Tech Manufacturing Services Sector - UOB Kay Hian 2021-07-29: Positive Industry Data Indicates Strong 2Q21 Results


Tech Manufacturing Services - Positive Industry Data Indicates Strong 2Q21 Results

  • Industrial production in Singapore and Malaysia showed a strong double-digit y-o-y recovery in 2Q21. This should benefit the manufacturing stocks under our coverage and we expect more companies to deliver better-than-expected earnings in the 2Q21 results season. Companies servicing the semiconductor and auto industries are clear beneficiaries given the industry tailwinds.
  • Our top picks are UMS (SGX:558), InnoTek (SGX:M14) and Aztech Global (SGX:8AZ) as they are serving the right industries and have better chances of earnings beat.

SGX listed tech-related companies scheduled to release their 2Q21 results between 30 Jul and 15 Aug.

  • Our channel checks suggest that factory utilisation rates remain elevated across Singapore, Penang and China for the companies under our coverage. Particularly, the upcoming 2Q21 results from Aztech Global (SGX:8AZ), UMS (SGX:558), Frencken (SGX:E28) and InnoTek (SGX:M14) could surprise on the upside as demand for their end-products continue to benefit from resilient demand.
  • Factories kept busy in 2Q21, supported by positive and expansionary headline figures for industrial production of 17.7%. Particularly, the semiconductor segment grew 28.2% y-o-y in Jun 2021, led by demand from cloud services and 5G markets, while output of machinery and systems expanded 28.6% y-o-y on the back of higher output of semiconductor and industrial process equipment. The team at UOB Global Economics & Markets Research continues to expect Singapore’s electronic and precision engineering clusters to support the overall manufacturing sector, on the back of global growth and a positive external environment.

Tailwinds in the semiconductor and auto industries.

  • The semiconductor industry is riding on a strong uptrend, with significant demand for semiconductor chips arising from 5G-related spending and the growth of data. Demand has shown resilience despite being impacted by supply chain disruption from global lockdowns related to the COVID-19 pandemic. There have been indications from upstream foundries that the near-term supply shock from the chip shortage situation would transition into longer-term demand sustainability due to new emerging technologies. This is supported by record capex spending by global foundry giants Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics and Intel Corp in a bid to capture the rampaging chip demand.
  • Chips shortage which has caused auto slowdown globally in 2Q21 has been resolved with China taking up more production and the auto sector should continue to grow in 3Q21.

Positive operating leverage to kick in.

  • The strong demand is expected to translate to increased factory utilisation rates, driving positive operating leverage for the tech-related manufacturers. We expect competition to stay rational among the suppliers, given the elevated capacity utilisation rates across the semiconductor industry.

Venture Corp (SGX:V03)

  • VMS continues to work on a variety of products and new opportunities. Venture Corp (VMS, SGX:V03) highlighted that orders from its customers are showing broad-based growth across the group’s technology domains. Customer orders for several sophisticated, leading-edge products in the Life Science Technologies, Medtech Devices & Equipment, and Lifestyle & Wellness Consumer Technology domains are coming in strong, according to the group. Furthermore, new products across the Instrumentation, Networking & Communications, Advanced Industrials and Advanced Semiconductor-related Equipment domains will be launched in response to the increasing needs for electronic test equipment, optical & photonics networking solutions and 5G infrastructure developments.
  • Expect sequential improvement from strong pipeline of orders. We expect 2021 to see a similar seasonality trend as in 2020, with sequential improvement in 2Q21 as the group fulfils its orders, assuming that the component shortage situation the group is facing improves. Venture Corp has guided that it expects a better 2Q21 on a q-o-q basis, leading to an overall better 1H21 compared to 1H20.
  • Maintain BUY with PE-based target price of S$23.47, pegged to +1 standard deviation above its forward mean P/E, of 20x on 2021F earnings. At the current price, Venture Corp offers an attractive dividend yield of 3.7%.
  • See Venture Corp Share Price; Venture Corp Target Price; Venture Corp Analyst Reports; Venture Corp Dividend History; Venture Corp Announcements; Venture Corp Latest News.

