Singapore Semicon Equipment - Maybank Kim Eng 2021-03-24: Read-across From Intel's Strategy Updates

Singapore Semicon Equipment - Maybank Kim Eng Research | SGinvestors.io AEM HOLDINGS LTD (SGX:AWX) UMS HOLDINGS LIMITED (SGX:558) FRENCKEN GROUP LIMITED (SGX:E28)

Singapore Semicon Equipment - Read-across From Intel's Strategy Updates

Positive spillover from Intel's announcement

  • Intel announced
    1. plans to spend US$20b to build two new fabs in Arizona, US;
    2. plans to reintroduce foundry services; and
    3. 2021 capex guidance of US$19-20b (2020: US$14.3b).
  • If Intel makes HDMT available for foundry clients, AEM (SGX:AWX) would be a structural beneficiary from technology and geopolitical perspectives in our view. As such we believe investors should overlook cyclical risks and focus on long-term positives.
  • We see UMS (SGX:558) and Frencken (SGX:E28) as beneficiaries of Intel’s 2021 capex guidance/ capacity expansion plans.

New foundry business may be positive for AEM

  • Intel had provided high density modular test (HDMT) to foundry clients in the past (see Intel's news release), and we do not rule out that it may do so again this time. If Intel’s foundry business is successful, and if HDMT/ system level test (SLT) is offered to clients, we believe this is positive to AEM’s structural prospects. This is because: 
    1. AEM is poised to be a beneficiary of geopolitical protectionism as US technology players reduce reliance on North Asian foundries; and
    2. AEM may be more immune to the potential rise in ARM vs x86 in high-performance computing, as Intel is also offering its services to ARM-based chipmakers.
  • Intel CEO Pat Gelsinger even suggested the prospects of winning Apple back via its foundry business. Apple had begun to use its own ARM-based chips for Macs beginning 2020 from Intel’s processors previously.

Intel’s capex guide may reduce AEM’s high-base risks

  • We believe Intel’s 2021 capex guidance is favourable to UMS and Frencken as much of this is for capacity expansion, and Intel is increasing focusing on EUV (favourable to ASML) as well as advanced packaging (favourable to Applied Materials).
  • In our view, Intel’s guidance reduces but does not eliminate our concerns for high-base effects that AEM may encounter in FY21E. We err on the conservative side as we are not privy to Intel’s allocation for tests. 
  • The two new fabs to be built are positive to AEM, UMS and Frencken, although we see AEM as the biggest beneficiary due to revenue concentration to Intel.

Client feedback

  • While we have been actively warning of cyclicality risks for AEM, interest in the stock remains high – perhaps because clients are interested in AEM’s positive prospects from SLT and how this is leveraged to trends with advanced packaging.
  • With the latest update, we recommend investors to focus on Intel’s execution of its roadmap as well as the new foundry business, as we see these as key drivers of AEM’s long-term upside.

Gene Lih Lai CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-03-24
SGX Stock Analyst Report BUY MAINTAIN BUY 5.050 SAME 5.050