AEM HOLDINGS LTD (SGX:AWX)
FRENCKEN GROUP LIMITED (SGX:E28)
UMS HOLDINGS LIMITED (SGX:558)
VALUETRONICS HOLDINGS LIMITED (SGX:BN2)
VENTURE CORPORATION LIMITED (SGX:V03)
Technology Stocks - Riding A New Wave Of 5G, IoT, AI & EV; Upgrade to POSITIVE
POSITIVE on Malaysia and Singapore Technology Sectors
- Upgrade both Malaysia Technology Hardware and Singapore Technology sectors to POSITIVE (from NEUTRAL). We adopt a positive growth outlook for the tech sector due to:
- rollout of 5G networks;
- ramp-up of semiconductor components and equipment;
- development of sub-sectors such as Internet of Things (IoT), artificial intelligence (AI) and electric vehicles (EVs); and
- Industry 4.0.
- These should bode well for OSATs (outsourced assembly and test), automated test equipment (ATE)/ automation manufacturers and electronics manufacturing services (EMS)/ precision engineering companies.
Key macro indicators are supportive for growth of Technology sector
- The World Semiconductor Trade Statistics (WSTS) in its latest report forecasts global semiconductor market to grow by 3.3% y-o-y in 2020 and 6.2% y-o-y in 2021 to USD426.0b and USD452.3b respectively, from USD412.3b in 2019. We take this as a positive signal for the recovery-cum-growth of the global semiconductor market, despite the COVID-19 pandemic.
- Zooming into the product breakdown of the global semiconductor market, WSTS expects market growth to be primarily driven by Integrated Circuits (IC) products - forecasting +5.3% y-o-y in 2020 and +6.3% y-o-y in 2021. Following that, WSTS estimates all products (discrete semiconductor, optoelectronics, sensors and IC), including all IC products (analog, micro, logic and memory) to grow 1-11% y-o-y in 2021. Such uptrend would broadly indicate rising demand for the respective components.
- Notwithstanding an indirect volume impact (due to the large scale and the diversity of the supply chain of the semiconductor industry), we believe such anticipated positive industry trend would broadly benefit the OSATs (outsourced assembly and test) and ATE (automated test equipment) manufacturers, namely the sensor and IC (i.e. non-memory) products. Product exposures of respective technology companies within our coverage including Inari Amertron, Globetronics, Vitrox, Greatech, VS Industry, Venture Corp (SGX:V03), Valuetronics (SGX:BN2), Hi-P International (SGX:H17), AEM (SGX:AWX), UMS Holdings (SGX:558) and Frencken Group (SGX:E28) are summarised in PDF report attached below (pages 5&6).
- Meanwhile, despite the cyclical nature of the semiconductor industry, we believe the uptrend in the output of wafers will continue in the long run. This would be attributed to the ever-growing demand for electronic components and products, particularly with the emergence of selected technologies such as 5G, IoT and AI, among many others. According to a local media report in Oct 2020, Apple’s main chipmaker, TSMC said 5G smartphones require 30-40% more chip contents than 4G.
- According to SEMI’s latest projections, global fab equipment spending is expected to increase by 8% y-o-y in 2020 and 13% y-o-y in 2021. The pandemic has increased demand for chips from various segments/areas such as communications, IT infrastructure, personal computing, gaming and healthcare electronics. This is also supported by the rising demand for semiconductors for data centre infrastructures and server storage along with the buildup of safety stock as US-China trade tension intensifies. We believe this bodes well with the overall macro trend, which points to favourable growth in 2021-2022.
- We see UMS Holdings (SGX:558) (through customer Applied Materials) and Frencken Group (SGX:E28) (through customers ASML, Applied Materials and more) as key beneficiaries of the fab equipment spending growth.
5G: The next big thing
- As 5G has been dubbed the next big wave in technology and telecommunication/network, we expect the deployment of 5G networks to progressively take place across major cities/countries in the coming years. This is because 5G offers major benefits, such as providing reduced latencies, lower performance degradation and significantly faster network speed. This, in turn, would translate into heightened prospects for the OSAT companies and ATE manufacturers due to the expected increase in supply and demand for newer and more sophisticated components and equipment.
- According to Ericsson, there have been more than 75 5G commercial launches globally and the most extensive coverage build-outs in 2019 were in the US, China, South Korea and Switzerland.
- From the Ericsson Mobility Report (Jun 2020), we learnt that Ericsson:
- forecasts 190m 5G subscriptions globally by end-2020 and 2.8b subscriptions by end-2025 (around 30% of all mobile subscriptions);
- expects a significantly faster uptake for 5G subscription as compared to LTE (launched back in 2009); and
- LTE to remain the dominant mobile access technology by subscription in 2020-2025 but subscriptions to peak in 2022.
- Ericsson expects key driving factors for the growth of 5G subscription are China’s earlier engagement with 5G (relative to 4G/LTE) and earlier availability of 5G devices.
