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Spotlight on Technology - DBS Research 2020-04-01: Reality Bytes

Spotlight on Technology - DBS Research | SGinvestors.io AEM HOLDINGS LTD (SGX:AWX) FRENCKEN GROUP LIMITED (SGX:E28) FU YU CORPORATION LTD (SGX:F13) HI-P INTERNATIONAL LIMITED (SGX:H17) UMS HOLDINGS LIMITED (SGX:558) VENTURE CORPORATION LIMITED (SGX:V03)

Spotlight on Technology - Reality Bytes

  • Tech companies hit on both supply and demand front.
  • Expect semiconductor to fare better as it forms part of the essential goods supply chain – BUY calls on AEM, UMS, Frencken Group.
  • Valuations more attractive now; strong balance sheet and cashflow, all net cash position.
  • 13/10% cuts in FY20F/FY21F earnings. Expect Venture Corp (BUY) to emerge stronger; downgrade Fu Yu to HOLD.



Impact of COVID-19


Supply and demand affected.

  • The COVID-19 pandemic has hit the business world at an unprecedented scale and speed. It has caused the closures of businesses, the stoppage of factory outputs, and the disruption to global manufacturing industries and their supply networks. The issue is compounded with the lockdown orders and the restriction in movements, leading to a demand crisis.
  • Even with the resumption of production, companies are slow to resume their normal productions due to various factors. These include the shortage of parts; the shortage of workers, the stringent requirements for companies to establish adequate protective measures, and the slow recovery of transportation network capacity.
  • Companies are finding alternative solutions, including shifting orders to secondary suppliers to make up for the missed delivery from their primary suppliers and moving some orders to their factories in other regions less affected by the virus.


China and Malaysia shut down non-essential businesses

  • The escalation of the coronavirus (COVID-19) in China and Malaysia has resulted in these two countries temporarily shutting down all non-essential businesses.

China: Most factories resumed operations on 10 February (following a three-week shutdown).

  • On 27 January, China’s State Council announced a one-week extension of the Lunar New Year holiday. The revised holiday period was 24 January to 2 February. However, depending on the severity of the situation in each province, provincial governments could delay the resumption of non-essential business activities. Most provincial governments extended the shutdown to 9 February.

Malaysia: Implements Movement Control Order (MCO) for four weeks.

  • On 16 March, in a bid to combat the rising number of COVID-19 cases in Malaysia, the Malaysian government initially implemented a two-week MCO which restricted inbound and outbound movement and the temporary closure of non-essential business operations from 18-31 March. However, despite the measures, the number of cases in Malaysia continued to soar and the Malaysian government has extended the MCO until 14 April.
  • From epidemic to pandemic in March; supply chains disrupted. In March, the number of COVID-19 cases began to rise globally, outside of China. The total case count in the US, Europe, and Korea had reached 496,411 as of 31 March. As such, the US has implemented a 15-day shutdown of non-essential businesses.
  • According to the Semiconductor Industry Association (SIA) and the World Semiconductor Trade Statistics (WSTS), the US accounted for 45% of the global semiconductor market share in 2018.

Silver lining – Relief from the flattening of cases in China and Korea after approximately one month.

  • China and Korea were previously reporting double-digit growth in new cases for weeks. However, both countries took drastic measures which included rapidly testing potential cases, disinfecting streets, and the locking down of provinces yielded results as the number of new cases begun to flatten out after c.1 month from the surge in new cases. China has since gradually resumed normal business activities across provinces, with the most recent being the lifting of its lockdown on Hubei province. This provides us with some relief that the US and Europe can potentially contain the spread of the virus in mid-to-late April.


