Chip tester AEM Holding has been identified by HSBC as a preferred counter among the Asean tech stocks riding on the artificial intelligence 'mega forces' investment theme.

While AI is an emerging sector in Asean, rising adoption is driving higher complexity in chips used by not just personal computers but also other product categories such as data centres and smartphones.

"This provides an opportunity for Asean tech suppliers to increase selling prices and win new customers," says HSBC in a June 30 report.

AEM, which generates more than 60% of its revenue from Intel Corp, is actively diversifying its customer base, including new high-performance computing and memory firms.

By doing so, AEM is broadening its addressable market to test chips such as high bandwidth memory that accelerates computing power in AI servers.

The company's earnings - and share price - has dropped over the past year, in line with the global chip industry which is in a downturn.

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However, HSBC analyst Wern Juan Chng believes AEM is poised to reach a revenue inflection point in 2H2023, given PC restocking in the global supply chain and normalisation of AEM’s key customer shipments and new customer contributions in 1QFY2024.

"With PC inventory digestion underway, we expect normalising sell-in relative to higher end-market demand to drive a 2HFY2023 recovery in test demand for AEM.

With Intel likely to ramp up production of its new products in the last quarter this year, AEM could raise its revenue guidance in the third quarter, says Chng, who has a "buy" call and $4.20 target price on the stock.

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"We expect higher sales to drive positive operating leverage and support AEM’s mid-term profitability," he says.

Chng's unchanged target price of $4.20 is based on 15x FY2023 earnings.

This valuation multiple is above the mean of 10x for the past five years given his expectation of structurally higher testing demand and revenue diversification away from Intel post the near-term macro uncertainty.

Downside risks include unsuccessful attempts at winning over new, substantial customers, as well as Intel outsourcing a bigger share of work to other companies. Another key risk is less heaty US-China ties, which would run contrary to Chng's thesis of supply chain reconfiguration.

AEM shares closed June 30 at $3.71, down 0.8% for the day, and up 7.23% year to date.

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