AEM HOLDINGS LTD (SGX:AWX)
UMS HOLDINGS LIMITED (SGX:558)
FRENCKEN GROUP LIMITED (SGX:E28)
AZTECH GLOBAL LTD. (SGX:8AZ)
VALUETRONICS HOLDINGS LIMITED (SGX:BN2)
VENTURE CORPORATION LIMITED (SGX:V03)
Singapore Technology Stocks - Time To Get Picky
Still POSITIVE, but time to be selective and vigilant
- We stay POSITIVE on Singapore Tech, as demand dynamics are still solid. Yet, in response to still stubborn supply-side bottlenecks, we are incrementally selective.
- We raise target price for AEM (SGX:AWX) to S$6.23 (16x FY22E P/E) as we increase FY22-23E EPS by 8% to factor in strong earnings momentum, and upgrade Frencken (SGX:E28) to BUY on unchanged target price of S$2.50 (15.5x FY22E P/E) after the recent correction.
- We prefer AEM, UMS (SGX:558) and Frencken for exposure as we believe these face less supply-side bottlenecks than downstream players.
Demand dynamics remain positive
- If AEM can sustain 3Q-4Q21 quarterly revenue run-rate in FY22, this infers FY22E revenue potential of S$700-800m (our estimate: S$753m). Over FY22- 23E, we believe upside drivers include Intel’s expansion plans in Penang and Costa Rica, as well as the node migration to Intel 4 in 2H22.
- In our view, UMS’s revenue upside can be unlocked if it is able to beef up its workforce sufficiently, on the back of robust demand outlook.
- Frencken and Venture Corp (SGX:V03)’ analytical and medical customers remain upbeat about FY22 prospects.
- Aztech (SGX:8AZ) also sees robust demand from consumer IoT end markets that has not abated.
Chip shortages well into 2H22
- We expect UMS and Venture Corp to be sequentially stronger in 4Q21 as they have resumed full workforce production since late 3Q21. With vaccinations, we are more optimistic towards the easing of labour bottlenecks than components – as many chipmakers expect shortages to last into 2H22 before easing in 2023. The key risk to this view is if Omicron results in the reintroduction of worker production limits and/or continue to limit worker immigration.
- Texas Instruments, one of the chipmakers widely blamed for current shortages, saw fast depleting finished goods in 3Q21 that resulted in overall inventory days being at 112, below desired levels of 130-190.
Watch Venture Corp if chip shortages ease
- Venture Corp reiterated that the demand outlook is strong but the key impediment remains chip shortages. Inventory has been creeping up, which we believe comprises WIP goods, as well as buffer stock. An alleviation of components shortages may help Venture Corp speed up the rate of completing WIP products and translate into earnings upside vs our FY22-23E, in our view.
- For the entire sector, the impact of Omicron towards supply chains and earnings is a risk that we are monitoring.
AEM (SGX:AWX)
Demand-side dynamics
- AEM's Management pointed towards quarterly run-rate in FY22E being comparable to 3Q-4Q21. This implies FY22E revenue potential of S$700-800m (Our FY22E: S$753m). We believe this is highly achievable on the back of
- new generations of equipment being catered for Intel's new chips (e.g. Sapphire Rapids); and
- Intel's capex growth in FY22 (and expansion plans in assembly and test in Penang and Costa Rica).
Supply-side dynamics
- Currently, AEM is not expecting any shipment delays, although it is mindful about such risks. AEM has strong relationships with its fabrication suppliers (largely in Malaysia/Singapore), and works with distributors and manufacturers to secure the chips needed.
- AEM's manufacturing is one that is primarily cell-based assembly. In that regard, leasing additional space and training new employees should take a few months.
Things to note
- In our view, the current demand-supply setup for AEM is among the most ideal in our SG tech coverage. On the upside, we look forward to the possibility of guidance increases on the back of stronger than expected momentum (AEM have thus far raised guidance every year since 2017).
- On the supply side, around 2/3 of AEM's production capacity is in Singapore, where production in essential industries have seen minimal production disruptions as compared to Malaysia/ China.
- See
UMS (SGX:558)
Demand-side dynamics
- UMS's Order outlook remains robust, which we believe is driven by
- WFE growth in 2022; coupled with
- shift of geographical allocation from US to ASEAN.
- Applied Materials continues to expect robust outlook, and we believe that a shift from "just-in-time" to "just-in-case" may also bode well for UMS as Applied Materials beefs up inventory to anticipate order upside. AMAT believes that it is currently not experiencing double-bookings.
Supply-side dynamics
- In our view, the key to unlock earnings upside vs our estimates is primarily via access to labour. UMS currently expects to employ much of the required additional workforce by mid-FY22. The impact of components shortage is currently negligible.
