This article first appeared in The Edge Malaysia Weekly on March 20, 2023 - March 26, 2023

OPPSTAR Bhd, the first pure integrated circuit (IC) design house listed on Bursa Malaysia, enjoyed a decent run last week, though there was some profit-taking activity on Thursday amid a broader market sell-off.

Those who successfully subscribed to its shares still raked in a 273% gain when the share price closed at RM2.35 last Friday — translating into a market value of RM1.5 billion, against its initial public offering (IPO) price of 63 sen apiece.

Having traded in the range of RM2 to RM2.95 last week, Oppstar was one of the best-performing IPOs in recent years, with its share price exceeding the target prices of between 93 sen and RM2.28 set by three research houses. Notably, UOB Kay Hian Research had the highest target price, which was the closest to its last traded price.

An industry observer believes Oppstar’s advisers and promoters were overly cautious when they fixed the pricing of the new shares, given that it was based on a price-earnings ratio (PER) of 24.14 times.

“Most likely, they adopted a super conservative stance in pricing the IPO to ensure full uptake,” he tells The Edge.

Oppstar’s IPO was oversubscribed by 77.05 times by the Malaysian public, who were allocated 31.81 million shares or 19.2% of the 165.5 million new shares sold at IPO, with the rest mostly placed out to selected investors as well as eligible directors, employees and business associates.

Based on the blue-sky valuation — with price/earnings-to-growth ratio of two times (average peak PEG valuation of tech names during the tech run in 2021), UOB Kay Hian Research says the stock could edge higher to RM3.20, at 70 times FY2024 PER. That implies 36.2% upside potential from last Friday’s close, if UOB Kay Hian is right.

Following the strong share price rally, Oppstar is now trading at a much higher forward 12-month PER of over 60 times, much higher than the global peers’ average of 43.5 times.

In contrast to most Malaysian tech firms, which are mainly in the outsourced semiconductor assembly and test (OSAT), automated test equipment (ATE) and electronic manufacturing services (EMS) space, Oppstar operates in the front-end semiconductor supply chain, an area largely dominated by large Western multinational corporations. Its services also cover back-end design and complete turnkey solutions.

“To me, its business is quite new in Malaysia. Most of the time, our tech firms are involved in testing, assembly and manufacturing of equipment. When Oppstar went for listing, I was quite surprised that Malaysia had such good technology,” says an analyst with a non-bank-backed research house.

It provides IC design services with process node technology ranging from 20nm to 5nm. Last year, it even secured projects using 3nm process node technology.

That said, Oppstar’s sales are primarily secured via purchase orders and contracts for a period of up to two years, which creates some uncertainty to its business prospects. The absence of long-term contracts begs the question of the sustainability of its order book, which stood at RM34.29 million as at Jan 30 this year.

Nonetheless, Mercury Securities analyst Ronnie Tan is not too concerned about this. While this is the nature of Oppstar’s business without long-term contracts, he is positive about the company’s capability in securing or replenishing its order book, judging from its proven track record on achieving a three-year revenue compound annual growth rate of 77.9% from FY2020 to FY2022.

“IC design prospects are looking strong in tandem with the growing semiconductor industry … Due to the trade war and the growing semiconductor industry, potentially this could benefit more companies in the IC design space,” he tells The Edge.

Its customers are mainly  integrated device manufacturers, fabless companies, fab-lite companies, electronic system providers and other IC design houses. Its customer base ranges from the telecommunications, industrial electronics and automotive to consumer electronics segments.

Due to the complexity factor, turnkey design service projects offer higher margins than those of specific design service projects. The former contributed the bulk of total revenue, at 79%, in FY2022.

Despite a potential slowdown in the semi­conductor industry, the non-bank-backed research house’s analyst highlights the need for industry players to continue with design works regardless of the upward cycle or downward cycle.

“Design works do take time; the players cannot do design works only when the demand turns good. When the upward cycle comes again, these products will be commercialised,” he explains.

In addition, he says the company’s business outlook is also very much dependent on its ability to hire the required engineers.

Labour cost is the largest component of Oppstar’s total cost of sales, at above 90%. This explains why almost half (RM50 million) of the RM104.25 million IPO proceeds raised is allocated for the expansion of its workforce. The remainder of the funds will be used for the establishment of new offices (RM25 million), research and development expenditure (RM12 million) and working capital (RM12.65 million).

To cater to its customers’ demand, Oppstar’s plan is to expand its total workforce by 280 people, comprising design engineers and engineers/technicians for post-silicon validation services over the next 36 months. Currently, it has 214 design engineers and three post-silicon engineers.

The concentration risk faced by the company cannot be ignored either. China’s Xiamen KirinCore accounted for 68.43% of its total revenue for FY2022. As such, China was the largest market for the company, accounting for 77.9% of total sales in FY2022, followed by Malaysia (15.1%) and Japan (6.6%).

Nonetheless, the analyst believes Oppstar will be able to seize more opportunities in the regional market going forward, partly attributed to the US-China trade diversion.

To expand its business, Oppstar plans to set up new offices in Penang, Singapore, Taiwan and India. Currently, it operates from rented offices in Penang, Kuala Lumpur as well as Shanghai, China.

Oppstar’s net profit doubled to RM16.63 million for the financial year ended March 31, 2022 (FY2022) from RM7.8 million for FY2021. Profit after tax margin was higher at 32.89% for FY2022 against 26.65% for FY2021.

For 9MFY2023, its net profit came in at RM14.85 million, on the back of RM43.42 million in revenue.

However, global semiconductor sales are projected to slip 4% to US$556.57 billion (RM2.45 trillion) in 2023 from US$580.13 billion in 2022, owing to lower demand for electrical and electronics products.

On dividend policy, Oppstar plans to pay 25% of net profit. As at end-December 2022, it had cash and cash equivalents of RM15.7 million with zero borrowings.

Post-IPO, Oppstar’s three major shareholders Ng Meng Thai (CEO), Cheah Hun Wah (chief technology officer) and Tan Chun Chiat (chief operating officer) collectively own a 54.55% direct stake in the company. They also hold a 3.34% indirect stake via Bigcore Technology Sdn Bhd.

On another note, Oppstar’s stellar share price performance could draw interest from other local IC design firms to list on the local bourse, such as UST Global (Malaysia) Sdn Bhd, Infinecs Systems Sdn Bhd, Aricent Technologies Malaysia Sdn Bhd, IC Microsystems Sdn Bhd and SkyeChip Sdn Bhd.

UST Global was among the top performing firms as its net profit jumped 120.16% to RM15.36 million for the financial year ended March 31, 2022, against RM6.98 million a year earlier, according to a CTOS search.

Infinecs Systems even saw its net earnings surge 486% to RM1.54 million for the financial year ended Dec 31, 2021, from RM261,947 in the previous year.

If these companies are inspired by the stock price run and decide to go for IPO, investors who missed out on Oppstar’s surge have another chance to gain exposure to the sector.

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