We came away from MPI’s Analysts Day with our POSITIVE conviction reaffirmed by management’s vision and forward strategies that focuses on: (i) high growth (Internet of Things) and defensive (Automotive) segments, (ii) product portfolio restructuring (towards higher margins products), and (iii) competitive positioning with products and manufacturing standards differentiation. Besides its technical edge and strategic product exposures that augur well for the current and upcoming for tech wave, we also like the management’s foresight in embracing various tech-cycles. We view its share price weakness as a good opportunity for accumulation. We reiterate our OP recommendation with an unchanged TP of RM8.90. This is based on a 15.5x FY16E EPS, a valuation which is broadly in line with the forward valuation of OSAT players in Malaysia.

Key highlights. MPI held its Analysts Day yesterday, which saw a decent crowd of c.30 analysts and fund managers. Key highlights as featured by Mr. Peter Yates, who is the group’s Managing Director and its management team include: (i) opportunities from Internet of Things (IoT) and Automotive, (ii) competitive positioning through products/manufacturing standards differentiation, and (iii) product portfolio restructuring in its S-site, M-site and Suzhou, followed by the plant visit on its S-Site.

Internet of Things (IoT) and Automotive to anchor growth going forward. Management sees a huge untapped market in the IoT space in view of the growing application encompassing daily consumer and business activities. The group has started developing products based on four main groups namely Connectivity (more towards Smartphone/Tablet (S/T) and wearable gadgets), Infrastructure, Industrial and Automotive. We gather that the products have garnered overwhelming responses with eight new customers being secured thus far in 2015. We take comfort from these developments as these moves are diversifying MPI away from the high growth S/T segment that is reaching saturation point. Meanwhile on the Automotive front, the group is focusing its R&D in the MEMs space (for TPMS, airbag sensors, wheel speed sensors, etc.) of which its market value is forecasted by experts to double to USD21b in six years.

Competitive positioning through products/manufacturing standards differentiation. The group is already developing the roadmap for ultrathin/miniaturisation with higher complexity of its products, which fit the products demand for greater mobility and connectivity amid the rising IoT era. We are positively surprised by the management’s foresight in positioning itself for the next growth wave. Meanwhile, on the manufacturing process, management noted that it is already in the transformation stage to i-Manufacturing which emphasises on higher productivity with lower floor space and headcounts required.

Product portfolios restructuring to augment margins. For Carsem’s S-site (which specialises in MLP-Micro Leadframe Package, advanced packages, and ICs), the group has reduced the dependency on Commodity-ICs based income generation compared to three years ago. While the Commodity-ICs still commands the lion share (of 30%) compared to RF (25%), MEMs sensors (22%) and Test (23%) to date, the group envisages that the revenue generation will be spread out evenly from each of the abovementioned portfolio in a year, suggesting that the margins could be on the uptrend should the execution proved successful. On its M-Site (which is more automotive-centric with customised packages), the Auto segment commands the highest revenue share (40%) currently, and will remain the lion share contributor in the next two years. Meanwhile at the Suzhou side, while BGA (as an alternative packaging) only contributes a mere 3%, the group intends to place more focus into this segment to diversify income generation from MLP.

Positioning well for the softer Industrial and PC segments. Touching base on the softer guidance by Front-End semiconductor manufacturers, management is cognizant of the products slowdown, particularly in the Industrial and PC segments. While that being the case, management does not see such impact across the wider industry as the S/T and Automotive are still the drivers for the whole sector; a view which is also shared by us. Note that these segments are already running at the max ramp mode; with higher capex being allocated for FY16. On our take, we do not see weakness in the abovementioned segments dragging down the group earnings; with expectations of S/T and Automotive segments (c.60% to the group revenue) to offset for the weakness in Industrial and PC segments (c.33%).

Source: Kenanga Research - 28 Jul 2015