BIMB Securities Research OSAT angling for growth Overweight · As the network evolves from 1G to 4G, mobile phone features and capabilities have taken a quantum leap; from a basic

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BIMB Securities Research

2 April, 2018 A Member of BIMB Holdings Group

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OSAT – angling for growth

Overweight◄►

Based on Semiconductor Industry Associate (SIA), global semiconductor sales

hit record high in 2017, an increase of 21.6% to US$412.2bn. The demand was

underpinned by several key sectors such as automotive, industrial and storage

markets.

Malaysia’s export has grown 17.9% yoy RM82.9 in January driven by strong

growth in manufactured goods. We believe the strong growth was supported

by the increase in demand for global semiconductor products.

Malaysian Outsourced Semiconductor Assembly and Test (OSAT) players under

our coverage have all embarked on diversifying their respective revenue

streams particularly making inroads or bigger headways into the automotive

sector.

We expect appreciation in ringgit and higher raw material cost (wafer and

metal price) to be main challenges for Malaysian OSAT players to maintain

their margins.

We initiate coverage on the Tech sector with an Overweight with our

recommendations on Inari (BUY, TP: RM3.25), Unisem (BUY, TP: RM3.20), MPI

(BUY, RM11.25) and Globetronics (SELL, TP: RM3.10). Our top pick is Inari,

bolstered by its sound business model which is reflected in its robust earnings

growth and margins, as well as structural growth from its capacity expansion.

SIA – global semiconductor sales to continue grow According to SIA, global semiconductor sales hit record high in 2017, an increase of

21.6% to US$412.2bn from US$335.2bn in 2016. The surge in semiconductor sales

was underpinned by strong end-product demand across various segments ie.

consumer, communication, automotive, industrial and medical devices

Malaysian OSATs to expand businesses towards automotive sector

Malaysian OSAT have started to expand their solutions and services towards the

automotive sector for better margin products ie. Unisem (high-end microphone),

MPI (sensors) and GTB (LED). This is in tandem with growing demand for

automotive sector as indicated by IC Insight, i.e. the growth in IC components used

in automobiles are forecasted to grow at 13.4% CAGR over 2016 – 2021.

Growth in OSAT business to meet market demand

Historical forward PE for Malaysian OSAT (MO) under our coverage trades at 15.5x

ahead of US semiconductor companies at 13.7x. We believe this was due to higher

demand for consumer products, automotive, industrial 4.0 and Internet of Things

(IoT) which drives OSATs production.

Inari - our top pick

Inari (BUY, TP: RM3.25) is our top pick given its sustainable business driven by robust RF filter business worldwide, growing demand for 4G/LTE network, and connectivity technology. We also like Unisem (BUY, TP: RM3.20) and MPI (BUY, TP: RM11.25) underpinned by better performance and expansion into new business segment- automotive.

Afifah Abdul Malek

[email protected] (603) 2613 1740

BIMB Securities Research Sector Update: Technology

www.bisonline.com.my | Page 2

Global semiconductor industry remains strong

The Semiconductor Industry Association (SIA) noted that global semiconductor sales hit

record high in 2017, a 21.6% increase to US$412.2bn (2016: US$335.2bn) (Chart 1). This

was driven by strong growth from integrated circuits (IC) products (ie. memory, logic, micro

and analog), representing over 80% of total sales, grew by 23% yoy. The growths from

other product segments – discrete semiconductor (+18.3% yoy), optoelectronics (+16.4%

yoy) and sensors (+16.2% yoy) – were also strong.

The sales across all regions were notably robust with China – the largest contributor

towards semiconductor sales – maintained a solid growth of +22.2% to US$129.7bn due to

strong internal demand and established value chain (Chart 2). The US also chalked the

fastest growth in 2017 at 35% yoy followed by Japan Asia Pacific/others and Europe. The

growth in these markets were underpinned by strong demand across various sectors as

more and more electronic products incorporate semiconductor components.

Chart 1: Global semiconductor sales from 2014 – 2018E Chart 2: Global semiconductor sales growth by region

Source: SIA, WSTS, BIMB Securities Source: SIA, WSTS, BIMB Securities

The momentum has thus far sustained in 2018 with semiconductor sales in Jan surged

22.7% yoy to US$37.6bn (from US$30.6bn). However, SIA expects 2018 global

semiconductor sales growth to moderate to 7%. The high-base effect in 2017 is one of the

reasons while easing demand from the communication segment which occupies 30% of the

semiconductor market also explains the slowing growth (Chart 3).

Gartner Inc. noted that smartphone sales posted its first yoy decline in 4Q17. This was

attributed to slower sales from Samsung (-3.6%) and Apple (-5%) amidst stiff competition

from Chinese-brand smartphones that offer high quality features at fairly low cost,

lengthening replacement cycles. Gartner expects smartphone sales growth to moderate to

6.2% in 2018 underpinned by key model launches (ie. Samsung Galaxy S9/S9+, Samsung

Galaxy Note 9 and Huawei P20). We also expect sales from other segments to gain more

traction; demand for the automotive sector would be strong as safety standards are raised

while the industrial sector would see automation increasing with adoption of Industry

Revolution 4.0.

Chart 3: Semiconductor by end use market, 2014-2016 Chart 4: Smartphone sales, 2015 – 2018F

Note: Gov’t – included military end-use (represent <2%)

Source: SIA, WSTS, BIMB Securities Source: Gartner Inc., BIMB Securities

-5.00.05.010.015.020.025.0

0.0

100.0

200.0

300.0

400.0

500.0

2014 2015 2016 2017 2018E

% US$ bn

Memory LogicMicro AnalogSensors OptoelectronicsDiscrete Semiconductors Change (RHS)

0

50

100

150

US Europe Japan China Asia Pacific/All other

US$'bn

2016 2017

0

4

8

12

16

1,300

1,400

1,500

1,600

1,700

2015 2016 2017 2018F

% mil units

Smartphone sales (LHS) Chg (RHS)

35.0%

17.1% 13.3%

22.2% 16.5%

Communication

PC/Computer

Industrial/Gov’t

Automotive

Consumer



IC Insight, a market research company focusing on the semiconductor sector, forecasted

end-user market to grow at 10% CAGR over 2016-2021 (Figure 1). The growth would be led

by the automotive sector (+13.4%) and IoT (+13.2%) systems. IC expects the smartphone

market growth to be at a slower pace of (7.8%) albeit remaining the single largest end-user

segment for semiconductor sector at US$89.7bn by 2021 (about 3-4x larger than

Automotive and IoT systems) (Figure 1).

Figure 1: IC end-use market, US$ bn and growth rates, CAGR 2016-2021

Note: *Covers only the internet connection portion of systems Source: IC Insight, BIMB Securities

The need for speed

We believe underpinning the growth for the semiconductor market would be the quality of

connectivity as this would it avail a viable ecosystem for ‘smart’ devices to be adopted in a

big way. A simple illustration of the mobile phone evolution reflects the improvement in

connectivity that the world has experienced over the past 18 years (Figure 2).

Figure 2: Network evolution, from 1G to 5G

Source: ThinkPalm Technologies, BIMB Securities

As the network evolves from 1G to 4G, mobile phone features and capabilities have taken a

quantum leap; from a basic voice service to high volume data-based services which enable

users to accomplish a myriad of tasks than just voice services on smartphones as well as

lead to the introduction of other mobile devices such as tablets, wearables and several IOT

devices such as Amazon’s Echo or Apple’s HomePod, amongst others.



The GSM Association’s Mobile Economy 2018 report forecasts penetration of 4G connection

worldwide to surge from 29% in 2017 to 53% in 2025. In 2017, 4G network penetration rate

hit c.70% of the world’s population and this is expected to increase to 79% by 2020 with the

rolling out of 5G network starting in early 2019 with an initial population coverage of 2%

before increasing to 11% in 2020.

The many types of network connectivity

The network connectivity of mobile phones or, as we know it today as smartphones, are on

regulated spectrum which are long-range (Figure 3). For most IoT devices today, network

connectivity relies on conduits (ie. home broadband, smartphones, tablets, etc.) although

increasingly, telco providers are providing IOT services such as tracking solutions for fleet

management and home security. The ecosystem that connects IoT devices to the conduit

devices are served by unregulated spectrums which are mostly short-range (Figure 3).

Figure 3: Different standards for network connectivity

Note: *-Preliminary specifications

Source: Company websites; expert interviews; GSA and McKinsey IoT collaboration; press research, BIMB Securities

Smartening up of smartphones pushing demand for better connectivity

For obvious reasons, the evolution of connectivity has underpinned the advancement in

smartphone capabilities. A research by Counterpoint Technology Market Research – a

research firm specialising in Technology products – note that over 6 billion sensors were

shipped within the smartphone segment in 2017 and it estimates this to grow by 19% to 10

billion sensors by 2020 as MEMs technology improve. In 2017, the penetration rate of

accelerometer sensors in sensors hit 100% followed by proximity (92%), compass (69%) and

other sensors (Chart 5).

Chart 5: Sensors penetration in smartphones shipped, 2017 and functions

Acceleromteter: Handle axis-based motion sensing, measure acceleration and switch apps from portait to landscape

Proximity: Keep from accidentally pressing buttons with cheek during calls

Magnetometer: Measure magnetic field strength ard smartphone – detrmine moving direction

Ambient light: Adjust screen’s brightness accordingly

Fingerprint: Biometric security features

Gyroscope: Assist accelerometer in detecting orientation with accuracy and correct camera shake

Near field communication (NFC): Enable device to connect in close proximity ie. mobile payment

Barometer: Measure air pressure, detecting whether and altitude change

Peripheral Capillary Oxygen Saturation (SPO2): Measure oxygen saturation in blood

Heart rate: Measure heart rate

Source: Counterpoint’s Components Tracker research, BIMB Securities

100%

92%

69%

59%

58%

48%

44%

24%

7%

7%

Accelerometer

Proximity

Magnetometer

Ambient light

Fingerprint

Gyroscope

NFC

Barometer

SPO2

Heart rate



Despite our expectations of moderate demand growth for smartphone, we believe rising

number of components embedded in a smartphone (ie. sensors) would underpin the

demand growth for semiconductors. To recap, there were only 6 sensors in the Samsung

Galaxy S1 in 2010. It has increased to 16 sensors for Samsung Galaxy S5 just in 4 years

(Figure 4). With Samsung Galaxy S6 to S9, we believe more than 20 sensors are embedded

into these models such as the iris scanner, facial recognition, virtual reality (VR) and

wireless charging.

