• We are positive with DNeX’s strategy to venture into manufacturing of wafer for emerging technology as it will boost both ASP and utilization rate at Silterra. This should underpin Silterra’s full recovery in 2H24 after posting six consecutive quarterly LBT since 4Q22, dragged by weakness in core technology for PC and devices.

• The plan to build a new 12-inch fab with Foxconn in Malaysia could materialize soon as it may benefit from NSS incentives allocation that worth RM25bn as announced by the government recently.

• Maintain DNeX as a BUY with unchanged TP of RM0.58, SOP-derived valuation. Key catalysts to stock price include: (i) Silterra’s earnings turnaround and (ii) incentives from government for the new wafer fab facility.

Proxy to EV and AI through Emerging Technologies

We are encouraged with Silterra’s potential turnaround as it embarks on new emerging technology products such as Silicon Photonics (SIPh) and Micro-electomechanical System (MEMS) to boost its average selling price (ASP) and utilisation rate. These technologies are used for AI, EV and life science. Note that emerging technology has contributed to circa 20% of its revenue in 1Q24 and the company is targeting to grow this to 40%. Towards this end, the company has undergone qualification process with various potential clients. As such, management anticipates that Silterra is poised for full recovery in 2H24. Recall that it has suffered losses since 4Q22 mainly due to weak demand in core technology (i.e. PC and devices) which led to lower wafer shipments. This was exacerbated by lower ASP as the company offers some discount to lock-in more volume from clients.

Potential Beneficiary of NSS Incentives

On the long-term perspective, we are optimistic with DNeX’s growth strategy as it has signed an MoU with Foxconn to build a new 12-inch fab facility in Malaysia. This facility is expected to produce 40k wafers/month encompassing 28nm and 40nm technologies. While the plan was announced 2 years ago, it faced some setback with regards to some incentives that it seeks from the government. Note that the government has recently announced RM25bn allocation to support the newly launched National Semiconductor Strategy (NSS) aimed at catapulting Malaysia at the top in the semiconductor industry. Among others, the government is looking to attract foreign direct investment for wafer fabrication which we believe it bodes well for DNeX-Foxconn partnership.

Maintain BUY on DNeX with TP of RM0.58

We maintain our BUY call on DNeX with unchanged SOP-derived TP of RM0.58 (refer table 1). This implies 1x FY24 P/B and 13x FY24F P/E. We like DNeX due to (i) strong and capable management team, (ii) promising prospect in fast-growing semiconductor sector, (iii) deep expertise in IT, digitalisation, and system integration, and (iv) further upside in O&G development projects.

Source: BIMB Securities Research - 17 Jul 2024