The briefing validates our bullishness and expects another all-time high quarterly earnings. Taiwan’s order is so robust till it has finally embarked on capacity expansion and is technologically ready to support the upcoming 3/2nm. SG’s semi is expected to see flat volume but lifted by strong margin. O&G’s prospect is not favourable but still expects to be profitable. Reiterate BUY with unchanged TP of RM4.10, pegged to 40x of mid-FY22 EPS. We like its unique exposure to world’s leading-edge semiconductor frontend supply chain.

Post briefing, we remain optimistic of Frontken’s business outlook and expect it to achieve another record high quarterly performance. Key takeaways as below:

Taiwan. Expect higher volume from one of its main customers who is advancing to 4nm or 5nm+ equivalent. 3nm is expected to be a long node with higher density and see up to 30% less power consumption vs 5nm. 3nm risk production is planned for next year followed by volume production in 2H22. Currently, AGTC has 3 months order visibility and still robust supported by unexpected high volume from 5nm. Price reduction roadmap is already in place although pricing pressure has subsided when customer’s margin is high. Efficiency improved significantly when handling same parts (process familiarity) with volume. Thus, 5nm margin is better than in the past. AGTC is securing few pieces of land near exiting facility for expansion. Expansion size has yet to be determined. Construction is targeted to commence next year in line with 3nm commercial production and will also support 2nm. The new plant will begin with small capacity and more automation to yield consistent high-end results. Existing facility is equipped with semi-automation (for 7/5nm), Class 10 cleanroom and can support up to 1nm. Some orders that were previously lost due to pricing have returned, as peers were not able to meet the required quality. ALD tool handling turnaround time has improved significantly (previously 1 month) supported by 4 teams despite complex process which require multiple steps.

Singapore’s semi. Qualified for new parts for MNC with fab in China. Logistic issue during pandemic lockdown period and early Oct due to Golden Week holiday. Output was impacted by labor shortage and now it is partly mitigated after bringing staff back from Malaysia. Volume is flat but lifted by strong margin. Memory customer will continue to expand despite volatile and dismal memory prices.

SMIC Blacklist. Negligible Impact as Volume Is Extremely Small, Only Requires Coating.

Ultra Clean’s establishment in Penang is to support Lam Research and not expected to compete in cleaning business.

O&G. Prospect Is Not Favorable and Continue to Lag But Still Expect It to be Profitable (

Travel curtailments have halted several project developments including anodization and new parts cleaning/degreasing (now on ad-hoc basis). M&A is also delayed.

Forecast. Unchanged.

Reiterate BUY with unchanged TP of RM4.10, pegged to 40x of mid-FY22 EPS. We justify this valuation based on its 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 (7nm and below), and (4) strong balance sheet (net cash of RM247m or 23.4 sen per share) to supports its Taiwan expansion.

Source: Hong Leong Investment Bank Research - 27 Oct 2020