Not all is doom for the technology sector: Work-from-home drives demand for servers and storage

  • Work-from-home drives demand for server DRAM, processors, and storage. Amidst the COVID-19 outbreak, governments are stepping up measures to minimise contact among individuals and companies are implementing a work-from-
  • home option/policy for its employees. This has shifted face-to-face meetings to teleconferencing and the demand for unified communications and collaboration (UC&C) solutions such as Zoom, Webex, Microsoft Teams, and Skype, has spiked. Cisco,
  • which operates Webex, saw a 22-fold increase in the amount of network traffic in February.
  • To handle the surge in concurrent users, more computing power and storage capacity are required for these UC&C solution companies. TrendForce has raised its forecast for 2Q20 server DRAM price trend from a 15% q-o-q increase to 20%.


Semiconductor – Faring better so far but disruption to supply chain inevitable


No slowdown in February despite the epidemic.

  • SEMI recently published its preliminary reading of the 3-month moving average of the worldwide billings for North American-based semiconductor equipment manufacturers in February 2020 and the figure (US$2.4bn; +26.2% y-o-y) highlighted the continued recovery in the semiconductor industry. This growth was despite the shutdown in China amidst the COVID-19 outbreak.
  • Downside risk prevails; outlook muted. However, going forward, though the factories for the semiconductor players were allowed to operate partially in countries affected by the lockdown, production will still be at a sub-par level. End-demand is also expected to be weaker on the back of a slower global economy with some countries, including Singapore, expected to fall into a recession in 2020. Hence, we expect the semiconductor equipment billings data to taper down. However, on a y-o-y basis it could still record positive growth given a weak 1H2019.
  • Overall, we expect the semiconductor sector to fare better than others in the technology value chain, as it forms part of the essential goods supply chain.


Impact on technology companies

  • Technology companies are hit on both fronts, the supply and demand side. The shortages of raw materials, components, workers and slow recovery of logistic network have disrupted the supply chain while job losses, slower wage growth and possibly recession in certain countries lead to weaker end-demand.

Beneficiary of strong USD.

  • The COVID-19 crisis has also led to the strengthening of the USD against local currencies like CNY, SGD and RM. The strengthening of the USD is beneficial to technology companies as most of their revenues are in USD while costs are mainly in local currencies. YTD, USD has strengthened c. 2-6% against RMB, SGD and RM.

13/10% cuts in FY20F/FY21F earnings.

  • In terms of earnings forecasts, we have revised down FY20F and FY21F figures for stocks under our coverage by an average of 10-13%, mainly on supply disruptions, weaker demand and margin pressure. Fu Yu and Hi-P International saw a steeper cut in FY20F earnings of 25% and 21% respectively.
  • We expect lower revenue across all segments for Fu Yu, except Medical. Hi-P International is mainly on weaker mobile phone sales and margin pressure. Our target prices are cut by 27% on average. We have also downgraded Fu Yu to HOLD from BUY.


AEM Holdings (SGX:AWX): Revise Target Price to S$2.29; no change to FY2020F/21F earnings; maintain BUY.


No changes to FY2020F sales guidance.

  • AEM released a statement announcing that its FY2020F revenue guidance of S$360-380m remains unchanged. It is also expecting a record sale of S$135-145m in 1Q20, which is 38-48% higher than its last record quarter in 2Q19 (S$98m).

Malaysia factories unlikely to be fully shut down.

  • The MCO issued by the Malaysian government requires all non-essential businesses to be shut down until 14 April. AEM has one factory located in Malaysia (Penang) and c.34% of its revenue in FY2018 was from Malaysia. However, we believe that with a portion of Intel’s chips used in mission-critical medical applications, AEM’s factory in Malaysia should still be able to operate, albeit at a reduced capacity. We estimate AEM’s Malaysia factory to be operating at 30-40% production capacity.

Intel’s factories are still in operation; company cites uncertainty in outlook.

  • On 19 March, Intel’s CEO announced that its business as usual for Intel’s vast manufacturing operations despite the shutdown in the US. He said that it is fulfilling more than 90% of orders on time. However, he also believes that there could be a financial impact on the company’s business due to a slowdown in the global economy.

Working from home raises demand for server processors.

