• We are optimistic on Malaysian Pacific Industries (MPI)’s future earnings prospects, driven by robust demand for electric vehicles (EVs), as well as expansions of the data centers and Industry 4.0. On this note, we anticipate MPI’s core profit to grow at a 3-year CAGR of 20% from RM189.9mn in FY24 to RM331.2mn in FY27F.

• We believe MPI’s future earnings will also benefit from Infineon’s expansion of the Kulim 3 semiconductor fab, as well as improving sales in China, which are expected to enhance the utilization rate of its Carsem Suzhou facility.

• We resume coverage on MPI with a BUY call at new TP of RM40.36, implying a PER of 38x (average of 3-year historical forward PER) on FY25F EPS of 106.2sen.

Strong Automotive and Industrial Segments to Drive Earnings

We are positive on MPI’s business outlook, fuelled by robust global demand for electric vehicles (EVs) and the expansion of data centers and Industry 4.0. We expect strong growth in these areas to significantly benefit MPI’s Automotive and Industrial segments, leading to core profit growth of a 3-year CAGR of 20%, reaching RM331.2mn in FY27F from RM189.9mn in FY24.

Strategic Venture into Emerging Technologies

We believe MPI has well-positioned itself as a leader in the semiconductor industry by continuing to invest in advanced packaging technologies i.e. Gallium Nitride (GaN) and Silicon Carbide (SiC) within the industrial and automotive electrification segments. The company has set a dedicated manufacturing space and aims to commence high-volume production in FY25F. This strategic move will enable MPI to capitalize on growth in key markets like renewable energy, industrial automation, and high-performance computing, thereby strengthening its competitive edge and revenue prospects.

Potential Beneficiary of Infineon’s Expansion, In Our View

We anticipate MPI to benefit from Infineon Technologies AG’s expansion of its Kulim 3 semiconductor fab, which aims to become the world's largest 200mm silicon carbide (SiC) power fabrication plant over the next 5 years. Given MPI’s expertise within the SiC technology (investment since 2020), we believe the company will be able to leverage on Infineon’s expansion, unlocking new business opportunities and increasing market penetration in the future.

Resume Coverage on MPI with a BUY call at new TP of RM40.36 We resume coverage on MPI with a BUY call at a target price (TP) of RM40.36. Our TP suggests a PER of 38x (average of 3-year historical forward PER) on FY25F EPS of 106.2sen. We believe this is fair given its strong earnings growth potential, particularly in the automotive and industrial sectors, coupled with its competitive advantage over its peers.

MPI Trading at a Huge Discount Despite Strong Growth Prospects

In FY21, MPI’s PER valuation rose above its 3-year average of 38x, climbing from 17x at the beginning of the year. The surged in valuation was driven by strong core net profit performance amid strong demand for electrical and electronics products across all segments i.e. wearables, smartphones, PCs/laptops, cloud services, and data centers, largely fuelled by the COVID-19 lockdown, as electronics devices became the enabler during this period.

MPI achieved a remarkable core net profit growth of 106% YoY in FY21, reaching RM273.8mn, and continued the upward momentum in FY22, with a further 15% YoY increase to RM314.8mn. The strong financial performance over FY21-22 was underpinned by significant revenue growth within its Industrial (FY21: +40% YoY, FY22: +35% YoY) and Automotive (FY21: +36% YoY, FY22: +39% YoY) segments, benefiting from heightened demand for cloud computing and rising EV sales, subsequent to governments’ various incentives for the EVs.

However, MPI’s core net profit dipped by 89.7% YoY to RM32mn in FY23 due to the normalisation of consumer electronics sales, weaker global demand for semiconductor products amid inflationary pressures, and rising operating expenses due to the hike in electricity tariffs. As a result, EBITDA margin contracted by 9.8 ppts to 20% in FY23 from 29.8% in FY22. Following the decline in FY23’s core net profit, MPI’s PER fell below its 3- year average of 38x and traded at 29x (-1SD).

Notably, MPI’s core net profit rebounded in FY24, reaching RM189.9mn, nearly 6-fold from FY23, propelled by higher contribution from the Industrial (+8% YoY) and PC/Notebook (+13% YoY) segments. Although core net profit remains below the exceptional levels of FY21 and FY22, the financial performance has surpassed pre-COVID levels. Nevertheless, MPI continued to trade at discount, with its PER at 29x (-1SD), despite the significant improvement in FY24 numbers.