Aztech Global (SGX:8AZ)

  • Manufacturing plant in Dongguan was not affected by the recent COVID-19 outbreak. We understand that Aztech Global (SGX:8AZ)’s manufacturing plant in Dongguan has not experienced any disruption in production for the entire 1H21. Also, 70% of the staff in the plant have been vaccinated, with a target to reach full vaccination by end-Jul 21. In addition, Aztech Global has put in place various preventive measures such as restricting outside visitors and only allowing its own staff to handle cargo. To recap, Aztech’s Dongguan plant accounts for 80% of the group’s total production.
  • Limited impact on production in Malaysia’s plant from the tightened MCO. Malaysia implemented a tightened movement control order (MCO) on 22 May 21,which allows only 60% of workforce to be on the factory’s premises. Despite a temporary reduction in production output, Aztech Global sees limited impact on the group’s top-line as its Dongguan plant is able to compensate the production. On the other hand, Aztech Global is phasing out low-margin products to free up more capacity for better-margin products.
  • Customer demand and orderbook remain robust. Aztech Global continues to see robust orders from its key customers with orders lasting until 2022. In addition, Aztech Global is working on several new products with its key customer, with production commencing in 3Q21. Compared with larger competing manufacturers, Aztech Global has advantages in its ability to provide more dedicated services and work closely with the design team of its key customer.
  • Maintain BUY with a target price of S$1.86, pegged to 18.4x 2021F earnings, based on the average of Singapore-and Malaysia-listed technology manufacturing peers. We believe orders are just starting to ramp up in 2021 and would sustain into 2022. Assuming a 35-40% payout ratio, 2021-22 dividend of S$0.04 and S$0.055 would translate into yields of 3.3% and 4.5% respectively.
  • See Aztech Share Price; Aztech Target Price; Aztech Analyst Reports; Aztech Dividend History; Aztech Announcements; Aztech Latest News.

NanoFilm Technologies (SGX:MZH)

  • Nanofilm’s second plant in Shanghai started operations in Feb 21, and will support the company’s growth as it will be able to house more coating equipment which would potentially increase its total number of coating equipment by 83% to 322 units vs 176 as at end-20.
  • Maximise core technologies in new end-markets that have favourable growth trends. To achieve sustainable growth, NanoFilm aims to capture greater market share in the established end-market especially for its 3C customers, and ramp up its market share gains in new markets in the automobile, optical lens and optical sensor industries. On the other hand, future new areas that NanoFilm is exploring include FMCG personal grooming, new energy, medical lens and biomedical. FMCG products in the personal grooming space include test-of-concept phase for shavers and electric toothbrush, while the new energy space includes bi-polar hydrogen fuel cells, which could be applicable nd complement renewable energy.
  • Last call was a BUY with a target price of S$5.51. We value NanoFilm based on a PEG of 1.2x (growth based on 3-year CAGR of 29% from 2020-2023F). Our target price implies a 35x 2022F P/E. We believe its unique technology, superior net margin and sole supplier status for most of its major customers provide a strong competitive advantage and warrant a premium to peers.
  • See NanoFilm Share Price; NanoFilm Target Price; NanoFilm Analyst Reports; NanoFilm Dividend History; NanoFilm Announcements; NanoFilm Latest News.

UMS (SGX:558)

  • Supply squeeze from ongoing chip shortage; demand sustainability from capex guidance for the years ahead. The global chip shortage situation brought about by rising consumer demand for electronic products and supply disruption has positively impacted UMS (SGX:558)’ key client, chip-making equipment producer Applied Materials (AMAT US, Not Rated). Also, in the recent 2QFY21 earnings transcript released by AMAT in May 21, the semiconductor giant disclosed that customers, for the first time, provided capital spending guidance for multiple years ahead, which will be a leading indicator for demand sustainability. This augments our thesis that: the ongoing massive capex spending, and supercycle in the semiconductor industry will bode well for UMS, lifting overall factory utilisation rates and revenue above the S$200m mark for the first time in 2021 (2010-20 average revenue was S$124m; ranging between S$110 and S$164m).
  • Growing potential for 2021 earnings surprise. For 1Q21, PATMI accounted for 26% of our 2021 earnings estimate, compared with 22% which 1Q historically accounted for in the past five years. We see increasing probability for an earnings upside surprise should factory utilisation rates remain elevated throughout the year. A sensitivity analysis shows that for every 5% increase in sales from our estimate, the expected rise in net profit will be 7% due to the impact of positive operating leverage.
  • Maintain BUY with a target price of S$1.92, pegged to 15.1x P/E or +2 standard deviation above its historical 4-year average, supported by the structural upturn for the semiconductor industry. UMS also offers an indicative forward dividend yield of 2.6% based on S$0.04 dividend for 2021.
  • See UMS Share Price; UMS Target Price; UMS Analyst Reports; UMS Dividend History; UMS Announcements; UMS Latest News.

