OSAT: Gripping The Trend Riders
The launch of a new-generation smartphone model in the US in Sep 17 and a smartphone model in Korea in 1H17 could create a strong replacement cycle. Relevant OSAT beneficiaries are ramping up capacities to ride on this smartphone wave. Globetronics is making a strong comeback with mass production of new sensors by May while Inari is on track to add new capacities for radio frequency and iris scanning component. OVERWEIGHT the sector with Inari our top pick.
● Local OSAT providers are preparing to ride on smartphone wave. The much anticipated launch of a new-generation smartphone by a US premium brand in Sep 17 is expected to create excitement for Malaysian outsourced semiconductor assembly and test (OSAT) providers. Expect for various material upgrades in the new-generation smartphone which should likely spur a strong replacement cycle, and hence rejuvenate the smartphone supply chain which suffered from unforeseen inventory rationalisation programmes in 1H16. Local OSAT companies Inari (BUY) and Globetronics (NOT RATED) are poised to benefit from this coming smartphone wave.
● Apple’s iPhone sales volume hit all-time high. In fact, Apple’s iPhone recorded surprising record high smartphone sales of 78.3m units in 1QFY17 (Dec 16 quarter), demonstrating resilient demand in spite of the perception of tough consumer sentiment.
● Modest uplift from strengthening US$. Local OSAT companies are expected to benefit from a stronger US dollar, which is trading at above RM4.40/US$ since 22 Nov 16 (2016 average: RM4.14). For Inari, we estimate every 1% change in our base-case scenario of RM4.15/US$ would result in close to a 2% change in our FY18 net profit forecast.
● Inari and Globetronics are key beneficiaries of the new US brand smartphone launch. Maintain BUY on Inari with an unchanged target price of RM2.00, pegged to 17x (+1SD) fully-diluted FY18 PE. The momentum of its iris scanning component orders could create significant upside to its FY18 earnings, hence upside to our conservative target price. Globetronics currently trades at 19.8x 2017F PE and 13.3x 2018F PE based on consensus forecasts. Globetronics’ fair value would be RM5.00 if pegged to mean+1SD PE of 15.4x and based on consensus 2018 forecast of RM92m.
● Revenue to grow 45-50% in 2017. After a drastic sales drop in 2016, Globetronics will be making a strong comeback in 2017, specifically from May, led by mass production of two new sensors – light and gesture. Globetronics should achieve revenue of RM310m- 320m in 2017, up 45-50% yoy, according to manangement. Sensor-related products should make up 40-45% of 2017 total revenue. Full-year contribution from the new sensors could lift total revenue by 22-28% in 2018, and net profit by 35-40% to a record high.
● Mass prodution of light sensors by May 16. The light sensor, which will be featured in its end client’s new-generation products (smartphones, tablets and PCs), is expected to obtain its end-client’s qualification approval in end-Feb 17. Chances for the plan to be cancelled are extremely low, given that the client has firmed up on machine procurement and indicated demand of 25m-26m units per month from May 17. The total capacity for light sensor would be 31m units per month.
● Ramping up production of gesture sensors. Globetronics will also ramp up capacity for gesture sensors to 20m units per month by April/May 17 from 5m-6m units per month currently. Management expects to produce 16m units per month from May 17, vs 3m-4m units currently. The gesture sensor, which is featured in headphones (hence two sensors per smartphone), is expected to be only incorporated in the new premium smartphone model.
● Visibility of 3D sensors remains unclear for now. Meanwhile, the visibility of the commercialisation of the 3D sensor (which was previously anticipated to feature in the new-generation smartphone by its end customer in Sep 17 after a series of delays) remains low at the moment.
● The LED segment is expected to achieve double-digit revenue growth in 2017, with encouraging orders from automobile, general lighting and smartphone-related products. However, the loading volumes of timing and quartz crystal are expected to stay flat in
● Expecting RM65m capex, partly funded by borrowings. Globetronics expects to incur a RM65m capex in 2017, with all going to adding capacity for sensors. We note that a portion of this capex plan is carried over from 2016, which only RM10m spent as the commercialisation of the new product was deferred last year. Globetroinics intends to fund about 50% of the 2017 capex via US-dollar borrowings.
● Dividend distribution to be impacted in the near term. Due to the capex plan, Globetronics’ dividend yield will be impacted in 2017. According to management, dividend payout would likely be around 60% in 2017 (representing 3.0% yield) and will resume to its previous payout of >80% in 2018.
● Expecting weak results in 4Q16 and 1Q17 due to low loading volume. The market expects Globetronics’ results for 4Q16 and 1Q17 to remain weak ahead of the new product’s contirbution kicking in. Particularly, monthly production volume of proximity sensor is currently 2m-3m units, vs end-16’s 4m-5m units and 2015’s 20m units. Globetronics’ overall utilisation rate is only 30% now. Consensus forecasts RM7.6m net profit in 4Q16 (3Q16: RM9.2m, 4Q15: RM15.7m).
● Inari is on track to achieve 22% and 26% yoy net profit growth in FY17-18 respectively, underpinned by smartphone-related products - radio frequency (RF) and iris scanning component - as well as data centre and telco-related products (physical switcher and fibre-optics).
● Targets to commercially produce iris scanning components in end-Feb 17. Inari aims to start commercial production of its iris scanning components (for smart devices’ security function) at its first production line in its latest P21 plant by end-Feb 17. A sample of this new product has been shipped to its client earlier this month.
● Potential earnings upside from this new contract. With contributions from two production lines (expected from FY18), this new product could contribute RM170m- 190m revenue per year. We now assume only one line’s contribution of RM90m revenue annually in FY18 and FY19 until the timing for the installation of the second line is confirmed.
● Targeting 780 units of RF testers by Jun 17. Inari is also ramping up its capacity in the RF segment. With a capacity of 700 RF testers currently, Inari targets to add another
80 testers by Jun 17.
source: UOBKayHian – 7/2/2107