Singapore Technology Stocks - Maybank Kim Eng 2021-08-23: Too Early To Switch Out Of Chip Shortage Beneficiaries


Singapore Technology Stocks - Too Early To Switch Out Of Chip Shortage Beneficiaries

  • Following 2Q21 results season, we remain POSITIVE on the Singapore Tech hardware sector. We continue to prefer beneficiaries of chip shortages (e.g. UMS, Frencken, and now AEM) over contract manufacturers that have exposure to multiple end-markets (e.g. Venture Corp, Aztech, Valuetronics).
  • We believe a material driver of Frencken and UMS’s outperformance year-to-date has been due to earnings m-o-mentum being stronger than expected. We continue to see potential for Frencken and UMS to positively surprise in the next 1-2 quarters, on the back of still strong demand m-o-mentum from customers. The outlook of semiconductor equipment customers (e.g. Applied Materials, ASML, etc) is still buoyant and is expected to remain so in 2022.
  • AEM has underperformed year-to-date, with a steep correction in May, particularly driven by guidance that disappointed the market. However, we favour AEM on a 12-month horizon as we expect the company to enter into a new earnings cycle, aided by
    1. new products and customers;
    2. easier base effects in 2022 given the transitory weakness in 1H21; and
    3. cyclical factors favouring increasing spend for test equipment.
  • Thus far, we have not observed rotation from Frencken and UMS into contract manufacturers like Venture Corp, Aztech and Valuetronics (SGX:BN2), which may suggest investors are still adopting a “wait-and-see” attitude for the catalysts to manifest. We believe that key rerating catalysts for Aztech, Venture Corp, and Valuetronics are delivery of earnings growth; and/ or convincing beats against street estimates, coupled with evidence that end-market outlook remains robust that lead to positive EPS revisions. We see these as catalysts as these should prove that growth bottlenecks from chip shortages are over.

How are tech companies tackling supply side challenges

  • Supply side challenges remain the key earnings bottleneck in 2Q21. To minimize the adverse impact of supply side disruptions, companies are implementing strategies such as
    1. advanced procurement of inventories,
    2. reaffirming suppliers’ delivery commitments,
    3. redesigning circuitry and using alternative components;
    4. speeding up vaccinations;
    5. leveraging support from blue-chip customers, and in certain instances,
    6. leveraging subsidiaries for capacity/ supply chain expertise.
  • Companies remain cautious on component availability. Aztech believes that the components shortage situation is unlikely to abate in the next 6-12 months. According to Susquehanna, chip wait times are now more than 20 weeks, the highest it has been since the firm tracked this metric since 2017.

Venture Corporation (SGX:V03)

  • Key supply side challenge(s)
    1. Components availability
    2. Worker capacity restrictions in Malaysia
  • Mitigating measures/ factors
    1. Applying various strategies, e.g. going to stockists, advanced procurement of components, or using alternative components
    2. Speeding up vaccination rates. Venture Corp aims to have 80% of Malaysia-based employees receive 1st dose by 3Q21.
    3. Implement additional shifts to get around worker capacity limits in Malaysia.


  • Key supply side challenge: Supply chain challenges as a result of COVID-19 situation in Malaysia.
  • Mitigating measures/ factors:
    • AEM is working with suppliers to secure adequate parts and components. CEI also has a good supply chain team that helps during supply crunch. AEM has high confidence of being able to deliver customer requirements at least for 2H21.
    • Implement additional shifts to get around worker capacity limits in Malaysia.

UMS (SGX:558)

  • Key supply side challenge: Production capacity, especially on the back of strong of strong demand, and worker capacity restrictions
  • Mitigating measures/ factors
    • Acquisition of JEP (SGX:1J4) provides capacity for semicon components
    • In Penang, worker capacity limits is now eased to 80% from 60%, which should alleviate some tightness. Implement additional shifts to get around worker capacity limits in Malaysia
    • UMS does not face inventory shortages, as distribution arm Starke is able to ensure sufficiency for UMS' needs.

Frencken (SGX:E28)

  • Key supply side challenge: Components shortages impacting supply chains in quite a few end-markets it is exposed to.
  • Mitigating measures/ factors
    • Anticipating semiconductor and automotive revenue to be flat h-o-h in 2H21, with upside if components shortages ease in these supply chains.
    • Notwithstanding shortages in the supply chain, Frencken sees medical and analytical revenues to be stronger h-o-h in 2H21.

Aztech (SGX:8AZ)

  • Key supply side challenge(s)
    1. Components availability
    2. Worker capacity restrictions in Malaysia
  • Mitigating measures/ factors
    1. Secure delivery commitments of components for 2H21 requirements
    2. Redesign parts and components for certain products
    3. Advanced procurement where necessary
    4. Transferred some of the allocation from Malaysia to China.

