R e g i o n a l M o r n i n g N o t e s Tuesday, 13 August 2019

SECTOR UPDATE OVERWEIGHT

Technology – Malaysia (Maintained)
Semiconductor: Look Beyond Near-term Lull; Focus On Promising Prospects
Ahead
While near-term prospects remain unexciting on repercussions of trade tensions, we OSAT  FORWARD PE
believe such lull has been overly priced in, which saw a mean reversion on the sector’s (x)
forward PE. Post our ground checks in Penang which suggest a meaningful recovery in 28
3Q19, we see a better risk-reward at this level, supplemented by opportunities from the 26 2sd
24
trade diversion alongside the imminent 5G commercialisation. Maintain OVERWEIGHT. 22 1sd
Top pick: Inari. 20
18 mean
WHAT’S NEW 16
14 -1sd
 Dawn before sunrise; a muted 2Q19. Thus far, weak results were observed among the 12
outsourced semiconductor assembly and test (OSAT) and automated test equipment (ATE) 10
8
players under our coverage. Tight shipment control imposed by most customers on a Aug 15 Aug 16 Aug 17 Aug 18 Aug 19
cautious outlook from the US-China trade dispute seemed to be the common trend across
the industry. Reading through Apple’s 3QFY19 results, while net sales were only down 1% Source: Bloomberg, UOB Kay Hian

yoy (helped by services revenue), sales from iPhone (which are more relevant to Malaysian ATE  FORWARD PE
OSATs) were down 16% qoq and 12% yoy. Taking cues from these indicators, we believe (x)
Inari’s 4QFY19 results (which will be released on 28 August) might not be spared from such 28
weakness. 26
24 2sd
22
 Recovery in sight. However, not all is doom and gloom as our recent channel checks with 20 1sd
local tech companies suggest brighter prospects for 2H19. Our long-term positive conviction 18
16 mean
is reaffirmed post our recent visit to Penang - the electrical and electronics (E&E) hub - 14
12
premised on the appealing trends of: a) higher production ramp-up for OSATs in 2H19; b) 10 -1sd
more R&D activities for ATEs with product commercialisation in 2020; and c) new job 8
6
opportunities from the trade diversion. Near-term catalysts include: a) new-generation 4
Aug 15 Aug 16 Aug 17 Aug 18 Aug 19
flagship smartphone launches in Sep 19; b) seasonal ramp-up for the year-end festive
season; c) orders diverted to Malaysian plants due to MNCs’ relocation strategies; and d) Source: Bloomberg, UOB Kay Hian
meaningful M&A by US and China investors amid trade diversion.
 Bright spots in OSAT, good visibility until year-end. For the smartphone-related
bellwether OSATs, ie Inari and Gtronic, we expect a meaningful recovery in 3Q19 premised
on the new phone launching in Sep 19. Notably, we gather that the current utilisation rate for
Jul-Sep 19 for Inari’s RF segment has ramped up to cope with orders for the new
smartphone. Meanwhile, the certificate of completion and compliance of P34 has been
received in May with both existing and new customers to utilise the capacities eventually.
For Gtronic, we expect light sensor’s monthly run rates of 25m units in 2H19 (1H19: run rate
of 16m units/month). Meanwhile, three new sensor-related products, namely environmental
and bio sensor, sensors related to power and GAN semiconductor devices, and hybrid light
and imaging sensors are on track for commercialisation as early as 3Q19.
 Mean reversion from the 5G euphoria; better risk-reward at this level. Since the trade
war erupted between China and the US, the forward PE valuations for both OSATs and
ATEs have reverted back to mean from the +2SD above the mean during the 5G euphoria.
Valuation-wise, two bellwethers for the sector, namely Inari and Gtronic, have seen their ANALYST(S)
respective valuations trading at two bands below the prevailing PEs they used to trade Desmond Chong
during the peak in early- to mid-18. While we still expect near-term prospects to remain +603 2147 1980
unexciting, we see a better risk-reward at this level, supplemented by opportunities from the desmondchong@uobkayhian.com
trade diversion alongside the imminent 5G commercialisation.
PEER COMPARISON
Share Price Target Market ----------------- PE ---------------- --- EV/EBITDA --- Div Yield P/B Net
9 Aug 19 Price Cap FY18 FY19F FY20F FY19F FY20F FY19F FY19F Gearing
Stock Ticker Rec (RM) (RM) (US$m) (x) (x) (x) (x) (%) (%) (x) (%)
Inari Amertron* INRI MK BUY 1.59 1.80 1,207.8 26.7 18.4 17.7 11.0 10.4 3.6 4.1 (46.8)
Globetronics Technology GTB MK HOLD 1.71 1.68 273.5 15.6 18.9 15.3 10.0 9.0 4.2 3.7 (28.6)
ViTrox Corporation VITRO MK HOLD 7.02 6.70 790.2 31.3 29.9 24.3 25.3 20.9 0.9 6.7 (31.6)
* FYE June
Source: Bloomberg, UOB Kay Hian

