Highlights

Through channel-checks, we believe that ViTrox will be achieving its historically strongest quarterly sales in 2Q14. In previous report, we mentioned that by taking the low-ends of its product forecasts, 2Q14 sales could potentially surge by 74.6% yoy to RM49.5m.

Our findings revealed that its MVS-S single largest customer, SRM, is benefiting from the solid global semiconductor market demand and staged a strong comeback. SRM’s 2Q14 volume shipments more than doubled yoy, while 3Q14’s order book continues to grow healthily with bookings visibility up to Aug 2014.

This augurs well for ViTrox as MVS-S is one of the most important components in SRM’s IC test-handlers and yields the highest gross margin amongst ViTrox’s product portfolio.

Recall that, although ABI (AOI and AXI) expanded by 35% yoy, 1Q14 revenue contracted by 41% qoq. Historical data showed that this is attributable to seasonality softness and touted to be the major sales driver in 2H.

It saw strong ABI demand from US contract manufacturers (e.g. Plexus, Jabil, Flextronics and Benchmark) as they were already operating at maximum utilization rate. Also, it managed to win several accounts in 1Q14 including Intel, Foxconn, Kingston, Venture, OKI and Fabtronic, which are expected to contribute in coming quarters.

In the last analyst briefing, management acknowledge the challenges in machinery parts sourcing. In order to mitigate this risk, it is stocking up essential parts as well as building orders in advance based on customers’ projections.

Referring to SEMI May preliminary data, semiconductor equipment industry’s book-to-bill ratio was 1.0, sustaining above parity level since Sept 2013.

Global Industry Analysts projected the global market for surface mount technology (SMT) equipment to reach USD5.3bn by 2018, driven by recovery in electronics and semiconductor industries, new products and the need to upgrade older production lines. Furthermore, Asia-Pacific represents the largest market worldwide, while Latin America is projected to emerge as the fastest growing marking with a CAGR of 7.2% from 2010 to 2018.

Risks

FOREX, downturn in semiconductor demand and equipment spending, patent infringement and technology imitation.

Forecasts

Maintained.

Rating

BUY, TP: RM2.78

Positives - undisputed 3D-AOI and AXI technology leader, great potential in winning more market share in the advent of global semiconductor recovery.

Negatives - MVS-S sales is dependent on single customer, majority of sales are non-recurring, highly competitive 2D-AOI market and prone to rapid advances in technology.

Valuation

Reiterate BUY with unchanged TP of RM2.78, pegged to 1SD above 5-year historical average P/E multiple of 16.2x (see Figure #1) reflecting its solid exponential growth ahead.

Source:Hong Leong Investment Bank Research - 27 Jun 2014