We expect local tech companies, particularly those with high sales exposure to US smartphone brands, to deliver strong report cards from 2Q17 onwards. This could include upstream testing equipment players such as MMSV and Elsoft in 2Q17, followed by OSAT vendors from 2H17. However, given the sharp share price run-up within the sector, we advocate investors stick to companies with multi-year growth legs while the near-term good results provide trading opportunities in small-cap companies. Maintain OVERWEIGHT. Top pick: Globetronics.
WHAT’S NEW
■ Local supply chain for US smartphone brand is poised to record strong earnings from 2Q17 onwards... The much anticipated launch of a new-generation smartphone by a US premium brand in 3Q17 is expected to have the relevant Malaysian testing equipment makers and outsourced semiconductor assembly and test (OSAT) providers reporting a strong set of results from 2Q17 onwards. Particularly, players that have high revenue exposure to this US end-client due to their sole supplier positions, such as upstream LED-related testing equipment makers MMS Ventures (MMSV MK, non-rated) and Elsoft (ELSR MK, non-rated), are expected to record superb results in 2Q17. OSAT vendor Globetronics (GTB MK, BUY) is on track to record strong earnings growth in 2H17 due to its sensor products. Inari, which has a dominant position on RF, is also expected to see a stronger 2H17.
■ ...despite rumours of a potential delay in the availability of the OLED screen model. Market consensus expects the US smartphone brand to stick to the traditional launch period of September for the roll-out of its three new flagship models (4.7-inch screen, 5.5-inch screen and 5.8-inch OLED screen) but some believe that there will be limited availability for the OLED model or a delay till mid-October/November (due to a delay in OLED production ramp-up). Despite the potential of a slight delay, we do not expect this to have an earnings impact on the relevant Malaysian vendors. Upstream players have delivered a majority of the orders in 2Q17 while certain OSAT players are loaded with more-than-expected orders and capacity expansion is on the way.
ACTION
■ Maintain OVERWEIGHT. Top pick: Gloebtronics. Local technology companies recorded a very nice share price run-up ytd (see overleaf side bar), with much of the rally fairly reflecting their outlooks. Among Malaysian vendors for the US smartphone brand, we see trading opportunities for the small-cap testing equipment makers on anticipation of the good upcoming quarterly results. Over the longer-term, we prefer OSAT companies which have more stable earnings with multi-year growth legs. Valuation-wise, OSAT companies are more attractive after the small-cap companies’ sharp run-up. Maintain OVERWEIGHT on the sector. Top picks: Globetronics.
ESSENTIALS
■ MMSV’s good results over the near term could provide trading opportunities. MMSV, which derives about 50% of its revenue from the smartphone segment, is expected to achieve 20-30% revenue growth in 2017, mainly on the back of its customised LED visual inspection solutions for its US end-client’s upcoming new smartphone models. Given that second quarter is seasonally stronger for the smartphone segment and the new testing equipment fetch higher selling prices, MMSV is poised to deliver one of its best quarters (if not the best) in 2Q17 (historical peak was in 2Q16 which reported RM20m revenue with RM5.7m net profit). Management shared that its existing margin is sustainable in 2017. This implies MMSV trades at 20-21x 2017F PE, on the assumption of 20-30% sales growth. While its valuation is not particularly attractive, its good results for the near-term could trigger trading opportunities.
■ MMSV: Expecting a weaker 2H17, dragged by non-smartphone segment. MMSV’s 2H17 could be weaker hoh due to the absence of orders from the more lucrative smartphone segment. MMSV’s other key areas of exposure are to the automotive, general lighting and semiconductor industries, which each made up 21%, 7% and 13% of its 2016 revenue respectively. While we are positive on MMSV’s automotive segment, but its revenue growth is lower than that of its smartphone segment due to a slower replacement cycle and a longer qualification period.
■ Globetronics: Stronger 2H17. Globetronics is ramping up its production volume on new light and gesture sensor products and is planning a Phase 2 capacity expansion to meet end-clients’ demand. We expect a strong net profit CAGR of 76% in 2016-19, and there could be potential earnings upside in 2018-19 due to: a) commercialisation of products under development (particularly 3D imaging sensor); and b) strong demand for gesture sensors (due to end-client’s bundling strategy). We expect Globetronics’ 2Q17 net profit to improve but it will still be an unexciting quarter as the light sensor’s mass production only started in June and loading volume is yet to normalise. We estimate 2Q17’s net profit to be in the range of RM7m-8m (1Q17’s RM6.0m, 2Q16’s RM5.5m) but will improve to
RM20m-25m per quarter in 3Q-4Q17.
■ Testing equipment makers’ earnings visibility is less predictable. Overall, we view that the earnings outlook for equipment players (with high concentration of a few key clients) is uncertain compared to OSAT’s. The outlook is highly dependent on whether the end-clients would need to replace existing equipment or simply need modifications on existing equipment to support new product launches. Testing equipment makers typically
have 3-4 months of order visibility.
source: UOBKayHian 10th July 2017
