Highlights

• We hosted a closed meeting recently and walked away with positive takeaways.
• With a firmer outlook, Unisem is raising its CAPEX to seize the growing demand for wlCSP and flip-chip. Deviating from its initial guidance of 33% of EBITDA, FY17 new CAPEX is budgeted to reach 40% of EBITDA and this is likely to be extended into FY18.
• Majority of the CAPEX will be utilized to increase flip-chip machines to 73 units by year end, representing a 35% yoy capacity addition. Besides, a portion is also earmarked for Chengdu plant expansion.
• In FY16, Unisem Chengdu contributed circa 30% or US$95m to group?s revenue. However, it is expected to experience a breakthrough this year with double-digit growth to surpass the US$100m turnover mark. It is currently enjoying lower tax rate of 15% and only up for renewal after another 5 years.
• Its China outfit is strategically located within the center of semiconductor and electronic ecosystems at Chengdu Hi- Tech Industrial Development Zone with close proximity to both upstream (GlobalFoundries, Texas Instruments and Siemens) and downstream (Foxconn, Dell, Huawei) players.
• Since Feb 17, GlobalFoundries has started building its largest 12-inch wafer plant with cutting edge 22FDX technology in Chengdu. Total investment is expected to reach US$10bn and this bodes well for Unisem to play a pivotal OSAT role.
• Batam?s monthly turnover of US$3.5m (accounting for 15% of group?s revenue), is improving and is targeted to achieve EBITDA breakeven by year end.
• 3Q17 US$ revenue is guided to improve 5% sequentially as it is experiencing strong demand in all segments with new opportunities in rental-bike systems (Mobike), microphones and SSD / DDR power management.

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

• Update model according to latest revenue and CAPEX guidance. As a result, FY17-19 EPS forecasts are adjusted by -5.0%, -0.3% and -0.3%, respectively.

Rating

BUY ↔ , TP: RM4.32 ↓

• Besides being the major beneficiary of strong greenback, we like its (1) exposure to the automotive sector; (2) strategic presence in China?s booming tech market; (3) healthy balance sheet; and (4) rewarding dividend yield.

Valuation

• Reiterate BUY although our fair value is trimmed by 0.5% from RM4.34 to RM4.32, reflecting earnings revision, pegged to 15x of FY18 EPS.

Source: Hong Leong Investment Bank Research - 04 Oct 2017