We are positive on the MoU with China Fortune-Tech Capital (a VC firm incorporated by SMIC) to set up a JV in China, offering OSAT related businesses. The new JV will utilise the existing facilities of Inari’s wholly-owned subsidiary, Amertron Technology (Kunshan), to accelerate the qualification process for new customers before moving into a new plant when the need arises. Such a move is in tandem with Inari’s goal to broaden its revenue stream and ride on China’s ambitious plan to achieve self-sufficiency (currently 16% vs its 70% target) in the semiconductor industry. Maintain OUTPERFORM and Target Price of RM4.80.

Expanding its China presence. Inari announced on Monday that the group has entered into a MoU with China Fortune-Tech Capital Co. Ltd. (CFTC) to carry out outsourced semiconductor assembly and test (OSAT) related businesses in China. The new JV company requires a total capital of RMB1.71b (c.RM1.11b) where Inari will contribute 100% equity shares of its wholly-owned subsidiary, Amertron Technology (Kunshan), and RMB463m (c.RM299m) cash while CFTC contributes RMB749m cash and RMB21m as 100% of equity shares of Yiwu Semiconductor International Corporation. Inari will have 55% stake of the new JV while CFTC holds the remaining 45%.

CFTC is a venture capital firm incorporated by China’s largest pure play semiconductor foundry, Semiconductor Manufacturing International Corporation (SMIC), focusing on IC design, materials, equipment, and IP services. We believe that Inari was identified by CFTC due to its excellent track record in the OSAT space and its capabilities which often attracts large MNC customers.

Strengthening the optoelectronic segment. Using the group’s existing facilities in Amertron Technology (Kunshan), the new JV will be able to accelerate the qualification process for new customers before moving into a new plant when the need arises. While Inari has yet to provide further information on its potential customers and products involved in the new JV, we opine that it is likely related to the optoelectronic segment, mainly in the automotive space, in line with the expertise in its Kunshan plant. Amertron Technology (Kunshan) has a land area of 50k sq. ft. and contributes c.10% to the group’s revenue.

Overall, we are positive on this MoU as the group continues its efforts to diversify and increase its revenue stream. In addition to its solid track record with western customers, this move will allow the group to grow its presence in China and ride the growth opportunities in the region given the ambitious goal of the Chinese government to achieve self-sufficiency (currently 16% vs its 70% target) in the semiconductor industry.

Maintain FY21E and FY22E net profit forecasts of RM394.0m and RM451.8m, respectively as we have yet to factor in any contribution from the MoU at this juncture.

We reiterate our OUTPERFORM call and Target Price of RM4.80, based on 40x FY22E PER, at +2SD of 3-year mean.

Source: Kenanga Research - 20 Oct 2021