Figure 4: Sensors evolution for Samsung Galaxy

Source: Hillcrest Labs Internal Research, BIMB Securities

The speedy challenge for RF filters

Along with the advancement in smartphone capabilities, the demand for these devices

have grown tremendously in the last 6-8 years. This has put pressure to the demand for a

more seamless connectivity – more data transfers at shorter time. The challenge for service

providers is to ensure higher bandwidth at lower latency which led to new technologies

and solutions achieved. Enter network/carrier aggregation which underpins the

connectivity of LTE-A.

In a nutshell, network/carrier aggregation enables service providers to combine two or

more blocks of LTE spectrum bands to achieve higher bandwidth that leads to faster data

transmission. This entails complex RF filtering which could see higher battery usage and

interference between spectrum bands (especially those in close proximity) if not addressed

correctly.

The need to aggregate blocks of LTE spectrum bands stem from the spectrum being a finite

resource while network providers also need to pursue a cost-effective solution. Typically,

higher frequency bands provide fast connections but this is limited by laws of physics

where the coverage range is limited. Aggregating high and low bands address the need to

optimise coverage at a reasonable cost.

This has pushed the development of RF filters with most smartphones available in the

market today are capable of accommodating carrier aggregation that allows users to

experience LTE-A connections.



Automotive space to be one of the fastest growing segments

In IC Insight’s 2018 Integrated Circuit Market Drivers report, it expects IC components in

automobiles to generate worldwide sales worth US$42.9bn by 2021 a 13.4% CAGR from

US$22.9bn in 2016. This was affirmed by McKinsey, a renowned management consulting

firm, which highlighted in its report: Automotive revolution–Perspective towards 2030,

four key factors driving this growth which are vehicle electrification (BMW, Ford, Honda,

Fiat, etc.), increase connectivity such as voice assistance, eCall (emergency-call),

autonomous driving (Tesla, Renault, BMW, Audi, etc.) and shared mobility services (Uber,

Waymo, Grab, etc.).

McKinsey estimates the segment would be dominated by micro components with 30%

market share in 2020, followed by analog (29%), optical and sensors (17%), Logic (10%),

discrete (7%) and memory (7%) (Figure 5, Table 2).

Figure 5: Automotive segment share and subsegment estimated revenue in 2020

Note: ASIC = application specific integrated circuit, ASSP = application specific standard product, DSP = digital signal processor,

MCU = microcontroller unit, MPU = microprocessor unit, NOR = non-volatile memory Source: IHS iSuppli, McKinsey, BIMB Securities

Table 2: Segment’s function Segment Function

Micro components Consists of microcontroller and microprocessor for software instruction execution to perform wide variety of task

Analog Include analog signal processing technologies, data converters, amplifiers and radio frequency integrated circuits

Optical and sensors Used for generating or sensing light i.e. traffic light or cameras

Logic Used for interchange and manipulation of data

Discrete To control electric current

Memory To store information

Source: Beyond borders: The Global Semiconductor Value Chain, Industry Surveys Semiconductor & Semiconductor Equipment, BIMB Securities

We also believe implementation of new more stringent international safety standards such

as the US Federal Motor Vehicle Safety Standards (FMVSS) and the Economic Commission

for Europe (ECE) that demand more active safety features. This would translate to more

semiconductors embedded in vehicles.



Industry 4.0 to gain momentum

IHS Markit forecast the contribution of industrial segment towards semiconductor to grow

at 5-year CAGR of 8.2% within 2015 to 2020E. We believe this would be driven by

implementation of Industry 4.0 or known as ‘smart factory/manufacturing where IoT,

sensors and cloud computing are the building blocks for this segment. Industry 4.0 is

believed to improve real time control, efficiency, productivity and reduce low-skilled labour

cost (Table 3).

Evolution Industry 3.0 to Industry 4.0 requires factories to upgrade machines for better

integration with new back end system (cyber-physical system) and network. Subsequently,

this would drive the sales for new machineries and contribute towards higher global

semiconductor sales.

Figure 6: Industry evolution, from Industry 1.0 to 4.0

Source: German Research Centre for Artificial Intelligence (DKFI), BIMB Securities

Table 3: Industry 4.0 key business objectives Key business Area Objective

Business Operations

Productivity improvements

To maximize asset utilization and minimize the downtime

To drive direct and indirect labour efficiency

To manage supply network costs and synchronization

To ensure schedule and plan stability and accuracy

Risk reduction To ensure raw material price and availability

To manage warranty and recalls efficiency

To mitigate geographic risks

Business growth

Incremental revenue

To find sources of growth for the core business

To grow aftermarket revenue streams

To deepen customer understanding and insights

To strengthen customer integration and channels

New revenue To create new products and service offerings

To expand internationally and in emerging markets

To identify attractive M&A opportunities

Source: Deloitte analysis, BIMB Securities



Semiconductor industry to boost external trade

Malaysia’s export has grown 17.9% yoy to RM82.9bn in January driven by improvements

across all major sectors. This was driven by a surge in exports of manufactured products by

20.4% yoy underpinned by higher exports of electrical & electronic (E&E) products which

rose 19.2% (Chart 6). The strong growth for E&E products were driven by semiconductor

exports – major contributor towards E&E (Chart 7) which grew 23.1% in 2017. We believe

the surge in semiconductor products were in tandem with the strong growth for global

semiconductor sales amidst higher demand for electronic products.

Chart 6: E&E exports, 2014-2017 Chart 7: E&E breakdown by products, 2014-2017

Source: Department of Statistics, BIMB Securities Source: Department of Statistics, BIMB Securities

Outsourced Semiconductor Assembly & Test Company (OSAT)

The semiconductor industry in Malaysia is primarily focused on the Outsourced

Semiconductor Assembly and Test (OSAT) segment. This is the back-end manufacturing

contract which carries out packaging, assembly and testing before delivering the products

to end customers (Table 4).

We believe the Malaysian OSAT (MO) companies would continue to benefit from the

robust demand growth projected for semiconductor products. The MO companies under

our coverage are divided into three divisions i.e. Automated test equipment (ATE) and

material supplier, other equipment and material supplier, and outsourced service provider

(contract assembly, packaging and testing).

Table 4: Value chain of electronics and semiconductor industry

Core value chain

Semiconductor Manufacturer/IC Developer/Brand Owner/Fabless

Semiconductor Company

Integrated Circuit Fabricator/Pure-Play

Semiconductor Foundry

Outsourced Semiconductor Assembly and Test Company (OSAT)

Customer/End User

Engineering support

companies

Electronic design

automation software

ICs design house

Equipment supplier

Material supplier

Automated test equipment (ATE) and material supplier

Other equipment and

material supplier

Outsourced service provider

(contract assembly,

packaging and testing)

Electronic manufacturin

g service (EMS)

provider

Equipment and tool supplier

Globalfoundaries, Broadcom, Texas

Instruments, Analog Devices, Infineon, etc.

Taiwan Semiconductor Manufacturing, United

Microelectronics, ASML, ASMI, etc.

Elsoft, Vitrox, KESM Industries, Aemulus, etc

Inari, MPI, Unisem, GTB,

etc. Apple, Samsung, Huawei, etc.

Source: The Edge, BIMB Securities

0.0

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25.0

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300.0

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2014 2015 2016 2017

% RM bn

E&E export (LHS) Chg (RHS)

49.7%

49.5%

50.3%

51.9%

16.2%

17.2%

17.1%

17.0%

18.0%

18.7%

18.6%

18.3%

16.0%

14.6%

14.0%

12.8%

2014

2015

2016

2017

Semi-conductors Electrical machinery

Office machines Telecommunications



Angling for growth in new segments

While demand for consumer products has been the mainstay for MOs, we note that the

technological evolution in this space have been fast paced. This has seen some of the

companies struggling to recoup major investments made in prior technologies.

However, with the evolving application of technology/semiconductor usage traversing

more sectors (as seen with WSTS’ shipment data), we believe the prospects for MOs have

improved. We understand that the technological evolution for some of these segments is

expected to be less aggressive than that seen in the consumer space. As such, we note that

most of the MOs under our coverage are venturing/diversifying revenue streams to tap

these new opportunities for expansion (Table 6) with most positioning to tap the

automotive segment:

Table 5: OSATs business focus Company Inari MPI GTB Unisem

Current focus RF testing Sensors for consumer & automotive segments

Sensors for consumer segment and general lighting

MEMs or IoT for consumer segment

Future growth Diversified business with OSRAM – Iris scanner

To focus on sensors for automotive sector

To expand business for industrial segment – copper clip

To expand business for blue LED laser light for automotive segment

To expand business for high-end micro controller (microphone) for automotive segment

Differentiating factor

Strong customer i.e. Broadcom & OSRAM

Own invention of copper clip – improve thermal efficiency

Brighter light and energy-saving sources of LED

Microphone with better sound filter

Source: Companies, BIMB Securities

Inari plans to diversify its business with OSRAM for the production of iris scanner. We

understand that the company have allocated RM5.5m of CAPEX to build a dedicated

production facility for OSRAM.

MPI is focusing its business in delivery its services for automotive segment (sensors)

with higher margins products compared to consumer segment. MPI is also leverage on

its copper-clip technology which provides 96% thermal efficiency that crucial for the

cloud services industry. MPI believes that this would enable data centres to house

c.30% more servers.

Globetronics (GTB) plans to leverage on its LED expertise for the automotive segment

as it plans to develop and produce blue LED laser technology together with one of its

key clients. This is typically found in luxury vehicles.

Unisem plans to leverage on its micro-electromechanical systems (MEMs) technology

in order to expand into the high-end micro controller (MC) which provides better

sound filtration. Apart from tapping the boom in IoT products (ie. Amazon

Alexa/Google Home), the MCs are also relevant for in-car voice activation applications.



