Kenanga Research & Investment

OPPSTAR - Japan, Here I Come

Publish date: Wed, 31 May 2023, 09:17 AM

OPPSTAR has set Japan to be its next overseas target market where it has started to engage with prospective Japanese clients. Meanwhile, it has marked a new milestone with an IP turnkey project where it will eventually co-own the IP developed, allowing for recurring IP royalties with high margins. We keep our forecasts (as we feel that it is still premature to reflect contributions from these new initiatives), TP of RM1.82 and MARKET PERFORM call.

We came away from OPPSTAR’s post-4QFY23 briefing feeling reassured of its prospects. The key takeaways are as follow:

1. Despite an industry-wide slowdown, OPPSTAR continues to receive a healthy number of enquiries from regional players. One notable engagement involves a Japanese company seeking to leverage OPPSTAR’s expertise as Japan revitalises its semiconductor investment. With that in mind, the group has made Japan its priority for its next overseas expansion, viewing the upcoming TSMC fab (focused on 5nm-10nm nodes) in Kyushu Island as a catalyst that will drive more demand for IC design services in the region.

2. Alongside its ongoing turnkey projects, the group was recently engaged to work on an intellectual property (IP) turnkey design. This marks a significant milestone for the group as it will hold co-ownership of the developed IP, allowing them to generate passive revenue from future IP royalties. We deemed this development to be positive, as the group taps into the recurring IP business which will bring about higher margins. However, it’s still at an early stage with meaningful contributions to likely be reflected in FY25.

3. The group has raised its headcount to 230 at present (from 183 in FY22) and has plans to expand its total workforce to 500 employees by FY26 to enable it to take on more projects simultaneously. It is willing to attract talent with good offers as a strong team is key to securing higher-value projects.

Forecasts. Maintained.

We keep our TP of RM1.82 based on 30x FY25F PER, in line with global peers’ forward average (see Page 2). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment thesis. 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 >30% vs peers’ range of 6.4%-19.3%. However, we believe its current share price has fairly reflected its value. Maintain MARKET PERFORM.

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 - 31 May 2023

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