We are turning more cautious on its short-term prospect in view of the ongoing inventory adjustments. We cut our FY18E/FY19E CNPs by -9%/-7%. Long-term wise, prospect should be supported by the collaboration with China-based TSHT: providing a wider foothold in Chengdu alongside access to the latter’s advance packaging technologies, all on top of the commencement of UAT plant in 1Q19. ACCEPT OFFER with a TP of RM3.30.

Headwinds in 4Q18. We came away from the briefing (which was attended by a crowd of c.30 analysts and fund managers) turning more CAUTIOUS on its short-term prospect. While 4Q18 should see stronger contribution from the communication segment amid the launching of the all-new US flagship Smartphone, we understand from management that the trend of inventory adjustments, particularly in the Power and IoT segments still persist, hence limiting growth. Management expects 4Q18 revenue in USD terms to come in flat or 5% lower than 3Q18, which is contrary to our previous bullish assumption of 2% growth.

Further details on 3Q18 results. In terms of 3Q18 sales in USD terms, it was down 0.3% QoQ and -3.4% YoY, which is at the lower end of management’s guidance. Note that inventory adjustments were seen from the customers in the Power and IoT segments. Segmental-wise, Automotive and Consumer segments continued to see incremental growth in contribution share by 1ppts to 18% and 28%, respectively, while Communication continued to see weakness on slower demand.

Updates on the takeover from TSHT. Management reiterates that the collaboration should bring positive synergistic benefits to both sides in terms of customer base as well as technology expertise; a view that is also shared by us. While there are not many updates as of this juncture, we understand that the managements from both sides are working hard to get approvals and believe that it should happen within the stipulated period (by March 2019). Synergistic-wise, while UNISEM would complement TSHT with its vast network of customers in Europe and North America, TSHT which has a significant presence in China would enable UNISEM to expand more rapidly in Chengdu. Currently, UNISEM Chengdu (which offers full turnkey assembly and test services for a wide range of advanced leadframe and substrate packages and the testing of analog, mixed signal and RF devices) is contributing c.35- 40% of revenue to the group. Moreover, collaboration with TSHT would also allow UNISEM to ride on the latter’s fan-out technology to venture into FOWLP.

Reiterate ACCEPT OFFER and TP of RM3.30. Post-briefing, we adjust our FY18E/FY19E NPs by -9%/-7% after assuming weaker 4Q18 numbers on lower UR and product mix changes. We deemed the Offer Price of RM3.30/share (after taking into account these re-rating factors) to be fair as the implied 17.5x FY19E PER, at +c.1.0x SD above its 5- year average Fwd. PER, is also largely in line with the Malaysian’s OSAT current 2-year Fwd. PER. We advise shareholders to ACCEPT the OFFER. Risks to our call include: (i) abortion of the deal and collaboration, (ii) escalating trade wars, and (iii) cannibalisation from servicing the same customers (if any).

Source: Kenanga Research - 05 Nov 2018