Rising raw material cost to be main concern

OSAT companies are highly dependable on the wafer shipment volumes (area shipments)

and metal price (i.e. copper, aluminium, palladium, platinum and etc.). According to SEMI,

wafer area shipments grew at a 3-year CAGR of 5.8% (Chart 8) underpinned by higher

demand for IoT products (i.e. mobile phones, tablets, TVs, LED lighting and etc.) from

various industries.

Chart 8: Wafer shipments worldwide vs. OSAT revenue, over 2013 – 2019E

Source: SEMI, Companies, BIMB Securities

In 2017, semiconductor companies were facing a challenge due to wafer shortage even

though the wafer shipments volumes for 9M17 grew 10.8% yoy. This was due to higher

demand from end market that eventually exceeds the supply of wafer. This will distort the

production volumes for semiconductor company. Due to wafer shortage, these

semiconductor companies are competing among them in securing the wafer contract

which subsequently leads to higher wafer price.

Metal prices for gold, silver, platinum, palladium, aluminium and copper show a bullish

trend which started in 2016 (Chart 9), growing at an average yoy annual growth of 27.7%.

Amongst all, palladium price saw highest yoy growth at 55.9% followed by aluminium

(+34.9%), copper (+31.7%), gold (+13.1%), silver (+6.0%) and platinum (+3.1%).

Chart 9: Metal prices (base 100), over 2014 – 2018

Source: Bloomberg, BIMB Securities

MetalMiner Research noted that the key drivers supporting the rally in metal prices were

weakening of the US dollar, continued growth in China’s economy and oil price recovery.

Assuming the uptrend in metal prices continues in 2018, we believe this would lead to

higher production costs and negatively impact semiconductor industry.

In order to mitigate the risk that directly impact MPI, GTB and Unisem, these companies

had come out with different strategies as follows:

MPI undergoing portfolio transformation by reducing its low margin products

(consumer segment) and increase the productions for high margin products

(automotive segment). MPI also moving into 100% automation for its consumer

-2

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4

6

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% Million of square inches

Area shipments (LHS) Area shipment chg (RHS) OSAT revenue chg (RHS)

40.00

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100.00

120.00

140.00

160.00

180.00

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Gold Silver Platinum Palladium Aluminium Copper



segment which will eventually reduce its labour cost and reflect into strong margins in

near future.

GTB to expand its business in automotive segment with higher margins. GTB will work

closely with SORAA for blue LED laser light which provides brighter and energy-saving

sources for LED.

Unisem to reduce its low margin with high cost products (leaded) and increase high

margin with low cost products (leadless and wafer level packaging).

Toppish valuations?

The forward PE multiple for Malaysian OSAT (MO) under our coverage (Inari, Unisem, MPI

and GTB) is at 15.5x, slightly ahead of the Taiwan and US tech sector (Chart 5). We believe

this was due to robust global semiconductor demand which led to strong production for

the MOs and, to a lesser extent, the weaker MYR boosting earnings. We also note that the

re-rating was attributed to structural improvements in the fundamentals for these

companies while sentiment towards the sector were further encouraged by the robust E&E

exports data.

Chart 10: Historical forward PE for semiconductors companies (Malaysia, US, Taiwan and China), 2014 – 2017

Source: Bloomberg, BIMB Securities

We initiate our Tech/OSAT coverage with an OVERWEIGHT rating while we choose Inari

(BUY, TP: RM3.25) as our sector top pick for its solid fundamentals and attractive growth

prospects. We also like Unisem (BUY, TP: RM3.20) and MPI (BUY, TP: RM11.25) as we

believe the revenue diversification plans would pay off and result improved earnings

quality over the near to medium term. We initiate GTB with a SELL, TP: RM3.10 as we

believe the business would face challenges in sustaining its high margin products and

securing new orders.

Table 6: OSAT peer comparisons

OSAT Market Cap PER (x) PEG (x) PB (x) ROE (%) ROE-PB (x) EBITDA margin (%) Div. Yield (%)

(RM m) FY17 FY18 FY17-19 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18

Inari 5,704.0 23.1 18.8 0.8 6.2 5.6 26.7 29.7 4.3 5.3 24.9 25.2 3.5 3.6

Unisem 1,790.5 11.5 10.2 2.2 1.2 1.1 10.2 10.8 8.7 9.8 23.9 24.0 4.9 5.3

MPI 1,714.5 11.2 10.8 (1.2) 1.2 1.1 10.5 10.0 8.9 9.3 27.0 28.0 3.5 3.7

GTB 1,159.6 24.2 21.7 3.8 3.9 3.8 16.2 17.3 4.1 4.6 27.3 27.6 2.9 3.4

Sector 10,368.6 17.2 15.0 2.3 2.5 2.3 14.4 15.2 5.8 6.7 25.5 25.9 3.7 3.9


Overall, we expect earnings for the MOs to grow at a 3-year CAGR of 7.5% to 2018. This is

underpinned by higher demand for semiconductor products especially in some of the

segments recently forayed (ie. automotive) while existing sectors (ie. consumer/mobile)

would face moderate growth. This, we believe, should sustain our positive view on the

sector although we note several pitfalls may pose a downside risk to earnings such as

rallying metal prices and the ringgit recovery, especially for MPI, Unisem and GTB.

15.5

13.7 14.9

18.8

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18

PE (x)

MYR US TWN CHN



Our conviction on Inari is further underpinned by its attractive multiples. Despite its rich

valuations, we believe this is justified by its robust growth from global RF filters as well as

structural earnings growth from capacity expansion with both products relating to

Broadcom and OSRAM.

Table 7: OSAT Du Pont analysis

OSAT ROE (%) Profit margin (%) Asset turnover (x) Equity multiplier (x)

FY17 FY18F FY17 FY18F FY17 FY18F FY17 FY18F

Inari 25.7 27.5 17.0 17.6 1.1 1.1 1.3 1.4

Globetronics 11.1 10.4 10.9 11.2 0.8 0.7 1.3 1.3

Unisem 15.3 11.0 12.4 9.9 1.0 0.9 1.2 1.2

MPI 17.5 16.6 15.7 14.8 0.9 0.8 1.3 1.4



COMPANY SECTION

Init

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PP16795/03/2013(031743) 14

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Inari Amertron (INRI MK)

BUY Share Price RM2.82

Target Price RM3.25 +15.2%

Sustainable growth

Price Chart (RM) We like Inari for its solid business model and strong earnings

growth over FY17-20F at 21% CAGR driven by production

capacity expansion at its RF testing segment.

Inari has strong relationship with its key clients, Broadcom (RF

testing) and OSRAM (iris scanning) which are poise to benefit

from the growth in 4G/LTE coverage in new markets which

would also see more consumer/IoT devices rolled out.

Initiate with BUY and TP of RM3.25 as we apply 9.3x FY18F

EV/ROIC multiple on the stock. We believe this is fair given to

Inari’s sustainable FR testing business and the expansion of its

business with OSRAM.

RF testing segments remains robust We expect Inari’s earnings to grow at a CAGR of 21% over FY17-20F

on strong demand for RF testing solutions that translates from

robust RF filters being embedded into end products ie. smartphones,

tablets, wearables and TVs.

Stable contribution from key clients We believe Inari strong relationship with key clients ie. Broadcom

and OSRAM to be the main reason of its stable earnings. This is

underpinned by large contribution of Inari’s sales come from

Broadcom orders, c.85% making it virtually integrated into

Broadcom’s production chain.

Plant expansion to meet strong demand The latest plant expansion in P13, costing c.RM10m is expected to be

commissioned in May 2018. The new plant goes to support RF,

assembly and testing market services. Plans are also underway for

further capacity expansion for iris scanning manufacture at Batu

Kawan. This is slated for completion sometime in Sep/Oct 2018.

Initiate with a BUY, TP of RM3.25 We initiate Inari with a BUY recommendation and an EV/ROIC-

derived (based on the GGM formula) TP of RM3.25, implying an

FY18E PE of 27x before it eases to 22x in FY19F (WACC: 8.6%, long-

term growth rate: 5%). We believe this is fair given to growing global

demand for RF devices and strong relationship with key clients –

Broadcom and OSRAM.

Share Performance (%) 1m 3m 12m

Absolute (18.0) (18.5) 39.8 vs FBM KLCI (19.0) (22.0) 26.2

Stock Data

Mkt Cap (RM) 5,704.0 Free float (%) 62.6 Issued shares (m) 2,074.2 52w H/L (RM) 3.82 / 1.89 3m avg daily volume (m) 9,389,461

Major Shareholders (%)

INSAS 18.3 KWAP 14.0 EPF 5.1

FYE Jun (RM m) FY16 FY17 FY18F FY19F FY20F

Turnover 1,043 1,177 1,401 1,611 1,772 EBITDA 202 275 348 405 455 Pretax Profit 153 241 263 324 377 Core Profit 151 200 246 304 354 Consensus NP 277 337 382 EPS (sen) 7.4 9.8 12.0 14.8 17.3 PER (x) 38.4 28.9 23.4 19.0 16.3 DPS (sen) 8.4 9.8 9.8 10.1 10.2 D. Yield (%) 3.0% 3.5% 3.5% 3.6% 3.6% P/B (x) 8.5 6.6 6.3 5.7 4.9 Key Ratios (%) ROE 24.8 25.7 27.5 31.3 32.3 EBITDA margin 19.3 23.4 24.9 25.2 25.7 Pretax margin 14.7 20.5 18.7 20.1 21.3 Net margin 14.4 17.0 17.6 18.9 20.0 Source: Bloomberg, BIMB Securities

Afifah Abdul Malek [email protected] (603) 2613 1740

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INRI MK KLCI Index

BIMB Securities Research Initial Coverage: Inari Amertron

PP16795/03/2013(031743) | Page 15

Strong RF, assembly and testing platform

The main business of Inari Amertron (Inari) is radio frequency (RF) testing for its key client,

Broadcom. Adopting a close working relationship, the segment contributes over 80% of

total sales. In 2016, Inari diversified into the optoelectronics segment, adopting a similar

business model to work closely with another major client, OSRAM, for the development of

the 3D Iris Scanner. Currently, it operates 12 plants with combined floor space of 1 million

square feet.

Shariah compliance

We reviewed Inari’s Shariah Status in accordance with screening methodology and

processes adopted by the Shariah Advisory Council of Securities Commissions Malaysia

(SACSC) (Table 1).

