UOB Kay Hian is upbeat on the prospects of the tech manufacturing industry, with a “buy” call on all the companies of this sector under its coverage.
In its July 29 report, the research team from UOB Kay Hian notes that companies servicing the semiconductor and auto industries are clear beneficiaries, given the industry tailwinds.
“The semiconductor industry is riding on a strong uptrend, with significant demand for semiconductor chips arising from 5G-related spending and the growth of data,” states the research team.
“Demand has shown resilience despite being impacted by supply chain disruption from global lockdowns related to the COVID-19 pandemic.”
Given how they are “are serving the right industries and have better chances of earnings beat”, UOB Kay Hian’s top picks are UMS Holdings, Innotek and Aztech Global, with target prices of $1.92, $1.20 and $1.86 respectively.
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“Particularly, the upcoming 2Q2021 results from Aztech, UMS, and Innotek could surprise on the upside as demand for their end-products continue to benefit from resilient demand,” writes the team.
Furthermore, unlike other sectors which faced low demand in the pandemic, factories for these tech manufactures have been kept busy in 2QFY2021, “supported by positive and expansionary” policies.
In June 2021, the semiconductor segment grew 28.2% y-o-y, led by demand from cloud services and 5G markets, while output of machinery and systems expanded 28.6% y-o-y on the back of higher output of semiconductor and industrial process equipment.
The strong demand is expected to translate to increased factory utilisation rates, driving positive operating leverage for the tech-related manufacturers.
But they expect competition to stay rational among the suppliers, given the elevated capacity utilisation rates across the semiconductor industry.
For Aztech, UOB KH highlights that the firm’s manufacturing plant in Dongguan was not affected by the recent Covid-19 outbreak, and its Malaysian plant only had “limited” impact from the country’s movement control order. It is also phasing out low margin products to free up more capacity for better-margin products.
Aztech’s customer demand and orderbook remain robust, with the company continuing to see robust orders from its key customers with orders lasting until 2022. In addition, Aztech is working on several new products with its key customer, with production commencing in 3QFY2021.
“Compared with larger competing manufacturers, Aztech has advantages in its ability to provide more dedicated services and work closely with the design team of its key customer,” the team notes.
As for UMS, it is enjoying support from the global chip shortage situation brought about by rising consumer demand for electronic products and supply disruption.
UMS’ key customer is chip-making equipment producer Applied Materials, which, in its 2QFY2021 earnings on May 21, notes that its customers, for the first time, have provided capital spending guidance for multiple years ahead, which will be a leading indicator for demand sustainability.
“This augments our thesis that the ongoing massive capex spending, and supercycle in the semiconductor industry will bode well for UMS, lifting overall factory utilisation rates and revenue above the $200 million mark for the first time in 2021.”
UMS is also poised for an earnings upside surprise, if factory utilisation rates remain elevated throughout the year.
The team reveals, “a sensitivity analysis shows that for every 5% increase in sales from our estimate, the expected rise in net profit will be 7% due to the impact of positive operating leverage.”
Last but not least, UOB Kay Hian has a positive outlook on Innotek, given its venture into the EV and parts assembly business, as well as its exposure to the automotive industry in China.
In InnoTek’s recent 2020 annual report, it highlighted that its China's auto division is experiencing great change, with a clear shift towards electric vehicles (EV). InnoTek’s precision metal components division also serves EV manufacturers.
However, as the industry evolves holistically towards charging stations and infrastructure support, InnoTek says it will seek to deepen its value proposition with existing customers and acquire new customers.
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This means moving beyond single-part manufacturing to parts assembly, and the company has secured initial orders of the latter and expects orders to increase as it establishes its foothold within the segment.
Furthermore, the UOB Kay Hian team thinks the company is set to benefit from a strong recovery in China’s auto sales. “China has successfully contained the Covid-19 outbreak, which has led to a surge in passenger vehicle (PV) sales back to pre-Covid-19 levels”, they point out.
Furthermore, China’s Association of Automobile Manufacturers estimates March auto sales at 2.38 million units, up 67% y-o-y and 64% m-o-m, and 1Q2021 PV sales should reach 6.34 million units, up 73% y-o-y.
Besides Innotek, UMS and Aztech, UOB Kay Hian also gave "buy" ratings for Venture Corp, Nanofilm Technologies International and Frencken Group, with target prices of $23.47, $5.51, and $2.13 respectively
