We recently visited 7 technology companies in Penang – VITROX, RGT, TECHFAST, UCHI, FPGROUP, UWC and GLOBETRONICS. The general tone was more positive with many of the companies indicating better visibility from their customers this time around compared with the same period last year. We are seeing signs of the conceptual play of “5G as a catalyst” beginning to show actual progress towards realisation. This is evident by a surge in orders for VITROX’s 3D AOI machine with demanding deadlines from customers in China. Such trend is in line with market demand as 5G-enabled PCB requires 3D AOI to properly measure top and bottom, as well as trapezoidal sections of the PCB. In addition, the global top 10 OSAT players recorded an aggregate revenue growth of 1% YoY, a commendable feat amid a turbulent semiconductor industry this year. This could lead to a turnaround next year as OSAT players’ are typically more susceptible to changes in the market. For investors who are looking to gain exposure to the sector at this juncture, we reckon that VITRTOX offers exciting prospects that will grow in tandem with the adoption of 5G given that 36% of its revenue is derived from the telecommunication sector.

Better clarity for 1HCY20. We visited 7 technology companies in Penang – ViTrox Corporation Berhad (VITROX), Rapid Growth Technology Berhad (RGT), Techfast Berhad (TECHFAST), Uchi Technologies Berhad (UCHI), FoundPac Group Berhad (FPGROUP), UWC Berhad (UWC) and Globetronics Technology Berhad (GLOBETRONICS). The general tone was more positive with many of the companies indicating better visibility from their customers this time around compared with the same period last year.

5G: from conceptual to realisation. We are seeing signs of the conceptual play of “5G as a catalyst” beginning to show actual progress towards realisation. For instance, equipment maker such as VITROX is currently experiencing a surge in orders with demanding deadlines from customers in China. Most of the orders were placed for 3D Automated Optical Inspection (AOI) machine, as many facilities in China has yet to switch from 2D to 3D inspection. This is in line with market demand as 5G-enabled printed circuit board (PCB) requires 3D AOI to properly measure top and bottom, as well as trapezoidal sections of the PCB.

OSATs flashed early signs of turnaround. In the recent 3Q2019 earnings, we noted that the global top 10 outsourced semiconductor assembly and test (OSAT) players recorded an aggregate revenue growth of 1% YoY for 3Q2019, a commendable feat amid a turbulent semiconductor industry this year. This could lead to a turnaround next year as OSAT players’ are typically more susceptible to changes in the market (due to their current just-in-time system) compared with equipment makers who generally have longer order book visibility.

Spotting the niche. Undiscovered material compound supplier like TECHFAST, whose customers are in the OSAT space, is also seeing an uptick in activities. Tianshui Huatian’s new plant in Xi’an (7x bigger than the current Tianshui plant) is currently qualifying TECFAST as its supplier for mould cleaning rubber sheets beginning 1Q2020.

Benefits from trade diversion begin to materialise. On the US-China trade war front, we are seeing contract manufacturer like RGT starting to see more enquiries materialising into orders due to the unsettled trade spat between US and China. FPGROUP on the other hand saw a doubling of orders recently from its China customer. Although the last wave of tariff was recently called off, we believe that it does not change the fact that China still intends to be technologically self-sufficient. As such, China will continue to spend on capex to increase its capacity and broaden its range of products to reduce reliance on US vendors.

Be selective. Overall, we would recommend devising a strategy which entails taking positions in selective companies who may benefit from the adoption of 5G, such as VITROX and TECHFAST. We foresee OSAT player like GLOBETRONICS missing out the growth momentum even though its end-customer is in the smartphone business. This is due to the fact that its main focus is on smartphone light sensors and TWS gesture sensors, which does not correlate with the growth of 5G.

Source: Kenanga Research - 20 Dec 2019