semiconductor

Coming out of 2022, a year of record profit, AEM Holdings stock has been punished for a less-than-optimistic outlook for 2023. DBS, UOB KH and Maybank KE have dismal target prices of $2 and $2.78. $2.66, respectively. However, CGS-CIMB maintained its $3.86 target as it looked to AEM's recovery in 2H2023 and beyond. This aligns with what AEM's CEO, Chandran Nair, said at yesterday's results briefing: 




Below are excerpts from CGS-CIMB report
Analysts: William Tng, CFA & Izabella Tan

FY22 revenue of S$870.5m (+53.9% yoy) was in line with our/Bloomberg consensus expectations, at 102%/104% of full-year expectations, and exceeded AEM’s own FY22 revenue guidance of S$820m-850m.

Profit before tax margin decreased to 18.2% in FY22 vs.19.7% in FY21 due to increased cost pressure from supply chain challenges and product mix.

FY22 net profit of S$126.8m (+37.9% yoy) was in line with our/Bloomberg consensus expectations, at 98%/99% of full-year forecasts.

There was a S$2.0m foreign exchange loss in FY22 due to the decline in the US$ versus the S$, which we had previously factored into our full-year forecasts.

AEM also slipped into a net debt position with a net gearing ratio of 3.1%, vs. a net cash position in 1H22.

AEM cautioned for a weaker FY23F given the global slowdown, rising interest rates, and weaker consumer demand. Initial FY23F revenue guidance of S$500m is 11% above the upper end of our previous S$350m-450m forecast.

AEM thinks that in FY23F, revenue contribution from three new customers could double from that achieved in FY22.

The company is also hopeful that FY24F could see higher production demand from these customers.

 
We reduce our FY23F revenue forecast by 10.5% (on concerns over the potential slowdown in FY23F), leading to a 19.3% decline in our EPS forecast.

We think AEM will benefit from the semiconductor industry recovery in FY24F and hence, maintain our FY24F net profit forecast though EPS increases by 0.1% as the number of shares declined after AEM’s share buybacks in FY22.

Reiterate Add with unchanged TP of S$3.86    William Tng, CFA.We reiterate Add on potential FY24F earnings recovery (FY23F EPS could drop 29.3% yoy). Our TP is still based on 9.5x P/E, 0.5 s.d. above its 6-year average given its sole supplier status with its major customer. Re-rating catalysts include stronger-than-expected orders from its major customer and earlier-than-expected success in securing orders from other potential customers.

 
Downside risks are delivery delays and the loss of its sole supplier status for its major customer, which would negatively affect AEM’s profitability, in our view.

Full report here. 

This is Part 2 of a 2-part report. Part 1: ASMPT: Business segments which buoyed 2022 profit after 2021 supercycle year

Below are excerpts from a Q&A session during ASMPT's FY2022 results briefing this week (results announcement here). The answers point to a positive near-term and mid-term outlook for ASMPT in terms of orderbook and gross margins as it navigates the current semiconductor downcycle. 

• Robin Ng, CEO, ASMPT:
We expect group Q-o-Q bookings to increase by maybe 10 to 20%, so Q1 will be higher than Q4 by 10 to 20%. 

This is largely in line with seasonality trends where Q1 bookings tend to be higher than Q4.

We see strength still in certain segments like automotive. Likewise I think for industrial segment and advanced packaging.

The whole industry is hopeful that China will start to recover after lifting its COVID-19 restrictions. We do see some pockets of buying interest so far in Q1 from certain China customers -- for high-end smartphone applications and also automotive. But this is not a sign of a broad-based China recovery.

We do a lot of channel checking -- with our customer base -- and also look at how industry watchers or independent research houses look at where the semiconductor industry will go from here.

Feedback from our customers and generally the industry view is that the recovery could begin in the second-half of 2023. And many, many customers of ours who have announced their result also cited that one possible tail wind for this to happen is the positive effect of the Chinese economy from the lifting of the COVID-19 restrictions.

• Katie Xu, CFO, ASMPT:
As we have communicated in previous quarters, and as you pointed out, we have increased our price during the supercycle year in a very sensible way, in a very targeted way, and so far we have been able to sustain that pricing level.

Now of course it's a competitive market and especially for our orders quoted in U.S. dollars because of the US dollar strengthening last year, we had some headwind on the FX side.

But for equipment sale, pricing is determined by manufacturers, right?

