MPI anticipates subdued contribution from China over the next three quarters on lower utilisation rate (currently at 52%) from its Suzhou plant caused by: (i) lockdowns, (ii) MNCs relocating due to geopolitical reasons, and (iii) interrupted wafer supply. Meanwhile, both Ipoh plants continue to fire on all cylinders thanks to resilient demand for its automotive packages. Overall, the group expects a year of inventory adjustment in China to follow before recovering in 2024. We maintain our forecasts, TP of RM34.50 and MARKET PERFORM call.

The key takeaways from our meeting with the group are as follows:

1. Utilisation rate for MPI’s Suzhou plant (which is more exposed to consumer-based products) has recently fell to 52% (vs. 80% in 4QFY22) due to: (i) sporadic lockdowns in China, (ii) MNCs moving out owing to geopolitical reasons, and (iii) lower wafer loading volume from customers. Not helping either is the fact that new machines started docking into the Suzhou plant at a period of lower utilisation rate. The group expects contribution from China’s operation to remain subdued on inventory correction over the next three quarters as a consequence of depressed consumer spending caused by the prolonged movement restrictions as well as fears of higher inflation rate.

2. Conversely, MPI’s Ipoh plants (both M site and S site) are running at >90% utilisation rate, thanks to MNCs relocating out from China coupled with resilient demand for its automotive packages (c.38% of group revenue) as its customers’ backlog remains elevated at 15-18 months.

3. Recognising the shift in the semiconductor landscape as a result of the US-China chip battle, MPI has adopted the “China for China and Ipoh for the West” approach and will continue with its expansion plans. Phase 1 of the new 5-storey plant in Suzhou will be ready by Jan 2024 with Phase 2 following suit. The new plant in Ipoh (M site) and new building in Ipoh (S site) are also slated to be completed by early-2023, catering for more automotive products.

Forecasts. Maintained We continue to like MPI for its: (i) growing presence in the high-growth automotive segment, (ii) first mover advantage in the highly promising new technology based on silicon carbide and gallium nitride, and (iii) strong management team with a proven track record. However, its prospects over the immediate term will be clouded by various operating challenges in China such as Covid-related lockdowns and MNCs diversifying their manufacturing bases geographically to de-risk.

Maintain MARKET PERFORM and Target Price of RM34.50 based on 19x FY23F (in line with peers’ forward mean). Our TP includes a +5% adjustment based on a 4-star rating as appraised by us (see Page 4).

Risks to our call are: (i) a deeper-than-expected down-cycle in the global chip sector, (ii) prolonged supply-chain disruptions, and (iii) unfavourable forex movements.

Source: Kenanga Research - 1 Sept 2022