INARI expects the revenue from its radio frequency (RF) business to experience a 5%-8% YoY decline owing to the general slowdown in the global smartphone market. In addition, customers seeing weakness in the tech space are spending cautiously, leading to one-to-two quarters delay in the ramping up of new projects. We maintain our forecasts, TP of RM2.60 and MARKET PERFORM call.

1. Despite the US smartphone manufacturer expanding its in-house development of wireless components, INARI believes that prospects of its radio frequency (RF) business will remain intact as one of its core business pillars over the next three years. However, in the immediate term, the group is not spared the slowdown in global smartphone shipment and anticipates revenue from the RF segment (c.65% of group revenue) to trend 5%-8% lower YoY.

2. We learn that the overall progress of new business ventures remains slightly behind schedule owing to softening demand in the tech space. While the group managed to qualify for the memory customer, there was some deferment on the high-powered LED product as well as the highspeed fiber optic deployment. As such, contributions from these new projects are likely to be delayed 1-2 quarters into FY24. Note that the pricing of the products from the new projects will have to reflect the increased electricity tariff.

3. China's reopening has not translated to a sharp recovery in demand as its Kunshan plant is still operating at a 50% utilisation rate. However, the easing of lockdown restrictions will allow the group to continue its qualification process of new potential customers. This is for the new incoming capacity of its 54.5%-owned Yiwu Semiconductor International Corp’s (YSIC)’s plant scheduled for completion by 4QCY23.

Forecasts. Maintained.

We also maintain our TP of RM2.60 based on 23x CY23F PER, which is in line with peers’ forward mean. Our TP imputes a 5% premium to reflect its 4- star ESG rating as appraised by us (see Page 4). 

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), 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 new ventures may not contribute soon enough. Maintain MARKET PERFORM.

Risks to our call include: (i) better-than-expected response to its new offerings by its key customer, (ii) easing in supply-chain disruptions, and (iii) expansion in China coming onstream sooner-than-expected.

Source: Kenanga Research - 28 Feb 2023