Tech Manufacturer Stocks - UOB Kay Hian 2022-10-17: Pricing In P/E Multiple De-rating Due To Chip War & Tech Leaders’ P/E De-rating


Tech Manufacturer Stocks - Pricing In P/E Multiple De-rating Due To Chip War & Tech Leaders’ P/E De-rating

  • Since the US imposed new restrictions on semiconductor exports to China on 7 Oct 22, industry leaders including AMAT, ASML, Intel and TSMC have started indicating a more challenging outlook.
  • Semiconductor stocks under our coverage (AEM, UMS and Frencken) may not be immediately impacted, but we are reducing our valuation multiple peg to -1 standard deviation from mean to price in the valuation de-rating of their major customers and weaker sentiment.
  • Our top picks are Venture Corp and NanoFilm Technologies for low semicon exposures.

The US imposed new restrictions on semiconductor and semiconductor equipment exports to China.

  • On 7 Oct 22, the US Department of Commerce published a draft highlighting:
    1. further restrictions on chip equipment that is used to produce logic chip circuits using a non-planar architecture or with production technology note of 14nm/16nm or less, NAND memory integrated circuits with 128 layers or more and DRAM integrated circuits using production technology node of 18nm half-pitch or less,
    2. restrictions on the export of certain advanced computing chips that are primarily used in supercomputers,
    3. any items that are used in the development and production of chip equipment will also be restricted, and
    4. all US persons (anyone with a US passport) that support the development or production of certain ICs in China will have to obtain a licence from the US government.

Industry leaders have started reducing financial guidance or scaling down operations.

  • In response to the new restriction, industry leaders who are also the major customers of semiconductor stocks under our coverage have recently indicated a more challenging outlook:
    • Applied Materials (AMAT) cut its 4Q22 revenue and earnings forecasts by around 6% and 24% respectively,
    • ASML’s US management team has directed its US employees to refrain from servicing, shipping or providing support to any customers in China until further notice,
    • Intel had slashed its financial guidance for 2022 in Jul 22. It is also planning to cut thousands of jobs, and could make the announcement around its 3Q22 earnings report on 27 Oct 22, and
    • TSMC is slashing its 2022 capital spending target by 10% and highlighted that the weaker demand will likely impact TSMC the most in 1H23.

Heeding the cautionary outlook of major customers for the stocks under our coverage and trimming target prices.

  • Since the new export restrictions came into effect, share prices of the major customers of the stocks under our coverage have fallen by 9-14% wow. Also, the P/E multiples of the industry leaders have also fallen to around 11x 2023F P/E, with the exception of ASML which is trading at 21x 2023F P/E.
  • See also SGX market update: Technology Stocks Take Spotlight On US Trade Policy & Growth Outlook.
  • To account for the more cautious outlook of major customers and valuation de-rating of industry leaders, we are reducing our valuation multiple peg of semiconductor-related stocks under our coverage from mean to - 1 standard deviation of long-term mean P/E:
    • Maintain HOLD on AEM, with target price reduced by 30% to S$3.50, pegged to 8x 2023F P/E, down from 10.5x,
    • Downgrade UMS to HOLD, with target price reduced by 24% to S$1.07, pegged to 8.5x 2023F P/E, down from 11.1x, and
    • Maintain BUY on Frencken, and reduce target price by 27% to S$1.14, pegged to 7.4x 2023F P/E, down from 10.4x.

Reducing valuation multiples for Venture and Aztech to mean P/E to reflect global tech valuation de-rating.

  • We reduce our target price for Venture Corp by 15% to S$19.32, pegged to 2023 mean P/E of 16x, from +1 standard deviation of 19.5x. We note that the one-month share prices of Venture Corp’s clients have fallen by around 8% on average, and they are currently trading at an average P/E multiple of 17x for 2023.
  • On the other hand, we trimmed our target price for Aztech Global by 32% to S$0.99 after reducing our P/E peg multiple to -1 standard deviation P/E of 8.5x, down from 12.5x.

Sanity checks for Nanofilm indicate that our previous valuation methodology remains valid.

  • We are maintaining our target price of S$2.72 and valuation methodology for NanoFilm Technologies, based on PEG of 1.0x (growth based on 3-year EPS CAGR of 20% from 2021-24). Our target P/E multiple of 20x 2023F P/E is at a slight premium vs NanoFilm Technologies’s peers’ 19x 2023F P/E.
  • In addition, NanoFilm Technologies is currently trading at 14x 2023F P/E, around 1.5x standard deviation below its long-term mean P/E of 33x (-1 standard deviation of 23x and -2 standard deviation of 13x).

