This article summarises our analysis and evaluation of MI’s latest quarter results. Our write-up focuses on 3 key areas:

1. MI’s latest financial performance;
2. MI’s consolidated financial position, post merger with Accurus Scientific Co Ltd (“Accurus”); and
3. Key updates from the 4 August 2021 analyst briefing.

We initiated coverage on the Group on 13 January 2021.

KEY SUMMARY

1. Strong performance from the SEBU and SMBU with a record-high revenue and profit in the latest quarter. The Group’s financial position remains solid as before despite a slight increase in debt position.

2. Interesting prospect ahead as the Group is i) launching Mi50 in 4Q2021, ii) expecting mass order for their new fully integrated Mi Series with automation capabilities in early 2022, and iii) targeting several acquisitions relating to their SEBU and SMBU (totaling RM1.2bn) over the next few years. In comparison, their current market capitalization is about RM3.5bn.

3. A potential multi-bagger based on its ambitious 10-year roadmap, strong execution track record, and the expected tailwind from the semiconductor supercycle.

UPDATE ON LATEST QUARTER (APR – JUN) RESULTS

To briefly recap, MI’s business can be segregated into two main units i.e. semiconductor equipment business unit (“SEBU”) and semiconductor material business unit (“SMBU”).

SEBU is involved in the manufacturing and sales of semiconductor manufacturing equipment paired with smart factory automation solutions, provision of maintenance services and technical support, and the sale of related spare parts and components.

SMBU is involved in the manufacturing and sale of solder spheres, a key assembly and packaging material in semiconductors. Further details can be found in our previous article.

We dissected and analyzed MI by the two business units separately for a clearer picture of the Group’s latest performance. The table provides a breakdown of MI’s performance by SEBU and SMBU with a comparison to the previous year and previous quarter results.

Semiconductor equipment business unit (“SEBU”)

During 2Q2021, the SEBU recorded strong growth in terms of top & bottom line compared to q-o-q and y-o-y. The achievement of RM90.7m and RM29.6m in quarterly revenue and profit was in fact a record-high performance since the incorporation of MI. The strongest quarter results recorded previously was in 4Q2019 with revenue and profit of RM68.2m and RM17.5m respectively.

The management indicated that the strong results can be attributable to the strong demand from its China and Taiwan-based clients, following the increased deployment of 5G-enabled phones, electronic for wireless and telecommunication applications.

The increased top-line and gross profits outpaced the Group’s increasing operating expenses. The higher operating expenses were due to MI’s aggressive expansions of SEBU in Taiwan, Korea and China as well as the SMBU’s new plant in Ningbo, China.

The new plant in Ningbo which is 2.5x bigger than the existing production plant in Tainan, Taiwan is scheduled to be commercially operational in early 2022 (after some delays). The new plant is expected to take up to 3 years to gear up to its full capacity.

Semiconductor material business unit (“SMBU”)

The table below compares Accurus’ / SMBU’s 2021 estimated annualized results to the previous years i.e. FY2018 and FY2019. FY2020 results were not available.

Based on the annualized full-year results, we expect SMBU to close the year at a record-high as revenue continues to improve since FY2018. The SMBU performance may outperform our full-year revenue estimate of RM132m as the management recently indicated the following (during the recent briefing):

“…the existing plant in Tainan is currently running beyond full capacity …our production workers are working extra hours to fill up clients’ orders.”

The management expects SMBU pretax profit margin to improve in upcoming quarters given the higher average selling prices. This is following a renegotiation with their customers due to a spike in raw material prices. The key raw materials used in the production of solder spheres are tin, silver, and copper.

The management deemed the latest quarter margin of 10.2% below expectation, compared to its 15% – 20% internal target.

LATEST FINANCIAL POSITION (post-consolidation of Accurus’ balance sheet)

Based on the above, the Group’s financial position appears to remain solid as before despite the slight increase in debt. During the quarter, MI’s net profit was RM26m versus a negligible finance cost of RM286k.

However, given the Group’s aggressive expansion plans (organic and inorganic), the business has been recording deficits in free cash flow (“FCF”) since its 2018 IPO. We expect the scenario to remain for the next 3 years or more.

