MPI’s quarterly losses at the group level are behind it with its Suzhou plant making a slow but sure progress towards break-even. However, rising labour and material costs are still a challenge. It has to ensure that its fixed expenses are covered with a sufficient loading volume. We keep our earnings forecasts, TP of RM24.05 and MARKET PERFORM call.

We came away from MPI’s post-4QFY23 results briefing feeling mildly encouraged. The key takeaways are as follows:

1. MPI reported that its turnaround in 4QFY23 was primarily driven by strategic and efficient cost-cutting measures, significantly reducing losses incurred by its Suzhou plant. The group anticipates that this turnaround will mark the conclusion of quarterly losses at the group level. Nevertheless, challenges persist in achieving profitability at the Suzhou plant, reflecting the slow recovery pace within China itself. Hence, its new plant in Suzhou Industrial Park Suxiang Cooperation Zone (Suxiang), China will remain at its delayed completion timeline of 1QCY25.

2. The Suxiang plant will double its existing capacity in China. MPI envisioned this new plant to be primarily automotive focused, positioning itself to take advantage of the growing adoption of electric vehicles (EV) in China. There has also been discussion with various Chinese domestic integrated design manufacturers (IDM) players on silicon carbide (SiC)-related businesses.

3. Its operations in Ipoh have remained healthy. The plant will continue to be the earnings driver while the Suzhou plant gradually inches back to its break-even point. That said, the group remains optimistic on its SiC business and is building up new capacity (76k sq ft in Msite and 39k sq ft in S-site) in Ipoh to cater for increased demand from its Western customers and potentially Chinese customers who are looking to move their back-end processes out of China.

Forecasts. Maintained.

We keep our TP of RM24.05 based on 23x CY24F PER, in line with peer’s forward average. Our TP includes a +5% adjustment based on a 4-star ESG rating as appraised by us (see Page 4).

Investment thesis. We like MPI for: (i) its strong exposure in the growing automotive semiconductor segment, (ii) its venture into promising new technology such as gallium nitride and silicon carbide, and (iii) its superior expertise in power management chip packaging for data centres. However, its prospects over the medium term will be clouded by slowing consumer electronics and data centres demand, resulting in sub-optimum plant utilisation. Maintain MARKET PERFORM.

Risks to our call are: (i) a weaker-than-expected recovery in the global chip sector, (ii) a further escalation in the Sino-US chip war, and (iii) MYR strengthening against the USD.

Source: Kenanga Research - 30 Aug 2023