Refer to last page for important disclosures. 171

R e g i o n a l M o r n i n g N o t e s Tuesday, 13 August 2019

ESSENTIALS MALAYSIA OSAT SALES GROWTH

(RMm) (%)
 Sales of local and global tech players to see meaningful recovery only in 2020. After 5,500
Malaysia Semicon Sales (LHS)
30
Malaysia yoy Growth (RHS)
the all-time-high sales in 2018, global semiconductor sales are expected to drop 12% yoy in 5,000
2019 before making a recovery in 2020 (+5% yoy), according to World Semiconductor Trade 20
4,500
Statistics. This reflects expected decreases across almost all major categories, with memory 4,000 10
products expected to lead with a 31% drop. Similarly, global semiconductor equipment sales 3,500
0
are expected to decline 4%, according to Semiconductor Equipment and Materials 3,000
International, due to a decrease in investments in major semiconductor companies, before 2,500 -10

staging a recovery in 2020. On the local front, OSAT’s 2019 sales are expected to continue 2,000
-20
1,500
in the downtrend (-1%) after 2018’s lacklustre performance (-2%), with an 8% recovery
1,000 -30
expected only in 2020. For local equipment makers, 2019 and 2020 sales growth are 01 03 05 07 09 11 13 15 17 19F
estimated at 15% and 17% respectively, and should outperform the global benchmarks.
Segment margins are expected to be sustainable at least in 2019 on favourable forex and Source: UOB Kay Hian, Bloomberg
better overall product mix.
MALAYSIA EQUIPMENT MAKERS SALES GROWTH
 5G commercialisation – A key sector catalyst. Despite the near-term lull, (RMm) Equipment Sales (LHS) (%)
1800 Malaysia yoy Growth (RHS) 120
commercialisation of the 5G network could spur demand for semiconductor components in
1600 100
the long run. Essentially, key global semiconductor players are racing to be front-runners in 1400 80
the 5G space, and other players in the supply chain from smartphone brands to telcos have 1200
60
committed investments to roll out 5G networks. In general, relevant 5G players are 1000
40
committed to introducing 5G-related chips and services by 2019 with revenue opportunities 800
20
600
to come by from 2020. In the meantime, while 5G technologies have yet to be rolled out 0
400
commercially and widely, upgrading of the current 4G/LTE network will continue to cater to 200 -20
increase traffic volumes and enhance network quality. 0 -40
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F20F
 Benefitting from US-China trade diversion; MNC customers knocking on the doors.
Our observations suggest that plans for production relocation due to the US-China trade war Source: UOB Kay Hian, Bloomberg

are being made and this could benefit the local supply chain over the medium to longer term. MALAYSIA OSAT NET PROFIT AND MARGIN
Key observations include: (RMm) (%)
700 14
Malaysia Semicon NI (LHS)
a) Enquiries from MNCs to government investment agencies (such as InvestPenang and 600 12
Sector Margin (RHS)
MAEI) to set up plants in Malaysia have increased after the trade war started earlier this 500 10
year. The enquiries came from MNCs from the US, China, the EU and Singapore.
400 8

b) Some MNCs with manufacturing facilities in Malaysia are transferring their production 300 6

capacities to Malaysia or are assessing the viability of such transfers. 200 4

100 2
c) Local OSAT companies have received a lot of enquiries from existing and new customers
0 0
for production transfers. However, local companies are selective on new job opportunities 01 03 05 07 09 11 13 15 17 19F

due to resources constraints and would give priority to products with sustainable demand
Source: UOB Kay Hian, Bloomberg
and margins.
MALAYSIA EQUIPMENT MAKERS NET PROFIT AND
d) Local equipment makers have started to see MNC customers’ machine procurements
MARGIN
diverted to Malaysian plants, which could be due to MNCs’ relocation strategies.
(RMm) (%)
400 40
ASSUMPTION CHANGES Equipment Maker NI (LHS)
350 35
Sector Margin (RHS)
 While we made no changes to the sector call, we cut Inari’s FY19 core net profit forecast by 300 30
25
250
6% to account for the lower utilisation rate at its RF segment. No change to our FY20-21 20
200
earnings estimates. We believe Inari will continue to enjoy from the long-term structural 150
15
10
growth which will ride on the 5G wave. 100
5
50 0
ACTION 0 -5

 Maintain OVERWEIGHT, taking a longer-term perspective and being selective. The recent -50
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F20F
-10

rout in global tech stocks presents opportunities for investors to accumulate high-quality
companies, even though recovery would only be more apparent towards 2H19 and beyond. Source: UOB Kay Hian, Bloomberg

Our top pick in the sector is Inari (BUY/Target: RM1.80), pegged to 21x FY20F PE - the 3-
year average forward PE. We expect a sequential earnings improvement in 1QFY20 on the
back of higher volume loading in RF amid the Sep 19 launch of the US premium
smartphones. We see decent value proposition at this level with the imminent 5G
convergence outweighing the negative impact from the near-term lull.

Refer to last page for important disclosures. 182

R e g i o n a l M o r n i n g N o t e s Tuesday, 13 August 2019

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