AEM Holdings - Maybank Kim Eng 2019-08-26: Estimating Hybrid Project’s Potential


AEM Holdings - Estimating Hybrid Project’s Potential

Potential 26% upside to current target price; BUY

  • We estimate AEM HOLDINGS LTD (SGX:AWX)'s blended FY20-21E fair value of:
    1. potential contributions from its hybrid project for a key customer;
    2. some frontloading of HDMT test handlers (TH) to FY20E; and
    3. an expanded total addressable market (TAM) of HDMT TH, as its key customer introduces 7nm chips in 2021.
  • Our ROE-g/COE-g fair-value outcome is SGD1.77, 26% higher than our current Target Price. We see positive revenue guidance as a catalyst while a sharp demand drop for its key customer’s chips is a key risk.
  • Maintain BUY and ROE-g/COE-g Target Price of SGD1.40.

Hybrid project to support earnings growth

  • In our scenario analysis, AEM’s FY18-21E earnings CAGR is 7% vs our current -0.4%. Pricing, quantity and margin assumptions to estimate its hybrid-project contributions are more conservative than for HDMT TH during the latter’s production ramp-up in 2016-17. This is to factor in the possibilities that
    1. the hybrid equipment being less complex than HDMT TH; and
    2. initial orders could be smaller than HDMT TH.
  • See attached PDF report for details of scenario analysis.

Potential for expanded HDMT TAM

  • For FY19E, AEM attributes its production ramp-up of 10nm chips to strong orders from its key customer. As this customer pushes for 7nm chips in 2021, we see potential for expanded TAM, as well as some frontloading of HDMT equipment into FY20E from FY21E.
  • AEM believes equipment orders are higher at new technology nodes due to increased testing requirements to ensure chip reliability.

Revenue clarity also a catalyst

  • We believe clarity for FY20E can provide a sharp drop in demand for its customer’s chips, as this could create slack capacity and slow down equipment orders.

Other updates

  • Afore, its MEMS and cryogenics prober subsidiary, has secured an order for a wafer level test handler for the labs of a market-leading German sensor supplier in the automotive and consumer industries. This is an important first step in a multi-year sales process. The long-term potential of this customer is exciting, as any meaningful adoption of AEM’s test approach by this customer could potentially set the standard for other industry players to follow.
  • Afore has also received enquiries regarding its cryogenics prober solutions from other quantum computing players. Its current customer is Intel – which claims that this prober is able to accelerate its development of quantum computing by shortening the time to collect data. Intel claims that this tool is able to automate and collect critical data to a matter of minutes from weeks (link).
  • AMPS (system-level test solutions): AEM has delivered early commercial systems to its memory customer and is working to secure more orders. AEM also aims to develop accounts with other semiconductor manufacturers. Based on encouraging industry feedback on the need for system-level tests, it will continue to invest in engineering and marketing talent to maintain its edge as competition heats up.

Lai Gene Lih CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-08-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.400 SAME 1.400