We reiterate our OVERWEIGHT call on the technology sector for 3QCY21. While there is a possibility of double booking amidst the current chip shortage situation, we are not overly concerned as the bargaining power has shifted to the vendors. With capacity expansion expected to lag behind by 6 to 12 months, certain vendors have imposed a non-cancellation clause up to one year for customers wanting to lock in a steady flow of supplies as demand for end-devices remains elevated. 

This has sparked capex spending even among smaller fabs like Global Foundries which recently allocated US$4b for its new expansion in Singapore, potentially benefiting 

KGB (OP; TP: RM2.60) given its strong presence in Singapore and China. 

This has thrust Kelington Group (OP; TP: RM2.60) into the limelight as it stands to benefit from these fab expansions given its strong presence in China and Singapore. The group is in the midst of tendering for GlobalFroundries ultra-high purity (UHP) gas delivery project and is expecting memory maker Micron Technologies to announce its new Singapore fab expansion in 3Q or 4Q this year as supply of memory chips is tightening

Double booking? We reiterate our OVERWEIGHT call on the technology sector going into 3QCY21. While there is a possibility of double booking amidst the current chip shortage situation, we are not overly concerned as the bargaining power has shifted to the vendors. The on-going pent up demand for end-devices has now resulted in tight supply while capacity expansion is expected to lag behind by 6 to 12 months or even longer as construction of new plants has been delayed owing to lockdowns that are still being enforced in certain countries around the world. This has allowed vendors to impose a non-cancellation clause up to one year for customers wanting to lock in a steady flow of supplies.

Expansion is inevitable as demand continues to surge. While bigger players like TSMC and SMIC have begun their expansion earlier this year, there are companies which adopted the wait-and-see approach to avoid the risk of demand cooling off. However, demand is showing no signs of abating as smartphone shipment in 1QCY21 saw 26% YoY growth while laptop shipment in 1QCY21 jumped 55% YoY. This was due to unfulfilled orders carried forward into 2021 coupled with additional orders brought on by further lockdown implementations as many firms continued to scramble for end-devices to enable employees to work from home. As a result, smaller players like GlobalFroundries recently allocated US$6b to expand its capacity in Singapore (US$4b), Germany (US$1b) and United States (US$1b) and the 

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CHAPTER 3

Kenanga forecasts higher orders for Kelington in FY21

TheStar Wed, Jan 20, 2021 08:56am - 1 week ago

 

KUALA LUMPUR: Kenanga Research has upgraded its earnings outlook on Kelington Group Bhd on expectation of another year of record high orders.

 

In the FY20, the group secured an all-time high order of RM490mil with SMIC continuing to award more jobs.

 

Existing SMIC jobs at hand are expected to keep the group busy until June, excluding on-going 2021 tenders.

 

"We came away from a conference call with the management feeling pumped-up over the group’s prospects.

 

"With increased expansions among wafer fab players taking place this year due to a surge in demand for semiconductor components, we believe that FY21 could yet be another record year, building upon the existing all-time high order of RM490m secured in FY20," said Kenanga.

 

It said Kelington as the incumbent has the advantage in winning the 2021 tenders, which will consist of UHP holl-up in all four SMIC fabs.

 

The group has also secured sub-contract jobs from TSMC via a partner as well as Micron, which is looking to expand due to the global memory shortage.

 

Kelington's tender book currently stands at RM900mil, spread equally across Malaysia, Singapore and China.

 

"Being regarded as a preferred vendor among large MNCs, the group is in a favourable position to benefit from various on-going expansions by the likes of WD Penang (announced RM2.3b investment), Micron SG (new fab construction), and Lam Research," the research house added.

 

Meanwhile, Kelington's LCO2 plant is expected to be halal-certified in a month's time, which will further increase demand as the group penetrates the food and beverage industry.

 

The plant utilisation has recently increased to 100% from 50% due to strong orders from Singapore, leading to higher average selling prices.

 

Kelington's operations in all 17 sites in Malaysia are on-going despite the movement control order as it has received approval as an essential service.

 

Kenanga maintained "outperform" on the counter while raising its target price to RM3.10 from RM2.30 based on a higher FY21 forecast price-earnings ratio of 32x.

 

"We believe KGB deserves to be traded at a higher multiple due to its exclusive exposure to the front-end semiconductor boom, which is very rare given that Malaysia is a back-end centric market," it said

 

SEE_ Research 

Latest update on the 

Short Term 

Target Price RM 1.50 

 

 Remarks 

A.  LCO2 = Liquid carbon dioxide

 

B. SMIC = Semi-conductor Manufacturing International Corporation, China

 

C. TSMC = Taiwan Semiconductor Manufacturing Company, Taiwan

 

D. UHP = Ultra high purity

 

Thanks for reading and see you in the next post.

THE ABOVE IS NOT A BUY OR SELL CALL AND IS ONLY A PERSONAL OPINION, WRITTEN AS ARTICLE FOR SHARING PURPOSES TO KLSE COMMUNITY MEMBERS.

DISCLAIMER: Investment involves risks, including possible loss of investment and other losses. 

This article and charts are provided for information only and should not be construed as a solicitation to buy or sell any of the instruments mentioned herein. The author may have positions in some of these instruments. The author shall not be responsible for any losses or profits resulting from investment decisions based on the use of the information contained herein. If investments and other professional advices are required, the services of a licensed professional person should be sought.

  

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(SENSING EAGLE EYES RESEARCH)