• Stay BUY, with new MYR3.39 TP from MYR4.18, 38% upside and c.3% FY23F yield. We factor in the slowdown of the semiconductor market, global growth challenges, and our in-house bond yield and FX assumptions, resulting in lower earnings forecasts and TP. We expect healthy loading at the Ipoh plant and favourable FX to cushion the prevalent slowdown in China in the short term, while its medium-term growth plan remains intact, where major plant expansions in China and Gopeng are expected to contribute from FY23F-24F.

• 1H22 earnings recap. 1H22 revenue of MYR888.5m (+14.5%) and core earnings of MYR122.4m (+19.6%) came in within expectations, with the better performance driven by higher sales volumes and ASPs, coupled with favourable FX, while its EBITDA margin was stable at c.27.5%. Its China unit contributed c.55% of revenue and 55-60% of group earnings.

• Outlook. Despite the weakness in the consumer electronics space, especially in China where inventory correction intensified in many consumer electronics-related supply chains, the automotive segment remained in demand as some customers were still experiencing wafer shortages. Hence, we expect the weakness from volume loading in Chengdu to be supported by robust customer loading and ASP increases for all products at its Ipoh plant. Looking ahead into FY23F, Phase 3A expansion in Chengdu (30-40% of the existing plant) is expected to kick in and fuel growth, should the overall demand for OSATs remain healthy, followed by an accelerated expansion plan at the Gopeng facility, which should be ready by 1H23.

• Forecasts and ratings. We tweak FY23F-24F by -3.6% and -25.9%, as we factor in lower volume loading in line with the broader slowdown of semiconductor market and the new USD/MYR FX assumptions of 4.652 for FY23. In line with the sector revision, we also lower the FY23F target P/E to 21x from 25x (c.+0.5x above its 5-year mean and in line with KLTEC’s 5- year mean) amid the continued hawkish tone of the US Federal Reserve that has contributed to the rising bond yield which will continue to dampen the equity valuation, and risk of earnings being derailed by uncertainties in the global macroeconomic environment. Our TP includes a 2% ESG discount based on our proprietary methodology.

• Downside risks: Slower-than-expected orders, and stronger-than- expected MYR vs USD.

Source: RHB Research - 12 Oct 2022