- Separately, by 2025, Huawei expects:
- 2.8b 5G users globally;
- 5G networks will cover 58% of the world’s population; and
- 6.5m 5G base stations installed globally.
- Huawei also expects the rollout of 5G networks to take only three years (2019-2022) vs five years for 4G networks (2009- 2014) and 10 years for 3G networks (2001-2010). The faster rollout would be partly supported by the availability of more 5G-ready devices (i.e. smartphones) and increase in investment in 5G equipment in various industries, such as automotive and IoT.
- In the near term, we believe key beneficiaries of the gradual rollout of 5G networks are OSAT players with sizeable exposure to flagship smartphones, namely Inari with about ½-¾ of its revenue contributed by the radio frequency (RF) division with Broadcom as its key customer. Globetronics also has exposure to 5G-related components for end-consumers (i.e. smart devices) and industrial usages. Throughout the rollout phase of 5G networks, we also expect the ATE manufacturers to benefit via growing demand for newer testing equipment that caters to new 5G-related parts/components, among others.
- The rollout of 5G is also expected to enable increased complexity in mission-critical applications, spanning across communications, consumer electronics, automotive and healthcare. This increased complexity has resulted in unprecedented challenges in chips testing. As semiconductor nodes decrease and the implementation of heterogeneous packaging becomes mainstream, we observe that system-level test (SLT) is also increasing in popularity. This is driven by the need to increase test coverage reliably in devices where design-for-test techniques leave hundreds of millions of transistors untested. AEM (SGX:AWX), having served Intel in SLT since the early 2000s, is a leader in this space.
- The deployment of 5G networks and infrastructure will also benefit contract manufacturers like Venture Corp (SGX:V03), through its customers such as Keysight (test and measurement), Broadcom, Lumentum and Marvell (networking and communications products).
Resilient demand for semiconductor equipment/ATE and automation
- SEMI forecasts global sales of semiconductor manufacturing equipment (by original equipment manufacturers) to grow 6% y-o-y to USD63.2b in 2020 and by 11% y-o-y to USD70b in 2021. Specifically, SEMI projects the assembly and packaging equipment segment to grow 10% y-o-y to USD3.2b in 2020 and 8% y-o-y to USD3.4b in 2021 - driven by advanced packaging capacity build-up. This is also on the back of the semiconductor test equipment market, which SEMI estimated to grow by 13% y-o-y to USD5.7b in 2020 and continue the growth momentum into 2021 due to increasing adoption and demand for 5G.
- We believe the growing global semiconductor market goes hand-in-hand with growing demand for semiconductor equipment (i.e. wafer fab, assembly and packaging and testers).
- Meanwhile, we expect the current Industry 4.0 (IR4.0) will drive and accelerate demand for factory automation, as IR4.0 is mainly centered on integration of manufacturing processes and digital applications (i.e. IoT, AI, data analytics, etc.) to improve efficiency, output and cost management. Notwithstanding a lower correlation with the broad semiconductor market (as compared to ATE), we believe there are still selected opportunities for technology companies with automation-centric offerings.
- Greatech is a key beneficiary in this area, as it offers production line systems and single-use machines (i.e. testing, assembly) to customers in the solar, medical, EV and semiconductor segments. Meanwhile, Pentamaster also has a sizeable revenue contribution from its Factory Automation Solution segment with various automation solution offerings (i.e. handling, testing, assembly, manufacturing, storage and robotics).
Up-and-coming segments as added boosters
Internet of Things (IoT)
- Despite the widespread implementation and integration of IoT across various industries (such as automotive, medical, industrial and consumer), we believe there is a high importance and focus placed on connectivity (data transmission and data storage), sensors (integration of physical and digital) and processors/chipsets (i.e. AI and machine learning), among others. Hence, the combination of low-latency network/services of 5G networks would bode well for wide-scale implementation of IoT, which has crucial importance for high speed and efficient data transfer and cloud connectivity.
- Meanwhile, we also believe IoT will drive demand for more advanced sensors and chipsets for IoT applications such as autonomous vehicles, smart homes, integrated medical equipment and lights-out manufacturing (fully automated factory with little to no human intervention; also part of IR4.0).
Automotive and Electric Vehicles (EVs)
- The growing segments of automotive and EVs would benefit OSAT and ATE players due to rising demand for automotive-related chips. Furthermore, we believe semiconductor content is higher for newer automobiles and EVs. Based on Yano Research Institute’s findings, analog IC (used for electronic circuits like Electronic Control Unit) represents a large part of the automotive semiconductor market, followed by Micro Control Unit, sensors, power semiconductors, and memory IC. Meanwhile, based on Deloitte’s findings in 2019, the cost of semiconductor content, i.e. the components that make up electronic systems, has increased from USD312 per car in 2013 to around USD400.
- The International Energy Agency estimates the global electric vehicle stock (excluding two/three-wheelers) grows by 36% annually, reaching 245m vehicles in 2030 – more than 30x above today’s level (2019E: ~2.8m vehicles). Looking into a sizeable EV market such as China, it has recorded a strong 5-year CAGR of 74% for sales of new energy vehicles, with 1.2m units sold in 2019.
