Highlights

• Share price rallied 16.5% since our last upgrade in late April, outperformed all its peers who largely impacted by the softer smartphone market. It was and still is HLIB’s top pick in the tech sector.

• Thanks to its diversified exposure to end application markets (see Figure #2), automotive segment was instrumental in driving top line growth in the seasonally softer 1Q16, despite the prolonged global inventory adjustments, especially in the smartphone market.

• Automotive is becoming a significant catalyst for the sector as more ICs are embedded for lighting, communication, safety, infotainment, etc. while hybrid and electric cars will further spur demand. According to IHS, automotive IC is forecasted to grow 6.7% yoy in 2016 compounded by 3.1% CAGR in global car production.

• Owns an edge in technology with its wafer level chip scale packaging (wlCSP) which is gaining popularity due to small form factor / miniaturization trend. Although its contribution contracted in 1Q16 (see Figure #1) due to stronger leaded demand associated to auto market, wlCSP is expected to gain traction as new smartphones are launched in 2H16. This advanced packaging usually command higher margins.

• As we expect MYR to remain weak against USD in 2H16 at RM4.00-4.20 with a FY average of RM4.05, this would be a boost to Unisem as revenue majority dominated by USD.

• Healthy balance sheet with a net cash position of RM65.8m as of 1Q16. Prudent CAPEX policy allows room for dividend which is projected with a yield of 5.4% for FY16.

• 2Q16 revenue (in USD) was guided to gain by 5-10% qoq, leading to PAT expectation ranging RM40-45m.

Catalysts

• Improved consumer confident and spending.

• Technological advancement and creation of new electronics.

Risks

• FOREX, weak consumer demand, labour wage hike and continuous drag by Batam’s performance.

Forecasts

• Fine-tune revenue and USD/MYR assumptions which led to upward revisions of FY16-17 EPS by 2.6% and 10.2%, respectively.

Rating

• TRADING BUY TP: RM2.81

• Positives – Strong greenback, proliferations of smartphones, tablets, wearable techs and hybrid / electric automobiles.

• Negatives – intense competition from Taiwanese peers, higher input costs, challenging economic outlook which will eventually hampers consumer confident and stalemate in electronics innovation.

Valuation

• Reiterate TRADING BUY after raising our TP by 12.9% from RM2.49 to RM2.81 reflecting the upward EPS revision and rolled forward valuation. TP is pegged to 13x of FY17 EPS.

Source: Hong Leong Investment Bank Research - 11 Jul 2016