On the side-line of G-20 summit, Trump and Xi held their bilateral trade meeting. Surprisingly, Trump agreed to reverse the sanction on Huawei. We cheer this development as this relief will normalize the global semiconductor supply chain. Huawei’s fate is now dependent on the outcome of the trade deal. Separately, Unisem Batam’s closure is also a positive move but we are not overly excited now as this may entails provisions for layoffs, shutdown and impairments. Reiterate NEUTRAL on the sector but upgrade Frontken to BUY with higher TP of RM1.67.

NEWSBREAK

G-20 summit. On the side-line, leaders from world’s two largest economies held their highly anticipated bilateral meeting in Osaka, Japan. Trump and Xi agreed to hold off on new tariffs and to proceed with trade negotiations after a series of escalation to their nation’s tariff battle threatened to disrupt the global economy.

Huawei embargo reversed. Surprisingly, Trump suggested to undo the decision to ban American companies from selling products to the Huawei which Washington has described as a security risk to the US and allies. Still, Trump said the issue of Huawei will be resolved only at the conclusion of the negotiations. Trump added that he would allow sales to the Chinese telecommunications behemoth where there is not a national security problem and there will be a US meeting to fully discuss the plan regarding Huawei.

Winding up Batam. On a separate note, Unisem’s decision to discontinue its subsidiary was based on the continuing losses over the years since 2011. Despite recent investments, the business outlook remains to be weak. The management will be working in phases to scale back the operations ahead of closing the facility in Batam effective 30 Sep 2019.

HLIB’s VIEW

Win-win scenario. We cheer this development as this sanction relief will normalize the global semiconductor supply chain. As the largest telecommunication equipment vendor globally and second largest smartphone (19% market share in 1Q19) supplier, Huawei is a huge buyer of US technologies, be it chip, software or patents. US companies assessed that this restriction may impact their initial earnings forecasts up to 20%.

Implications. This truce reveals that (1) Huawei’s fate will be reliant on the outcome of the trade deal; (2) China depends on US for leading edge technologies, yet to be self-sufficient; and (3) US companies are relying on China market for growth and profitability.

Stop the bleeding. Batam has been a stubborn drag to Unisem. In FY18, Batam was generating USD3-4m revenue per month and did not achieve a breakeven even at EBITDA level. Although this shut down may aid Unisem’s bottom line, we are not overly excited now as this may entail provisions for layoffs, shutdown and impairments. Bursa has granted Unisem till 31 Dec 2019 to comply with the public shareholding spread, or else it may face the risk if being delisted.

Maintain NEUTRAL. The ban removal is a silver lining in these dull outlooks for global semiconductor sales and capital spending. We are cautiously optimistic and remain selective. We also take this opportunity to upgrade Frontken to BUY (from Hold) with a higher TP of RM1.67 after rolling forward our valuation, pegging to 25x of FY20 EPS. We expect Frontken to experience multi-year growth ahead on the back of (1) sustainable global semiconductor market outlook; (2) robust fab investment; (3) leading edge technology; (4) O&G recovery; and (5) strong balance sheet.

Source: Hong Leong Investment Bank Research - 1 Jul 2019