- Inari and Globetronics would benefit from an improving automotive industry globally, as the former has exposure to automotive sensor products and the latter has exposure to automotive lighting. Elsewhere, D&O Green Technologies also has a sizeable revenue contribution from its LEDs products for automobiles.
- While we believe AEM currently does not have exposure in the automotive space, we see automotive as a potentially lucrative market for AEM’s system level test solutions. This is because AEM’s asynchronous, modular, and massively parallel approach to system level test presents a cost-effective manner in adequately testing mission critical automotive chips that are typically hard to test, given requirements for zero defect and high thermal reliability.
Artificial intelligence (AI)
- Growing demand for AI-based technology will increase demand for AI chipsets – supporting the broad demand for chips and OSAT services globally. This is attributed to growing AI usages such as e-commerce (e.g. recommendation engines), virtual assistance (e.g. speech recognition and understanding) and financial services (e.g. fraud detection, risk assessments). Global Market Insights forecasts the global market value for AI chipsets would grow to over USD70b in 2026, from over USD8b in 2019.
- UMS (SGX:558)’s key customer, Applied Materials (AMAT), sees AI as a key “trillion-dollar inflection” that it is well positioned to capitalize. This is because AMAT’s core capabilities in materials engineering is critical enabling custom chips for increasingly specialized workloads. Further, AMAT believes chipmakers have to explore new computing architectures and chips via more innovative materials and scaling approaches – in order to overcome current energy constraints caused by current AI training practices.
Medical/ Healthcare/ Life Science
- We believe the healthcare sector will continue to provide various opportunities for EMS/precision engineering, semiconductor and technology/automation companies. From a macro perspective, this would be attributed to:
- a progressively aging population globally;
- higher budget/funds allocation for the healthcare sector due to the pandemic; and
- technology advancements of healthcare-related equipment.
- This, in turn, would lead to increasing demand for:
- medical devices/equipment and its chips; and
- automated production solutions for medical devices/equipment, among others.
- Meanwhile, Omdia expects the medical end-use market will account for USD5.8b of total semiconductor sales in 2020, roughly 11% of the global industrial semiconductor market and +8.1% y-o-y.
- Key beneficiaries are:
- Venture Corp (SGX:V03), as its earnings are currently supported by devices used to combat COVID-19 (e.g. ventilators, dPCR/qPCR equipment), and also as it launches new products in 2021,
- Pentamaster, having acquired TPConcept, a die casting parts and medical machines manufacturer that offers automation/assembly solutions for medical devices/products; and
- Greatech, which supplies single-use assembly machines for products such as catheters and syringes.
Singapore listed Technology stocks
- Our Singapore coverage universe is trading at 12x, which is a discount to Malaysian-listed counterparts. We surmise that Malaysian-listed peers tend to be able to command premium valuations due to a combination of:
- Stronger CY21 EPS growth of some Malaysia-listed companies over Singapore-listed ones, in particular Greatech and Inari.
- Freer-flow of capital in Singapore. We have observed that Singapore-listed names tend to trade in line or at slight discounts to global peers.
- Difference in investment mandates. Funds in Singapore tend to have a regional/ international mandate, while it is not uncommon for Malaysian funds to be domestically focused;
- Scarcity of quality growth ideas vis-à-vis other sectors domestically in Malaysia.
- In the EMS/ precision engineering space, we favour exposure to Venture Corp (SGX:V03) and Frencken Group (SGX:E28) (15x FY21E P/E and 9x FY21E P/E respectively).
- While we are excited about signs of an earnings upgrade cycle for Venture Corp, we believe Frencken’s medium-term margin expansion potential is underappreciated, and increasing investor interest could spur meaningful rerating for Frencken over the medium term. See
- In the semiconductor equipment space, we remain positive on AEM (SGX:AWX) and UMS (SGX:558) in FY21E, and see near-term weakness as opportunities to buy on dips.
- Our conviction is less for Valuetronics (SGX:BN2) and Hi-P International (SGX:H17) over the next 12 months.
- Although a Biden-win may pave the way for improving US-China relations, we believe positive earnings effects may take much longer than expected to materialize for Hi-P International and Valuetronics – which have significant China footprint.
- For instance, scarred by the precedent set by President Trump, customers may still consider diversifying sourcing from China into ASEAN sites despite improving US-China relations. This in turn could lead to lower margins – due to less cost efficiency, either a result of reduced scale per site and/or increased fixed costs for both Hi-P International and Valuetronics – unless customers are willing to share the burden of additional manufacturing costs. See
- Click view full report button below to view the complete analysis on Technology sector of Malaysia & Singapore.
Gene Lih Lai CFA
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2020-11-21
SGX Stock
Analyst Report
5.050
SAME
5.050
1.390
SAME
1.390
1.410
SAME
1.410
0.580
SAME
0.580
23.270
SAME
23.270
