Singapore Semicon Equipment - Maybank Kim Eng 2021-04-07: Pulse Check On The Playbook

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AEM HOLDINGS LTD (SGX:AWX) UMS HOLDINGS LIMITED (SGX:558) FRENCKEN GROUP LIMITED (SGX:E28)

Singapore Semicon Equipment - Pulse Check On The Playbook

Recent news reinforces current positive momentum on SG semicon equipment sector

• Recent news continue to reinforce our view that the current momentum for our SG semicon equipment coverage is POSITIVE.
  • Applied Materials (AMAT) reiterated its position as an enabler of important semiconductor technological inflections that drives an AI economy.
  • TSMC also announced US$100b capex and R&D budget over 3 years.
• These are favourable read-across to suppliers like UMS (SGX:558), Frencken (SGX:E28).
• We also highlight cyclical risks to observe, and ideal scenarios in which these can be mitigated for our coverage.

Takeaways from Applied Materials (AMAT)'s Investor Day

• Applied Materials (AMAT) is positive towards the long-term prospects of the WFE industry, supported by several concurrent inflections:
  • Digital transformation of the economy – accelerated by COVID-19. Everything is getting smarter and has increasing silicon content.
  • AI Era – Only 2% of data is currently processed and 80% of data is unstructured. Data is nearly doubling every two years, yet, turning data into insight through AI is very computationally intensive. Fig1 in report attached below shows the expected explosion in data expected from the proliferation of IoT.
  • Moore’s Law 2D scaling to new PPACt playbook – traditional 2D scaling and general purpose computing is insufficient to drive AI infrastructure at the edge and cloud. This is where the semiconductor industry is driving towards the PPACt (performance, power, area-cost, and time-to-market) playbook – which includes new architectures, structures, materials and ways to shrink geometries.
• In that regard, AMAT views itself has having the broadest and most enabling portfolio of unit process technology that spans across materials creation, modification, removal and analysis. This in turn allows AMAT to enable important inflections such as 3D DRAM and 3D logic, EUV enablement, advanced packaging and so on.
• AMAT also reiterated its view that equipment industry prospects are bright and leveraged to an increasingly digitized world.
• See AMAT's press release.
• Contrasting the period of 2000-13 when the industry was no-growth and cyclical due to falling capital intensity, capital intensity has since bottomed in 2013 at 9% and rose to 14% in 2020. This in turn has been driven by structural trends such as
  1. more chip demand drivers, and
  2. increasing chip complexity, at a time where
  3. 2D scaling hits limits and
  4. the promise of 450mm wafers has evaporated.
• AMAT also provided its financial projections, where against the backdrop of these favourable drivers, it expects its semi systems/ services businesses to enjoy a FY20-24 revenue CAGR of 17%/13% respectively. We singled out these businesses because we believe these are the segments most relevant to UMS.

