A US smartphone maker was reported to phase out Qualcomm and Broadcom’s chipsets (modem, Wi-Fi and Bluetooth components) by 2025 in favour of in-house developed ones. We do not expect INARI to be impacted as it is involved in RF filters which are more complex in design and unlikely to be replaced in the short term. However, the growing inclination of the US smartphone maker to develop its proprietary chipsets to command control of the supply chain will likely create adverse sentiment towards its suppliers. We maintain our forecasts but trim our TP by 8.7% to RM2.60 on lower valuation. Maintain MARKET PERFORM.

1. Bloomberg reported that the US smartphone manufacturer intends to replace Broadcom’s Wi-Fi and Bluetooth components with its in-house developed chip to combine both functions into a single module. In addition, Qualcomm’s cellular modem will reportedly be swapped out by early 2025 in favour of a proprietary replacement.

2. We do not expect these changes to impact INARI’s earnings in the immediate term as the group is only involved in the radio frequency (RF) filters and not any of the components stated in the news. Moreover, RF filters are much more complex in design (compared to Wi-Fi or Bluetooth modules) and are unlikely to be replaced in the short term. Based on the trend seen, it will be more than 5 years (since the acquisition of Intel’s cellular modem arm in 2019) before the US smartphone manufacturer finally implements its own design in 2025 that is able to compete with what Qualcomm is already offering.

3. However, this is not the first time that the US smartphone maker has hinted on growing its in-house chip design capabilities in order to have better control of its supply chain, and the emphasis on this strategy is likely to remain given the experience from the chip supply disruption saga during the pandemic. That said, we keep our forecast with the expectation of INARI’s RF business to remain intact but trim our valuation to account for the increased adverse sentiment towards players involved in the US smartphone supply chain.

Forecasts. Maintained.

Investment thesis. We like INARI for: (i) it being the closest proxy to 5G adoption, (ii) it being highly responsive to the market demand with the rollout of new technologies such as double-sided moulding (DSM) and system-on-module (SOM) recently, and (iii) its significant expansion in China, capitalising on the superpower’s aggressive push for semiconductor self-sufficiency. However, we remain cautious due to the waning consumer demand in the smartphone market while its JV venture may only begin to contribute meaningfully in 2HFY24.

Maintain MARKET PERFORM but trim our Target Price to RM2.60 (previously RM2.85) based on 23x (previously 25x) CY23F PER, to reflect the downtrend in peers’ forward PER.

Risks to our call include: (i) less aggressive orders from its key customer, (ii) delay in 5G roll-out, and (iii) higher input costs.

Source: Kenanga Research - 11 Jan 2023