And the customers do consider our solutions, our strong relationship, our leading technology and our after sales services in a combined way.  The short answer to your question -- from the gross margin performance you can tell that we have been able to sustain the pricing level.

• Katie Xu, CFO, ASMPT:
The group delivered another very solid gross margin quarter, making the 7th consecutive quarter of the margin above 40%.

To put this into perspective, in the last downcycle, the group's gross margin level was hovering around 35 to 38%. So, we believe there is a step change.

Now in terms of the sustainability of gross margin, I'd like to look at the drivers of the solid performance, so far. There are three layers:

One is both semi and SMT gross margins have improved year over year.

Second, the product mix -- the auto, industrial and AP momentum -- have contributed. Their revenue has become very sizable compared to the group revenue and margins from those end markets and solutions are relatively accretive to the gross margin of the company. 

Also, I want to point out as we were coming into the downturn, the group has reacted quite timely in terms of cost control measures.

The measures include, especially on the SEMI side, the sensible hiring only for very critical positions, flexible workforce reduction, and some prioritization of strategic investment, etc. 

All that, we believe, will be sustainable.

Having said that, I want to put a pretty large caveat out there. The group's margin is influenced definitely by volume and also the segment mix between SMT and SEMI and lastly, product mix if the mainstream products rebound in a big way.

I hope I have given you enough color on the gross margin going forward.

(Q&A content has been edited for brevity and clarity)

This is part 1 of a 2-part report. Part 2 is: ASMPT: Q&A on 40% gross margin, semicon recovery

Reflecting different business cycles, the SEMI segment's revenue fell 25.2% y-o-y while SMT segment grew 9.8%.Regarding ASMPT's unique and broad-based portfolio, the Group’s SMT segment delivered record revenue in 2022, fuelled by strong demand from the Automotive and Industrial end-markets.

The SMT segment also recorded its highest ever share of contribution to Group bookings in 2022.

"These developments clearly reflect the resilience of our business model even in a semiconductor downcycle."

As for the end-markets, with macroeconomic uncertainties and dampened consumer sentiments, the Consumer, Communication and Computer end-markets were weak in 2022.

However, the Automotive and Advanced Packaging end-markets did well, delivering an aggregate of about 40% of Group revenue for 2022: 

Heading into 2023, Automotive and Advanced Packaging set ASMPT's orderbook up well, boosting the total backlog to US$1.15 billion. Most of it will be delivered this year. 

The Group expects revenue for first quarter of 2023 to be between US$455 million to US$525 million. At mid-point of guidance, this will be a decline of 11.4% quarter-on-quarter.  

For more on the results, see the Powerpoint deck here. 

Nordic Group, a SGX-Mainboard listed company, was chosen to be among 200 public listed companies in the Forbes Asia 2022’s “Best Under A Billion” list, which identified excellent companies with annual revenues under US$1 billion. (More on Nordic at the bottom of this page)

Nordic Group had record profit in 2022 and is set to pay out dividends post-AGM on April 24 that will add up to be a record (final dividend: 0.906 cents/share).  The payout ratio is 40%, as in recent years. Nordic management held a Q&A session with investors last week, excerpts of which are presented below. One key takeaway: There are no near-term big risks faced by the company. Instead it stands poised for a good year ahead given its record outstanding orderbook of S$233 million (as at end-2022) which is exposed to diverse industries. Look out for the contribution of superior profit margins from Starburst which was acquired in early 2022. Notably, the acquisition was non-dilutive as it was an all-cash $59.1 million purchase -- the biggest of Nordic's 5 M&A deals to date -- and so the deal didn't result in a greater number of Nordic shares on issue.

CFO Chia Meng Ru: The increase in Malaysia is from semicon industry, and the project contracts were awarded in 2021 and 2022 for the construction ofnew plants. 

These projects will be finished in 2023 and 2024. After completion, we should have opportunities for maintenance jobs and maintenance of the systems that we built. 

 
CFO Chia Meng Ru: From the colorful charts, you can see that everybody is still contributing about the same percentage as per the previous year.

"Specialist Structural Engineering Services" refers to Starburst contracts.

CFO Chia Meng Ru: We have already reduced the net debt from $35.1 million to $16.2 million. We are planning to pay off more loans in 2023.  

With our EBITDA at $32 million per year, we should be in net cash quite soon if we don't buy anything else.