Semicon takeaways

AEM – Positive read-across from Intel’s actions

  • AEM reiterated that new generation tools for Intel will undergo mass production in late 3Q21 through 2022. In that regard, AEM expects 2H21 uptake to be strong following 1H21 transitory weakness. We are excited with AEM’s earnings prospects in 2022, given some of the corroborating factors below.
  • AEM believes its addressable market will benefit from additional investments in back-end test in the subsequent quarters, following strong capex from front-end players (e.g. Intel/ foundry players). To handle new demands by Intel’s customers and to speed up the ramp for assembly and test operations, Intel is investing US$600m in Costa Rica (up from US$350m in Dec-20). Separately, Buletin Mutiara (Penang government-affiliated news site) announced in Jun-21 that Intel will invest MYR4.4b (US$1.04b) in Penang.
  • In the 17 months leading up to Jan-21, Intel invested US$475m in Vietnam (assembly and test site). Coincidentally in 2020, AEM’s revenue from Vietnam rose 75% y-o-y to S$140.2m, accounting for 27% of revenue. As we believe the proposition of AEM’s equipment remains very relevant to Intel, we do not rule out that the expansion of assembly and test capacity in Costa Rica and Penang are corroborative factors for AEM’s growth in the near term.
  • In the past, AEM’s growth has also coincided with Intel’s node migrations. For instance, in 2019, AEM’s revenue grew 23% as Intel transitioned to 10nm. The reason why we believe major node migrations at Intel are positive for AEM is because at new nodes, chips require more testing to ensure reliability, until such time that engineers are familiar with the node. Intel’s next major node migration is to Intel 4 (formerly “7nm”), with production set for 2H22 and the first four products planned for 2023 (Meteor Lake for consumer products, and Granite Rapids for data centres).
  • In Intel’s Jul-21 update on process and packaging innovations, it reiterated its commitment to advanced packaging technologies such as EMIB (embedded multi-die interconnect bridge), and Foveros 3D stack. We see this trend is beneficial for AEM as we do not rule out that in addition to current equipment, new generations of equipment from AEM could be used to address test complexities as a result of advanced packaging technologies. For instance, in the case of 3D logic stack, interconnects must be adequately tested for thermal reliability, and AEM believes it has the best active thermal control capability to accurately and speedily test for thermal reliability. Moreover, Intel’s chips are often highly mission critical, with parts per billion requirements to ensure no product failure or recall.

Takeaways from wafer fab equipment (WFE) customers

  • ASML believes that the current shortages were in part result of supply chains’ cautiousness at start of COVID-19 and sees the current cyclical catch up in chip demand to persist into next year. Meanwhile AMAT sees WFE spending being > US$80b (i.e. growth > 30%) in 2021, and expects WFE to be higher in 2022, across logic/foundry, DRAM and NAND segments.
  • ASML and Applied Materials continue to note strong demand m-o-mentum in logic/ foundry. In memory, ASML notes tight supply-demand dynamics, while AMAT cites that DRAM/ NAND inventory levels are below normal/ normal respectively.
  • Several themes have also been mentioned:
  • Long-term demand driven by digital infrastructure buildout: In logic/foundry, strength is observed in both leading and trailing nodes. In trailing nodes, ASML attributes the strength of long-term demand to the buildout of digital infrastructure as 5G and edge computing takes off. For instance, while compute at the edge is typically done on advanced chips, sensing devices that are connected to them are typically manufactured from mature nodes.
  • Regionalisation of fab capacity: Amid the realization of over-reliance on North Asian fabs, countries are now pushing to regionalize fab capacity to diversify geographical risks. ASML and AMAT expects spending from such initiatives to take place more towards the 2023-24 timeframe. The implication of this is likely higher demand for semicon equipment, as the regionalisation of fab capacity will likely create inefficiency in the semiconductor supply chain.
  • Capacity expansion by WFE players and supply chain. ASML, AMAT, and Lam are actively expanding capacity. On the back of robust demand, ASML is actively working with the supply chain to increase capacity. We understand some of Frencken’s (ASML is customer) capacity addition also caters for semicon. While ASML is expanding capacity in the immediate horizon and for the long-term, it specifies that its capacity expansion plans are focused on long-term demand. ASML also reiterates that it has long-term demand commitments from its customers. This is because tools built by ASML are highly specialized for semiconductor manufacturing, and overcapacity and high inventory levels could result in large obsolescence and losses unless capacity is managed with discipline. Lam Research have shipped out the first equipment built at the new Penang plant, and we continue to think Lam’s supply chain buildout may benefit contract manufacturers and precision-engineering players in Malaysia/ Singapore. Meanwhile, UMS notes that the consolidation of JEP provides it access to capacity amid strong order flows from customer Applied Materials.

Takeaways from Venture Corp’s end-markets

  • Venture Corp remains optimistic of the demand outlook over the next 12 months. Across seven domains, broad-based strength is observed, with the exception of one (i.e. financial technology). In particular, life-science and medical technology customers are benefitting from strong pharma and biotech end-markets amid the current battle against COVID-19.
  • Venture Corp highlighted liquid chromatography and mass spectrometry as a key growth area. These were areas where customers like Agilent and Thermo Fisher are launching new products. Venture Corp’s customers were also optimistic in test & measurement, networking and communications, advanced industrials onductor-related equipment verticals.
  • See report attached below for complete analysis.

Gene Lih Lai CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-08-23
SGX Stock Analyst Report BUY MAINTAIN BUY 2.100 SAME 2.100