VENTURE CORPORATION LIMITED (SGX:V03)
VALUETRONICS HOLDINGS LIMITED (SGX:BN2)
HI-P INTERNATIONAL LIMITED (SGX:H17)
UMS HOLDINGS LIMITED (SGX:558)
AEM HOLDINGS LTD (SGX:AWX)
Singapore Technology Sector - Bracing For A Storm
Bracing shutdowns, demand and supply shock
- Except AEM Holdings (SGX:AWX), we slash earnings of the Singapore Tech universe to factor in factory shutdowns in Malaysia, supply chain disruptions, and demand risks.
- We downgrade Venture Corp (SGX:V03) to HOLD, as we expect corporate capex appetite to plunge, while we upgrade Hi-P International (SGX:H17) to HOLD as risks appear priced in. AEM, UMS Holdings (SGX:558) and Valuetronics (SGX:BN2) remain BUYs.
- Key risks to our view are if we have underestimated demand softness and/or overestimated dividends despite corporates’ healthy balance sheets and cash flow.
Operational updates
- Venture Corp, UMS and AEM’s facilities in Malaysia are closed from 18-Mar to 14-Apr due to a nationwide movement control order (MCO). While Valuetronics’ (90% of production in China) workers have mostly returned, some of its suppliers and customers’ factories are shut as their countries are locked-down.
- Some of Venture Corp, Valuetronics, and Hi-P International’s customers are turning cautious.
- For UMS, we believe softness in consumer electronics end-markets may be cushioned by strength from data centre end-markets from the work from home economy.
- AEM has maintained FY20 sales guidance of SGD360- 380m, and hence has the strongest earnings visibility, in our view. Inside the report, we provide ROEs and estimated earnings CAGRs at various share prices to gauge what the market is currently pricing in.
Healthy balance sheets to tide through the storm
- All companies are in net cash positions, with Valuetronics and AEM strongest (~80% net cash to equity) and UMS weakest (9%). This, coupled with broadly strong FCF generation should underpin our dividend estimates, in our view.
- Overall, customers’ liquidity, gearing and coverage ratios are healthy, and most customers have been good paymasters even throughout the GFC.
Where do we see valuation support?
- While we continue to expect share price volatility, AEM, UMS and Valuetronics’ valuations appear attractive.
- Valuetronics is trading at 1.1x FY20E ex-cash P/E, near crisis lows.
- Despite being in an earnings up-cycle, UMS’ 1.3x FY20E P/B is reminiscent of 2016 and 2019 cyclical downturns.
- AEM (3.9x FY20E EV/EBITDA), which we see as a potential M&A candidate appears attractive compared to the 7-8x Cohu acquired Xcerra for.
- Venture Corp and Hi-P International are trading at 1.6x/ 1.1x FY20E P/B, while GFC troughs were 0.5-0.6x.
- EMS++; high mix, high complexity, low-to-mid volume. Customers largely industrial.
Investment Thesis
- As corporate capex appetite shrinks, we no longer expect Venture Corp to stage a y-o-y earnings recovery in 2H20E. However, we favour its long-term prospects due to strong balance sheet, solid executional track record, and exposure to attractive structural trends (e.g. genomics, wellness, 5G).
What to watch out for
- 2020: Customers increasingly reducing or withdrawing guidance. Customers may also defer new products initially slated for 2H20 launch. We believe new products are a key driver of earnings growth in any given year.
- 2021 and beyond: Venture Corp affirms share gains from customers' relocation to its facilities in ASEAN; Venture Corp successfully launching key products for customers both current and new.
Current direct impact of Covid-19
- Facing backlog in 1Q20 due to shortage of components and buffer orders by customers.
- Malaysia factories (~65% of capacity) are partially shut from 18-Mar to 14-Apr.
Indirect risks of Covid-19/ other risks
- End markets turning cautious which results in delays of new product introductions, and/ or negatively affect volumes. Some customers are already turning cautious.
- Major M&As by key customers that may disrupt short term volumes.
Company report:
- Semiconductor back-end equipment manufacturer. IP owner to its product suite
Investment Thesis
- AEM is a beneficiary of Intel's capacity expansion in 2020 and structurally increasing its 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.
