This article first appeared in The Edge Financial Daily on October 5, 2017 - October 11, 2017

Unisem (M) Bhd
(Oct 4, RM3.89)
Reiterate buy with a target price of RM4.32: We hosted a closed meeting recently and walked away with positive takeaways.

With a firmer outlook, Unisem (M) Bhd is raising its capital expenditure (capex) to seize the growing demand for wafer-level chip-scale packaging and flip chip. Deviating from its initial guidance of 33% of earnings before interest, taxes, depreciation and amortisation (Ebitda), financial year 2017 (FY17) new capex is budgeted to reach 40% of Ebitda and this is likely to be extended into FY18.

The majority of the capex will be utilised to increase flip-chip machines to 73 units by year end, representing a 35% year-on-year capacity addition. Besides, a portion is also earmarked for the Chengdu plant expansion in China.

In FY16, Unisem Chengdu Co Ltd contributed about 30% or US$95 million of group’s revenue. However, it is expected to experience a breakthrough this year with a double-digit growth to surpass the US$100 million (RM423 million) turnover mark. It is currently enjoying a lower tax rate of 15% which is only up for renewal after another five years.

The China outfit is strategically located within the centre of semiconductor and electronic ecosystems at Chengdu Hi-Tech Industrial Development Zone with close proximity to both upstream (GlobalFoundries, Texas Instruments and Siemens) and downstream (Foxconn, Dell, Huawei) players.

Since February 2017, GlobalFoundries had started building its largest 12-inch wafer plant with cutting-edge 22FDX technology in Chengdu. Total investment is expected to reach US$10 billion and this bodes well for Unisem to play a pivotal semiconductor assembly and test role.

PT Unisem Batam’s (Batam) monthly turnover of US$3.5 million (accounting for 15% of group’s revenue) is improving and is targeted to achieve Ebitda break-even by year end.

The third quarter of financial year 2017 revenue in US dollars is guided to improve 5% sequentially as it is experiencing strong demand in all segments with new opportunities in rental bike systems, microphones and memory (SSD/DDR) power management.

Catalysts are improved consumer confidence and spending, technological advancements and creation of new electronics. Meanwhile, risks are foreign exchange, weak consumer demand, labour wage hike and continuous drag by Batam’s performance.

Besides being the major beneficiary of a strong greenback, we like its exposure to the automotive sector, strategic presence in China’s booming technology market, healthy balance sheet and rewarding dividend yield.

Valuation: Reiterate “buy” although our fair value is trimmed by 0.5% from RM4.34 to RM4.32, reflecting earnings revision, pegged at 15 times of FY18 earnings per share. — Hong Leong Investment Bank Research, Oct 4