Tech Manufacturing Services Sector - CGS-CIMB Research 2021-05-24: A Question Of Execution

Tech Manufacturing Services Sector - CGS-CIMB Research | SGinvestors.io AZTECH GLOBAL LTD. (SGX:8AZ) AEM HOLDINGS LTD (SGX:AWX) FRENCKEN GROUP LIMITED (SGX:E28) FU YU CORPORATION LTD (SGX:F13) GRAND VENTURE TECHNOLOGY LTD (SGX:JLB) ISDN HOLDINGS LIMITED (SGX:I07) NANOFILM TECHNOLOGIES INTL LTD (SGX:MZH) UMS HOLDINGS LIMITED (SGX:558) VENTURE CORPORATION LIMITED (SGX:V03)

Tech Manufacturing Services Sector - A Question Of Execution

  • Demand remains strong in FY21F for tech manufacturing companies under our coverage. The challenge for companies is to deliver on execution given component shortages/tightness and the ongoing COVID-19 pandemic.
  • In the semiconductor space, we favour smaller caps, such as Grand Venture Technology (SGX:JLB) and ISDN (SGX:I07).
  • In the consumer product-related space, we like Aztech Global (SGX:8AZ) given its strong order book.



Semiconductor stocks did well in 1Q21…

  • Semiconductor related stocks were the best performers in 1Q21 with share price appreciation ranging from 15.9-49.4% for 1Q21.
  • Electronics manufacturing services (EMS) companies only managed 2.5-3.3% share price gains in 1Q21 due to demand concerns.
  • Aztech's share price registered a 10.2% decline in 1Q21 (IPO price was S$1.28; listed on 12 Mar 2021).


…reflecting strong earnings from semiconductor stocks



State of the industry – chip shortage spurs spending

  • The global chip shortage has spurred major producers such as Intel (INTC US), TSMC (2330 TT) and Samsung Electronics (005930 KS) to hike their capex for the coming years.
  • Intel has announced US$20bn spending to build 2 new fabs in Arizona and a planned US$10bn for a new chip plant in Israel.
  • TSMC has guided that FY21F capex could be in the range of US$25bn-28bn (FY20 capex was US$17.2bn).
  • Media reports suggest that Samsung Electronics could spend US$151bn through 2030 to boost its non-memory chip production capacity. Such aggressive capex by various chip makers will benefit equipment suppliers such as Applied Materials (AMAT US) and ASML (ASML NA). As at 16 Mar 2021, Semiconductor Materials & Equipment International (SEMI) projected that global spending on chip manufacturing equipment could grow 16% y-o-y in 2021F followed by 12.0% y-o-y growth in 2022F.
  • On the demand side, Applied Materials believes that semiconductor content in our daily life is set to increase.
  • From capacitors to resistors, the ongoing COVID-19 pandemic has disrupted supply chains leading to shortages even in other associated electronics components.
  • Taiwan has recently seen a surge in COVID-19 cases. Pegatron (4938 TT) and Largan Precision (3008 TT) have seen individual infection cases involving their employees.
  • Vietnam’s northern province of Bac Giang has ordered four industrial parks, including three that house production facilities of Foxconn (2317 TT), to close temporarily due to an outbreak of COVID-19.


AEM (SGX:AWX) (ADD, target price S$4.63)

  • AEM (SGX:AWX) has guided that FY21F revenue is expected to be between S$460m and S$520m.
  • Production ramp-up for its next generation test handlers will start in late-3Q21 and into FY22.
  • On customer diversification efforts, AEM has been in deep technical engagements with 10 out of the top 20 semiconductor companies spanning mobility, memory and high-performance computing segments. The company guides that it hopes to achieve meaningful revenue from these engagements in FY22F.
  • In the short term, we expect AEM’s 1H21F to be lower y-o-y (given record numbers in 1Q20 last year) with a strong recovery in 2H21F.
  • Over the next three to five years, Intel’s aggressive capex could lead to sustained demand for AEM’s test handlers. It could take Intel one to two years to build its new fabs.
  • Target price for AEM remains at S$4.63 (Gordon-Growth derived P/BV multiple of 4.40x).
  • Potential re-rating catalysts include possible upward revisions in revenue guidance over the coming months.
  • See AEM Share Price; AEM Target Price; AEM Analyst Reports; AEM Dividend History; AEM Announcements; AEM Latest News.


