OPPSTAR specialises in integrated circuit (IC) design with capabilities up to 5nm process node. Being the first local IC design house, the group offers a unique exposure to the front-end semiconductor space which entails lucrative margins. OPPSTAR is poised to benefit from the growing demand for IC design services given its expertise in FinFET technology and good working relationship with various foundries. Its venture into proprietary IP development over the next three years may potentially morph into another significant revenue stream being an alternative to Western-dominated chip architecture. Initiate with an OUTPERFORM call and TP of RM1.30.

Forging new paths in the industry. OPPSTAR, led by three ex-Intel engineers, is taking the lead as the first prominent front-end semiconductor player in the local tech scene largely dominated by back-end processes (i.e. OSATs) for many decades. Thanks to its asset-light business model, OPPSTAR solely depends on its engineers to carry out IC design projects, translating into lucrative gross profit margins of c.59% and net profit margins of >30%.

Forefront of the competition. OPPSTAR specialises in FinFET designs with a proven track record of delivering multiple turnkey projects requiring process nodes ranging from 20nm to 5nm. The group has also developed a good working relationship with various foundries (i.e. TSMC, Samsung Semiconductor, Intel and GlobalFoundries), with the ability to adapt to different parameters and requirements that are unique to each foundry. As such, the group as an outsourced IC design house is well positioned to benefit from the US-Sino trade war as many Chinese IDMs are looking for IC design services to help develop their own chips, or to migrate to a different foundry due to tightening US restrictions on access to Western-developed chips and foundry equipment.

Breaking grounds with new IPs. Recognising the growing demand for higher efficiency chip design with quicker time-to-market, the group has allocated RM12m or 11.5% of its IPO proceed for development of its proprietary intellectual property (IP) in the following areas: (i) RISC-V SoC, (ii) 3D-FPGA and (iii) AI and machine learning. We are very positive on this initiative as having its own IP that runs on an open-sourced chip architecture will enable the group to offer an alternative to IDM players that are looking to move away from Intel’s x86 and ARM-based architecture which is susceptible to US restriction policy.

Initiate coverage on OPPSTAR with an OUTPERFORM call and a TP of RM1.30 based on 25x FY25F PER, at a 10% premium to the weighted average forward PER of 23x of its peers. We believe the premium is justifiable based on: (i) its Malaysian nationality which is less susceptible to the fallout from the Sino-US chip war; and (ii) the scarcity of listed IC designers in the local stock market.

We like OPPSTAR for: (i) its foothold and growing presence in the front-end semiconductor space with high entry barriers, specifically, stringent qualification requirements, (ii) its ability to attract customers from both the East and the West thanks to its access to various foundries and strong design capabilities in leading-edge process nodes; and (iii) its superior net profit margin of c.32.8% vs peers’ range of 6.4%-19.3%.

Risks to our call include: (i) longer-than-expected gestation period for its regional expansions, (ii) single customer concentration risk with c.68% group revenue derived from Xiamen KirinCore, (iii) economic downturn resulting in customers slowing down the development of new ICs.

Source: Kenanga Research - 15 Mar 2023