This article first appeared in The Edge Malaysia Weekly on November 13, 2023 - November 19, 2023

With the automotive industry needing more chips than ever to keep vehicle production running, Malaysian Pacific Industries Bhd’s (MPI) automotive-centric strategy is proving prescient.

While global vehicle sales may be weighed down by slower consumer spending and higher interest rates, the need for more sophisticated sensors and chips to produce electronic components in cars increases with higher levels of driving autonomy as well as the path to electrification. Indeed, just like personal mobile devices, cars are also getting smarter as global car makers introduce better safety and infotainment systems, more so for higher-end marques.

The significance of chips to carmakers came to the forefront during the Covid-19 pandemic as global chain disruptions caused a chip shortage and priority for chips was given to makers of consumer electronics that consume far more chips than automakers globally. Before then, many people did not realise that chips are necessary to control power steering and even trigger airbags. Even the old-fashioned speedometers are increasingly being replaced by digital units in modern cars.

It is no surprise that shares of MPI, an outsourced semiconductor packaging and testing services player that also manufactures leadframes (a thin metal plate used in chip packages), were a darling during the pandemic. As work-from-home propelled demand for consumer electronics, MPI turned in a record high net profit and revenue for the financial year ended June 30, 2022 (FY2022). Its net profit increased by 21% to RM328.9 million in FY2022 from RM271.8 million in FY2021 as revenue grew 21.5% to RM2.4 billion from RM2 billion previously, also helped by a stronger US dollar. Prior to that, it posted an annual net profit of RM153 million in FY2020, up from RM128.3 million in FY2019.

Based on The Edge Billion Ringgit Club (BRC) Awards methodology, the profit growth represents a risk-weighted compound annual growth rate of 30% over the three-year evaluation period from FY2019 to FY2022 — the best among its peers. This makes it The Edge BRC’s winner for highest growth in profit after tax over three years in the technology sector — MPI’s first BRC win.

MPI shares, which had been hovering around RM10 before the pandemic, shot up above RM50 at the height of the pandemic in 2021, when there was a severe chip shortage. Since then, mirroring the semiconductor cycle and slowdown in demand, the stock has been in a downward trend. Closing at RM26.68 on Oct 27, the stock is down 6.4% year to date.

In its 2023 annual report, MPI said it continues to believe in the long-term prospects of the semiconductor industry despite the current short-term correction due to high inflation and lingering geopolitical unrest, which have caused lower consumer spending, especially in consumer electronics and in particular the smartphone and personal computer market.

Citing the Worldwide Semiconductor Trade Statistics report, MPI noted that the global semiconductor market is estimated to decline by 10.3% in 2023, but this is expected to be followed by a robust recovery with growth estimated at 11.8% in 2024, on the back of increasing demand for 5G connectivity, the adoption of artificial intelligence and smart sensors and the continuing preference for electric vehicles (EVs) or autonomous vehicles, which will secure the industry’s long-term growth.

“Both in hybrid electric vehicles and EVs, developments within automotive technology are ever more centred on the electrification of the drivetrain,” it says.

Against this backdrop, MPI is well-positioned to benefit given its capability to package next-generation chips that use materials such as silicon carbide and gallium nitride — technologies to power vehicles and devices.

Notably, MPI had 43% revenue exposure to the automotive and industrial segments in FY2023, up from 38% in FY2022.

To be sure, the group has not been spared from the semiconductor industry’s cyclical downturn. Coming off a record year, its revenue fell by 15% to RM2 billion in FY2023 from RM2.4 billion a year ago. Its net profit saw a bigger decline, dropping 81% to RM61 million from RM329 million previously due to weak end-market electronics demand, elevated inventories and higher energy costs.

Despite the weaker financial performance in FY2023, the group is maintaining the same dividend payout as FY2022, amounting to 35 sen, which is also higher than 27 sen each for FY2019 and FY2020 and 30 sen for FY2021.

“Dividend payout is one of the important elements considered by the company in enhancing its shareholder value. Earnings, capital expenditure requirements, borrowing repayments, capital adequacy, dividend yield and other relevant factors are considered by the board in determining the actual dividend payout,” MPI said in its 2023 annual report.

In an Aug 30 report maintaining a “buy” call and RM32.15 target price, TA Securities says it continues to like MPI for its automotive-centric strategy as it seeks to capitalise on the promising prospects for content gains within vehicles, catalysed by the global transition to EVs and autonomous driving, among others. “Key downside risks include weaker-than-expected loadings, geopolitical tensions weighing on economic growth and disrupting supply chains,” it says.

At the time of writing, TA had the only “buy” call on MPI while there were three others with “hold” and another three saying “sell”. Target prices ranged from RM19.20 to RM32.15, averaging RM25.30.

AmInvestment Bank Research, in an Aug 29 report, had cut its earnings forecasts by 14% for FY2024 and 15% for FY2025 to reflect the slower-than-expected recovery in the industry. It now expects MPI to deliver a net profit of RM220.3 million in FY2024 and RM296.7 million in FY2025 — still much higher than just concluded FY2023 net profit of RM61 million.

Incorporated in 1962 under the name of Federal Paper Products Ltd, MPI listed on Bursa Malaysia (then the Kuala Lumpur Stock Exchange) in 1983. Currently, MPI operates four manufacturing facilities, of which three are in Malaysia and one in Suzhou Industrial Park in Jiangsu Province, China.

MPI’s automotive-centric strategy should make it a proxy for the EV boom for many years to come.

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