Table 1: Inari’s Shariah Status review as of FY17

Business Activity Benchmark Inari SACSC Benchmark Remarks

Non-permissible Income / turnover 0.5% 5% Below the allowable limit set by SACSC

Financial Ratios Benchmark Inari SACSC Benchmark

Cash in conventional account to Total Asset 16.3% 33% Below the allowable limit set by SACSC

Conventional debt to Total Asset 3.4% 33% Below the allowable limit set by SACSC

Source: Company, BIMB Securities

Sustainable future prospects

We like Inari for what we view as a robust business model which is premised on strong

relationship with key clients that are established in their respective sectors such as

Broadcom and OSRAM. This is a key advantage, reducing downside earnings risks as the

close working relationship ensures good returns for Inari’s capex investments and stable

cashflows.

In 2016, Broadcom was the fifth largest global semiconductor player (measured by SoC

sales) (Chart 1). Its close working relationship with Broadcom mitigates earnings downside

risk such as wafer shortage, raw material cost hikes and strengthening ringgit, which has

mired the other domestic OSAT players.

Chart 1: Top 10 global semiconductor market share in 2016

Source: Gartner, BIMB Securities

Figure 1: Broadcom wireless connectivity portfolio

Source: Broadcom, BIMB Securities

15.9% 11.8%

4.5%

4.2%

3.9%

3.7%

3.5%

3.0%

2.7% 2.6%

Intel

Samsung

Qualcomm

SK Hynix

Broadcom

Micron Technology

Texas Instruments

Toshiba

NXP

MediaTek


PP16795/03/2013(031743) | Page 16

Chart 2: Broadcom revenue breakdown by products Chart 3: OSRAM revenue breakdown by products

Source: Broadcom BIMB Securities Source: OSRAM BIMB Securities

Meanwhile, contribution from the business with OSRAM makes up only 15% of Inari’s total

revenue as of FY17. Inari works closely with OSRAM for the development of the Iris

Scanning module which is fitted in mobile phones. Optoelectronics is one of OSRAM’s key

growth pillars – the biggest contribution towards revenue (Chart 3). It has invested some

RM1.8bn for the development of a new plant in Kulim Hi-Tech Park in Kedah which is

touted to be the world’s largest and most modern factory for 6-inch-wafers for LED chips.

The completion of this plant, by 2020, would also bring OSRAM closer to the market leader

in the optoelectronics segment, Nichia Corporation, and solidify its position ahead of Cree

Inc. At Inari, plans are underway to grow its business contribution from OSRAM to 35% of

its topline. Our positive view is elaborated further below:

RF filter-testing segment to remain strong. We believe demand growth for RF chips

would be underpinned by two key factors: i) the evolution of the wireless technology

(ie. from 4G to 5G), and ii) increasing usage of RF chip-embedded devices (ie. driven by

IoT devices, mobile devices and the adoption of Industry Revolution 4.0, amongst

others). This would likely benefit Inari as Broadcom dominates the global RF market.

The increasing usage of wireless network-dependent devices have pushed demand for a

fast and seamless connectivity – further pushing demands of an RF chip. At Inari, it has

added 960 new testers in Nov 2017 to meet the demand from its clients under Plant

13B Phase 1 expansion which adds 60,000 sqft of floor space – boosting floor space to

226,000 sqft. Under Phase 2, it has spent another RM10m worth of capex which is due

for completion in May 2018, adding another 120,000 sqft. These expansions brings Plant

13 total floor space to 346,000 sqft and should provide structural growth to earnings

going forward.

Iris scanner from consumer segment – to expand more. In recent years, sensors are

gaining traction especially biometric sensors (ie. fingerprint, iris, face and voice

recognition) for better security. Most smartphones today incorporate fingerprint

sensors. However, given its limitations (ie. unable to detect fingerprint due to sweat, oil

and condensation), smartphone manufacturers have started to incorporate iris scanners

(ie. Samsung Galaxy S8 and iPhone X) for enhanced security features. We believe this

would be the next big thing for Inari after RF-testing with Broadcom. Inari has guided for

the revenues from its business with OSRAM to grow to 35% of total revenue from the

current 15%.

New plant complex in Batu Kawan. Plans are underway for another three factory blocks

which would have a combined floor space of 600,000 sqft, making it one of its largest

facility. Built on its 5-acre land at Batu Kawan, the expansion is worth RM60m of capex

and is expected to complete sometime in Sep/Oct 2018. Management has not guided

the purpose of the new factory complex but we believe this is well-positioned to benefit

OSRAM’s new plant in Kulim as well as Broadcom’s growth ambitions.

22%

50%

48%

37%

28%

31%

32%

17%

16%

9%

5%

5%

2015

2016

2017

Wired infrastructure Wireless communication

Enterprise storage Industrial & other

32%

31%

34%

45%

47%

46%

23%

22%

20%

2015

2016

2017

Opto semiconductors Specialty lighting

Lighting solutions & systems


PP16795/03/2013(031743) | Page 17

2Q18 earnings surged on robust demand growth

Inari's 2QFY18 core earnings grew 3.2% qoq and 61.6% yoy to RM74m reflecting the strong

demand from both clients (Table 2, next page). Over the same period, Broadcom’s earnings

surged 44% yoy and 12% qoq whilst OSRAM’s earnings rose 59% qoq. Inari declared a

second interim DPS of 2.5 sen, which brings total DPS declared to 4.8 sen in 1HFY18.

Table 2: Inari’s 2Q18 performance

FYE 30 Jun (RM m) 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ Chg YoY Chg 6M17 6M18 YTD Chg

Revenue 275.1 274.0 345.7 373.1 376.0 0.8% 36.7% 556.6 749.1 34.6%

EBITDA 61.0 67.7 78.9 98.5 103.2 4.8% 69.2% 120.4 201.6 67.5%

Pretax profit 64.4 54.3 72.2 73.7 77.9 5.7% 21.0% 114.3 151.6 32.6%

Taxation (2.0) (2.1) (6.2) (5.0) (8.8) 77.7% >100% (3.8) (13.8) 261.3%

Minority interest (0.7) 1.0 0.4 0.3 0.5 42.6% -165.7% (0.5) 0.8 -242.0%

Core profit 45.8 49.6 52.0 71.7 74.0 3.2% 61.6% 90.3 145.7 61.4%

Core EPS (sen) 6.5 2.6 3.3 3.4 3.4 -1.2% -48.5% 5.0 6.8 35.3%

Net gearing (x) Net cash Net cash Net cash Net cash Net cash Net cash Net cash

EBITDA margin 22.2% 24.7% 22.8% 26.4% 27.4% 21.6% 26.9%

PBT margin 23.4% 19.8% 20.9% 19.7% 20.7% 20.5% 20.2%

Core profit margin 16.6% 18.1% 15.1% 19.2% 19.7% 16.2% 19.4%

Effective rate 3.1% 3.9% 8.5% 6.8% 11.3% 0.7% 1.8%


Sustainable earnings

We expect Inari’s earnings to grow at 21% CAGR over FY17-20F underpinned by higher

demand for RF testing solutions as we expect the growth in IoT devices, demand from new

product segments and the evolution of connectivity to continue drive growth. Additionally,

we also expect structural growth arising from stronger orders by OSRAM which would

underpin its goal to increase revenue from the optoelectronic sensors to 35% from the

current 15%. In tandem with the increased revenue and stable input costs, we expect

EBITDA margins to improve further to over 25% over FY18-FY20F on the back of improved

operating scale.

Table 3: Earning’s forecast

FYE Jun (RM m) Actual Forecasts Growth (%)

FY17 FY18E FY19E FY18E FY19E

Revenue 1,176.7 1,400.6 1,610.7 19.0 15.0

EBIT 209.4 256.9 316.5 22.7 23.2

PBT 262.6 323.9 377.1 23.3 16.4

Net profit 199.8 246.4 303.9 23.4 23.3


Ample upside from strong growth prospects - BUY

We initiate coverage on Inari with a BUY call and RM3.25 TP which is derived based on the

Gordon Growth Model (GGM) that implies a fair EV/ROIC multiple of 9.3x (Table 4). This is

based on a WACC of 8.6% and long term terminal growth rate of 5%.

Table 4: TP derivation breakdown

Items RM m Remarks

WACC 8.6%

Long term growth 5.0%

EV/ROIC multiple (x) 9.3

Enterprise value 6,404

Less: Net debt/(cash) (247)

Total equity value 6,651

No. of shares 2,048

Equity value per share (RM) 3.25 Implies FY18F PE of 27x before easing to 22x

Source: BIMB Securities

At our TP, the stock implies FY18F PE of 27x before easing to FY19F of 22x. We believe this

is justified by its positive earnings outlook which is underpinned by our expectations of

robust demand for RF filters on the back of evolution in connectivity, more RF-embedded


PP16795/03/2013(031743) | Page 18

devices and further increase in 4G global penetration which would sustain demand growth

for 4G/LTE smartphones. Additionally, we are also excited with the prospect of Inari’s

business with OSRAM on the back of the latter’s push to grow its optoelectronics segment.

Inari also boasts the strongest ROE amongst its peers at 25% in 2017. Our DuPont analysis

points to its superior asset turnover and profit net margins over its peers. We expect Inari’s

ROE would continue to improve as it achieves better operating scale amidst robust RF filter

demand and increased exposure to OSRAM.

Table 5: Inari Du Pont analysis

OSAT ROE (%) Profit margin (%) Asset turnover (x) Equity multiplier (x)

FY17 FY18F FY17 FY18F FY17 FY18F FY17 FY18F

Inari 25.7 27.5 17.0 17.6 1.1 1.1 1.3 1.4

Unisem 11.1 10.4 10.9 11.2 0.8 0.7 1.3 1.3

MPI 15.3 11.0 12.4 9.9 1.0 0.9 1.2 1.2

GTB 17.5 16.6 15.7 14.8 0.9 0.8 1.3 1.4


Inari has consistently paid quarterly dividends with payouts increasing from 33% in FY14 to

as high as 77% in FY17 of its net profit (Chart 2). Based on our forecast, we expect Inari to

continue to rewards shareholders with DPS of 9.8sen/10.1sen/10.2sen over FY18-20F

based on payouts of 50-80%.

