ongoing China-US chip war. While the recently passed Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act may not benefit our local semiconductor players in setting up new plants in the US, we are optimistic that the potentially higher semiconductor flows from the country could continue to support our incumbents’ top line. According to the Semiconductor Industry Association (SIA), Malaysia accounted for 24% of all US semiconductor global trade in 2021. Globally, Malaysia makes up 7% of total semiconductor trade flows.

• Global semiconductor sales remain robust as June 2022 sales increased 13% YoY to US$51bil compared to US$45bil in June 2021. This also marked a 29-month streak of uninterrupted growth. On an YTD basis, sales have grown by 21% to US$305bil, on track to meet World Semiconductor Trade Statistics’ (WSTS) 2022 global sales projection of US$633bil (Exhibit 4). This continued to be led by the Americas market, which expanded 29% YoY, followed by Japan (16%), Europe (12%), Asia Pacific (12%) and China (5%).

• We retain our OVERWEIGHT call on the sector, favouring companies with a sales mix that tilts towards the automotive segment given the ongoing critical supply-demand imbalance for automotive chips. We continue to like MPI (fair value at RM38.40), due to its focus to be the globally preferred OSAT partner for the automotive segment. Recall that the automotive segment accounted for 38% of MPI’s 4QFY22 revenue.

• Headwinds. (i) Persistent supply chain disruptions; (ii) critical talent shortages which could lead to higher cost of labour and margin erosion; and (iii) weaker-than-expected sales as global recessionary fears cause delays in new project launches and customers to cut back on production.

Source: AmInvest Research - 7 Sept 2022