Investment Merits

• Attractive risk-reward at current trough backed by solid orderbook

• Growth prospects with the proliferation of 5G
• Wider adoption of complementary metal-oxide semiconductor  (CMOS) image sensor tester
• Capture the divergence of semiconductor supply chain

Company Profile

Aemulus Holdings is principally involved in the design and development  of automated test equipment (ATE), test & measurement instruments, and provision of design consultancy and test-related services. Since  2005, the ATE unit has targeted the semiconductor industry. It focuses  on radio frequency (RF), image sensors, and mixed-signal  semiconductor test markets. This is followed by the automotive and  lighting industries.

Highlights

Broader adoption of tester solutions.There is an enormous  addressable market for surveillance, and 3D sensing, as well as  cameras in Internet of Things (IoT) devices, smartphones, and  automotive applications with increasing pin counts and integrated  circuits needed for advanced electronic devices. Additionally, the  CMOS image sensor (CIS) tester can be further customised to cater to  higher-end solutions (with higher ASPs and margins) at the front-end  wafer level as well as display driver integrated circuits or DDIC testing.  Meanwhile, the solutions for automotive industries remain solid with  unfulfilled orders on hands.

5G technology.

Wireless communication, connectivity, mobile,  consumer electronics, IoT in the era of 5G technology creates  exponential demand growth for signal testing for all the wireless related  components from filters, power amplifiers, transceivers, switches, and  chipsets. While the current dire market demand may not be exciting, the  enormous market potential remains. Aemulus has successfully  penetrated into the supply chain of high growth RF component leading  players in China over the past two years. By boosting testers in both RF  (AMB7600-S) and RF surface acoustic wave or SAW (AMB7300) filters,  the high growth in 5G content, higher adoption, and increased  complexity should bode well for the company.

Divergence of semiconductor supply chain. Divergence of semiconductor supply chain. China, an enormous market for the tester,  may continue to be a boon for Aemulus as it continues to build on its  sales channel through its partner and capture the non-America supply  chain. Aemulus’ 40%-owned TMSS Technology (TMSS) – a JV with  Tangren Microintelligence – is primed to benefit from the divergence of  the semiconductor supply chain, incited by the US-China trade war and  US sanctions on advanced chipmaking technologies. The Made in China 2025 policy may have also made varying degrees of headway – despite the self-sustaining vision in the semiconductor ecosystem still a  distance away, the funding the Chinese Government has been willing to  pour into expanding semiconductor capabilities would bring countless  opportunities. Besides, Aemulus may have successfully penetrated the  supply chain of high growth RF component leading players in China.  Although the traction TMSS suffered in 2HFY22 (Sep) along with the  sector slowdown, we believe the reopening in China may help to  reignite interest and sales.

Company Report Card

Latest results.

1HFY23 revenue slumped by 60% YoY, inflicting two  consecutive of quarterly loss amounted to MYR9.5m (1HFY22:  +MYR9.1m) due to cautious capital expenditure from customers that  foresaw a slowdown in the semiconductor industry and a deferment of  delivery for the quarter under review due to a slowdown in customers’  expansion pace.

Balance sheet/cash flow.

As of 2QFY23, Aemulus is in a net cash  position of MYR28.1m. The negative cash flow from operations was  largely on an increase in inventory given the longer lead time for major  materials and rise in receivables with growing revenue over the past two  years.

Dividend. There is no dividend policy and we do not expect one in the  near future as the company is still very much in a growing phase.

Management. Aemulus is headed by the founder-cum-Executive  Director/CEO Ng Sang Beng. Ng is supported by CTO Wong Shee  Kian, and CFO Ng Chin Wah. They share extensive professional  experience in the semiconductor sector, and together hold a substantial  stake within the group.

Investment Case

An attractive risk-reward at current trough. The current down cycle  of the semiconductor sector has sent Aemulus’ 1HFY23 bottomline into  the red after over two years of strong performance. The near-term  prospects may continue to be undermined by the profound weakness in  the PC and smartphone/tablet markets, however the automotive and  enterprise storage markets may see some recovery in the next 3-6  months. Share price is also near the trough level with limited downside,  providing attractive risk-reward proposition. While we are unsure of the  next upcycle for the sector, the resumption of delivery from its current  solid orderbook cover ratio of 0.8x should steer the company to a better  2HFY23 and beyond.

Fair value. Pegged to a target 25-30x P/E on FY24F earnings, fair  value could range between MYR0.43 and MYR0.52. The target P/E is  within the range of the 5-year mean for local equipment players (28- 40x). We believe earnings recovery is key for the rerating of this stock  and reinstate investor confidence, taking nothing away from the  technology of its tester solutions, and R&D capability to innovate and  capture growing technology trends.

Key risks include technology obsolescence, slower market expansion  in China, weaker-than-expected sales, and unfavourable FX.

Source: RHB Securities Research - 16 May 2023