Chart 2: Inari’s dividend payout


Key catalysts

More plans to build new plants. Given the strong positioning of its key clients such as

Broadcom and OSRAM, we believe news of new plant expansion augurs well for Inari’s

prospect as it paves the way for a structural earnings growth.

Strong semiconductor shipment. Robust demand in semiconductor shipment,

especially for RF filters, would likely translate to better orders for Inari’s RF filter testing

solutions.

Strong performance of its key clients. Continued growth by its key clients in relevant

divisions (ie. RF filters for Broadcom and optoelectronics for OSRAM) implies better

prospects for Inari.

Key risks

High reliance on Broadcom. While the stability of Broadcom as Inari’s client has been a

boon for Inari so far, a black swan event impacting its key client could pose uncertainty

to its prospects.

Strengthening in Ringgit. A sharp recovery in ringgit could lead to lower sales as the

business are transacted in US Dollar terms. However, the robust demand in RF and

OSRAM’s growing opto-semiconductor business could mitigate this impact in near term.

Headwinds on US trade policies. While the sound fundamental of Malaysia’s economy

and stabilising crude oil price should see ringgit gaining strength, headwinds in US

foreign policies regarding trades could impact sentiment towards the stock.

30

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70

90

0

5

10

15

FY14 FY15 FY16 FY17 FY18E FY19E FY20E

% sen

DPS (LHS) Dividend payout (RHS)


PP16795/03/2013(031743) | Page 19

Income Statement FYE 30 Jun (RM m) 2016 2017 2018F 2019F 2020F

Revenue 1,043.1 1,176.7 1,400.6 1,610.7 1,771.8

Operating cost (841.4) (901.6) (1,052.2) (1,205.2) (1,316.9)

EBITDA 201.8 275.0 348.4 405.5 454.9

Depreciation (49.3) (65.6) (91.5) (88.9) (88.9)

EBIT 152.5 209.4 256.9 316.5 366.0

Interest income 4.9 5.8 8.1 9.7 13.4

Interest expense (1.9) (2.2) (2.4) (2.4) (2.4)

Pretax profit 153.1 241.0 262.6 323.9 377.1

Income tax (6.0) (12.4) (15.3) (18.8) (21.9)

PAT 147.1 228.6 247.3 305.1 355.2

Minority interest (1.2) 0.9 0.9 1.2 1.4

Core net profit 150.6 199.8 246.4 303.9 353.8

Balance Sheet FYE 30 Jun (RM m) 2016 2017 2018F 2019F 2020F

Non-Current Asset 324.0 346.0 331.6 328.0 331.2

Current Asset 551.8 857.4 905.3 1,040.5 1,206.5

Total Asset 875.8 1,203.4 1,236.9 1,368.5 1,537.7

Non-Current Liabilities 30.1 31.5 31.5 31.5 31.5

Current Liabilities 164.7 298.5 283.6 314.9 337.8

Total Liabilities 194.8 330.0 315.1 346.5 369.4

Total Equity 681.0 873.3 921.8 1,022.0 1,168.3

Total liabilities & equity 875.8 1,203.4 1,236.9 1,368.5 1,537.7

Cash Flow FYE 30 Jun (RM m) 2016 2017 2018F 2019F 2020F

Cash flow from operating activities (CFO) 170.4 304.4 286.0 361.0 416.9

Cash flow from investing activities (CFI) (172.0) (53.8) (77.0) (85.4) (92.1)

Cash flow from financing activities (CFF) (88.7) (7.5) (198.9) (204.8) (208.9)

Net change in cash & cash equivalent (90.3) 243.0 10.0 70.9 115.9


Init

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PP16795/03/2013(031743) 20

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UNISEM (UNI MK)



Strong growth for MEMs segment

Price Chart (RM) We believe the sales will continue to grow underpinned by

strong demand for MEMs (micro-sensors products) driven by IoT products. This arguers well with its venture into micro-controller business (high quality of microphone).

We believe Unisem business expansion for its wafer level packaging into 12 inch wafer bumping to give structural earnings growth for the company to meet the higher demand for market as this could increase production capacity.

We view its plan to focus the production of leadless and wafer products (ie. higher-value products), swings in input costs and/or currency could put EBITDA margins as it strives to rationalise costs. We expect earnings to grow at 17% CAGR over 2016-19F.

Initiate with BUY and TP of RM3.25 as we apply 1.8x FY18F EV/ROIC multiple on the stock. We believe this is fair as we expect strong growth in the MEMs segment on higher demand for IoT applications and better cost management.

Strong growth from MEMs segment

We expect the core profit to grow at 3-year CAGR of 17% over FY16-

19F. The strong growth is underpinned by higher demand for MEMs

(micro-electromechanical system) and IoT products. This argues well

with its venture into micro-controller business on high quality of

microphone for communication, power and automotive sectors.

Business expansion into 12 inch wafer bumping

Starting 2018, Unisem Chengdu is expanding its wafer bumping to 12

inch from 8 where this can reduce their cost and increase capacity,

productivity and efficiency as more of semiconductor components

are embedded per wafer.

Better cost management

Due to increase in raw material cost, Unisem had come out with a

strategy to focus the production of leadless and wafer products (with

high-value products). We believe the EBITDA margins will record

over 26% over FY17-FY19F with better cost management.

Initiate a BUY call with TP of RM3.20

We initiate Unisem with a BUY and an RM3.20 TP which is derived

based on EV/ROIC using the GGM formula. Our valuation assumes

WACC of 9.4% and long-term growth rate of 1%. We believe this is

fair as we expect strong growth in the MEMs segment on higher

demand for IoT applications and better cost management.


Absolute (10.0) (33.2) (19.8) vs FBM KLCI (10.3) (35.5) (27.3)

Stock Data

Mkt Cap (RM) 1,790.5 Free float (%) 62.6 Issued shares (m) 733.8 52w H/L (RM) 4.25 / 2.34 3m avg daily volume (m) 2,130,344


Estate of Soo Yut Ku 12.8 Jayvest Holdings Sdn 11.9 Sin Tet Chia 8.6

FYE Dec (RM m) FY16 FY17 FY18F FY19F FY20F



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UNI MK KLCI Index

BIMB Securities Research Initial Coverage: Unisem

PP16795/03/2013(031743) | Page 21

Integrated suite of packaging and test services provider

Unisem has three main operations located in Ipoh, Chengdu and Batam. Segmental

contribution towards revenue come mostly from communication (c.27% of revenue)

followed by consumer, PCs, industrial and automotive segments. Its main earnings driver is

the growing demand for micro-electromechanical systems (MEMs) which are finding its way

in more devices especially in internet of things (IoT) devices and the automotive segment.

Shariah compliance

We reviewed Unisem’s Shariah Status in accordance with screening methodology and


(SACSC) (Table 1).

Table 1: Unisem’s Shariah Status review as of FY17 Business Activity Benchmark Unisem SACSC Benchmark Remarks


Financial Ratios Benchmark Unisem SACSC Benchmark




Strong growth potential

We believe Unisem’s earnings prospect remain robust amidst robust demand of MEMs for

micro-sensors products as more IoT devices are being rolled out. Our positive view is also

supported by the potential structural growth from its wafer level packaging business which

is able to accommodate wafer bumping for 12 inch wafers. The shift towards 12 inch wafers

should boost production volume to meet global demand while accommodating end clients’

goal to optimise costs.

We like Unisem’s plan to expand its current MEMs business into high quality micro-

controllers (micro phone) that caters to the growing demand from different segments (ie.

consumer, automotive and IoT devices). This would provide a more sustainable growth

potential over the longer term for the MEMs product segment. We also like Unisem’s cost

management strategy to address the impact from rising raw material prices; plans are

underway to review its product portfolio by reducing exposure to low margin products

(leaded) and focus on high margin products (leadless and wafer packaging). This should

translate to better profitability for the company. Our view is further elaborated as follow:

MEMs business to reflect strong potential growth. Unisem has been packaging MEMs

since 2007 with the development of MEMs microphone. Currently, MEMs represent

c.40% of total sales and volume growth would be underpin by higher demand from end

market products (ie. wearables, smartphones, tablets and IoT applications). Yole

Development, an industry research firm, ranked Unisem as the sixth largest MEMs

packaging player in 2017. It expect the MEMs market would grow at 16.7% CAGR to

US$6.5bn from US$ 2.6bn over 2016 to 2022 (Chart 1).

Moving forward, Unisem is planning to diversify its business into pressure sensor under

the MEMs segment which focuses on high quality microphone known as Micro-

Controller (MC) for communication, power and automotive sectors. The MC business is

also expected to enhance margins especially for automotive segment that will reflect

into its positive earnings growth. As management guidance, c.70% of the Technology is

already in place for execution and expected to contribute towards FY18 earnings.

Full turnkey wafer level packaging. Unisem is the only OSAT in Malaysia providing full

turnkey service for wafer level packaging (ie. from wafer bumping, probing, to wafer

level packaging) at both of its operations in Malaysia and Chengdu. In 2018, Unisem

would be spending US$10m of capex at its Chengdu operations to upgrade its facility to

accommodate wafer bumping for 12 inch wafers. The upgrade is expected to complete


PP16795/03/2013(031743) | Page 22

in 2H18 with production beginning from 1Q19 onwards. This would boost production

volume (as more components are embedded per wafer), translating to improved

operating scale while supporting its end clients’ goal to optimise costs. According to

McKinsey, the larger wafer size ie. from 200mm (8 inch) to 300mm (12 inch) could

reduce unit die costs by 10-15%.

Review IC package strategy. In view of the rising raw material cost, Unisem is currently

reviewing its product portfolio by lowering exposure to low-margin products (leaded

ICs) and increasing the sales of high-margin products such as leadless ICs and Wafer

Level packaging (WL pkg). This has resulted in leaded product sales contribution easing

to 18.5% in FY17 from 24.1% back in 2014 (Chart 1).

Chart 1: Unisem revenue breakdown by products, over FY14-FY19F


Higher sales for 3Q17

Unisem 3Q17’s core earnings rose 4.7% yoy but fell 1.0% qoq while its 9M17's core earnings

grew at 13.7% to RM382.3m underpinned by higher sales, improved average selling price

and the appreciation of USD/MYR exchange rate. Overall, the group 9M17’s core earnings

were behind consensus expectation making up 67.6% of FYE17. Unisem declared a second

interim dividend of 3.5 sen, YTD DPS of 7 sen (2016:7 sen). This implies a dividend yield of

1.8% at current level.