 
CFO Chia Meng Ru: These intangible assets are related to the customer order backlog from the Starburst acquisition mainly. The remaining amount will be amortized over eight years, which is the length of the maintenance contracts.

 
CFO Chia Meng Ru: Our 2023 revenue will mainly derive from fulfilling the contracts we have secured in our order book now at $232.5 million. The weaker semiconductor industry will not affect our 2023 revenue. And part of 2024 is also secured already.

 
Executive Chairman Chang Yeh Hong: The projects we have secured are all locked-in projects and mostly projects for new plants. 

It's unlikely they will drop off. These are all big multinationals --  our customer base are mostly blue chips and oil companies and semiconductor players. So it's unlikely that they will fall short in funding the projects.

As for the maintenance segment, it is also safe in the sense that the plants have billions of dollars invested already. They need to be maintained.

Executive Chairman Chang Yeh Hong:There always will be competitors, right? What is more critical is how long have we been entrenched with the clients. Most of our maintenance contracts are more than 20 years. The track record is there and they continue with us if our price is right.

We just got a maintenance contract for about $12 million from an oil major and we have been with this client for more than 20 years for two services. This time, they decided to combine the services into 1 package -- scaffolding, insulation and painting services. In the past, we got scaffolding on its own and installation on its own.

Executive Chairman Chang Yeh Hong:The greatest risk now is not related to the contracts that we have secured. Rather, it's inflationary pressures, particularly on labor and material. In services, the labor cost is critical to us, their dorm cost is critical to us because we have to house them.

We are very concerned about that but having said that, some of our businesses' margins are stable and unless inflationary pressures get out of hand I still think we will maintain our profitability provided we continue to get more contracts and it spreads the overhead costs.

The FY2022 Powerpoint deck is here.  

Nordic provides system integration solutions, repair and overhaul (MRO), precision engineering, scaffolding and insulation services, petrochemical and environmental engineering services and cleanroom, air and water engineering services. And there is Starburst, which has capital projects and maintenance contracts for the design, fabrication, installation and maintenance of anti-ricochet ballistic protection systems used in shooting ranges and tactical training mock-ups for the security industry in Singapore and Middle East.

It's only a matter of time before the semiconductor market recovers from the 2022/2023 major correction cycle which has seen  demand for PCs, smartphones, tablets and consumer electronics significantly decline.  Well, DBS Research is now calling for a recovery not too far in the future (excerpts below). CEO Lim Eng HongSo, time to pick up some semicon stocks? One Singapore-listed stock, Avi-Tech Holdings (market cap: S$45 million, net cash S$33 million, dividend yield 6.6%), has seen buying by its founder-CEO recently. And its most recent set of results --1HFY2023 (ended Dec 2022) -- were decent: • Revenue increased by 14.6% to $17.8 million;  • Gross profit margin was 25.7% (-2.1 ppt); • Net profit was unchanged at $2.0 million; • Interim dividend was unchanged at 0.75 cent/share. Share purchases by Lim Eng Hong, CEO of Avi-Tech  Date No. of shares Price Value Cumulative stake (%stake) 8-Jun-2023 204,700 $0.25 $51,175 62,112,875 (36.3%) 6-Jun-2023 354,900 $0.25 $88,725   1-Jun-2023 223,400 $0.25 $55,850   Source: Company announcements

Excerpts from DBS report

Heading to the right side of U-shaped recovery 

 * The PHLX Semiconductor Sector (SOX) is a Philadelphia Stock Exchange capitalization-weighted index composed of the 30 largest U.S. companies primarily involved in the design, distribution, manufacture, and sale of semiconductors.

Industry close to bottoming – are we on the left or right side of the U-shaped recovery?
Recent semiconductor shipment data registered m-o-m growth after 14 consecutive months of decline, suggesting we are closer to bottoming now.

Trade data from countries such as China, South Korea and Taiwan have shown clearer signs of stabilisation, though not yet a recovery. 

Drivers for anticipated 2H23 recovery in place.
These are:-

Fast-growing AI benefitting the entire value chain. 
Generative AI is expected to be a US$1.3trn market by 2032 (2022-32 CAGR of 42%) according to research from Bloomberg Intelligence.

Potential beneficiaries are:

Companies with direct exposure to AI are: Nvidia Corp, Marvell Tech, Broadcom, AMD, TSMC, Lenovo, Delta Electronics. 

Risks: Further demand weakness, deterioration of global economies, geopolitical and currency headwinds.

Full report here.