Looking ahead, we expect MPI’s core net profit to grow by 11% YoY to RM211.2mn in FY25F, with further growth of 32% YoY to RM278.7mn in FY26F. The growth is expected to be driven by recovering demand across key markets, normalisation of supply chain constraints, higher utilisation capacity, a favourable product mix shift towards highermargin segments, and better operational efficiencies. Moreover, we believe MPI’s strategic investments in advanced packaging and new technology nodes are set to enhance its market position, supporting sustained profit growth.

Given MPI’s robust prospects, we believe the company’s current 12-month forward PER of 23x is largely at discount and merits a higher valuation. This is due to its strong earnings growth potential, especially in the automotive and industrial segments, along with its competitive advantage and the likelihood of outperforming both the broader market and its peers (refer to Chart 3).

MPI’s Earnings Prospects Remain Alluring, with a 3-Year CAGR of 20% over FY24-27F

We expect MPI’s core net profit to grow at a 3-year CAGR of 20% to RM331.2mn from RM189.9mn over FY24-27F, and our optimistic views on MPI’s business prospects are further elaborated as follows:

• Sustainable growth in the automotive segment. MPI has established a formidable presence in the automotive semiconductor market, with this segment now constitutes around 41% to its topline, up from 24% since FY16 (refer Chart 4). We believe this strategic shift is going to drive a sustainable growth for the company, as the automotive industry increasingly relies on advanced electronics and is expected to expand, fueled by the rapid adoption of electric vehicles (EVs) and autonomous driving technologies. MPI is riding on the wave by ramping up its System-in-Package (SiP) sensors for automotive and safety applications, while also developing cutting-edge sensors, particularly those focused on EV innovations such as the wettable flank technology sensors. On this note, we expect MPI’s Automotive segment to grow by a 3-Year CAGR of 5% over FY24-27F.

Our optimistic view on MPI’s automotive segment is further supported by robust global electric car sales projected for 2024, expected to grow by 21% YoY, reaching 16.6mn units from 13.7mn units in 2023, according to the International Energy Association (IEA). The strong growth will be driven by the China’s market (+25% YoY), representing 61% of the global market share, followed by the US market (+21% YoY). Similarly, the European market is also expected to grow in 2024, albeit at a moderate pace of 6%, down from 19% in the previous year. According to IEA, the modest growth in the electric car sales in 2024F is due to tightening CO2 targets which will come into effect only in 2025.

• Power management chip packaging expertise. Following the booming and expansion of data centers and Industry 4.0, we expect MPI’s Industrial segment to grow by 4% in FY25F and 7% in FY26F, further solidifying its market position as demand for efficient power management solutions rises. To meet increasing demand for AI servers, MPI is currently ramping up chip embedded technology at its Carsem-S site and advancing multiple pipeline projects in Copper (Cu) clip technology. For Micro-electromechanical Systems (MEMS) and sensors, the company is also expanding into high end applications, including special coating on die technology and developing both hermetical and non-hermetical ceramic packages for gyroscopes and accelerometers, with production targeted by 2025. We believe these should retain the industrial segment revenue contribution of over 30% to MPI. Our positive outlook on MPI’s Industrial segment is further supported by Technavio’s forecast for the global data center chip market, which is projected to grow at a 5-year CAGR of 2.4%, rising from USD15.6bn in 2023 to USD17.6bn by 2028F.

• Strategic venture into emerging technologies – GaN and SiC. MPI's proactive investment in emerging technologies, such as Gallium Nitride (GaN) and Silicon Carbide (SiC), underscores its commitment to stay at the forefront of semiconductor innovation. These materials are known for their superior efficiency and performance in high-power and high-frequency applications, making them highly attractive for next-generation power devices. According to Mordor Intelligence, the consumer electronics industry is the largest enduser of GaN semiconductors as of 2023, accounting for 30% of the total market share (refer to Chart 7). Similarly, SiC semiconductors are predominantly used in the consumer electronics, representing 57% of the market, as reported by MRFR Analysis (refer to Chart 8). In 2023, automotive industry is the third largest market for GaN semiconductors (18%) and the second largest for SiC (18%). However, the automotive sector is expected to experience the highest 4-year CAGR growth over 2023-2027F as compared to other industries, with GaN technology for the automotive projected to grow at 24%, reaching USD1.6bn from USD680mn, while SiC technology anticipated to grow at 22%, reaching USD331.7mn by 2027 from USD152.1mn in 2023. MPI has expanded dedicated floor space and production lines to support these advanced technologies, with expectations for some products to enter high volume manufacturing (HVM) in FY25F. By diversifying its product portfolio into GaN and SiC, we believe MPI is tapping into lucrative and high-growth markets including renewable energy, industrial automation, and high-performance computing, thereby strengthening its competitive edge in the future.

