Kenanga Research & Investment

Malaysian Pacific Industries - Out of the Woods

Publish date: Tue, 21 May 2024, 10:39 AM

MPI guided for a strong recovery in 4QFY24 on rising utilisation at its Suzhou plant, in the absence of shutdown costs from its lead- frame operations and a favourable product mix on the back of higher demand for premium packages (i.e. SiC and GaN). We raise our FY24-26F earnings forecasts by 25%, 17% and 17%, lift TP by 17% to RM46.84 (fromRM40.14) and maintain our OUTPERFORM call.

We came away from MPI’s post-3QFY24 results briefing feeling upbeat on its prospects. The key takeaways are as follows:

1. Having achieved break-even at its Suzhou plant since 2QFY24 with a 64% utilisation rate, production rates continued to trend steadily upwards. This is attributable to the overall recovery in China smartphone market, which recorded a 1.5% YoY sales growth in 1QCY24, according to Counterpoint Research. Notable catalysts leading the recovery are breakthrough in Huawei’s (+70% YoY, albeit from a low base) 7nm processor and premiumisation efforts from brands like Xiaomi and Honor, resulting in higher sales growth of 8.6% YoY and 11.5% YoY, respectively for 1QCY24.

2. MPI's decision to discontinue its lead frame operations (Dynacraft Industries in Penang that had incurred a net loss of RM10m per quarter) has paid off in 2QFY24 and 3QFY24. While there were still some one-off shutdown costs related to severance payments and the relocation of machinery recognised in the recently reported 3QFY24, the group managed to report a flattish QoQ performance despite 3Q being its seasonally weak quarter. Thankfully, the group has guided that these payments have now been fully settled, closing the chapter on Dynacraft Industries.

3. Going into 4QFY24 with a clean slate, MPI is poised for significant improvement, driven by its recovering China operations (benefiting from favourable operating leverage) and a favourable product mix at its Ipoh plant, owing to growing demand for premium packages related to SiC and GaN. Consequently, the group is in the midst of expanding capacity in Ipoh (76k sq ft at the M-site and 39k sq ft at the S-site) to cater to the growing demand from Western and potentially relocating Chinese customers. Furthermore, the group anticipates a strong recovery for its industrial segment (approximately 38% of group revenue) as the proliferation of AI data centres will eventually lead to a surge in demand for MPI’s power management chips used in servers.

Forecasts. We raise our FY24-26F earnings forecasts by 25%, 17% and 17%, respectively.

Valuations. Consequently, we lift our TP by 17% to RM46.84 (from RM40.14) based on an unchangedCY25F PER of 29x, 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 case. 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. Maintain OUTPERFORM.

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

Source: Kenanga Research - 21 May 2024

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