Results 

Superb  3Q14  propelled  9M14  revenue  to  RM752.9m  which was  translated  into a core net profit of RM38.3m , surpassing HLIB  and  street’s  full  year forecasts by  31%  and  29%, respectively  if annualized.

Deviations

• Better-than-expected  gross margins due to product mix.

Dividends

• Tax  exempt  interim  dividend  of  4%  or  2  sen  per  share (3Q13: none)  with an ex -date on 13 th Nov.

Highlights 

Solid  3Q14  earnings  chiefly  due  to  strong  demand  of  new smartphone  launches  as  well  as  proliferation  of  4G technology in China.

Resilient  demand  in  bumping,  8in  and  12in  wlCSP  and flipchip has led the following  capacity expansions: -  Increased  capacity for wlCSP in 3Q by 20%; -  Bumping  in  Malaysia  and  Chengdu  by  25%  and  33%, respectively  in  1H15  wi th  potential  of  further  addition  in 2H15. This expansion  requires  long leadtime; and

Demand  for  power  management  chips  also  strengthened  to support the emerging  technology of Internet  of Things (IoT).  

Automotive  tire  pressure  management  systems,  MEMs microphone  and  pressure  sensors  for  smartphones  continue to be steadily increasing.

Although  demand  momentum  extended  into  Oct  and  Nov, Unisem  expect  sales  to  be  flat  to  -5%  qoq  in  4Q14  to  be cautious on Dec in view  of year-end  inventory  adjustments.

Overall  utilization  rate  improved  to  70%  although  wlCSP  / flip-ship  product lines were  running  at more than 80%.

CAPEX  guidance  to  be  20%  -  30%  of  EBITDA  mainly  into wlCSP and flip chip.

Unisem  Test  located  in  Sunnyvale  will  be  scaled  down  with immediate  effect  and  cease  all  production  by  1Q15  due  to the  anticipation  of  significant  reduction  in  business  volume. 60  employees  will  be  made  redundant  and  ~RM580k will be provisioned  in 4Q14.

Catalysts   

• I mproved  consumer  confident.
• Technological  advancement  and creation  of new electronics

Risks

• FOREX ,  weak  consumer  demand,  continuous  drag  by Batam’s performance.

Forecasts

• Adjusted  forecast  based  on  deviations above  leading  to upward  revision  of  FY14-16  EPS  by  74.9%,  53.2%  and 42.5%, respectively.

Rating

BUY, TP: RM2.02

• Positives  –  Appreciation  of  greenback,  proliferations  of smartphones,  tablets ,  wearable  techs   and  hybrid  /  electric automobiles.
• Negatives  –  intense  competition  from  Taiwanes e  peers, higher  input  costs,  challenging  economic  outlook  which  will eventually  hampers  consumer  confident  and  stalemate  in electronics innovation.

Valuation

• Reiterate  BUY  after  raising  our  fair  value  by  22.4%  from RM1.65 to RM2.02  reflecting the upward  earnings  revision.
• Valuation is  pegged  to  1.5SD  (previously  1SD)  above 5-year historical  average  P/B  of 1.30x (previously 1.13x) FY15 book per  share.  This  is  also  in  line  with  the average  FY15 P/B of its regional peers

Source: Hong Leong Investment Bank Research - 31 Oct 2014