Overview

Inari Amertron Berhad (INARI) is an outsourced semiconductor assembly and test and electronic manufacturing services provider. Its principal business involves backend wafer processing, package assembly, and final testing of radio frequency (RF) semiconductor components. The group counts a leading US-based chipmaker as its key customer. Its facilities are located across Malaysia, the Philippines, and China.

Investment Themes

• RF Segment’s Growth Prospects Intact. We believe INARI’s core radio frequency (RF) segment will further benefit from: i) growing RF content demanded per smartphone (to support a broader range of frequency bands), and ii) ongoing 5G smartphone upgrade cycle. The volume of 5G smartphone shipments worldwide is estimated to grow from 657.6mn in 2023 to more than 1.0bn in 2027 at a CAGR of 9.4%.

• Eying for More New Products Launching. The group has been actively working on new projects as part of its customer diversification efforts. These new projects include memory products, high-power LEDs, system on modules, and optical/sensor products. Meanwhile, the group has ventured into testing and packaging of AI-related products. Despite the earnings contribution is relatively small at this juncture, the potential for AI-related products could be huge due to its wide applications. The group is currently working with both a US and a Japanese customer on these new AI-related services.

• The Progress of China JV Remains Intact. The new plant in China has passed the qualification for 4 products. The low-volume manufacturing for these products is expected to take place by 2H2024. Going forward, INARI’s 54.5%-owned Yiwu Semiconductor International Corporation (YSIC) stands a good chance to capitalise on the strong growth of semiconductor industry in China, given that China is actively pushing for self-sufficiency on its semiconductor supply chain amid the persisting US-China trade tensions. Within 5 years, YSIC ambition is to achieve revenue of RMB1.0bn and listing status.

Risk

• Key downside risks include: 1) geopolitical tensions weighing on economic growth and disrupting supply chains, 2) weakening of USD against Ringgit, 3) surge in commodity prices, and 4) material shortages.

Recommendation

• We value INARI at RM4.30 based on 33.0x CY25F EPS, which is around +1.0SD to the stock’s 5-year mean. We like INARI for its growth prospects with catalysts from the 5G and AI theme, traction with customer diversification efforts, and above-industry average profitability. Reiterate BUY

Source: TA Research - 2 Jul 2024