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November 21, 2020 ASEAN Technology POSITIVE (Upgrade) Riding a new wave; U/G to POSITIVE Analysts POSITIVE on MY and SG tech sectors U/G both Malaysia Technology Hardware and Singapore Technology Kevin Wong sectors to POSITIVE (from NEUTRAL). We adopt a positive growth outlook (603) 2082 6824 for the tech sector due to: (i) rollout of 5G networks; (ii) ramp-up of [email protected] semiconductor components and equipment; (iii) development of sub- Gene Lih Lai, CFA sectors such as Internet of Things (IoT), artificial intelligence (AI) and (65) 6231 5832 electric vehicles (EVs); and (iv) Industry 4.0. These should bode well for [email protected] OSATs, ATE/automation manufacturers and EMS/precision engineering companies. Technology Catching the 5G wave We believe the sector will ride an imminent upcycle, as indicated by the positive growth outlook for the global semiconductor industry. The World Semiconductor Trade Statistics (WSTS) projects global semiconductor market to grow by 6.2% YoY to USD452b in 2021 (2020: +3.3% YoY) while SEMI (the global industry association) estimates global semiconductor manufacturing equipment sales to grow 11% YoY to USD70b in 2021 (2020: +6% YoY). This upcycle would also be driven by the rollout of 5G MKE: Tech coverage in MY and SG networks across key cities - accelerated by the growing number of 5G- Regional Stock BB Ticker Rec. Price TP U/D enabled devices (i.e. smartphones and IoT) and high adoption rates of 5G (%) by key countries (i.e. China, US and South Korea). Specifically, we expect OSAT Inari INRI MK Buy 2.62 3.40 29.8 semiconductor equipment component and module suppliers, OSAT Globetronics GTB MK Buy 2.87 3.30 15.0 companies and ATE/SLT manufacturers to be key beneficiaries of such a Semiconductor equipment/automation favourable outlook, attributed to rising supply and demand for advance ViTrox VITRO MK Sell 15.06 11.60 -23.0 chipsets and components (i.e. sensors). This, in turn, would also lead to Greatech GREATEC MK Hold 9.10 8.90 -2.2 AEM AEM SP Buy 3.24 5.05 55.9 higher spending and stronger demand for semiconductor equipment. UMS UMSH SP Buy 1.01 1.41 39.6 EMS/precision engineering Rise of new tech sub-sectors V.S. Industry VSI MK Hold 2.40 2.45 2.1 Venture VMS SP Buy 19.06 23.27 22.1 We also anticipate growth from up-and-coming tech sub-sectors – namely Hi-P Int’l HIP SP Buy 1.47 1.23 -16.3 IoT, EVs and AI. Although such sub-sectors would deem to be more niche Frencken FRKN SP Buy 1.04 1.39 33.7 Valuetronics VALUE SP Hold 0.58 0.58 0.0 (relative to the larger core semiconductor market), we believe there are Note: U/D = upside/downside to TP selective opportunities for semiconductor equipment/ATE manufacturers Source: Maybank KE, Factset (as at 20 Nov 2020) while the booming of any tech sub-sectors would generally entail demand for components and chipsets. Elsewhere, we believe the progressive transition into Industry 4.0 would benefit automation companies. MY and SG: Valuations and Top Picks Our Malaysia technology universe (semicond) is trading at an average forward PER of 35x. We think the rich valuations are justified by the potential earnings growth catalysts and upsides – in tandem with the sector’s upcycle. This is also on the back of strong domestic equity fund flows. For Malaysia, our Top Pick is Inari and we have upgraded Globetronics to a BUY. The Singapore technology universe is trading at 12x, around 1.5 SD higher than 6-year mean. Top picks include Frencken, Venture, UMS and AEM. THIS REPORT HAS BEEN PREPARED BY MAYBANK KIM ENG RESEARCH SEE PAGE 73 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS ASEAN Technology Table of Contents Investment Thesis Summary ............................................................................................................. 3 1. Investment Thesis ................................................................................................................... 7 2. Risks .................................................................................................................................. 19 3. Valuations ........................................................................................................................... 20 Companies AEM Holdings (AEM SP) .................................................................................................................. 23 Frencken Group Ltd (FRKN SP) ......................................................................................................... 28 UMS Holdings (UMSH SP) ................................................................................................................ 33 Valuetronics (VALUE SP) ................................................................................................................. 