OPPSTAR is joining hands with two Chinese parties to produce intellectual property (IP) patented integrated circuit (IC) designs. We are positive on this strategic move which could broaden its earnings base in terms of IP royalties in future. However, we maintain our forecasts as we do not expect any meaningful contribution from this venture during our forecast period. Hence, we also keep our TP of RM1.82 and MARKET PERFORM call.

OPPSTAR has entered into a MoU with Chen Junhua and Shenzhen City Yixin Investment (Yixin) to set up a company in Shanghai to further strengthen the group’s involvement in ICs, particularly in developing and coowning the intellectual property (IP) rights of the designs. The proposed company will have a paid-up capital of RMB10m (or RM6.4m) with shareholding structure of 50%, 45% and 5% for Chen Junhua, OPPSTAR and Yixin, respectively.

Chen Junhua, the controlling shareholder of OPPSTAR’s largest customer Xiamen KirinCore IOT Technology Ltd (accounting for c.68% of the group’s revenue), will play a crucial role in navigating Chinese regulatory frameworks and implementing effective marketing strategy. Meanwhile, Yixin, a seasoned investor in the IC design industry, will take charge of raising capital to the tune of RMB200m (or RM128m) in two phases for R&D and business development purposes.

We are positive on this MoU as it aligns with the group’s strategy of advancing up the front-end semiconductor value chain by venturing into coowing IP designs. By doing so, this will allow OPPSTAR to generate passive revenue from future IP royalties which is typically recurring in nature and commands higher margins. However, we have yet to fully account for the contributions from this venture as it is still at an early stage with any meaningful contributions only likely to materialise beyond 2024.

Forecasts. Maintained.

We keep our TP of RM1.82 based on an unchanged 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 - 14 Jul 2023