Maintain OVERWEIGHT but be selective on names with low semiconductor exposure and more diversified customer base.

  • We recommend investors to focus on our top picks, Venture Corp and NanoFilm Technologies, as we believe their diversified customer base and low exposure to the semiconductor industry should reduce the negative impact of weaker demand and weakening sentiment.
  • We believe Venture Corp should continue to deliver a good set of results in 2023 as:
    1. it continues to see healthy demand from most of its customers which are diversified across seven domains, and
    2. it has a proven capability in managing supply chain disruptions.
  • In addition, Venture Corp should be able to manage costs and pass on higher prices to customers given its differentiated capabilities.
  • On the other hand, we expect NanoFilm Technologies to deliver a stronger 2H22 as it enters a seasonally stronger demand period from the new product launches of its major customer. For 2023, NanoFilm Technologies expects positive earnings contributions from the commencement of coating services of battery components for EV.

Expect earnings beat in 3Q22 for 4 out of 6 stocks under our coverage, but share prices could be driven more by market sentiment and performance of industry leaders.

  • We think more than half of the tech stocks under our coverage could deliver better-than-expected earnings, including Venture Corp, AEM, UMS and Aztech Global, given that we and the market have started to turn more cautious since 2Q22 due to the slower global growth.
  • However, despite earnings beat and bullish outlook, stock price movements may be driven more by share price sentiment and valuations of the industry leaders, which are mostly listed in the US.

Venture Corporation (SGX:V03)

NanoFilm Technologies (SGX:MZH)

Aztech Global (SGX:8AZ)

Frencken Group (SGX:E28)

  • Expect 3Q22 earnings to recover q-o-q, driven by margin recovery. We expect Frencken to report 3Q22 earnings of S$14m (-5% y-o-y/+8% q-o-q) as the impacts from supply chain disruptions, higher cost pressures from raw materials, rising energy prices and workforce disruptions start to ease.
  • We expect 3Q22 earnings to be sequentially better as management:
    1. is working to mitigate cost inflation pressures by passing on cost increases through operational initiatives, and
    2. is anticipating signs of easing supply chain constraints.
  • In the mid to longer term, Frencken would benefit from positive market trends in 5G, Internet Of Things and artificial intelligence.
  • Maintain BUY on Frencken with a 27% lower target price of S$1.14, pegged to 7.4x 2023F P/E, based on -1 standard deviation of mean P/E, down from 10.4x that was based on mean P/E.
  • See


  • Expect 3Q22 earnings to decline y-o-y and q-o-q after an exceptionally strong 1H22. We are expecting AEM to report 3Q22 earnings of S$20m (-14% y-o-y, -53% q-o-q), with the sequential decline from an exceptionally strong 1H22 mainly driven by the uptake in new generation equipment and tools and the consolidation of CEI Limited, which was acquired in 1H21.
  • We also believe that there could have been some front-loading of orders in 1H22 as AEM's major customer attempts to mitigate the risk of supply chain constraints. On 7 Jun 22, Intel’s CFO stated that he expected the US chipmaker's 2Q22 earnings to take a hit due to customers working through stockpiled inventory instead of placing new orders.
  • Maintain HOLD on AEM with a 30% lower target price of S$3.50, pegged to 8x 2023F P/E, based on -1 standard deviation of mean P/E, down from 10.5x, that was based on mean P/E.
  • See

UMS (SGX:558)

  • Expect a healthy y-o-y and stable q-o-q earnings growth for 3Q22. We are expecting UMS to report 3Q22 earnings of S$20m (+33% y-o-y/0% q-o-q), excluding a one-off tax writeback of S$15m, as the company should enjoy continued strength in semiconductor demand, as well as consolidation of sales from JEP starting in 2Q21.
  • We understand that factory utilisation levels at the downstream semiconductor manufacturers, including UMS, will stay elevated in 2022-23.
  • Downgrade UMS to HOLD with a 24% lower target price of S$1.07, pegged to 8.5x 2023F P/E, based on -1 standard deviation of mean P/E, down from 11.1x, that was based on mean P/E.
  • See

Sector Catalysts

  • Increasing capex spending by upstream global tech manufacturers.
  • Better-than-expected 3Q22 sales and net profit numbers.

Assumption Changes

  • No changes to our forecasts. Changes to our target prices are shown earlier.

Sector Risks

  • Reduced demand for electronic goods as a result of global recession.
  • Escalation of geopolitical tension and trade conflict between the US and China.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-10-17
SGX Stock Analyst Report BUY MAINTAIN BUY 1.600 SAME 1.600