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.
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.
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.
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.
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
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