• Maintain BUY and MYR3.39 TP, 39% upside, c.3% FY23F yield. Unisem’s 9M22 core earnings of MYR179.1m (+25.9% YoY) met expectations on healthy topline growth and favourable FX movements. We believe its P/E valuation of 15x presents a good entry point into a solid OSAT player with exposure in both Malaysia and China, and is primed for growth with systematic expansion plans in place. Unisem’s short-term earnings trajectory also remains healthy despite the weakness seen in the sector.

• Within expectations. The 9M22 results came in at 72.1% and 74% of our and Street’s full-year estimates. Higher sales volumes and ASPs drove revenue growth (+16.3%), while bottomline was lifted by favourable FX and economies of scale. EBITDA margin was stable at 27.3% despite being affected by sub-optimal operations due to the COVID-19 lockdown in China in 3Q, which caused a c.USD13m loss in revenue. A second interim dividend of 2 sen/share was declared, going-ex on 10 Nov.

• A solid 3Q despite challenges: 3Q22 revenue of MYR439.7m (-5.3% QoQ) and core earnings of MYR56.7m (-19.7% QoQ) was due to lower production volumes at its Chengdu plant, which was affected by power restrictions in the Sichuan Province and the COVID-19 lockdown. YoY bottomline, on the other hand, was up 42.2%, spurred by a stronger topline, favourable FX movement, and lower effective tax rate. Total capex incurred in 3Q22 was at MYR120.1m (2Q22: MYR146.3m), mainly for the construction of the Chengdu and Gopeng plants; while headcount was lower at 6,004 (from 6,152).

• On course for growth in 4Q22, from solid demand for power management and automotive-related chips, as well as favourable FX movement, despite a slowdown in the consumer electronics space, which saw volume contraction in the low-teens. Wafer shortage situation has improved significantly, and should drive utilisation of the Unisem Advanced Technologies (UAT) bumping facility. Management remains optimistic on the growth outlook and views the plant expansions as timely to capture customers’ growing demand, and opportunities from the US-China technology war.

• Expansion plans. The Phase 3A expansion in Chengdu will ready by end of the year and equipment installation should begin thereafter. So far, the export curbs by the US have not impacted Unisem’s operations, as back-end semiconductor processes are generally not affected. Meanwhile, the expansions for the Gopeng facility are on course to be ready by 1H23. Management alluded that various customers are in talks and interested to take up the space in the new facility, as they look to move their supply chain away from China, given the escalated geopolitical risks.

• Forecasts and ratings. We keep our forecasts, as the results are in line. Our TP stays at MYR3.39, based on 21x FY23F P/E (in line with KLTEC’s 5-year mean) after imputing 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 - 28 Oct 2022