Investment Highlights

• We downgrade our recommendation on ViTrox Corp (ViTrox) to HOLD (from BUY) with a lower fair value of RM7.10/share from RM8.96/share previously. Our fair value is derived based on a reduced FY23F EPS and a lower target PE of 32x (from 36x), based on its 5-year historical average. We ascribe a 4-star ESG rating to ViTrox, which adds a 3% premium to our valuation.

• Given slower earnings growth prospects over the upcoming years (FY21-FY23F net profit CAGR of 13%), the stock’s riskreward profile looks less compelling at this juncture, in our view. We cut our FY23F-FY24F earnings by 11%-13% after imputing a more conservative sales assumption due to softer global economic growth expectations in the coming months amid uncertainties in the China market.

• The persistent sporadic COVID-19 lockdowns in China and broader restrictions on semiconductor exports to China by the US has heightened market wariness and due to this, Vitrox customers, especially China-based, are taking a waitand-see approach before making further investments in new machinery/equipment. This poses a downside risk to Vitrox’s earnings given that China accounts for its largest exposure at 28% of 9MFY22 revenue.

• Product-wise, the delivery for automated board inspection (ABI) machinery is likely to decelerate from the 3QFY22 record high due to the uncertainty in general business outlook. The shift in preference towards local brands among Chinese firms and price-war waged by competitors may also limit the segment’s near-term upside.

• The machine vision system (MVS)-S sub-segment is facing a similar threat as competition from Chinese machine makers intensified, particularly within the lower-end and costsensitive space. In addition, the already soft demand from mobile and personal computer (PC) segments could worsen as demand for the end-products remain sluggish following the expectations of a global economic slowdown.

• Nevertheless, the well-diversified revenue base and exposure to high-growth industries remain the company’s bright spots. ViTrox’s diverse geographical presence also might help the company to capture new customers resulting from trade diversion caused by the US-China chip war, particularly in Mexico and ASEAN region.

• Management also will be taking a longer-term view on the situation in China by continuing to provide support to its customers, aiming to capture more market share and position for the next market upcycle.

• At 33x FY23F PE, the stock is trading near its 5-year historical average of 32x. We believe the stock is fairly valued at this level.

Source: AmInvest Research - 11 Nov 2022