Investment Highlights

• We maintain our HOLD call on Malaysian Pacific Industries (MPI) with a lower fair value of RM28.10/share (from RM29.50/share) based on revised FY24F EPS with an unchanged target PE of 18x, which is at parity to its 5-year mean. We continue to ascribe a neutral ESG rating of 3 stars to MPI.

• MPI’s near-term outlook is expected to remain challenging due to: i) slower-than-expected recovery in China, ii) labour shortages affecting its Suzhou operation, and iii) increased costs of doing business due to electricity tariff hikes and higher labour costs.

• This is on top of economic headwinds which contribute to sluggish demand for consumer electronic products. Anecdotally, global PC (-29% YoY) and smartphone shipments (-18% YoY) declined in 4QCY22. Taking all these into consideration, we are reducing FY23F/FY24F earnings by 10%/4%.

• Separately, the construction of the SuXiang plant’s is being delayed with the production expected to commence starting August 2024 (from January 2024) while there is no change in Malaysia’s S-site expansion timeline which is expected to be completed by July 2023. The new footprint is part of the group’s strategy of strengthening its capabilities within the growing automotive & industrial segments to tap into future opportunities.

• Nevertheless, MPI’s Malaysian sites ie. M-site (full swing) and S-site (87% rate) are still running at a healthy utilisation rate. Despite the postponement some of its projects due to wafer shortage and the decline in end-customers’ demand, MPI’s pipeline remains healthy with major projects coming from the automotive segment, signifying that customers are anticipating demand to eventually recover. The reopening of borders also has helped the company engage and collaborate better with its clients.

• Nevertheless, despite the challenges, we expect MPI’s FY23F earnings to be supported by healthy demand from the automotive industry, riding on rising demand for electric vehicles (EV). The group’s core strength arises from its early move to produce silicon carbide (SiC) and gallium nitrate (GaN) power products, which have applications in EV, servers, renewable energy and consumer gadgets.

• From a valuation perspective, the stock is trading at an unattractive valuation of 20x FY24F PE compared to its 5- year historical average of 18x while dividend yields are unexciting at 1%.

Source: AmInvest Research - 28 Feb 2023