• We are cautiously optimistic on MPI’s near term outlook  following the slowdown in China market due to the strict COVID19 policies and higher depreciation which may hurt its earnings.  Notwithstanding that, orders from the US and Europe markets for  automotive and industrial are likely to remain solid.

• We cut our FY23F-25F earningsforecast between 14% - 23% as we  lower our sales expectations amid softer contribution from China  market, whilst increase our depreciation assumption due to  higher capex investment for new plants in China and Ipoh

• Nevertheless, MPI’s long-term outlook remains attractive  underpinned by robust demand for EVs and data centers globally, higher productions volume upon commencing operations for the  new plants in Suzhou and Ipoh, and its strong fundamentals.  Besides, we believe the easing in China’s COVID-19 policies, expected in 2023, would provide upside risks to our earnings.

• Reiterate our BUY recommendation at a lower TP of RM33.51  (from RM39.67), pegged at 24x PER to FY23F EPS of 139.6 sen.

Cautiously Optimistic on Near-term Outlook

We are cautiously optimistic on MPI’s near term outlook after the  company reported a lacklustre 1QFY23’s financial performance due to  1) a slowdown in China market (22%-25% of revenue) – which slid to losses, no thanks to strict zero COVID-19 policies and higher expenses, 2) softening demand for consumer electronics amid inflationary  pressure, and 3) higher depreciation following huge capex investment  for new plant. Nevertheless, management guided that orders from  MPI customers in Malaysia plants (M-site & S-site) that cater for the  US and Europe customers including for automotive and industrial  segment (Chart 1), are expected to remain robust.

Automotive and Industrial Segment Remain Resilient

MPI’s automotive and industrial segments growth remains resilient  (automotive: +7% YoY, industrial: +9% YoY) despite supply chain  disruption thanks to solid demand for electric vehicles (EVs) and data  centers globally. As of 1QFY23, automotive and industrial segment  contributed 41% and 35% of revenue respectively.

Expansion Plan to Cater Strong Demand from Customers

According to management, MPI new expansion plant located at Msite, Ipoh and the Suzhou Industrial Park Suxiang Cooperation Zone,  China are underway and expected to commence operations in FY23  and FY24 respectively with a full utilisation rate could push productions to double. The expansion is crucial to cater for a solid  demand especially for SiC and GaN technology within the automotive  and industrial segment as well as MEMs and RF on surging 5G adoption  worldwide.

Earnings Revision

We cut FY23F-FY25F earnings between 14% - 23% (Table 1) as we lower our sales  expectations amid persistent headwinds in China, whilst increase our depreciation  assumption due to higher capex investment for new plants in China and Ipoh.

Long-term Outlook Remains Attractive

While we are cautious on MPI’s near term outlook, long term business prospects remain  attractive premised on robust demand for EVs and data centers globally, and its strong  fundamentals. On this score, the expected easing in China’s COVID-19 policies in 2023 may  provide upside risks to our earnings forecast.

Reiterate BUY at Lower TP of RM33.51

Reiterate a BUY call on MPI though at a lower TP of RM33.51 (from RM39.67), pegged at 24x  PER (2-year average historical forward PER) to FY23F EPS of 139.6 sen.

Source: BIMB Securities Research - 8 Dec 2022