China expansion to augur well for Unisem

PETALING JAYA: Unisem (M) Bhd stands to benefit from its diversification plans and the upscaling of its domestic operations following the arrival of new foreign workers in the second half of the year.

CGS-CIMB Research said despite the softer demand outlook, it thinks that Unisem would stand to benefit from its customers’ diversification plans under its “China Plus One” strategy amid the trade war with the United States.

“Unisem is scheduled to open the Phase 3 expansion at Unisem Chengdu (UC) in the fourth quarter (4Q22). However, we do not expect meaningful earnings contribution within financial year 2023 (FY23) given the higher pre-operating expenses and new customer qualification processes,” the research house stated in a report on the company.

CGS-CIMB Research expects Unisem to see softer 3Q22 sales quarter-on-quarter (q-o-q) from UC in China due to a city-wide lockdown implemented by the local government in the first two weeks of September.

Despite the lockdown, UC managed to operate, albeit at a lower utilisation rate during the period.

CGS-CIMB Research anticipates UC’S utilisation to improve q-o-q in 4Q22 in view of the order backlog from 3Q22. It estimates that the UC business made up 50% to 55% of Unisem’s FY21 revenue.

The World Semiconductor Trade Statistics in August this year had revised down its 2022 and 2023 global semiconductor sales growth forecast to 13.9% and 4.6% (versus 16.3% and 5.1% in June 2022), respectively.

“We cut our FY23-FY24 earnings per share (EPS) forecast for Unisem by 13% to 22% to account for the potential industry demand slowdown, but this could be partially cushioned from favourable foreign exchange movement in view of the depreciation of the ringgit versus the US dollar (an 11.7% fall year-to-date),” CGS-CIMB Research added.

In terms of foreign workers, the research house noted that Unisem’s management had highlighted in a July analyst briefing that it was in the midst of receiving 238 new foreign workers.

This was a positive catalyst for the company in the second half of the year, given its Ipoh plant has been running at around 65% capacity utilisation since last year mainly due to a labour shortage. Hence, the company expects the additional workers to drive higher utilisation in the second half.

CGS-CIMB Research has downgraded the stock from an “add” to a “hold” with a lower target price of RM2.60, premised among others, on the softer demand outlook and weak sentiment in the technology sector.

For 2Q ended June 30, 2022, Unisem reported a leap in earnings and revenue and said its performance for the coming quarter is expected to be satisfactory.

For the quarter, the semiconductor provider’s net profit almost quadrupled to Rm205.9mil while revenue increased 15.4% year-on-year to Rm464.06mil. On a per share basis, Unisem’s earnings rose to 12.76 sen.