OPPSTAR, via its newly-acquired Japanese unit, is bidding for design jobs in Japan. It is close to establishing a direct partnership with a world-renowned wafer fab. We cut our FY24-25F net profit forecasts by 15% and 5%, respectively, (to reflect its increased headcount for expansion), reduce our TP by 5% to RM1.72 (from RM1.82) but reiterate our OUTPERFORM call.

We came away from OPPSTAR’s post-4QFY23 briefing feeling reassured of its prospects. The key takeaways are as follow: 1. OPPSTAR has completed the acquisition of a design company in Japan, allowing it to bid for design jobs in the country. This is one of the group’s strategies to broaden its regional presence and Japan is prioritised due to a healthy number of enquiries from Japanese companies seeking to leverage OPPSTAR’s expertise, in line with the Japanese government’s initiative to revitalise its semiconductor industry.

Notably, TSMC has also recently set up two new wafer fabs in Kyushu, Japan, focusing on 6nm and 7nm process nodes.

2. The group has initiated a strategy to establish direct partnerships with wafer fabs, streamlining the tape-out process. Although the specific wafer fab remains undisclosed, OPPSTAR has hinted at collaborating with a globally recognised facility with expertise in manufacturing cutting- edge process nodes. This strategic shift enables OPPSTAR to offer a comprehensive process, spanning from initial design and tape-out to mass production, packaging, and the final chip product. By aligning itself with the entire chip’s life cycle, it creates customer stickiness and ensures consistent recurring income for the group.

3. OPPSTAR is also currently working with three customers on field- programmable grid array (FPGA) designs which are used in equipment to enable artificial intelligence (AI), and expects the race for AI supremacy to bring about greater demand for customised chip design services.

Forecasts. We cut our FY24-25F net profit forecasts by 15% and 5%, respectively, to account for higher operational cost as the group continues to scale up its headcount for future business expansion.

Valuations. Correspondingly, we reduce our TP by 5% to RM1.72 (from RM1.82) based on an unchanged 30x FY25F PER, a c.45% discount to global peers’ forward average (see Page 2) due to the substantial disparity in revenue size and capabilities between OPPSTAR and its global counterparts. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. 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 strong design capabilities in leading-edge process nodes, and (iii) its diverse customer base, i.e. both from the East and the West given its strong working relationships with various foundries. Maintain OUTPERFORM

Risks to our call include: (i) longer-than-expected gestation period for its regional expansions, (ii) single customer concentration risk with c.60% group revenue derived from Xiamen KirinCore, (iii) economic downturn resulting in customers slowing down the development of new ICs.

Source: Kenanga Research - 28 Feb 2024