Table 3: Unisem’s 3Q17 performance

FYE 31 Dec (RM m) 3Q16 4Q16 1Q17 2Q17 3Q17 QoQ Chg YoY Chg 9M16 9M17 YTD Chg

Revenue 322.0 362.1 360.2 365.7 382.3 4.5% 18.8% 960.6 1,108.3 15.4%

EBITDA 85.6 104.1 92.4 88.4 87.4 -1.2% 2.1% 252.7 268.2 6.1%

Pretax profit 44.1 62.8 50.9 47.9 45.4 -5.2% 2.9% 124.4 144.2 15.9%

Taxation (5.3) (11.3) (5.5) (5.4) (4.5) -17.2% -16.0% (12.5) (15.3) 22.4%

Minority interest 0.2 0.2 0.5 0.4 0.5 19.0% 178.9% 0.9 1.4 59.7%

Core profit 38.6 51.3 44.9 40.8 40.4 -1.0% 4.7% 111.0 126.2 13.7%

Core EPS (sen) 5.3 7.0 6.1 5.6 5.5 -1.0% 4.7% 15.1 17.2 13.7%


EBITDA margin 26.6% 28.7% 25.7% 24.2% 22.9% 26.3% 24.2%

PBT margin 13.7% 17.3% 14.1% 13.1% 11.9% 12.9% 13.0%


Effective rate 12.0% 18.0% 10.8% 11.2% 9.8% 10.1% 10.6%


MEMs initiative to pay off – but structural growth from 12 inch capabilities

We believe the company will grow at a 3-year CAGR of 6.4% over FY17-20F (Table 4)

underpinned by demand for IoT and MEMs products. As noted by SIA, sensors products

have consistently grew by double digit numbers since 2016.

24.1% 19.1% 19.8% 18.5% 17.1% 15.7%

33.5% 32.3% 32.7% 33.0% 33.2% 33.4%

24.5% 31.9% 30.5% 32.2% 33.9% 35.8%

17.8% 16.8% 17.0% 16.4% 15.8% 15.2%

2014 2015 2016 2017 2018E 2019E

Leaded Leadless WL pkg/MEMs Bump Test


PP16795/03/2013(031743) | Page 23

Its strong growth in earnings also driven by the group’s strategy to reduce the low margin

leaded product and increase leadless and wafer packaging products which are of higher

margins.


FYE Dec (RM'm) Actual Forecasts Growth (%)

FY17 FY18F FY19F FY17F FY18F

Revenue 1,465.7 1,400.1 1,458.2 (4.5) 4.2

EBIT 178.9 173.6 192.7 (2.9) 11.0

PBT 180.8 177.3 198.1 (1.9) 11.7

Net profit 159.3 156.4 174.7 (1.8) 11.7


Structural growth from 12 inch strength - BUY We initiate coverage on Unisem with a BUY call at EV/ROIC-derived TP of RM3.20. Our

EV/ROIC assumes a WACC of 9.4% and terminal growth rate 1%. At our TP, the stock

implies FY18F PE of 15x before easing to FY19E of 13x. We believe this is fair given to the

robust business for MEMs segments driven by consumer, automotive and IoT segments as

well as its structural growth business in full turkey wafer level packaging.


Items RM m Remarks

WACC (%) 9.4%

Long term growth (%) 1%

EV/ROIC multiple 1.8

Enterprise value 1,834



No. of shares 734

Equity value per share (RM) 3.20 Implies FY18F PE of 15x before easing to 13x


Unisem has consistently paid dividends. Based on our forecast, we expect Inari to continue

rewards its shareholders with DPS of 12.5sen/13.0sen/13.5sen over FY18-20F which implies

payout of 52-56% over the period (Chart 2).

Chart 2: Unisem’s dividend payout


Key catalysts

12 inch wafer goes mainstream. We expect Unisem to be the main beneficiaries from

the increasing adoption of 12 inch wafer for the production of semiconductor chips.

Key risks

Wafer shortage. Wafer shortage will distort its production volume.

Strengthening ringgit. As surge in the ringgit would likely impact revenue growth as

sales are in US dollar.

30.0

35.0

40.0

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PP16795/03/2013(031743) | Page 24

Income Statement FYE 31 Dec (RM m) 2016 2017 2018F 2019F 2020F

Revenue 1,322.8 1,465.7 1,400.1 1,458.2 1,513.8

Operating cost (971.4) (1,119.1) (1,064.8) (1,108.6) (1,149.3)

EBITDA 351.4 346.6 335.3 349.6 364.5

Amortisation & Depreciation (169.7) (167.7) (161.6) (156.9) (153.9)

EBIT 181.7 178.9 173.6 192.7 210.6

Interest income 3.2 5.0 6.7 8.4 10.1


Pretax profit 187.2 180.8 177.3 198.1 217.6

Income tax (23.8) (19.4) (19.0) (21.3) (23.3)

PAT 163.3 161.4 158.3 176.8 194.3

Minority interest 1.1 1.9 1.9 2.1 2.3

Core net profit 155.5 159.3 156.4 174.7 191.9

Balance Sheet FYE 31 Dec (RM m) 2016 2017 2018F 2019F 2020F

Non-Current Asset 1,153.5 1,120.6 1,086.3 1,062.2 1,046.8

Current Asset 632.6 724.5 824.6 938.9 1,050.5

Total Asset 1,786.2 1,845.1 1,910.9 2,001.2 2,097.4




Total Equity 1,419.0 1,462.7 1,531.0 1,617.7 1,710.5

Total liabilities & equity 1,786.2 1,845.1 1,910.9 2,001.2 2,097.4

Cash Flow FYE 31 Dec (RM m) 2016 2017 2018F 2019F 2020F




Net change in cash & cash equivalent 117.4 105.7 112.0 100.9 98.9


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Malaysian Pacific Industries (MPI MK)



Automotive segment to push earnings

Price Chart (RM)

We believe MPI’s transformation plan to focus into higher

margin product (automotive segment) will contribute towards

better earnings performance in the long-term.

MPI is looking into 100% automation to reduce labour cost and

also boost its productivity and efficiency.

Initiate with BUY and TP of RM11.25 as we apply 2.2x FY18F

EV/ROIC multiple on the stock. We believe this is fair as we

expect its portfolio transformation plan would translate to

better earnings quality.

Moderate earnings growth

We believe MPI’s plan to focus on higher margin products

(automotive segment), as well as better contribution from industrial

segment (given the robust demand for cloud services), will

contribute positively to long-term earnings.

Automotive segment to continue strongly We expect MPI’s automotive segment to continue registering strong

revenue growth, aided by MPI’s plan to focus more on high margin

products. Currently, automotive segment contributes c.28% of MPI’s

sales and we expect the contribution to expand to 30% in 2018. We

see low downside risk to earnings under its transformation push

towards achieving better margins as the company will only lose

several clients in the consumer segment.

Targeting 100% automation

MPI is progressing well in achieving 100% automation at one of its

sites in Ipoh under the consumer segment. Currently, all MPI’s plants

are already at c.50% automation level. We believe this will help

reduce its labour cost in the long term, as well as boost its

productivity and quality of products without human interference.

Initiate with a BUY call with TP of RM11.25

We initiate MPI with a BUY recommendation and an EV/ROIC-

derived (based on the GGM formula) TP of RM11.25, implying an

FY18F PE of 14.6x before easing to 14.0x in FY19F (WACC: 9.1%, long-

term growth rate: 0%). We believe this is fair given the growing

global demand for sensors and MPI’s plan to focus on attaining

higher margins in the automotive segment.



Stock Data

Mkt Cap (RM) 1,714.5 Free float (%) 38.0 Issued shares (m) 198.9 52w H/L (RM) 14.52 / 8.42 3m avg daily volume (m) 331,736


HONG LEONG 52.5 MPI 5.2 EPF 4.3

FYE Jun (RM m) FY16 FY17 FY18F FY19F FY20F



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BIMB Securities Research Initial Coverage: MPI

PP16795/03/2013(031743) | Page 26

Malaysian Pacific Industries (MPI) is one of the first semiconductor companies in Malaysia.

It is known with its principal activities in assembly, packaging and testing for sensors with

exposure to the consumer and automotive segments. MPI also diversified into the data

centre ecosystem with the development of copper-clip Micro Leadframe Packages (MLPs).

The copper clip MLPs provide improved current distribution and better thermal efficiency,

making its products well positioned to benefit from the strong growth in data centres. MPI

is currently reviewing its entire product portfolio by paring down exposure to low margin

products (consumer segment) and raising exposure to higher margin products (automotive

segment). It currently has four manufacturing operations:

Carsem (M) Sdn Bhd (M-Site & S-Site) – both manufacturing operations are located in

Ipoh, Malaysia. The productions are to cater to demand for the industrial and

automotive sector

Carsem Semiconductor (Suzhou) – the manufacturing operation is located in Suzhou,

China and focuses on the demand for the consumer sector.

Dynacraft Industries Sdn Bhd – the manufacturing operation is located in Penang. It is

one of the largest manufacturer of leadframe and leads the industry in design,

manufacture and supply of microelectronic packaging systems.

Shariah compliance

We reviewed MPI’s Shariah Status in accordance with screening methodology and


(SACSC) (Table 1).

Table 1: MPI’s Shariah Status review as of FY17

Business Activity Benchmark MPI SACSC Benchmark Remarks


Financial Ratios Benchmark MPI SACSC Benchmark




Strong future prospects

We are positive on MPI’s plan to overhaul its product portfolio towards having more high-

margin products as this would improve its earnings quality going forward. Some of the plans

in place is to expand within the automotive segment (which it entered since 2000) amidst

growing adoption of passive safety features. This should translate to robust demand growth

for its sensors. Our view is further elaborated as follow:

Portfolio transformation. Since 2012, MPI had venture into automotive segments with

its first project for under the hood application. In the initial days, MPI was only a

second-tier supplier before it was upgraded to being a tier-1 supplier starting in 2014.

