What’s new

• Unfazed by the tech war. As checked with the management, Frontken’s business outlook remains intact despite recent disruption arising from the “tech-war” between the US and China. We gather that its biggest client continues to be busy amid loss of order from one of the biggest Chinese smartphone makers in the world.

Comment

• No major disruption in smart device segment. We understand that the outlook of smart devices remains optimistic and resilient after having a series of tussles between China and the US. Demand projection for 5G related devices is relatively strong on the back of prolonged COVID-19 pandemic, implanted online communicating behaviour, and quick adoption of 5G infrastructure in the world. Meanwhile, Frontken’s biggest client in Taiwan is filled with orders for next year 2021 which bodes well for the Group even with lingering “tech war” between the two hegemons. Hence, the robust demand for high-end chipsets indicating strong orders from a renowned upstream customer for 5G smart devices to be launched in end of October 2020 (following recent launch of its wearable devices and gadgets). In short, we still favour the Group for its business nature of serving a niche segment which is unlikely to face any stiff competition from Chinese players or to be targeted and involved in any turmoil alike “tech-war”.

Risk

• China may retaliate? Recent moves which were initiated by the US on China’s technology companies such as Tiktok and Huawei have dented the bright outlook of the sector. Having said that, China is planning to spend multi-billion dollars to invigorate the local semiconductor industry, and the policy may take few years to bear fruit. Notably, China which accounts for approximately 20% of Apple’s revenue might be the next target of the tech war after Huawei being sanctioned by the US. The fall of Apple could potentially have a tremendous impact on the global technological value chain.

Valuation & Recommendation

• Maintain BUY with an unchanged target price of RM4.33. Our target price is pegged at PE multiple of 41x F21F which is in line with +1SD of 5-year mean PER. Our fair value of the stock renders 28.5% upside to the current share price.

Source: JF Apex Securities Research - 23 Sept 2020