CEO Morning Brief

China Competition May Force ViTrox to Increase R&D Spending, Says CGS

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Publish date: Wed, 15 Jan 2025, 10:23 AM
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TheEdge CEO Morning Brief

KUALA LUMPUR (Jan 14): ViTrox Corp Bhd (KL:VITROX) will need to spend more on research and development (R&D) to counter intense pricing competition from China in the machine vision system (MVS) segment, said CGS International.

CGS suggested that setting up new, small-scale operations in China could enhance ViTrox’s competitiveness by increasing localised content, thereby improving its sales funnel for Tier 1 customers in the region.

“This is imperative, as China remains a main revenue driver for the group, combined with the Chinese government’s initiative to further strengthen its self-sufficiency in the semiconductor industry, through the deployment of its Big Fund 3.0,” it said in a note.

Given the potential margin pressure from rising competition, CGS has maintained its “reduce” call on ViTrox, with a target price of RM2.93.

While the stock has risen by 20% over the past three months due to optimism surrounding order recovery, the firm believes this momentum may be short-lived.

“De-rating catalysts are a slowdown in the semiconductor industry, intensifying competition from new players, and worsening [the] US-China chip war that could limit its order visibility,” said CGS.

On the other hand, CGS noted that some of ViTrox’s key Chinese customers, who had previously deferred orders due to market uncertainty, have now committed to delivering its MVS equipment, following the conclusion of the US presidential election.

Hence, CGS said ViTrox’s overall business outlook remains supported by a healthy book-to-bill ratio of 1.22 times as of September 2024, indicating strong progress in high-performance computing and artificial intelligence through key backend customers, and a gradual recovery in the electric-vehicle segment.

ViTrox shares dipped 1% or four sen to RM3.96 on Tuesday, giving the company a market capitalisation of RM7.57 billion.

The stock is already trading above its 12-month consensus target price of RM3.81, according to Bloomberg data.

Of the 12 analysts covering the stock, five have it on “buy”, four have placed it on “hold”, while three have given it a “sell” call.

Source: TheEdge - 15 Jan 2025

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