• Dagang NeXChange (DNeX) announced that it has commenced an arbitration against CGP with regards to ICPS issuance of DNeX Semiconductor to the latter.

• Pending the arbitration result, Silterra remains in full compliant with its manufacturing licence and hence, ‘a business as usual’ for Silterra as our base case.

• Maintain a BUY recommendation on DNeX but with a lower SOP-derived TP of RM0.77 (from RM1.05). This is after we take into account the potential stake dilution in Silterra.

Arbitration with CGP

DNeX announced that it has commenced an arbitration proceeding against CGP in relation to the latter’s proposed investment in ICPS issuance of DNeX Semiconductor SB (DNeX Semicon). Recall that DNeX owned 60% equity in Silterra via its wholly-owned subsidiary DNeX Semicon. Via the ICPS, CGP will pay to DNeX Semicon amounting to RM100mn which would allow CGP to become a 33.33% shareholder in DNeX Semicon, hence effectively increasing its stake in Silterra to 60% from current 40%. The funding is necessary as part of DNeX’s portion of additional equity injection into SIlterra that is amounted to RM120mn which is required in accordance to the agreement with Khazanah prior to acquiring Silterra. However, this fundraising put Silterra at risk of breaching a condition that at least 55% of its shareholding must be owned by a Malaysian entity. A breach of this condition would trigger a possible revocation of its manufacturing licence that was issued pursuant to Industrial Coordination Act 1975.

Our View

We view this arbitration as necessary in order to avoid any interruption to Silterra’s operation. While it may jeopardise DNeX’s relationship with its partner, we are comforted with management’s clarification that their relationship remain intact and that this tussle would not affect Silterra’s long-term agreement (LTA) with its clients. Moving forward, we take business-as-usual for Silterra as our base case with some possible scenario such as (i) Malaysia’s Ministry of International Trade and Industri (MITI) reduces the shareholding condition, and (ii) DNeX seeks for other alternative source of fund to finance its additional equity contribution into Silterra. Moreover, we find that the implied value of Silterra’s 20% equity as represented by RM100mn DNeX Semicon’s ICPS is way too low against our estimate for Silterra’s EV of RM4.5bn. Should DNeX continue with the ICPS issuance, the dilution in Silterra pose a downside risk to our estimate for DNeX’s fair value.

Maintain BUY with lower TP of RM0.77

We maintain a BUY recommendation on DNeX but with a lower SOP-derived TP of RM0.77 (from RM1.05). This is after we take into account the potential stake dilution in Silterra.

Source: BIMB Securities Research - 21 Nov 2022