Aztech Global (SGX:8AZ) (ADD, target price S$1.91)

  • Aztech Global (SGX:8AZ)’s 1Q21 revenue grew 211% y-o-y to S$116m while net profit grew 2,100% y-o-y to S$13.2m.
  • Order book as at end-1Q21 was S$489m.
  • As at end-1Q21, Aztech had secured 11 new customers and projects, of which Aztech is the sole supplier to two new lines of products of Customer A. Management expects to see contributions from new contract wins to come in FY22F. As consumers continue to invest in the smart home ecosystem, we believe there are opportunities for Aztech to further expand its Internet of Things (IoT) product manufacturing portfolio within the smart home value chain.
  • We have an ADD rating and a S$1.91 target price for Aztech based on 16x FY22F P/E, supported by capacity expansion and robust order book, which could provide strong net profit growth potential of ~18% CAGR over FY21F-23F, in our view.
  • Potential re-rating catalysts are new customer wins and strong order book. Downside risks include customer concentration risk, component shortages and a worsening COVID-19 pandemic.
  • See Aztech Share Price; Aztech Target Price; Aztech Analyst Reports; Aztech Dividend History; Aztech Announcements; Aztech Latest News.


Frencken Group (SGX:E28) (ADD, target price S$1.87)

  • Frencken Group (SGX:E28)’s 1Q21 net profit was above expectations at 32.3/29.5% of our/consensus’ FY21F forecasts. The better-than-expected performance was driven by the semiconductor segment which registered 58% y-o-y revenue growth in the quarter.
  • Management guided that it expects its 1H21F revenue to exceed that of 2H20 (S$328.1m), driven by higher sales from most of its key business segments.
  • We have an ADD call with a target price of S$1.87 for Frencken Group, based on the current FY22F sector average P/E of 13.5x for tech stocks under our coverage.
  • Downside risks are supply chain disruptions due to new COVID-19 variants, while re-rating catalysts could come from new customer wins and stronger-than-expected sales in the semiconductor and industrial automation segments.
  • See Frencken Share Price; Frencken Target Price; Frencken Analyst Reports; Frencken Dividend History; Frencken Announcements; Frencken Latest News.


Fu Yu (SGX:F13) (ADD, target price S$0.35)

  • Fu Yu (SGX:F13)’s 1Q21 sales/net profit at 21/24% of our full-year forecasts were in line with our expectations.
  • Noticeably, cost reduction efforts resulted in better margins and profitability. Operating profit margin in 1Q21 was 13.3% while net profit margin was 14.7%. We believe the better margin could be due to higher revenue contribution from higher margin medical products.
  • Fu Yu's balance sheet remains strong with net cash per share of S$0.144 (no bank borrowings) as at end-Mar 2021.
  • Our S$0.35 target price for Fu Yu is based on our Gordon Growth derived P/BV multiple of 1.49x on FY21F BVPS of S$0.238.
  • From a medium-term perspective, re-rating catalysts could come from what plans the new shareholders have in store for Fu Yu.
  • Key risks are supply chain disruptions due to new COVID-19 variants.
  • See Fu Yu Share Price; Fu Yu Target Price; Fu Yu Analyst Reports; Fu Yu Dividend History; Fu Yu Announcements; Fu Yu Latest News.


Grand Venture Technology (SGX:JLB) (ADD, target price S$1.12)

  • Grand Venture Technology (SGX:JLB)’s 1Q21 revenue grew 59.0% y-o-y. Net profit grew 434.9% y-o-y to S$3.3m, achieving 41.1% of our FY21F forecast.
  • Grand Venture Technology remains committed to growing the company. Recall that no vendor shares were sold in its Jan 2019 IPO. With S$23.5m net proceeds from its Mar 2021 placement to Novo Tellus, the group will continue to seek growth via M&As and increase its competencies in advanced manufacturing techniques including the ability to machine advanced materials such as quartz and ceramics.
  • We believe a new chapter of growth is unfolding at Grand Venture Technology. Efforts to onboard new customers and products in the past 2 years are finally bearing fruit in FY21 (evidenced by the 1Q21 revenue jump and the further sub-classification of non-semiconductor related revenues into the life sciences segment and a separate electronics, medical and others segment versus a single segmental classification over the past 2 years).
  • Our S$1.12 target price for Grand Venture Technology is based on Gordon-Growth derived P/BV multiple of 5.37x on FY21F book value per share of S$0.209.
  • Key risks are lower-than-expected revenue due to measures to contain the COVID-19 pandemic that could result in work stoppages at e-rating catalysts are stronger-than-expected results and accretive M&As.
  • See Grand Venture Share Price; Grand Venture Target Price; Grand Venture Analyst Reports; Grand Venture Dividend History; Grand Venture Announcements; Grand Venture Latest News.