MPI’s sales are largely derived from consumer products which represent c.40% of total

revenue. However, due to increase in market competition and fast life cycle for

consumer products that eventually contributed to lower margins, MPI is making a

huge step by focusing into its high margin business (automotive segment) by reducing

low margin business (consumer).

We expect the group will lose some of its customers for consumer business in the

short-term, which could impact earnings. On the flipside, we expect earnings quality

would improve while earnings growth could recover amidst the growing demand for

sensors used in the automotive segment. BIS Research – a research company that

focuses on Technology trends – estimates the global automotive sensors market to

reach US$25.6bn by 2021. This is underpinned by rising demand of luxury and mid-size

cars, increasing safety concerns and stringent governmental regulations.


PP16795/03/2013(031743) | Page 27

Figure 1: MPI in automotive segment (application & system involvement)


Figure 2: MPI in consumer segment - communication


Copper clip applications – increased efficiency. According to IC Insight, the servers

are expected to grow at CAGR of 6% within 2016-2020. MPI’s copper clip technology

under industrial segment focuses on improving the thermal efficiency of the servers by

reducing the die thickness to 2mm from 8mm. The improved efficiency has enabled

MPI to grow its presence within the data centre segment as it enables an additional

30% more servers operating at 96% efficiency. We believe this provides MPI an edge

over its peers given the growing demand for cloud services.

However, the demand growth in the data centre space is slower compared to the

consumer and automotive segments. As management guided, currently MPI only has

two clients under this segment although it expects the number to grow in the longer

term. We see this as the next growth driver for MPI given that the Industry 4.0 as well

as data center will start picking up.

Moving into 100% automation. MPI is moving into 100% automation for one of its

sites in Ipoh. As at now, all MPI’s plants are already operating at c.50% automation.

The full automation plan is a big step towards Industry 4.0 as this would reduce labour

cost in the long term while boosting productivity and product quality. Management

guided that capex for machineries and robotic appliances will be funded using

internally-generated funds and is due for completion in 2018.

Earnings impacted due to higher material cost and volatility in forex

MPI’s earnings grew 13.7% qoq but dropped by 25.1% yoy This was due to higher material

cost and unfavorable forex for the company which resulted in a lower EBITDA margin by

3bps. Management guided that the automotive segment is strengthening, which


PP16795/03/2013(031743) | Page 28

contributed c.28% of total sales. Under its portfolio transformation, the company lost

several clients under the consumer segment but an increase in its clients base in the

automotive segment is believed to have offset the loss.

Table 2: MPI’s 2Q18 performance

FYE 30 Jun (RM m) 2Q17 3Q17 4Q17 1Q18 2Q18 QoQ Chg YoY Chg 6M17 6M18 YTD Chg

Revenue 401.4 396.0 389.1 387.6 395.3 2.0% -1.5% 759.4 782.9 3.1%

EBITDA 120.4 112.3 105.6 101.9 103.9 1.9% -13.7% 225.3 205.9 -8.6%

Taxation (12.4) (9.0) (4.6) (8.8) (10.6) 21.2% -14.6% (18.7) (19.4) 4.0%

Minority interest 12.2 10.1 8.7 7.6 7.6 0.3% -37.6% 22.1 15.2 -31.2%

Core profit 48.4 45.3 41.6 36.8 40.8 10.9% -15.5% 99.9 77.2 -22.7%

Core EPS (sen) 29.0 22.8 21.1 19.1 21.7 13.7% -25.1% 49.9 40.8 -18.2%


EBITDA margin 30.0% 28.3% 27.1% 26.3% 26.3% 29.7% 26.3%

PBT margin 13.9% 20.1% 16.0% 13.7% 13.3% 17.8% 14.3%



Strengthening of ringgit and high raw material cost main challenges

We expect earnings to drop by 2.1% while revenue to grow marginally at 1.8% between

FY17-20E. We estimate that its portfolio transformation will result in short-term pain as

MPI is likely to lose several clients under the consumer segment. However, this will be

offset by better demand from the automotive segment. Additionally, MPI’s earnings will

also be impacted by a strengthening ringgit, as well as higher raw material cost. Despite the

surge in raw material cost, however, we believe MPI’ plan to focus on the automotive

segment is expected to improve its earnings in the longer term.


FYE Jun (RM m) Actual Forecasts Growth (%)


Revenue 1,540.5 1,541.4 1,595.4 0.1 3.5

EBIT 265.0 215.1 224.0 (18.8) 4.1

PBT 214.0 223.2 251.3 4.3 12.6

Net profit 152.9 159.4 179.4 4.3 12.6


BUY recommendation

We initiate coverage on MPI with a BUY recommendation at EV/ROIC-derived TP of

RM11.25. Our EV/ROIC assumes a WACC of 9.1% and terminal growth rate 0%. At our TP,

the stock implies FY18E PE of 14.6x before easing to FY19E of 14.0x. We believe this is fair

given MPI portfolio transformation plan of focusing on the higher-margin products in the

automotive segment. This is also supported by higher demand for automotive segment

globally where IC Insight indicates that automotive segment would grow at CAGR of 13%

within 2016-2020.


Items RM m Remarks

WACC (%) 9.1%




No. of shares 199

Total equity value 11.25 Implies FY18F PE of 14.6x before easing to 14.0x



PP16795/03/2013(031743) | Page 29

Consistent dividend payout. MPI has consistently paid dividends as first and second

interim. Based on our forecast, we expect MPI to continue to reward its shareholders a DPS

of 30sen/32sen/35sen over the next 3 years. This translates into dividend payout between

38% - 40% for FY18-20F (Chart 1).

Chart 1: MPI’s dividend payout


Key catalysts

Secure new customers. MPI is expanding its business for automotive and industrial

segments. New customer secured for these segments would be positive to its bottom

line.

Key risks

Intensifying competition in automotive segment. MPI has a few key customers which

collectively contributes over c.70% of revenue. Intensifying competition from other

OSATs could adversely affect its earnings.

Technology evolution faster than expected. MPI plans to expand its business presence

within the automotive segment. This is premised on its view that technology evolution

in this space is slower than the consumer segment. Should this prove otherwise, MPI

may not be able to recoup its capital investment.

20

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40

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30

40

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PP16795/03/2013(031743) | Page 30


Revenue 1,463.3 1,540.5 1,541.4 1,595.4 1,627.3

Operating cost (1,042.1) (1,082.4) (1,125.2) (1,148.7) (1,170.0)

EBITDA 421.1 458.0 416.2 446.7 457.3

Depreciation (209.4) (193.0) (201.1) (222.7) (206.0)

EBIT 211.7 265.0 215.1 224.0 251.3

Interest income 1.1 1.8 2.1 2.3 3.1


Pretax profit 196.4 251.0 214.0 223.2 251.3

Income tax 0.4 (32.2) (26.1) (27.2) (30.6)

PAT 196.8 218.7 187.9 195.9 220.6

Minority interest 39.3 40.8 35.1 36.6 41.2

Core net profit 171.7 191.3 152.9 159.4 179.4



Current Asset 617.4 926.9 807.5 1,006.9 1,229.1

Total Asset 1,370.8 1,630.6 1,743.7 1,880.0 2,034.6




Total Equity 1,170.1 1,329.0 1,457.2 1,589.5 1,740.5

Total liabilities & equity 1,370.8 1,630.6 1,743.7 1,880.0 2,034.6





Net change in cash & cash equivalent 165.3 215.6 (84.9) 188.3 216.3


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Globetronics Technology (GTB MK)

SELL Share Price RM4.12

Target Price RM3.10 -24.8%

Remain cautious

Price Chart (RM)

We expect GTB’s earnings to grow at 6.7% CAGR over FY17-20F

underpinned by lower margins from consumer segment as

competition from end market products intensifies.

While its key client, AMS Heptagon contributes c.40% of total

sales, we remain cautious over the strength of its key client

within the competitive consumer devices segment.

Initiate GTB with SELL and TP of RM3.10 as we apply 6.9x FY18F

EV/ROIC multiple on the stock. We believe this is justified

given to its unattractive earnings prospect amidst margin

pressures amidst competitive environment for the consumer

devices segment, increase in raw material cost and the

strengthening ringgit which erodes its earnings quality.

Slower earnings growth ahead

We expect GTB’s earnings to grow at 6.7% CAGR over FY17-20F but

at lower margins as competition in the consumer segment is intense.

This is exacerbated by higher raw material cost and strengthening of

ringgit which weighs on margins and pose downside earnings risk.

Limited strength of key client

While we believe its strong relationship with key clients such as AMS

Heptagon (contributes c.40% of total sales) provides good earnings

visibility, earnings fell 64% in FY16 after AMS Heptagon lost out to a

key competitor for the supply of sensors to a major phone maker.

LED – automotive, the next earnings driver

GTB would be leveraging on its general lighting business to enter the

automotive segment with a key client, SORAA for blue LED laser light

production. However, it is still early days as management has yet to

provide meaningful guidance. Notwithstanding, this could be its next

earnings driver as the technology is typically available in higher-end

vehicles at this juncture.

Initiate with a SELL call with TP of RM3.10

We initiate coverage on GTB with a SELL call and an RM3.10 TP which

implies 18.5x FY18F PE and 16.6x FY19F. Our valuation assumes a

9.5% WACC and 3% terminal growth rate. We are cautious over its

prospect in the near term amidst intense competition in consumer

device segment. We believe there is room for optimism should its

LED business take off ahead of expectations.