38 Venture (VMS SP) ......................................................................................................................... 43 Globetronics Technology (GTB MK) .................................................................................................... 48 Greatech Technology (GREATEC MK) .................................................................................................. 54 Inari Amertron (INRI MK) ................................................................................................................ 60 ViTrox Corp (VITRO MK) ................................................................................................................. 66 November 21, 2020 2 ASEAN Technology Investment Thesis Summary Key macro indicators are supportive of growth The World Semiconductor Trade Statistics (WSTS) forecasts global semiconductor market to grow by 6.2% YoY to USD452.3b in 2021 and global fab equipment spending to increase by 13% YoY in 2021. A growing global semiconductor industry would broadly benefit the OSATs (outsourced assembly and test; e.g. Inari, Globetronics) and ATE manufacturers (automated test equipment; e.g. ViTrox), namely for the sensor and IC (i.e. non-memory) products; and suppliers of semiconductor modules/components (e.g. UMS, Frencken). 5G: The next big thing An increasing roll-out and adoption of the 5G network would heighten prospects for the OSAT companies and ATE manufacturers due to the expected increase in supply and demand for newer and more sophisticated components and equipment. This would also be driven by stronger sales of 5G devices, namely 5G smartphones. Due to the complexity of 5G applications, it would also drive demand for system-level test – of which AEM is a beneficiary Resilient demand for semiconductor equipment/ATE and automation The growing global semiconductor market goes hand-in-hand with growing demand for semiconductor equipment. SEMI forecasts global sales of semiconductor manufacturing equipment to grow by 11% YoY to USD70b in 2021. We see UMS and Frencken as beneficiaries of this as their customers AMAT and ASML are among the largest and most critical fab equipment suppliers globally. Meanwhile, SEMI also projects the assembly and packaging equipment segment to grow by 8% YoY to USD3.4b in 2021 - driven by advanced packaging capacity build-up and on the back of a growing semiconductor test equipment market. Elsewhere, we are in view of automation solutions provider to benefit from the Industry 4.0. Up-and-coming segments as added boosters We expect the tech sector to also benefit from other growing segments/industries, such as Internet of Things (IoT), automotive and electric vehicles (EV), artificial intelligence (AI), and medical/healthcare/life science. We believe this would drive demand for myriads of advanced products (i.e. electronics, devices) and services (i.e. cloud, data centres) which would benefit companies of the areas of OSAT, ATE, robotics/automation and EMS/precision engineering. November 21, 2020 3 ASEAN Technology Fig 1: Malaysia and Singapore: peer comparison Company BBG FYE MKE MKE Share Market P/E P/B Div code Rec TP price cap yield (Month) (LC) (LC) (USDm) (x) (x) (%) OSAT CY19A CY20E CY21E CY21E CY21E Inari Amertron INRI MK 6 Buy 3.40 2.62 2,105 48.3 38.7 28.0 6.8 3.0 Globetronics GTB MK 12 Buy 3.30 2.87 470 41.8 35.3 28.1 6.0 2.8 Malaysian Pacific Ind. MPI MK 6 NR - 23.40 1,200 31.6 28.4 26.1 3.1 1.3 Unisem UNI MK 12 NR - 5.68 1,019 60.7 32.2 25.3 2.6 1.6 KESM Industries KESM MK 7 NR - 10.12 106 129.2 111.6 30.5 1.2 1.0 Average 62.3 49.3 27.6 4.0 1.9 Semiconductor equipment/automation CY19A CY20E CY21E CY21E CY21E ViTrox Corp VITRO MK 12 Sell 11.60 15.06 1,737 99.9 62.3 48.0 10.5 0.5 Greatech GREATEC MK 12 Hold 8.90 9.10 1,392 99.4 62.8 36.9 12.9 0.0 Pentamaster PENT MK 12 NR - 4.93 858 43.4 47.3 34.3 6.4 0.3 Mi Technovation MI MK 12 NR - 4.10 751 50.2 52.5 33.7 6.7 1.2 Aemulus AMLS MK 9 NR - 0.70 103 - - - - - Elsoft Research ELSR MK 12 NR - 0.64 105 - - - - - MMS Ventures MMSV MK 12 NR - 0.72 36 - - - - - VisDynamics VHB MK 10 NR - 0.47 20 - - - - - AEM AEM SP 12 Buy 5.05 3.24 667 16.5 9.8 9.0 3.2 2.8 UMS UMSH SP 12 Buy 1.41 1.01 403 16.1 11.1 8.9 1.7 3.0 Micro-Mechanics MMH SP 6 NR - 2.62 271 - - - 5.6 5.2 Average 73.2 56.2 38.2 9.1 0.5 EMS/precision engineering CY19A CY20E CY21E CY21E CY21E V.S. Industry VSI MK 7 Hold 2.45 2.40 1,109 24.3 25.2 18.6 2.7 2.4 ATA IMS AIB MK 3 NR - 2.33 686 24.0 18.3 14.8 2.9 2.3 SKP Resources SKP MK 3 NR - 1.96 599 20.9 15.5 13.7 3.0 3.6 D&O Green Tech DOGT MK 12 NR - 1.48 414 55.8 56.9 34.4 4.6 0.8 JHM Consolidation JHMC MK 12 NR - 2.07 282 34.9 38.9 24.1 4.3 1.4 P.I.E. Industrial PIE MK 12 NR - 2.14 201 22.5 33.2 21.5 - 2.6 Venture Corp VMS SP 12 Buy 23.27