Excerpts from Maybank KE report
Analyst: Gene Lih Lai, CFA
BUY the dip; milestones intact
AEM’s key customer Intel’s operations are “relatively normal”, while Lam Research, the closest competitor of UMS’ key customer Applied Materials (AMAT), sees no basis to change its optimistic view of 2020. |
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AEM – Intel ‘relatively normal’ amid Covid-19 |
Loke Wai San, executive chairman, AEM. NextInsight file photoIntel updated on 2-Mar that its operations, both group and in China (including a test and packaging facility in Chengdu) are “relatively normal” notwithstanding Covid-19.
Intel’s stability in outlook is because it entered 2020 from a position of shortage of its chips relative to customer demand. Intel maintained its plans to expand wafer capacity by 25%.
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Intel has so far not been able to rebuild both its own and customer inventory, although it still aspires to meet market demand within 2020.
This would imply demand-supply dynamics are still in favour of Intel, in turn supportive of our view towards AEM.
In late-Feb, AEM updated that it is confident of achieving its raised revenue guidance of SGD360-380m, and that components from China can also be sourced from ex-China suppliers.
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UMS – Lam Research maintains FY20 outlook |
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Lam updated on 3-Mar that it has “heard nothing” from customers that changes its optimistic outlook for FY20.
We believe this corroborates AMAT’s expectation of “strong double-digit” growth for its semiconductor business in 2020 and favourable 2021 setup.
Lam updated that amid the outbreak, it is currently driving alternative options throughout the supply chain.
Given UMS’ entrenched working relationship with AMAT, we see it as a theoretical beneficiary if AMAT decides to increase sourcing allocations away from China.
In late-Feb, UMS updated that current shipment delays, amounting 1-2 weeks, should be cleared by end-1Q20.
| Risks to our view Amid a highly dynamic situation across supply chains, we believe any severe shortage of components is a key risk to our view for both AEM and UMS. Given Intel’s aspirations to meet market demand for its chips, we see order cancellations at AEM as a low-probability event. For UMS, we believe a key demand risk is if a weaker economic outlook results in lower investment appetite for semiconductor equipment, and/or delayed recovery in memory investments. That said, we note various observations that server demand remains strong due to the work-from-home economy. |
Full report here.