  • With more companies implementing a work-from-home policy for its employees amidst the COVID-19 outbreak, the demand for laptops and server capacity has surged. The use of remote working applications such as Zoom, Webex, and Skype has increased dramatically. Cisco saw a 22-fold increase in the amount of network traffic in February. More computing power is required for these communication companies to cater to the increased users and as a result, server chip demand has risen.

Maintain BUY with a lower Target Price of S$2.29 on the back of a negative economic sentiment.



Frencken Group (SGX:E28): Revise Target Price to S$0.74; 16%/15% cuts to FY2020F/21F earnings; maintain BUY.


Factories in Malaysia partially affected; China plants have resumed operations.

  • Frencken Group has received approval from the authorities in Malaysia to continue with its mechatronics manufacturing operations in Bangi, but with a reduced number of employees during the MCO period. Its factories for the IMS division in Sungai Buloh and Johor remain closed during this period.
  • In China, the Group’s five factories in Wuxi, Chuzhou, Tianjin and Zhuhai (Jinding and Nanshui) have resumed normal operations and are fulfilling orders from customers.

Exposure to Medical segment an added advantage in this pandemic crisis.

  • For the Medical division, Frencken Group is involved in components and sub-assembly for CV (cardiovascular) patient tables, histopathology digital scanners, X-ray gantry and telescopic tubes and micro motors for heart implants. Exposure to the Medical segment could be an added advantage during this pandemic crisis as some countries like Italy and Spain have already reached their limits on medical resources.

Expect better performance for Semiconductor.



Fu Yu (SGX:F13): Revise Target Price to S$0.21; 25/28% cuts to FY2020F/21F earnings; cut to HOLD


Shutdown of Malaysia factories, Singapore factories’ production capacity not impacted.

  • To comply with the MCO issued by the Malaysian government, two of Fu Yu’s factories in Malaysia will be temporarily shut down. We believe that the four-week shutdown is unlikely to have a significant impact on the Fu Yu’s revenue (c.2%).

Anticipate higher revenue in the medical segment.

  • The medical industry is facing a stress test as the number of COVID-19 cases increase globally. Italy and Spain have reached their limits on their medical resources and are forced to triage their patients. Fu Yu’s medical business segment accounted for 16% of its FY2018 revenue (latest available) and we are anticipating a 15% y-o-y growth in FY2020.

Lower revenues across all other segments in FY2020F.

  • While we may see growth in its medical segment, we foresee a contraction across its other business segments. As businesses are unable to function normally and unemployment rises, we could see weakened demand across all other business segments (Printing & Imaging, Networking & Communications, Consumer, and Automotive & Power Tools) as companies and consumers cut back on spending.

Cut to HOLD with a lower Target Price of S$0.21 on the back of lower FY2020F/21F revenues and gross profit margins.

  • We have reduced our FY2020F/21F revenue forecasts by 10/13% due to a weakening of the global economy and supply chain disruptions. We have also cut gross profit margins for FY2020F from 22.3% to 18.8% on the back of lower utilisation levels and shutdown in factory operations in China and Malaysia. Overall, our FY2020F/21F earnings forecasts are lowered by 25/28% and we derive a lower Target Price based on its 12- month forward PE of 13.7x.
  • See Fu Yu Share Price; Fu Yu Target Price; Fu Yu Analyst Reports; Fu Yu Dividend History; Fu Yu Announcements; Fu Yu Latest News. 


Hi-P International (SGX:H17): Revise Target Price to S$0.85; 21%/10% cuts to FY2020F/21F earnings; Maintain HOLD


Weaker mobile phone sales partly mitigated by the less volatile Consumer Electronics.

  • Apple's iPhone shipments in China plunged more than 60% in February, when the coronavirus outbreak first started. With the widespread of the virus to the rest of the world, iPhone sales in 2020 is expected to be weak. Apple is now unable to meet the revenue guidance it provided for the March quarter. Apple had forecast revenue of US$63-67bn for 2Q FY September 2020, vs revenue of US$58bn in 2Q19.
  • The Consumer Electronics segment, which accounts for the bulk of about 40% of total revenue, is less volatile. We are now expecting flat-to-lower single-digit negative growth, vs our previous expectation of stable single-digit growth.