What to watch out for
- 2020: AEM affirming guidance; demand supply dynamics of Intel's products remain favourable; Intel's and AEM's operations not materially hindered by Covid-19 related supply disruptions.
- 2020 and beyond: Continued evidence that AEM's solutions are gaining traction, e.g. new customers and new products sold to Intel.
Current direct impact of Covid-19
- Penang facility (secondary site) closed from 18-Mar to 14-Apr. Deliveries expected to be delayed Remains confident of achieving full year revenue guidance of SGD360-380m.
Indirect risks of Covid-19/ other risks
- For 2020, we believe the key vulnerability is if AEM faces a shortage of components amid Covid-19.
- For 2021E, we believe the key earnings risk is if high base effects of HDMT/ STHI equipment shipments in 2020 may result in tough y-o-y comparisons.
Company Report
- Precision engineering and assembly for front-end semiconductor equipment manufacturer.
Investment Thesis
- Beneficiary of global semiconductor capex spending recovery through key customer Applied Materials. However, with supply chain disruptions and uncertain demand outlook for consumer electronics, we now expect the pace of recovery to be shallower.
What to watch out for
- 2020: AMAT’s customers affirming capex guidance; favourable memory price and inventory dynamics. We note that AMAT has recently pulled 2QFY20 guidance, although no comments have been made regarding full year.
- 2021: Continuation of recovery in 2020, recovery in memory investments approaching full swing.
Current direct impact of Covid-19
- Penang facility (volume manufacturing) closed from 18-Mar to 14-Apr.
- Customer Applied Materials has withdrawn 2QFY20 guidance amid supply chain and manufacturing operations disruptions.
Indirect risks of Covid-19/ other risks
- We are concerned that a global economic shock due to Covid-19 may delay the recovery of memory investments, and/or investment appetite in logic/ foundry may reduce.
Company Report
- Fully integrated EMS; customers range from consumer electronics to industrial and commercial electronics.
- > 90% capacity in China.
Investment Thesis
- Diversification efforts in Vietnam is expected to provide a long-term source of growth. Valuetronics has delivered double-digit ROEs since listing in 2007, indicating track record of solid execution. We believe earnings risks have adequately been priced in as Valuetronics approaches forward ex-cash P/E levels reminiscent of crisis times.
What to watch out for
- FYMar21 and beyond: Vietnam expansion plans are on track (i.e. moving to new plant in 1QCY20, new facility by 2021); allocations from customers are intact.
Current direct impact of Covid-19
- > 90% production in China. China operations resumed in late Feb, with 80% of workers back at work.
- Some suppliers and customers are temporarily shutting down factories to halt the spread of Covid-19.
Indirect risks of Covid-19/ other risks
- Automotive products account for around 15% of revenue. Automotive customer has withdrawn guidance amid heightened uncertainties.
- Softer than expected volumes from other products, both in consumer electronics (PCBAs, smart-lighting) and commercial (transaction printers, industrial GPS).
Company report:
- EMS - key capabilities in plastics, metals machining and assembly. Highly consumer electronics focused. Apple makes up 40-50% of revenue.
Investment Thesis
- Amid margin pressure due to increasingly competitive pricing environment, and negative operating leverage, Hi-P International is guiding for FY20E earnings to be lower y-o-y.
- As demand for consumer electronics wane, implying weaker volumes, we see earnings risks from negative operating leverage.
What to watch out for
- 2020: Update in management's guidance on revenue and earnings direction y-o-y; demand dynamics of its customers' (e.g. Apple) products.
Current direct impact of Covid-19
- We estimate 8-9 out of its 12 sites are in China.
- China operations resumed in late Feb. However, we see dismal 1H20 performance as certain customers based in China have long supply chains prone to disruptions.
Indirect risks of Covid-19/ other risks
- Softer than expected volumes in 2H20E being unable to offset dismal 1H20E performance due to weakening consumer confidence.
Company report:
Gene Lih Lai CFA
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2020-03-29
SGX Stock
Analyst Report
13.900
DOWN
18.23
0.82
DOWN
0.940
0.780
DOWN
1.00
0.96
DOWN
1.130
2.820
SAME
2.820
