Maybank Kim Eng’s Lai Gene Lih has maintained his “positive” rating on the semiconductor industry, saying, “recent news continue to reinforce our view that the current momentum
for our Singapore semicon equipment coverage is positive”.

He notes that Applied Materials (AMAT) reiterated its position as an enabler of important semiconductor technological inflections that drives an AI economy. Additionally, Taiwan Semiconductor Company (TSMC) also announced US$100 billion ($134 billion) of capex and R&D budget over 3 years. 

As such, Lai feels like these are favourable read-across to suppliers like UMS/ Frencken.

Lai elaborates that AMAT sees concurrent trends in accelerated digitization of the economy; an AI era driving data explosion, and new chipmaking technologies required to drive the improvements necessary to enable AI. 

AMAT also sees the wafer fab equipment (WFE) industry as one with higher highs and higher lows, and projects its semiconductor systems/services revenue to enjoy a compounded annual growth rate (CAGR) of 17%/13% in the base case from 2020-2024. “UMS and Frencken, which are AMAT suppliers, should benefit, in our view.” he says.

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Furthermore, Lai highlights the recent spate of news about semiconductor capacity expansion from TSMC is “positive for our coverage from the perspective that 2022 outlook is well supported, and medium-term cyclicality is reduced.”

It also reinforces his view of demand momentum from production localization to drive self-sufficiency, as well as structural drivers such as economic digitization; and current chip shortages. 

While he also acknowledges the structural aspects of localization and digitization, the risk remains if chipmakers end-up over-expanding capacity by the end of the cycle. He points out that another area to watch out for is the pace of inventory build-up across supply chains in 2022 as supply shortages ease.

As such, he picks UMS as a top pick, and adds that upside drivers that could minimize earnings cyclicality include stronger than expected momentum from AMAT; positive effects from Lam’s expansion in Penang; and a potential customer win. 

For Frencken, if eventual semicon softness is offset by a continual upswing in other end-markets, this could smoothen cyclicality.

For AEM, if FY2021 turns out to be cyclically soft, Lai believes this sets up more favourable base effects in FY2022, and this could aid investors to take a more focused and long term view on system level test’s potential.

Lai gives “buy” ratings for all three companies, with target prices of $5.05, $1.57, and $1.74 for AEM, UMS and Frencken respectively.