Highlights 

After  going  through  the  heavy  industrial  and  manufacturing revolution,  China  is  entering into the semiconductor era to fuel its  economy  growth  as  well  as  reducing  its heavy reliance on others for semiconductor  components and capabilities.

According  to  McKinsey,  Chinese  officials  have  convened  a unique  task  force  charged  with  setting  an  aggressive  growth strategy.  This  group helped develop a policy framework that is targeting  a  CAGR  for  the  industry  of  20%  between  2015  and 2020,  with  potential  financial  support  from  the  government  of up to Rmb1tr (USD170bn)  over  the next 5 to 10 years.

Investments  will  be  made  by  the  National  Industry Investment Fund  and  provincial-level  entities.  These  entities  will  invest across  multiple  categories,  including  project  finance  and domestic  and  foreign  acquisitions,  as  well  as  traditional  R&D subsidies and tax credits.

Comments 

This  development  will  have  mixed  impacts  to  the  whole sector.  However,  we  think  this  will  be  a  boon  to  ViTrox  as  a semiconductor equipment  supplier.

This  enormous  investment  will  allow  China  to  create  national champions  over  the  whole  spectrum  including  research, design,  manufacturing,  assembly  and  test .  Thus,  this  may lead to  potential multi-year  high demand  of ViTrox’s products.

With  its  cutting  edge  precision  technology,  we  are  confident that  ViTrox has the upper hand over competitions and  can  win more  market  share,  especially  when  20nm  and  below  chips are becoming  an industry norm.

Its  presence  is  well-established  and  has been increasing both sales channel partners  and customers  in China.

After  achieving  its  historical  record  breaking  results  in  2Q14, 2H14  is  traditionally  weaker  due  to  seasonality.  Nonetheless, the  swift  industry  recovery  coupled  with  this  new  opportunity, we are confident  that ViTrox will continue to grow  strongly.

Risks 

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

Forecasts 

• Raised  revenue  forecast   along  with  margin  improvements  due to  economy  of  sc ale.  As  a  result, FY15-16 EPS were revised upward  by  6.7%  and  7.3%,  respectively  while  FY14  EPS remained  unchanged.

Rating  BUY , TP: RM3.17

• 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 

• Upgrade  from  HOLD  to  BUY  after  raising  our  fair  value  by 7.5%  from  RM2.95  to  RM3.17,  reflecting  our  upward  EPS revisions.   TP  is  pegged  to  1SD  above  5-year  historical average  P/E multiple of 16.2x

Source: Hong Leong Investment Bank Research - 3 Oct 2014