There was a brief uptick for MPI’s smartphone related packages but not significant enough to turn the company around. It has shifted its break-even guidance for its operations in China by five months to Apr 2024 (from Nov 2023). It also guided for reduced earnings visibility at the automotive segment. We keep our earnings forecasts, TP of RM27.20 and MARKET PERFORM call.

We came away from MPI’s post-2QFY24 results briefing with mixed feelings. The key takeaways are as follows:

1. Losses from its Suzhou plant in China narrowed further thanks to a 15% sequential revenue improvement on the back of brief uptick in orders for communication related packages (which goes into the latest Chinese flagship smartphone). It acknowledged that this was not significant enough to turn the company around. As a result, it has shifted its guidance for the breakeven timing for its operations in China by five months to Apr 2024 (from Nov 2023). The group will continue to implement strategic and efficient cost-control measures for expenses and material costs.

2. The group has observed early indications of Western automotive customers considering hydrogen as an alternative energy source for vehicles, aiming to counter the increasing dominance of Chinese brands in the electric vehicle (EV) race. Consequently, MPI is proactively securing its position in the supply chain and is in preliminary discussions with two potential customers. Meanwhile, its Suxiang plant (to be completed in 1QCY25), which will double its existing capacity in China, will primarily focus on the automotive sector. This positions the group to capitalize on the expanding influence of EVs in China.

3. Overall, the group hopes for marginal improvements in 2QFY24 and is optimistic about its recovery path. However, it acknowledges that the journey will be challenging as order visibility for automotive is reduced (compared to 6-9 months visibility), with certain customers making weekly revisions. Despite these challenges, the group remains positive about its SiC business in the long run. It is actively expanding its capacity, adding 76k sq ft in M-site and 39k sq ft in Ssite in Ipoh. This expansion aims to accommodate increased demand from Western customers and potentially Chinese customers looking to relocate their back-end processes outside of China.

Forecasts. Maintained.

We keep our TP by of RM27.20 based on an unchanged CY24F PER of 26x, in line with peer’s forward average. Our TP reflects a 5% premium 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 rather muted in the absence of a significant recovery in chip demand from the consumer electronics sector as well as data centres. 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) the USD weakens.

Source: Kenanga Research - 17 Nov 2023