Highlights

• As guided, 3Q15 revenue is expected to be rather flat with 3.3% yoy growth reaching RM40.8m. While ABI is forecasted to deliver strong performance, this will largely eroded be by the sluggishness of MVS-T.

• Bullish ABI estimate is mainly contributed by: a. Orders from Mexican EMS with 4 AOI and 4 AXI orders; b. Potential orders from Penang EMS with 1 AXI and 7 AOI; c. Orders of 5 AXI, 4 AOI and 6 V810 SI and SII upgrade from another Penang EMS; d. New account wins from Europe, Japan and Malaysia; and e. Various ODM in China and Taiwan buying 1 or more AXI.

• MVS-T demand continues to be weak mainly due to sufficient installed capacity and lack of end-user demand visibility. As such, 3Q15 sales expected to be between RM3.5-5.0m, implying a yoy decline ranging from 55.8% to 69.0%.

• Channel check reveals that ViTrox’s main MVS-S client, SRM is also expecting a rather flat FY15 but expecting a more challenging FY16 coupled with very limited order visibility.

• Pioneer status was renewed for 10 years until 2024 but only expects to enjoy the full tax exemptions in FY16 once all products have complied with the new requirements. Although this was granted in June, 2Q15 was fully provisioned with 26% effective tax rate. Upon regulator’s approval, it is likely that June’s tax will be reversed in 2H15, which is estimated to be circa RM1m on top of FY15E PAT.

• Book-to-bill ratio dipped marginally below parity in May and June but rebounded firmly in July and August with 1.02 and 1.06, respectively.

• YTD global semiconductor equipment spending is flat (see Figure #1) and expected to be so for the rest of 2015. Some major players have announced CAPEX reductions, including TSMC by USD2bn and Intel by USD1bn in view of efficiency improvements rather than cut back in expansions. However, this will be cushioned by higher investments by Sony into image sensor and Samsung into its new plant in Pyeongtaek.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD , TP: RM2.95

Positives

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

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 HOLD with unchanged TP of RM2.95. Our TP is pegged to unchanged 1SD above 5-year historical average P/E multiple or 16.0x of FY16 EPS (see Figure #3).

Source: Hong Leong Investment Bank Research - 30 Sep 2015