UNISEM's 1HFY23 net profit disappointed as the loading volume from customers remained subdued. It guided for a flattish 3QFY23 QoQ despite the annual launch of new US smartphones. We cut our FY23-24F earnings forecasts by 15% and 4% respectively, lower our TP by 4% to RM2.65 (from RM2.75) and downgrade our call to UNDERPERFORM from MARKET PERFORM.

Below expectations. UNISEM’s 1HFY23 core net profit of RM33.8m (- 72% YoY) came in below expectations, accounting for only 24% and 19% of both our full-year forecast and the full-year consensus estimate. The variance against our numbers was largely attributable to languishing chip demand amidst an oversupply situation.

Results highlights. YoY, its 1HFY23 revenue fell 17.5% (or 21% in USD terms) as its 2QFY23 revenue in USD terms only inched +3.9% against the group’s guidance of +10% to +12% QoQ previously. The group attributed this to weaker loading volume across all segments and chip packages which is in line with the general slowdown seen in the semiconductor sector. The impact was even more pronounced in consumer electronics as consumers cut back on spending amidst rising interest rates and sustained inflation. Its plant utilisation rates remained fairly unchanged QoQ with its Chengdu plant running at 70-75% while the Ipoh plant struggled at 50%. Therefore, the marginal QoQ improvement came largely from the normalisation of working days (in the absence of Chinese New Year break) while actual demand remained subdued.

Chugging along. It guided for a flattish 3QFY23 QoQ revenue outlook due to the lack of order visibility. The group indicated that there is an absence of a ramp-up in smartphone-related chips despite the seasonal launch of a US smartphone in 3Q2023, which is unheard of in the past. Meanwhile, the loading volume for automotive and data centre-related chip packages remain unexciting with no urgency from customers’ end to increase orders anytime soon. However, the group continues to plan ahead for future demand with the completion of its Phase 3 plant (which doubles the capacity of Phases 1 and 2 combined) in Chengdu and the construction of a new plant in Gopeng that is expected to be ready by end-2023.

Investment thesis. We like UNISEM for: (i) its healthy exposure in the power module business, (ii) it being able to command pricing and retain customer stickiness given its quality packaging services, and (iii) a strong balance sheet to support its expansion plans. However, there is still looming uncertainty in the immediate term which has resulted in cautious order replenishment among customers.

Forecasts. We lower our FY23F-24F net profit forecasts by 15% and 4%, respectively.

Correspondingly, we cut our TP by 4% to RM2.65 (from RM2.75) based on an unchanged 20x FY24F PER, in line with the mean of its peers’ forward PER. There is no adjustment to TP based on ESG given a 3- star ESG rating as appraised by us (see Page 4). Downgrade to UNDERPERFORM from MARKET PERFORM as valuations have become stretched after the recent run-up in its share price.

Risks to our call include: (i) a stronger-than-expected recovery in global consumer electronics demand; (ii) easing in US-Sino chip and trade wars; and (iii) a steep appreciation of the USD against MYR.

Source: Kenanga Research - 28 Jul 2023