- On the back of robust demand outlook, UMS is doubling capex to ~S$20m in FY22E. We expect some equipment to contribute to production capacity in the earlier part of FY22E, while a new factory is expected to complete in 3Q22.
Things to note
- We believe our FY22E PATMI of S$76m (+14% y-o-y) is not onerous, as it implies a run-rate of S$19m per quarter, in line with our current 4Q21 estimate. In other words, we see upside from evidence that UMS is able secure the workforce it needs to convert demand potential into actual revenues.
- See
Frencken (SGX:E28)
Demand-side dynamics
- The demand outlook among customers remain robust, including semiconductor, analytical and medical. We believe that "stable" h-o-h revenue expectation in 2H21 is largely due to supply chain bottlenecks. Our forecasts assume that a majority of shortfall will spill over into FY22E.
Supply-side dynamics
- In 3Q21, we believe incremental bottlenecks were in automotive and possibly medical. While semiconductor bottlenecks appeared unchanged (Frencken maintained expectations for 2H2 semi revenue to be stable h-o-h), materials shortages have created some bottlenecks for customers like ASML, Applied Materials and Lam in latest quarter earnings. However, all are actively resolving this, and Frencken is also adding capacity as well.
Things to note
- Frencken's net margin fell 0.5 ppt y-o-y to 7.5% in 3Q21. This is due to increased freight and components prices. Our FY22- 23E net margin expansion assumptions are now less aggressive to factor in some inefficiencies in passing costs along. We remain optimistic that over time, Frencken's margins should trend upwards with new products with greater value-add.
- See
Venture Corp (SGX:V03)
Demand-side dynamics
- Seeing strong trends in new product introduction activities which are expected to translate into mass production in the next 12 months.
Supply-side dynamics
- Components shortages remain the key bottleneck. While Venture Corp's inventory levels are high, these are largely WIP inventory, together with buffer stock. Without the chips in shortage, full products cannot be completed and shipped. While Venture Corp can engage in component redesign, we suspect the scope here is limited.
- Our checks suggest that labour is not a key constraint as Venture Corp was agile to foresee worker restrictions and prepared ahead of time.
Things to note
- 3Q21 net margin was resilient at 10% (although GPM was not disclosed). It may have been likely that if not for higher input costs that are not yet passed along, margins could have been higher. In any case, resilient margins likely indicate strong operational cost control.
- Given the strong demand backdrop and high inventory levels, we believe the key swing factor for FY22-23E earnings is whether components shortage abate.
- See
Aztech (SGX:8AZ)
Demand-side dynamics
- Demand remains robust, with order book of S$636m for Aztech as at 14 Oct, expanding from S$604m in 30 Jul. Of this, S$454m are for delivery in 2022 (mostly in 1H22, and some in 3Q22).
Supply-side dynamics
- In October, Aztech expressed that it does not expect the components shortage situation to abate in the next 6-12 months. We believe large customers like Customer A should continue to help Aztech secure components. However, smaller customers should have less bargaining power. We have observed that consumer electronics have been disproportionately hit as chip supplies prioritise other end-markets like mobile, laptop and even automotive
Things to note
- Aztech continues to expect to be able to pass along costs to management despite industry-high net margins (9M21: 12.1%, +50 ppt y-o-y) due to still robust demand for its products.
- Barring a worsening of components and labour bottlenecks, we believe Aztech should deliver attractive y-o-y revenue and earnings growth in 1H22, due to the shift in revenue seasonality as 4Q21 deliveries are pushed out to 1H22 due to current chip shortages.
- See
Valuetronics (SGX:BN2)
Demand-side dynamics
- With the move of customers’ allocation largely done in FYMar22E, we are forecasting revenue growth of 6% in FY23E. Upside to our forecast may be from new customers, for which Valuetronics (SGX:BN2) is currently finalising terms. One of these potential customers is a hardware provider for a retail chain store, and another provides cooling solutions for high performance computing.
Supply-side dynamics
- Like most EMS players, components shortages is affecting Valuetronics's ability to fulfill orders. In the near term, China's COVID Zero policy is also discouraging workers to travel from the North to the South. Rising components and labour prices are negative to Valuetronics's margin prospects, in our view. While management endeavours to pass costs along, this must be done in a manner that does not erode Valuetronics's competitiveness
Things to note
- We are optimistic towards Valuetronics's longer-term prospects given a long-track record solid execution through the years. However, in the near term, components shortage and margin erosion risks may imply that investors could collect the stock at lower prices.
- See
Gene Lih Lai CFA
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2021-12-01
SGX Stock
Analyst Report
6.23
UP
5.770
1.710
SAME
1.710
2.500
SAME
2.500
1.260
SAME
1.260
0.500
SAME
0.500
19.180
SAME
19.180
