• Maintain BUY and MYR3.75 TP, 36% upside with c.3% FY22F yield. Unisem (M) recorded yet another historic high 1Q core earnings of MYR51.8m (+14.1% YoY), as expected, on stronger topline – although this was lower QoQ due to higher tax and payroll expenses. Its current share price weakness presents a good buying opportunity, as the growth momentum should be persist in the coming quarters on strong underlying demand, and better ASP despite the imminent higher operating costs.

• Meets expectations. 1Q22’s revenue of MYR424.4m (+13.5%) and core earnings (+14.1%) are within our and Street full-year estimates, at 21.8% and 20.9%, in view of stronger quarters ahead amid seasonal effects. The better performance was driven by higher sales volumes and ASPs, coupled with favourable FX, while its EBIDTA margin dipped to 25.8% from 26.7%, mainly due to additional staff costs. Core earnings contracted 13.7% QoQ despite the flattish revenue (-0.5%), largely on higher tax expenses and higher payroll costs with a higher headcount (by 150) of 6,148.

• Favourable outlook with minimal disruption. Management expects stronger in the quarter ahead, with good visibility – as the overall supply of chips remains tight in the industry. Management also alluded to an ASP increase for products from the Ipoh plant, to cushion the hike in its utility costs and the minimum wage. We understand that the Chengdu plant was running at full capacity with minimal disruptions despite the lockdowns, as most supplies are from multiple sources. The majority of the clients are not significantly affected at the current juncture. Meanwhile, the utilisation rate in the Ipoh plants continued to be dragged by headcount and wafer shortages, but this is expected to improve with the reopening of borders and the return of foreign workers.

• Expansion plan on track. The Phase 3A expansion in Chengdu (30-40% of the existing plant) should start commissioning by Oct-Nov 2022 to capture the growing demand, followed by an accelerated expansion plan in the Gopeng facility – which should be ready by 1H23. Total capex incurred in 1Q22 was MYR182m (1Q21: MYR138m), for additional capacities at its Chengdu and the construction of Phase 3 building in Chengdu.

• Maintain BUY as we expect resilient demand for OSATs amid chip shortages and production bottlenecks. Medium-term growth can be expected once the major plant expansions in China and Ipoh begin contributing significantly to group numbers from FY23-24 onwards. We make no change to our forecasts and TP of MYR3.75, based on an unchanged FY22 target P/E of 26x (+0.5SD from the 5-year mean), after imputing a 2% ESG discount based on our in-house proprietary ESG methodology.

• Downside risks to our call are slower-than-expected orders and stronger- than-expected MYR vs the USD.

Source: RHB Research - 28 Apr 2022