AEM HOLDINGS LTD (SGX:AWX)
UMS HOLDINGS LIMITED (SGX:558)
VENTURE CORPORATION LIMITED (SGX:V03)
FRENCKEN GROUP LIMITED (SGX:E28)
Singapore Technology Stocks - Drivers Intact; Beneficiaries Of Advanced Packaging; Accumulate On Dips.
Chance to accumulate Singapore Tech stocks on dips
- We remain POSITIVE on the Singapore Tech sector, and believe the recent retracement is an attractive opportunity to accumulate as our theses are unchanged. We note over a longer horizon, share prices correlate highly to consensus earnings per share revisions, and have little correlation to 10-year US Treasury yields.
- As we see upside drivers to UMS (SGX:558) and Frencken (SGX:E28), we now value them at 15x/14.5x FY21E P/E respectively, as our previous ROE-g/COE-g method does not capture these. Hence our
- UMS Target Price is up 17% to S$1.57,
- Frencken Target Price is up 25% to S$1.74.
- Sector favourites are UMS (SGX:558), Frencken (SGX:E28), Venture Corp (SGX:V03) and AEM (SGX:AWX).
Theses unchanged
- Observations of our coverage universe and their customers support our theses. We see UMS as the best candidate to ride out chip shortages, as it is a beneficiary of foundry spending.
- Meanwhile, Venture Corp’s and Frencken’s end-markets are improving, and they are expecting several customers to launch new products in FY21.
- While we are concerned about HDMT TH (high density modular test test handlers) high-base effects for AEM in FY21E, we see upside drivers from:
- accretive M&A; and
- stronger-than-expected cloud/ 5G spending in 2H21.
Higher target price for UMS and Frencken due to upside drivers
- For UMS, we believe potential upside drivers include:
- positive surprise of current business momentum in 2021 amid Applied Materials’ (AMAT) robust outlook;
- new business opportunities (e.g. Lam Research building supply chain in Penang/ UMS courting potential new customer).
- See report: UMS Holdings - Maybank Kim Eng 2021-03-14: Several Upside Drivers.
- For Frencken, we and consensus’ net margins are 7-8% for FY21-23E, but we believe Frencken has scope to outperform these from levers such as:
- greater value-add with customers in coming years; and
- continual cost control.
- See report: Frencken Group - Maybank Kim Eng 2021-03-14: Thesis Playing Out.
AEM and UMS: beneficiaries of advanced packaging
- Performance, power, area-cost and time to market demands from inflections like Big Data, IoT and AI are putting limits on traditional Moore’s law scaling. As such, chipmakers expect to increasingly rely on advance packaging technologies to drive performance improvement.
- Intel is a key advocate of this, and we see AEM as a beneficiary of current known-good-die issues surrounding heterogeneous packaging. As deposition and etch technologies are also crucial in enabling advanced packaging, and this is a high growth area for AMAT, we believe UMS is a beneficiary of this trend too.
- Key risks in our sector include:
- chip shortages/ slower-than-expected recoveries curtailing volumes; and
- excessively weak US$.
Advanced packaging and beneficiaries
- According to AEM, referencing data from AMD and ASML, 42% of chip improvements over the next decade are expected to come from packaging technologies. A primary driver of this is because traditional Moore’s law scaling is facing limitations amid increasing demands on performance, power, area-cost, and time-to-market factors as megatrends like IoT, Big Data and AI take off.
- Heterogeneous design and advanced packaging allows functional system blocks that do not demand leading-edge nodes to be fabricated on trailing-nodes. This reduces silicon cost, shorten design time, and accelerate time to yield and market. In turn, these are key benefits to establish leadership in new markets.
- Intel are among the key advocates of advanced packaging. In today’s data-centric world, a lot needs to be done to move, store, and process data. Workloads are also increasingly varied and specialized. Varied workloads require different processing architectures. For instance, scalar workloads run well on CPUs, vector workloads work well on GPUs, matrix workloads (e.g. AI and machine learning) run well on ASICs, while spatial workloads work well on FPGAs. Bringing CPUs, GPUs, FPGAs and specialised accelerators to together mix, match and integrate silicon allows Intel to help its customers solve problems intelligently and efficiently.
- We see AEM as a beneficiary of Intel’s focus in advanced packaging as system level test is able to overcome current difficulties in ensuring known-good-die (KGD) for chiplets. See report:
- We also see Applied Materials, and by extension UMS, as a beneficiary of this trend.
- Applied Materials’ products enable the foundational building blocks of heterogeneous integration, such as advanced bump and microbump (1D), fine-line redistribution layer (RDL-2D), through-silicon via (TSV-3D) and hybrid bonding interconnect (HBI-3D). In turn, enabling these are the strengths of AMAT’s equipment catering for PVD, CVD, etch, ECD and so on. In fact, AMAT said one of their fastest growth areas are in advanced packaging.
- We see UMS as a beneficiary of this trend because it manufactures the:
- wafer transfer modules for the Endura platform, which is AMAT’s flagship deposition platform (according to AMAT, Endura caters for PVD and CVD); and
- components that go into other AMAT platforms.
Opportunity to buy the dip
- We believe the recent sell-off in the Singapore Technology sector provides an opportunity to accumulate on dips. Our theses for our picks are unchanged, and we observe that over a longer horizon, share prices move in tandem with consensus earnings revisions more so than other variables (e.g. rising US 10-year yields). We believe this in turn is largely due to company specific earnings drivers that have little correlation with cross-asset class factors.
- Furthermore, we think valuations for our sector coverage (10-16x FY21E P/E) are reasonable, and most companies have favourable or improving end-market outlook. To illustrate, we plot the relationship of share prices vs 10-year US treasury yields, share price vs consensus earnings for our favourite picks Venture Corp, AEM, Frencken and UMS. See charts in report attached below.
Gene Lih Lai CFA
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2021-03-14
SGX Stock
Analyst Report
5.050
SAME
5.050
1.570
UP
1.34
22.000
SAME
22.000
1.74
UP
1.39