Proxy to geopolitics and secular trends; but mind risks of overcapacity

• In 3Q20, as a protectionist move on behalf of the US, President Trump announced US semiconductor restrictions on China-based Semiconductor Manufacturing International Corp (SMIC). Equipment providers like Lam Research and Applied Materials were unfazed by this, as in the long-term, what they saw was a structural digitization of the global economy – where if one player is restricted (in this case SMIC), another will rise to fulfill this demand. And to fulfill this demand, chipmakers depend on leading equipment makers the likes of ASML, AMAT, and Lam Research in the front end.
• With recent events, we believe Lam Research and AMAT’s perspectives are playing out.
• From the angle of geopolitics, the US’ latest moves appear to be ramping up protectionism and self-sufficiency. President Biden allocated US$50b for production incentives and R&D to boost the US semicon industry.
  • While Intel stated it will pursue expansion and its new foundry model with or without government incentives. We believe that Intel could be a meaningful beneficiary of these grants as this may accelerate capacity build in US/ EU even more than what Intel (or other chipmakers) would have done on their own. (See also previous report: Singapore Semicon Equipment - Maybank Kim Eng 2021-03-24: Read-across From Intel's Strategy Updates)
  • Aside, not long after Intel’s expansion announcement, TSMC said it will spend US$100b on capacity expansion and R&D over three years and seeks to address customers needs in a “sustainable manner”. This works out to be an average of US$33b p.a., which is comparable to what TSMC is planning to spend on capex and R&D in FY21 (~US$30b).
• In totality, we see the recent news as beneficial for a favourable 2022 semiconductor equipment spending set up. In turn, these should benefit
  • AEM (SGX:AWX) (Intel is customer),
  • UMS (SGX:558) (AMAT is customer), and
  • Frencken (SGX:E28) (ASML and AMAT are customers).
• Moreover, as chip shortages are likely to last till 2022, and semiconductor tools have long lead times, these translate to robust visibility in the coming few quarters.
• Although momentum is favourable, we do not see room for complacency. An area of caution is if chipmakers over-expand capacity by the end of the cycle, in our view. As such we believe capital discipline remains an important factor to monitor.
  • Despite severe DRAM undersupply, Micron’s tone on capex remains one that is disciplined. While this is a good anecdotal check, Micron’s FY21 capex guidance of US$9b is only a fraction of the likes of Intel (FY21 guidance: US$19-20b) and TSMC (FY21 guidance: US$25-28b), underscoring that discipline needs to be across the entire market.
  • TSMC is of the view that the US and Europe fab expansion drive is unrealistic, as it highlights that beyond the current chip shortage (which is an anomaly), overall foundry capacity is still sufficient to satisfy demand in normal times.
• Another area of potential concern is reflexivity across the entire supply chain. While we see current chip shortages as a tailwind for the semiconductor equipment industry, where we are concerned is if current “starvation” across the supply chain may induce the whole chain to over-book. This may inadvertently result in a longer than otherwise necessary inventory gestation period down the road – which may in turn result in steeper than expected headwinds for the semicon equipment supply chain.

Translating observations into a playbook

• Consolidating these thoughts, our high-level “playbook” is:
  • UMS (SGX:558): Still our top pick.
    • We see FY21 prospects as largely driven by industry momentum, and proxy to AMAT’s position in the industry (i.e. organic drivers). As Lam Research builds its supply chain in Penang, UMS may be a beneficiary of increased industry demand – which could translate favourably in FY21-22, in our view. If UMS is able to clinch a new customer, we currently envisage that meaningful revenue would only come in in the medium term, possibly in FY23. If this sequence of events play out, we see potential for materially lower earnings cyclicality over our forecast horizon, and could translate into upside to our projections.
    • BUY, target price S$1.57 based on FY21E P/E of 15x.
    • See UMS Share Price; UMS Target Price; UMS Analyst Reports; UMS Dividend History; UMS Announcements; UMS Latest News.
  • Frencken (SGX:E28):
    • As we currently do not see a scenario of huge allocation gains for Frencken during our forecast horizon – we expect its performance to be in line with the cumulative effect of its end-markets. In this regard, the ideal scenario would be if the rise in other end-markets coincide with and offset the semiconductor downturn. Frencken’s industrial automation sub-segment has been underperforming, but we see scope for outperformance if Seagate decides to install capacity to mass produce HAMR drives. As such, we will focus our efforts in monitoring the ebbs and flows of various end-markets.
    • BUY, target price S$1.74 based on FY21E P/E of 14.5x.
    • See Frencken Share Price; Frencken Target Price; Frencken Analyst Reports; Frencken Dividend History; Frencken Announcements; Frencken Latest News.
  • AEM (SGX:AWX):
    • If FY21E turns out be cyclically soft, we think this paves the way for FY22E to enjoy favourable base effects, from
      1. continued product launches from AEM;
      2. cyclical recovery alongside Intel’s recent expansion plans; and more importantly
      3. to ride system level test’s structural growth prospects.
    • BUY, target price S$5.05 based on FY21E P/E of 14x.
    • See AEM Share Price; AEM Target Price; AEM Analyst Reports; AEM Dividend History; AEM Announcements; AEM Latest News.
• As this “playbook” is our view of the ideal scenarios of which these companies can benefit in this cycle, the key risks are
  • timing of these drivers; and/ or
  • if these drivers do not pan out (e.g. customers spend less than expected, disappointing arkets recovery, failure to clinch new customers).

Gene Lih Lai CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-04-07

SGX Stock Analyst Report BUY MAINTAIN BUY 5.050 SAME 5.050

BUY MAINTAIN BUY 1.570 SAME 1.570

BUY MAINTAIN BUY 1.740 SAME 1.740