Stock Data

Mkt Cap (RM) 1,159.6 Free float (%) 75.9 Issued shares (m) 285.6 52w H/L (RM) 7.00 / 4.02 3m avg daily volume (m) 962,641


EPF 11.1 General Produce Agency 7.2 KWAP 5.9

FYE Dec (RM m) FY16 FY17 FY18F FY19F FY20F

Turnover 215 305 323 330 331 EBITDA 48 82 88 91 92 Pretax Profit 33 56 53 59 64 Core Profit 23 48 48 53 58 Consensus NP 97 112 122 EPS (sen) 8.2 16.8 16.8 18.7 20.3 PER (x) 50.4 24.6 24.5 22.0 20.3 DPS (sen) 23.0 11.0 12.0 14.0 15.0 D. Yield (%) 5.6% 2.7% 2.9% 3.4% 3.6% P/B (x) 4.4 4.2 4.0 3.8 3.6 Key Ratios (%) ROE 8.3 17.5 16.6 17.7 18.3 EBITDA margin 22.0 26.8 27.3 27.6 27.8 Pretax margin 15.5 18.3 16.3 17.8 19.3 Net margin 10.8 15.7 14.8 16.2 17.5 Source: Bloomberg, BIMB Securities


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BIMB Securities Research Initial Coverage: Globetronics

PP16795/03/2013(031743) | Page 32

Transitioning into the automotive segment Globetronics Technology Bhd (GTB) is primarily involved in the co-development and

manufacturing of sensors (ie. light sensor, gesture sensor and 3D-Imaging sensor) for

various consumer products such as smartphones, mobile devices and wearables. It also has

expertise in LED lighting, primarily for general lighting purposes. Within the smartphone

segment, it provides assembly and testing services for the development of sensors to a key

client, AMS Heptagon. GTB also plans to expand the LED business into the automotive

segment by providing assembly services for its key clients, SORAA which is developing blue

light LED technology. Apart from these, GTB is also involved in assembly, packaging and

testing of Integrated Circuits (IC) as well as quartz crystal and timing devices.

Shariah compliance We reviewed GTB’s Shariah Status in accordance with the screening methodology and


(SACSC) (Table 1).

Table 1: GTB’s Shariah Status review as of FY17

Business Activity Benchmark GTB SACSC Benchmark Remarks


Financial Ratios Benchmark GTB SACSC Benchmark


Conventional debt to Total Asset 0% 33% Below the allowable limit set by SACSC


Remain cautious on future prospects We see potential structural growth for the LED segments, especially for energy-saving

general lighting as it works with key clients such as OSRAM and SORAA as well as with the

expansion into the automotive segment with SORAA. However, exposure to AMS Heptagon

(AMS), which occupies the competitive, consumer device segment poses downside earnings

risk to GTB and contributes 40% of total sales in FY17.

While AMS is an established player in the production of gesture and proximity sensors,

competition within the communication/consumer segment has intensified. In FY16, GTB’s

earnings fell 37% after AMS lost out to a major competitor. While management is hopeful

that the sensor business could grow at 31% CAGR over 2017-2021, we remain cautious over

the intensifying market competition and the strength of its key client, AMS.

Concurrently, management noted that plans are underway for GTB to expand its LED

segment into the automotive segment with SORAA while retaining its presence in general

lighting by offering LED energy saving lighting to OSRAM and SORAA. Should its automotive

venture with SORAA takes off, we believe GTB’s prospects could improve although we note

that management has yet to provide any concrete guidance on this front.

Our view is further elaborated as follow:

Thinning margins for sensors. Currently, the sensors business contribute c.38-40% of

GTB’s revenue. Moving forward, GTB aims to grow this segment to c.60% of total

revenue by leveraging on the growing demand for sensor products such as gesture

sensors and 3D imaging sensor.

However, in view of intense market competition within the communication/consumer

segment, we expect ASP would come under pressure and weigh down on margins. This

is also exacerbated by the slowing shipment of smartphones. Gartner Inc. expects

smartphone shipment growth to moderate to 6.2% in 2018 after the segment saw its

first sales decline in 4Q17 due to slower sales from Samsung and Apple.

We believe slower smartphone sales was also on the back of increasing penetration of


PP16795/03/2013(031743) | Page 33

Chinese-made smartphones which offer high quality features at “ultra-low-cost” while

replacement cycles start to lengthen.

LED for general lighting to see healthy demand. Under the LED segment, GTB is

working with OSRAM for infrared (IR) LED and SORAA for general lighting which

contributes c.25% of total revenues in FY17.

According to LEDinside, a market research firm, LED general lighting is expected to

grow at 12% CAGR over 2016 to 2020. This is underpinned by greater demand for

better quality and higher energy-saving light. Thus, we expect to see general lighting

segment contribution towards GTB’s revenue to increase by more than 20% in 2018.

LED for automotive, next growth driver. Leveraging on its relationship with SORAA,

GTB intends to expand into the automotive segment for the development of blue LED

laser light which, at this juncture, are typically found in high-end vehicles.

LEDinside expects the automotive LED market value to grow at 12.5% to US$3.2bn in

2018 from US$2.8bn in 2017. This is underpinned by the growth of low/high beam

headlamps expanding within high-end vehicle segments and starting to make its way

into the mid-range vehicle segment.

Should this venture takes off, it could be the group’s next earnings driver although we

note that management has yet to share concrete guidance over this segment.

Latest financial quarter GTB’s FY17 core profit surged by more than 100% qoq and yoy to RM22.4m. The growth

was underpinned by higher volume loadings and commencement of mass production of

new products from a key phone maker. However, we note that the strong growth was also

boosted by lower effective tax rate and distorted by the low-base effect in FY16 after

earnings fell 74% in the wake of AMS losing its supply contract to a key competitor.

Table 2: GTB’s 4Q17 performance

FYE 31 Dec (RM m) 4Q16 2Q17 3Q17 4Q17 QoQ Chg YoY Chg FY16 FY17 YTD Chg

Revenue 46.7 62.9 87.0 104.8 20.4% >100% 215.3 304.6 41.4%

EBITDA 11.0 9.5 23.4 33.7 43.6% >100% 45.4 76.5 68.5%

Pretax profit 8.7 8.5 16.1 25.2 56.6% >100% 33.4 55.9 67.0%

Taxation (2.3) (1.4) (1.7) (0.1) -93.0% -95.0% (7.7) (4.7) -38.8%

Net profit 1.7 4.7 14.1 22.4 58.8% >100% 21.5 46.4 >100%

Core EPS (sen) 2.3 2.5 5.1 8.8 74.0% >100% 9.1 18.0 97.6%

Net gearing (x) Net cash Net cash Net cash Net cash Net cash Net cash

EBITDA margin 23.6% 15.0% 26.9% 32.1% 21.1% 25.1%

PBT margin 18.6% 13.5% 18.5% 24.0% 15.5% 18.3%

Net profit margin 3.7% 7.5% 16.2% 21.3% 10.0% 15.2%

Effective rate 26.9% 16.6% 10.5% 0.5% 23.1% 8.5%


Slower earnings growth ahead

We expect GTB’s earnings to grow at an anaemic 6.7% CAGR over FY17-20F underpinned by

increase production from sensors and LED general lighting. However, we expect margins to

come under pressure amidst stiff competition within the communication/consumer space.

Contribution from its new venture is likely to provide some much added boost to earnings

but management has yet to provide any concrete guidance on this front. We remain

cautious over GTB’s prospect.

Table 3: GTB earnings’ forecast

FYE Dec (RM m) Actual Forecasts Growth (%)


Revenue 304.6 322.6 330.2 5.9 2.4

EBIT 52.8 50.0 55.4 (5.3) 10.9

PBT 55.9 52.6 58.7 (5.9) 11.6

Net profit 47.7 47.8 53.4 0.2 11.6



PP16795/03/2013(031743) | Page 34

Unattractive prospects at premium valuations – SELL

We initiate coverage on GTB with a SELL call and RM3.10 TP which is derived based on the

Gordon Growth Model (GGM) that implies a fair EV/ROIC multiple of 6.9x (Table 4). Our

valuation assumes a 9.5% WACC and 3% terminal growth rate. At our TP, the stock implies

FY18F PE of 18.5x and 16.6x in FY19E. Our negative call is further strengthened by the

following reasons:

Margins for consumer segment to come under pressure. We believe GTB’s margins

for the consumer segment (mainly sensors) would remain under pressure amidst

intense market competition for end products, rising input cost and strengthening

ringgit. This segment contributes c.38-40% of GTB’s total sales.

Securing order from end customer. We remain cautious over the prospects of one of

its key client, AMS. After losing out to a competitor, GTB saw sales orders to AMS

collapsed in FY16, down 37%, after the latter lost its supply contract to a key

competitor.


Items RM m Remarks

WACC (%) 9.5%



Enterprise value 693


Total equity value 887

No. of shares 285

Equity value per share (RM) 3.10 Implies FY17F PE of 18.5x before easing to 16.6x


Key catalysts

Withdrawal order from its customer. GTB has a few largest customers that

contributed more than c.70% of its earnings. Withdrawal orders from its customers

will affect its earnings.

Strengthening Ringgit. Better performance in Ringgit will lead to lower margin since

the sales were done in USD.

Key risk

Venture into new segment. GTB to grow its business within the automotive segment

for better margin.


PP16795/03/2013(031743) | Page 35


Revenue 215.3 304.6 322.6 330.2 330.6

Operating cost (167.9) (223.0) (234.6) (239.1) (238.8)

EBITDA 47.5 81.6 88.0 91.1 91.9

Depreciation (20.3) (28.7) (38.0) (35.6) (32.0)

EBIT 27.2 52.8 50.0 55.4 59.8

Interest income 3.8 3.4 3.2 3.8 4.4


Pretax profit 33.4 55.9 52.6 58.7 63.7

Income tax (7.7) (4.7) (4.7) (5.3) (5.7)

Core net profit 23.3 47.7 47.8 53.4 57.9



Current Asset 215.4 224.7 230.8 252.9 278.7

Total Asset 310.4 397.1 397.5 407.1 417.3




Total Equity 264.1 281.3 295.1 308.7 324.1

Total liabilities & equity 310.4 397.1 397.5 407.1 417.3




Cash flow from financing activities (CFF) (66.0) 17.9 (39.6) (45.2) (48.0)

Net change in cash & cash equivalent (12.8) (47.5) 30.7 20.0 25.5



PP16795/03/2013(031743) | Page 36

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STOCK RECOMMENDATION

BUY Total return (price appreciation plus dividend yield) is expected to exceed 10% in the next 12 months.

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HOLD Share price may fall within the range of +/- 10% over the next 12 months

TAKE PROFIT Target price has been attained. Fundamentals remain intact. Look to accumulate at lower levels.

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SELL Share price may fall by more than 10% over the next 12 months.

NOT RATED Stock is not within regular research coverage.

SECTOR RECOMMENDATION

OVERWEIGHT The Industry as defined by the analyst’s coverage universe, is expected to outperform the relevant primary market index

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index over the next 12 months

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