Company may see small loss in 1Q20.

  • With more than half of its factories in China affected by the shutdown, 1QFY20F performance would be weak. Though the Group is drawing down on its inventory to tide over this period, the whole supply chain, including Hi-P International’s customers, are affected. Thus, Hi-P International could register a small loss in 1QFY20F.

Continues to divest its operations out of China and is actively on the lookout for M&A targets.



UMS Holdings (SGX:558): Revise Target Price to S$0.77; 11%/11% cuts to FY2020F/21F earnings; Maintain BUY


Update on factory closure.

  • UMS' Penang factory will remain closed until 14 April 2020, in compliance with the Malaysian Government's announcement on 25 March 2020 to extend its MCO nationwide to contain the COVID-19 outbreak.
  • The Group's factory in California, US will stay closed in compliance with the California State's "Stay at Home" Executive Order in the US issued on 19 March 2020, until further notice. However, its production facilities in Singapore will remain in operation.
  • Key customer toning down guidance. Key customer Applied Materials (AMAT) has recently withdrawn its business outlook for 2Q FY October 2020 because the COVID-19 pandemic is affecting its supply chain and manufacturing operations. AMAT had previously provided a bullish guidance for 2Q FY2020, expecting revenue to surge by c.23% y-o-y and earnings to jump 50% y-o-y, during the release of its 1Q FY2020 results in February.
  • With c.90% of its revenue attributed to AMAT, we have trimmed our earnings forecasts for FY2020F and FY2021F by 11% each. Accordingly, our Target Price is reduced to S$0.77, pegged to +0.5SD valuation (vs +2SD previously) or 11.6x on FY2020F earnings.
  • See UMS Holdings Share Price; UMS Holdings Target Price; UMS Holdings Analyst Reports; UMS Holdings Dividend History; UMS Holdings Announcements; UMS Holdings Latest News. 


Venture Corp (SGX:V03): Revise Target Price to S$15.80; 5%/3% cuts to FY2020F/21F earnings; maintain BUY


Factories affected by shutdown.

  • As most of Venture Corp’s factories are in Malaysia, it is affected by the MCO. The resumption of production in its China plants and the Singapore plants remaining in operation should help to mitigate some of the negative impact from its Malaysia plants.

New product introductions to cushion impact.

  • In FY2020, Venture Corp will be supporting new product introductions from its existing partners across multiple selected technology domains, such as Life Science, Healthcare & Wellness, Instrumentation and Networking & Communications. It also expects to gain momentum with several new partners in the Life Science & Genomics and Healthcare & Wellness domains with growing contributions beyond 2020.

Exposure to Medical segment an added advantage in this pandemic crisis.

  • Venture Corp’s business segments include Medical Devices and Equipment, Healthcare & Wellness Technology, and also Life Science, Genomics and Molecular Diagnostics, which can be in high demand during this pandemic crisis.
  • Some countries like Italy and Spain have already reached their limits on their medical resources. Furthermore, if R&D is required, Venture Corp can tie up with its customers to perform R&D together. Venture Corp is not new to this kind of collaborations with customers in manufacturing new products. The company has been working with industry leaders in the various segments to develop new products. These include working with a leading laboratory analytical instrument company to manufacture their next-generation mass spectrometry instrument, and also in the Life Science domain, collaborating on a partnership with an emerging leader to develop next-generation equipment.

Venture to emerge stronger.



Read also technology company reports:





Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-04-01
SGX Stock Analyst Report BUY MAINTAIN BUY 2.29 DOWN 2.520
BUY MAINTAIN BUY 0.74 DOWN 1.060
HOLD DOWNGRADE BUY 0.21 DOWN 0.350
HOLD MAINTAIN HOLD 0.85 DOWN 1.370
BUY MAINTAIN BUY 0.77 DOWN 1.120
BUY MAINTAIN BUY 15.80 DOWN 18.500


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