Frencken (SGX:E28)

  • Major customers seeing orders ramp up. Key clients of Frencken (SGX:E28) in the semiconductor and medical & analytical segments, namely ASML Holding (ASML NA), Thermo Fisher Scientific (TMO US), Koninklijke Philips NV (PHIA NA) and Siemens Healthineers (SHL GR), have continued to see an increase in orders. ASML is benefitting from the 5G digital infrastructure build-up, while the others are seeing order resumption following push-backs related to uncertainties surrounding the COVID-19 pandemic. Accounting for a combined 65% of Frencken’s 2021 revenue, the semiconductor segment (34%) and medical & analytical segments (31%) are not expected to present any negative surprises in the upcoming 1H21 results in mid-Aug 21.
  • Bright spots emerging in industrial automation. Global demand for hard disk drives (HDD) is expected to increase over 2021-25, according to International Data Corporation (IDC). Both industry heavyweights Seagate Technology Holdings (STX US) and Western Digital Corp (WDC US), have seen accelerating growth year-to-date on the back of high demand for storage. Hence, we believe there is increasing potential for Frencken’s industrial automation segment to surprise on the upside in 2H21, as improved industry conditions should lead to higher capex budget for key customer Seagate. Frencken builds the modular parts of the HDD assembly line for Seagate, and also manufactures the sheet metal in-house. Typically, Frencken will receive orders 3-6 months ahead, and have a delivery lead time of a month.
  • Maintain BUY with target price of S$2.13, based on 18.2x 2021F P/E, or 20% discount to the blended average 2021F P/E range of Frencken’s key customers. Relative to Frencken’s historical share price, the implied target price falls between its +2.5 standard deviation and +3 standard deviation of 17.8x and 19.4x 2021F P/E respectively. We believe Frencken’s valuation would continue to re-rate upwards, in tandem with the cyclical upturn across the semiconductor, industrial automation and medical & analytical segments.
  • See Frencken Share Price; Frencken Target Price; Frencken Analyst Reports; Frencken Dividend History; Frencken Announcements; Frencken Latest News.

InnoTek (SGX:M14)

  • Positive outlook from venturing into the EV and parts assembly business. In the outlook statement of InnoTek (SGX:M14)’s recent 2020 Annual Report dated 13 Apr 21, InnoTek highlighted that its China's Auto division is experiencing great change, with a clear shift towards electric vehicles (EV). InnoTek’s precision metal components division also serves EV manufacturers. However, as the industry evolves holistically towards charging stations and infrastructure support, InnoTek will seek to deepen its value proposition with existing customers and acquire new customers. This means moving beyond single-part manufacturing to parts assembly. InnoTek has secured initial orders of the latter and expect orders to increase as it establishes its foothold within the segment.
  • Set to benefit from a strong recovery in China’s auto sales. China has successfully contained the COVID-19 outbreak, which has led to a surge in passenger vehicle (PV) sales back to pre-COVID-19 levels. CAAM estimates March auto sales at 2.38m units, up 67% y-o-y and 64% m-o-m, and 1Q21 PV sales should reach 6.34m units, up 73% y-o-y. InnoTek, which has large exposure to China’s automobile market (historically accounted for >30% of annual revenue), is set to benefit from the recovery in auto sales.
  • Strong cash generating ability and high net cash balance underappreciated. As of end-20, InnoTek ha a net cash position of S$90.2m, up from S$35.0m (+158%) as of end- 15, forming around 44% of its current market cap. InnoTek has been paying out a dividend of S$0.005 since 2016, and gradually increased this to S$0.02 in 2020.
  • Maintain BUY with a PE-based target price of S$1.20, based on a 12x 2022F P/E. InnoTek is trading at 9x 2022F P/E (ex-cash P/E of 5x), which is unjustified based on its resilient business model, high net cash position and high margins as compared to its peers. Thus, we believe InnoTek should trade nearer to its peers’ multiple of 12x 2022F P/E. Risks include demand disruption from COVID-19, competition and adverse regulatory changes.
  • See InnoTek Share Price; InnoTek Target Price; InnoTek Analyst Reports; InnoTek Dividend History; InnoTek Announcements; InnoTek Latest News.


  • Increasing capex spending by upstream global tech manufacturers.
  • Better-than-expected 2Q21 sales and net profit numbers.


  • No changes to our forecasts.


  • Escalation of geopolitical tension and trade conflict between the US and China.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-07-29
SGX Stock Analyst Report BUY MAINTAIN BUY 1.200 SAME 1.200