iPhone 12 launch was greeted with overwhelming demand thanks to Huawei’s sourcing woes and spending diversion from tourism to consumer electronics. This iteration’s super cycle is expected to boost those who are in the supply chain. Clarity in iP12’s RF configuration removes our earlier monopoly concern by Qualcomm. Upgrade sector rating to OVERWEIGHT as we expect tech sector to experience multiyear earnings growths supported by fundamental exponential demand. Our forecasts reflect that majority of the companies under coverage will deliver all-time high earnings in the upcoming quarterly results. Although we tactically position ourselves in favour of frontend players, we add Inari on top of Frontken and UWC as our top picks.

5G iPhone 12 comes in 4 variants (mini, iP12, Pro and Pro Max) with varying screen sizes and photography capabilities while other specifications including processor and 5G cellular are largely the same. iP12 and Pro models will hit the shelves on 23 Oct (pre-order started on 16 Oct) while mini and Pro Max will be available on 13 Nov (preorder on 6 Nov). Slightly lower pricings were largely within street expectations with the exclusions of power adaptor and headphones

Out of stock. Reservations for iP12 and Pro are so strong that they are reported sold out in Taiwan and US. Apple China website crashed briefly due to huge pre -order traffic. These signs imply that this iPhone iteration is likely to be another super cycle. We are not entirely surprise considering: (i) Huawei, world’s top smartphone brand in terms of shipment, is handicapped in hardware and software sourcing; (ii) travel ban to divert spending from international tourism to consumer electronics (refer to thematic report titled “Galvanizing growth for EMS” dated 24 Sep 2020).

A14 bionic chip. State-of-the-art ARM-based processor comprising of 6-core CPU, 4- core GPU, 16-core neural engine and a machine learning controller (see Figure #1). All in, there are 11.8bn (A13 chip: 8.5bn) transistors and this only possible with the most advance 5nm (A13 chip: 7nm) fabrication process. Apple outsources A14 chip production to world leading foundry TSMC and its supply chain is expected to be the prime beneficiary leveraging on the success of this gadget.

RF. There are two types of 5G RF configurations for all 4 models: (1) mmW and sub-6 hybrid which is only for US market; and (2) sub-6 only for the rest of the world. After years of hiatus due to legal dispute with Apple, Qualcomm has made a comeback by substituting Intel as one of the RF suppliers. While all iP12 models are embedded with its Snapdragon X55 modem (see Figure #2), Qualcomm only supplies RFFE for mmW (QTM525) while RFFE ICs for Sub-6/LTE/UMTS/GSM/CDMA continue to be sourced alternatively. This deviates from our earlier belief that Qualcomm will supply all-in-one RFFE that handles all cellular connectivity. As such, our earlier concern of such a threat on other RFFE vendors’ (Broadcom, Skyworks, Qorvo, etc) becomes invalid.

Frontken. Reiterate BUY with higher TP of RM4.10 (previously RM3.96) as we roll our valuation from FY21 to mid-FY22 EPS with unchanged 40x PE multiple. It has a unique exposure to world’s leading-edge semiconductor frontend supply chain which is currently in high demand on the back of national strategic and security interests. We like Frontken for its multi-year growth ahead on the back of: (1) sustainable global semiconductor market outlook; (2) robust fab investment; (3) leading edge technology (5/3/2nm); and (4) strong balance sheet (net cash of RM247m or 23.4 sen per share) to support its Taiwan semiconductor business expansions.

Inari Amertron. Following our change of view in RF mentioned above, we turn more bullish and confident on its outlook. We raise FY21-23 earnings by 17-19%, lift PE multiple from 30x to 35x and roll forward its valuation from CY21 to FY22 FD EPS, leading to higher TP of RM3.28 (previously RM2.24). Upgrade its rating from Hold to BUY. iPhone 12 super cycle is likely to boost Inari back to its glory days while opto division is expected to improve with more customer diversifications and partnerships

UWC. With its increasing exposure to semiconductor front end supply chain and solid demand for its products, we increase FY21-22 earnings by 4% and 17%, respectively. After rolling our valuation from CY21 to FY22 EPS pegged to unchanged 38x PE, our TP is lifted to RM8.88 from RM6.56. In turn, we upgrade UWC from Hold to BUY. The escalating trade intensity may eventually benefit UWC which provides a one-stop solution as more companies shift productions out of China to avoid import tariffs.

Unisem. Despite trade war and Covid-19 risks, prospects are likely to improve with the (i) closure of loss-making Batam plant; (ii) strengthening USD; (iii) gradual synergistic relationship with TSHT; and (iv) healthy balance sheet. We increase FY20- 22 earnings by 32%, 30% and 29%, respectively. As we rollover valuation from FY21 to mid-FY22 EPS on the back of unchanged PE multiple of 20x, our TP is lifted from RM3.13 to RM4.17. Maintain HOLD taking into consideration of potential share price overhang should TSHT dispose partial holdings to meet public spread requirement.

ViTrox. Following our thematic report titled “Galvanizing growth for EMS” dated 24 Sep 2020, we opine that global CM/EMS’ large scale relocation, expansion and order diversion activities are expected to create a big demand for its products. As such, tweak our FY20-22 projections higher by 7%, 22% and 41%, respectively. After we roll our valuation from FY21 to mid-FY22 coupled with higher PE multiple of 35x from 30x, our TP is higher at RM11.45 (previously RM7.17). As such, its rating is upgraded from Sell to HOLD.

With the promotions of Inari and ViTrox stock calls, we upgrade the sector rating from Neutral to OVERWEIGHT. We expect tech sector to experience multiyear earnings growths supported by fundamental exponential demand. Our forecasts reflect that majority of the companies under coverage (Frontken, UWC and ViTrox) will deliver alltime high earninigs in the upcoming quarterly results. Although we tactically position ourselves in favour of frontend players, we add Inari on top of Frontken and UWC as our top picks.

Source: Hong Leong Investment Bank Research - 22 Oct 2020