LATEST INVESTMENT OF 22.6% STAKE IN TALENTEK

On 5 August 2021, the Group announced its latest investment of RM29.3m / 22.6% stake in Talentek Microelectronics (Hefei) Limited (“Talentek”). Talentek’s ultimate holding company is Hon Hai Precision Industry Co. Ltd. (aka Foxconn) who holds a 59.5% stake. Based on disclosure, Talentek was incorporated in China in June 2017 and commenced its business operations in January 2018.

Talentek is engaged in:

• Electronic technology and software technology development;
• Production and sale of electronic products and integrated circuits;
• Design, R&D, testing, sale of electrical equipment, communication equipment and automation equipment; and
• Agent of import and export for various commodities and technologies.

With a stake in Talentek, MI’s management is expecting collaboration between MI Equipment China and Talentek on the development of automated test equipment and test handler as well as providing test services to customers in China. The move should reduce the time for MI to penetrate the China domestic ecosystem.

KEY UPDATES FROM THE RECENT ANALYST BRIEFING

1. The Group remains focused on expanding its SEBU, underpinned by its flagship Mi Series. In 4Q2021, the Group is expected to launch the new Mi50 die sorter machine.

2. The Group shipped two fully integrated wafer-level die sorter machines to a Chinese and a Taiwanese customer during 2Q2021. These are newly designed systems utilizing the Mi Series combined with automation capabilities of the Oto and Kobot series. The Group has received favorable feedback from its clients and expects this to translate to mass orders in FY2022.

3. As part of MI’s 10-year (2019 – 2028) Business Roadmap, the Group plans to add two new business units within the next 3 – 5 years. The 3rd unit would be on semiconductor manufacturing and specific process services (by 2024) and the 4th on technology intensive commercial products (by 2026). Further details will only be disclosed at a later stage.

4. The Group is targeting up to RM1bn worth of acquisitions in China, Taiwan and Korea to expand the SEBU’s portfolio. In addition, it has also set aside up to RM180m to acquire two chemical companies in the EU and US, which have exposure to the automotive and semiconductor high-end package sector that will complement its SMBU.

All-in, the Group is setting sight on acquisition deals of up to RM1.2bn.

5. The management further indicated plans to expand its solder sphere business in the Southeast Asian market through its Batu Kawan plant.

MANAGEMENT OUTLOOK

The management is optimistic about the Group’s prospects. They expect the strong demand to sustain as China progresses toward building its own semiconductor ecosystem and reshuffling the global semiconductor supply chain following the US‐China decoupling.

An extract of the management explanatory notes, as follows:

“…. having the SEBU and SMBU integrated and with ready presence in strategic countries where key IDMs and OSATs operate, the Group is now well‐positioned to benefit from the growth of cloud computing, AI, IoT, EV, and 5G, by offering a total solution to the customers.

In the semiconductor industry, the winner will take all is the common phenomenon. The Board believes the strategy to upsize the Group business by organic and inorganic expansion is the hard truth of success.

Given this, the Group will continue its effort to develop new technologies in the semiconductor industry through collaborations with customers and acquisitions of synergetic business partners.”

CLOSING THOUGHTS

As mentioned and elaborated in our previous articles, we reiterate our optimism for the Group and the industry as a whole. We see MI as a potential for a multi-bagger given its ambitious 10-year roadmap, strong execution track, and the expected semiconductor supercycle for the next 10 years.

As before, we refrain from providing an update on MI’s valuation in the near term. We prefer to only do so with better clarification in the next few quarters.

Nonetheless, as guidance on MI’s valuation, a 30x – 40x PE based on MI’s next 12 months’ results would value MI’s share price at the range of RM4.36 – RM5.82. An upward revision to our previous estimates taking into account the significantly better results from SEBU. We made a rough estimate that the SEBU and SMBU were to contribute a full-year net profit of RM100m and RM20m respectively over the next 12 months.

Having said the above, our key concern on the Group lies with its aggressive expansion plans, specifically on the spree of inorganic acquisitions. A synergistic failure e.g. disagreements between the new and existing management could be detrimental to the Group’s business and prospect. A risk that may go unnoticed for months/years before is all too late...