MPI is bracing for a challenging 3QFY23 which is affected by the Chinese New Year holidays as well as weaker order replenishment at its Suzhou plant despite the easing of China lockdown restrictions. Heavily dependent on the currently softening consumer electronics segment, its Suzhou plant is expected to continue operating below breakeven level for the coming quarters. We keep our forecasts, TP of RM20.00 and UNDERPERFORM call. The key takeaways from the 2QFY23 results’ briefing are as follows:

1. MPI guided for a weaker quarter ahead as utilisation in its Suzhou plant trended lower to c.30% from c.41% in the previous quarter, way below its breakeven level of 70%, as order visibility remained cloudy despite the easing of Covid-related restrictions in China. Its Suzhou plant is expected to continue operating below breakeven point in the coming quarters ahead given its high exposure to the weakening consumer electronics segment, where global smartphones shipment declined 18.3% YoY in the holiday-laden quarter while PC shipment fell 28.5% YoY.

2. The group has also opted to defer the completion of its new plant in China to April 2024 from Dec 2023 as customers delayed their order replenishment. Meanwhile, MPI’s utilisation rate at both its Ipoh plants remain healthy albeit a marginal dip due to lower orders from the data centre segment where players are currently facing a slew of job layoffs (e.g. Google, Microsoft, Amazon). However, order for its automotive business (c.43% of group revenue) remained fairly stable.

3. MPI is anticipating higher operating costs in CY2023 with higher electricity tariff (additional c.RM10m per quarter) and increased wages (c.RM1m per quarter). To cope with the tougher operating environment, MPI will continue to focus on advanced packages in the automotive space as well as expanding its capabilities in more value-enhancing module business which will propel the company up the value chain.

Forecasts. Maintained

Investment thesis. 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) its superior expertise in power management chip packaging for data centres. However, its prospects over the medium term will be clouded by slowing consumer electronics and data centres demand, resulting in sub-optimum plant utilisation.

Maintain UNDERPERFORM with an unchanged TP of RM20.00 based on 18x CY23F PER, representing a c.20% discount from peer’s forward average to factor in the group’s unfavourable outlook. Our TP reflects a +5% adjustment based on a 4-star ESG rating as appraised by us (see Page 4).

Risks to our call are: (i) a quicker-than-expected recovery in the global chip sector, (ii) de-escalation in the Sino-US chip war, and (iii) further strengthening of the USD.

Source: Kenanga Research - 20 Feb 2023