After eight consecutive quarters of growth, the group may take a breather due to the impact of China’s lockdown which poses logistical challenges for wafer deliveries. This has caused its Suzhou’s plant utilisation rate to decline from >100% to 80% which is expected to continue in subsequent quarters. Meanwhile, the group will research new applications with silicon carbide (SiC) and gallium nitride (GaN) as it awaits new capacity to come online in FY24. Maintain OUTPERFORM with a lower Target Price of RM38.10

The eighth quarter of continuous revenue growth was achieved in the latest reported 3QFY22, making MPI the only company among the top 10 heavyweights in the KL Technology index to accomplish such a feat. Though many of its peers reported lower QoQ revenue in the JanMar 2022 quarter due to Chinese New Year holidays, MPI on the other hand managed to eke out 0.6% growth which speaks volume about the company’s work culture and drive. While the group’s long-term prospects remain bright, we came away from its post-results briefing last Friday learning that short-term macro challenges may impact growth in FY23.

Macro challenges. From the beginning of the pandemic until today, MPI has managed to keep its Suzhou plant free from infection as the group has reported zero cases and zero plant shut-down over the past two years. However, some things are beyond the group’s control such as the aggressive implementation of zero-Covid-19 policy by the Chinese government. With Shanghai still on lockdown, the group is facing logistical challenges for wafer delivery. As a result, utilisation in its Suzhou plant fell from >100% to c.80% in the last five weeks of 3QFY22. MPI expects utilisation rate to remain at the 80% level in the subsequent quarters as the sporadic lockdowns in China will take 6-9 months before the entire supply chain returns to normalcy.

Timely break. We believe FY23 will still be a year of growth for MPI, albeit at a smaller quantum as the group awaits new capacity to come online in FY24. MPI is building two new factories, one in Suzhou (expected completion by 2024) and another one in Ipoh M-site (expected completion by Jan 2023). It has also recently decided to build another building at Ipoh S-site on customer’s request to expand the production of SiC packaging. Meanwhile, the group is also exploring the possibility of applying these new materials (SiC and GaN) in the telecommunication and data center space which may potentially be commercialised in 2024.

Maintain FY22E and FY23E earnings forecasts of RM324.5m and RM342.4m, respectively.

Maintain OUTPERFORM with a lower Target Price of RM38.10 (from RM50.50) based on 22x (previously 30x) rolled-forward FY23E PER, +0.5SD to its 5-year mean. We reduce our PER valuation to account for the modest growth due to the macro challenges in China.

Risks to our call are: (i) weaker sales, (ii) unfavourable currency exchange rates, and (iii) disruption from the US-China trade war.

Source: Kenanga Research - 30 May 2022