• Beneficiary of Infineon expansion, in our view. On 8th of Aug, Infineon Technologies AG announced to invest an additional RM30.1bn (€5bn) to expand its Kulim 3 semiconductor fab, aiming to address the growth in power semiconductors and decarbonization. This expansion, which follows an initial €2bn investment, will create the world's largest 200mm silicon carbide (SiC) power fabrication plant for the next 5 years. The project is also expected to generate a total of 1,500 high-value jobs and is aligned with Malaysia’s National Semiconductor Strategy (NSS) and Green Investment Strategy (GIS), enhancing the country’s position in the global semiconductor supply chain. We believe this should benefit MPI given its expertise in SiC technology, hence leveraging this expansion for increased business opportunities and market penetration.

• Diversified customers and markets – advantages for MPI. MPI’s diverse client base and strategic market positioning in the semiconductor industry present several advantages, in our view. We believe MPI stands to benefit from long-term technology drivers, such as power technologies (SiC, GaN), and automotive technologies (electrification, sensors, safety) across the US and EU and RF (5G) in Asia. Capitalizing its Malaysian base, MPI can serve as a reliable supply hub for the US and EU, while its Suzhou facility is well-equipped to meet China's localization demands, allowing the company to seize growth opportunities in both regions amid shifting global supply chain dynamics. For instance, Carsem Suzhou has been actively developing 5G test technology and is already engaging with major 5G players in China for front-end modules (FEM) used in 5G base stations.

• Solid balance sheet and healthy cash flows – MPI is well-positioned to navigate potential challenges, backed by a solid balance sheet and strong financial resilience. The company boasts a net cash position of around RM1bn, reflecting its prudent financial management. MPI's healthy cash flows, driven by robust operations and disciplined cost control, has resulted in strong free cash flow (FCF), with a 3-year average of RM139.7mn (FY22-FY24). We believe this solid financial footing provides the flexibility to absorb any negative surprises, such as market downturns or currency fluctuations, without compromising growth plans. With ample liquidity, MPI is wellprepared to sustain its long-term strategic initiatives and capitalize on future opportunities.

• Consistent dividend payout. MPI does not have a formal dividend policy, but it has consistently rewarded shareholders with annual DPS ranging from 23sen to 35sen. This translating to payout ratio between 20% to 50% (refer to Chart 10), with the exception of FY23 (payout ratio of >200%), due to lower earnings reported. Given MPI’s solid balance sheet, strong expected ROE and FCF over FY25-27F, we expect the company to continue offering solid DPS of around 30sen to 40sen, yielding 1.5% at current share price.

• Solid FY25F financial performance expected ahead. We expect MPI’s core profit to grow by 11% in FY25F to RM211.2mn from RM189.9mn in FY24 driven by robust demand for its edge AI-related products in the industrial segment, and a positive longterm outlook for the EV market in China – expected to boost utilization rates at Carsem Suzhou – of which will offset the risks of weakening USD and slower demand from the European car manufacturers. According to Frost & Sullivan, China’s EV shipments are expected to reach 21.9mn units by 2028, growing at a 5-year CAGR of 19.7% (refer Chart 12), further support our bullish stance. MPI’s EBITDA margin has shown improvement since 4QFY23, and has remained stable above 20% since then (refer to Chart 13). We expect this positive trend to continue as MPI continues to optimize its product mix and enhance manufacturing capabilities. Nevertheless, the potential impact of a weakening USD, is still a key risk to be watched as most of its revenue is denominated in USD, hence the direct bottom line impact should USD weakening (refer to Chart 14).

Resume Coverage on MPI with a BUY Call at a TP of RM40.36.

We resume coverage on MPI with a BUY call at a target price (TP) of RM40.36. Our TP suggests a PER of 38x (average of 3-year historical forward PER) on FY25F EPS of 106.2sen. We believe this is fair given its strong earnings growth potential, particularly in the automotive and industrial sector, coupled with its competitive edge against peers. Following the recent sell-off among Malaysian technology stocks, we believe this presents an enormous opportunity for investors to accumulate the stock at a good bargaining price.

ESG Exposure and Score

We assessed MPI ESG’s initiatives based on our framework which evaluate its overall ESG risk. The score summarizes how well a company’s ESG risks are being managed. We hold MPI an overall ESG rating of 4.3 out of 5.0, which falls in the rating band of “Best”

Source: BIMB Securities Research - 3 Oct 2024