Post-briefing, management stressed that it will improve its yield in the coming quarters following some unexpected interruption in the 1H. We cut FY24F earnings by 10% nonetheless to account for a weaker 1HFY24 due to production yield loss caused by electricity-related disruptions. Meanwhile, we also include new contribution from the China JV, which raises our FY25- 26F core earnings by 1-5%. Maintain Outperform with a higher TP of RM3.73 based on 35X FY25 EPS.

• Soft season ahead. 2HFY24 is traditionally weak as annual flagshipphones are released annually in Sept/Oct. In the past 5 years, 1Hresults made up 54%-61% of the full-year numbers (with the exceptionof FY21 due to a delay in iPhone 12 release). In addition, the 1Hresults would have been closer to our full-year expectation if notbecause of the i) electricity supply glitch, ii) yield loss, iii) startup costand iv) upgrade costs for new products. Given the lacklustre demandfor iPhone 15 coupled with the seasonally soft quarters, we expect tosee weaker radio frequency earnings in the 2H on lower utilization levelof 80% compared to 90% in the prior quarter.

• Working on multiple new projects. In contrast to the previousguidance of RM100m-150m for high-speed transceivers and flashmemory projects, management has toned down expectation as it hasyet to move to turnkey model compared to the current consignedmodel as it is in the midst of improving its efficiency. Following thesuccessful audits from customer G, the group targets to generate smallvolume of 800G transceivers in 1H 2024 and will run on a high volumemanufacturing soon for 400G transceivers. Management also guidedthat 4 production lines for memory chips are expected to be ready byJune 2024 and will ramp up on an aggressive basis.

• Eyeing small maiden contribution from China JV. Progress at the54.5%-owned subsidiary, Yiwu Semiconductor International Corp(YSIC) looks to be slower than expected as management cited aslowdown in China’s OSAT as the main reason. It expects to rake in asmall contribution of RMB30m in FY24 as it sets to be operational bymid-2024. Despite it being a huge potential market with more than 92foundries in the pipeline, pricing is also competitive with the groupguiding for a net margin of 10%-15% compared to the current grouplevel of 22%-23%. Qualification of the new plant has been completed.Under the plan, the new plant offers i) Chip-Scale Packaging, ii)System-in-Package, iii) Wafer-Level Packaging and iv) Ball Grid Array.Management has set a target of RMB1bn sales for the new plantbefore considering any plans to unlock the value.

Source: PublicInvest Research - 15 Mar 2024