Singapore Semicon Equipment - Maybank Kim Eng 2020-03-10: Shaken, Not Stirred

Singapore Semicon Equipment - Maybank Kim Eng Research | SGinvestors.io AEM HOLDINGS LTD (SGX:AWX) UMS HOLDINGS LIMITED (SGX:558)

Singapore Semicon Equipment - Shaken, Not Stirred

BUY the dip; milestones intact

AEM – Intel ‘relatively normal’ amid Covid-19

  • Intel updated on 2-Mar that its operations, both group and in China (including a test and packaging facility in Chengdu) are “relatively normal” notwithstanding Covid-19. Intel’s stability in outlook is because it entered 2020 from a position of shortage of its chips relative to customer demand.
  • Intel maintained its plans to expand wafer capacity by 25%. Intel has so far not been able to rebuild both its own and customer inventory, although it still aspires to meet market demand within 2020. This would imply demand-supply dynamics are still in favour of Intel, in turn supportive of our view towards AEM.
  • In late-Feb, AEM updated that it is confident of achieving its raised revenue guidance of SGD360-380m, and that components from China can also be sourced from ex-China suppliers.
  • AEM is beneficiary of Intel's capacity expansion in 2020 and structurally increasing focus on various packaging and testing technologies. Growth initiatives with new customers are also beginning to pay off, e.g. with Huawei and new memory customer.
  • See AEM Holdings Share Price; AEM Holdings Target Price; AEM Holdings Analyst Reports; AEM Holdings Dividend History; AEM Holdings Announcements; AEM Holdings Latest News.
  • See recent report: AEM Holdings - Maybank Kim Eng Research 2020-02-26: Continues To Outperform.

UMS – Lam Research maintains FY20 outlook

Risks to our view

  • Amid a highly dynamic situation across supply chains, we believe any severe shortage of components is a key risk to our view for both AEM and UMS. Given Intel’s aspirations to meet market demand for its chips, we see order cancellations at AEM as a low-probability event.
  • For UMS, we believe a key demand risk is if a weaker economic outlook results in lower investment appetite for semiconductor equipment, and/or delayed recovery in memory investments. That said, we note various observations that server demand remains strong due to the work-from-home economy.

Additional updates

Intel (Morgan Stanley TMT conference, 2 Mar-20)

  • Reminded that cloud workloads are increasingly customized. Intel is able to fulfill such requirements from its capabilities ranging from software, AI, architectural elements and memory.
  • Intel believes it could achieve technological parity with its 7nm node and regain leadership with 5nm.
  • As Intel meets market capacity for its chips in 2020, it aspires to win back some market share, particularly from lower performance PCs.
  • Relative to demand picture, Intel observes critical shortages of NAND, which is a tailwind for NAND recovery y-o-y.

Lam Research (Investor Day, 3 Mar-20)

  • Sees wafer fab equipment (WFE) market of USD60b p.a. over the next two years as a reasonable assumption. With strong growth of semiconductors, increasing manufacturing complexity and device scaling challenges, WFE levels have inflected higher from USD30b p.a. 5-6 years ago. These drivers are structural and are expected to drive sustainable growth in WFE across future cycles.

Applied Materials (1QFY20 earnings call, 12 Feb-20)

  • For its semiconductor systems business, AMAT sees 1H:2H as roughly similar HoH, although 2H20 dynamics largely hinge on the rate of memory investments recovery. 2021 is seen as “up a fair amount” over 2020.
  • No change to full year guidance. While some revenues are deferred in 2QFY20 in light of Covid-19, AMAT expects these to be realized in 2HFY20.
  • Near term, AMAT sees recovery thesis unchanged, from robust logic/foundry spending, and memory investment recovery.
  • Logic/ foundry demand drivers are from the leading edge, in relation to 5G rollout, and also from IoT, communications, automotive, power and image sensor markets.
  • Sees NAND in early stages of recovery. Inventory levels were at 4-5 weeks from 8-10 weeks a year ago.

Lai Gene Lih CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-03-10
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