ISDN (SGX:I07) (ADD, target price S$0.84)

  • ISDN (SGX:I07)’s 1Q21 revenue/net profit at 26%/25% of our full-year forecast were in line with our expectations. 1Q21 revenue rose 23.4% y-o-y while gross profit climbed 52.7% y-o-y. Net profit jumped 95.4% y-o-y to S$6.1m. ISDN reported that there was broad revenue growth across its customer portfolio in 1Q21.
  • According to Mordor Intelligence, the factory automation and industrial controls market is forecasted to grow at a compound annual growth rate (CAGR) of 9.0% to reach US$337.0bn by 2026. ISDN’s mini-hydropower plant business in Indonesia came to a standstill as the country battled the COVID-19 pandemic. ISDN is working hard to restart work to commission its power plants by Jul 21.
  • We have an ADD call with a target price of S$0.84 for ISDN based on 12.5x Singapore tech sector’s CY22 average P/E.
  • Potential re-rating catalysts could come from stronger-than-expected sales orders for its mainstay industrial automation business and profit contribution from its hydropower segment. Downside risks are order delays, cost overruns in its hydropower business and a prolonged COVID-19 outbreak.
  • See ISDN Share Price; ISDN Target Price; ISDN Analyst Reports; ISDN Dividend History; ISDN Announcements; ISDN Latest News.


NanoFilm Technologies (SGX:MZH) (ADD, target price S$5.52)



UMS (SGX:558) (ADD, target price S$1.58)

  • UMS (SGX:558)'s 1Q21 revenue grew 42% y-o-y to S$49.6m while net profit grew 44% y-o-y to S$15.4m. 1Q21 net profit at 31%/29% of our/consensus full-year forecasts was ahead of expectations.
  • UMS is optimistic about its outlook for FY21F, citing research from SEMI which projects that global fab equipment spending could grow 15.5% y-o-y in 2021F followed by 12.0% y-o-y growth in 2022F.
  • Given the current super cycle, our valuation is still based on 2.893x (the peak P/BV achieved over the FY16-18 upcycle), leading to a target price of S$1.58.
  • Potential re-rating catalysts include stronger-than-expected orders for its semiconductor business and better-than-expected performance of JEP Holdings (SGX:1J4).
  • Downside risks are disruption to the supply chain if the COVID-19 outbreak worsens and higher-than-expected tax rate due to the expiry of pioneer tax status for a Malaysian subsidiary.
  • See UMS Share Price; UMS Target Price; UMS Analyst Reports; UMS Dividend History; UMS Announcements; UMS Latest News.


Venture Corp (SGX:V03) (ADD, target price S$22.51)

  • Venture Corp (SGX:V03)'s 1Q21 revenue at 18%/20% of ours and consensus FY21F revenue expectations was a miss compared to the historical 8-year average of 23%. With the tepid 2.0% y-o-y revenue growth, 1Q21 net profit at 17%/19% of ours and consensus full-year expectations was also below the 8-year historical average of 21%. 1Q21 revenue was held back by the current ongoing component shortage in the electronics manufacturing industry.
  • Venture Corp guides that it expects quarter-on-quarter improvement in 2Q21F leading to a stronger 1H21F compared to 1H20. The company highlighted that orders from customers are showing broad-based strength across the group’s various business segments.
  • Based on a P/E multiple of 17.1x (0.5 standard deviation above its 20-year average of 15.1x), our target price for Venture Corp is S$22.51.
  • Re-rating catalysts are new product launches by customers. A worsening of the COVID-19 outbreak and component shortages are downside risks.
  • See Venture Corp Share Price; Venture Corp Target Price; Venture Corp Analyst Reports; Venture Corp Dividend History; Venture Corp Announcements; Venture Corp Latest News.





William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-05-24
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