Singapore Technology Stocks - DBS Research 2022-10-18: Semiconductor Outlook Turning Negative Near Term

Singapore Technology Stocks - Semiconductor Outlook Turning Negative Near Term

  • The Singapore technology sector P/E has dipped below -1 standard deviation of its 5-year average P/E. Semiconductor players were the main culprits owing to mounting macro headwinds. (see also recent SGX Market Updates: Technology Stocks Take Spotlight On US Trade Policy & Growth Outlook and summary of SGX technology sector stocks share price performance.)
  • Weakness for end-market demand persists. Among the various segments – PC, tablet, phone, server – server is the only bright spot, while the rest of the segments are affected by cuts in discretionary spending.
  • US CHIPS Act and US export controls have major implications to global semiconductor supply chain –
    • The former, signed in August, seeks to increase the US’ chips resilience by incentivizing chip manufacturers to re-shore and produce chips back in the US. Companies (or integrated device manufacturers) that are involved in the fabrication/production/manufacturing process are expected to benefit the most from subsidies under the US Chips Act. Examples include domestic players like Intel’s 8 fab-plants worth US$100bn in Ohio, Micron’s US$100bn mega-fab in New York, and GlobalFoundries’ US$4.2bn plant in New York. On the other hand, most leading US semiconductor players (e.g., Qualcomm, Broadcom, Nvidia, and AMD) are focused on chip-design and operate on a “fabless” business model, and thus do not stand to benefit directly from this.
    • Conversely, the latter, put forth in October, looks to restrict the supply of high-performance chips and equipment to China – case in point: chips for the purposes of deep learning and artificial intelligence (DL/AI); advanced chips, typically smaller than 18nm. US advanced chipmakers and semiconductor equipment suppliers will likely see more direct, immediate impact from the export ban. The export ban is likely to be applied on chips produced by Nvidia and AMD for the purposes of DL/AI. Equipment makers like Applied Materials, Lam Research, KLA Corp, and ASML are also affected.

Lower valuation peg for technology sector stocks

  • With the further de-rating of the technology sector, we have reduced our valuation peg, given the strong macro headwinds.
  • For pure semiconductor stocks such as AEM (SGX:AWX) and UMS (SGX:558), we have downgraded both companies to hold recommendation last week with lower target price, pegged to 9x P/E, reduced from 15x previously.
  • For Frencken (SGX:E28) and Micro Mechanics (SGX:5DD), we had already cut our recommendation to HOLD back in May, mainly on margin pressure.
    • Frencken could see some improvement in margins in 2H22, given the gradual improvement in the supply chain disruption, and the group’s continuous efforts on mitigating cost inflation through its operational initiatives and passing some of the increased input costs to customers from 2H22. However, with about half of its manufacturing facilities in Europe, more affected by the Russia-Ukraine conflicts, coupled with its exposure to the consumer electronics segment, we have lowered the valuation peg to 7x, ~-1.5 standard deviation from its 5-year average P/E on FY23F earnings, from 11x previously. Our target price for Frencken is reduced to S$0.95, from S$1.36.
    • Similarly, target price for Micro Mechanics is reduced to S$2.97, peg to 20x P/E, on the back of the softer semiconductor outlook. Micro Mechanics's share price is supported by an attractive dividend yield of about 4% to 5%.
  • We maintain our BUY call on Grand Venture Technology (SGX:JLB).
    • Grand Venture Technology is targeting to enter into the semiconductor front-end space, from servicing top tier customers in the back-end space currently. A successful entry could open considerable growth opportunities for the group.
    • Given the strong macro headwinds, we have also lowered the valuation peg to 12x, slightly below the 5-year average P/E, with a lower target price of S$0.57 but maintain our BUY call. Penetration into the front-end with increasing customer acquisitions will be a key catalyst of Grand Venture Technology’s growth.
    • Though FY22F and possibly 1H23 earnings could be muted on the back of the macro headwinds, we look forward to a better 2H23, on margin improvement as utilisation rates improve from wallet share growth and new customer acquisitions.

Downstream players trading at attractive valuation of below -1 standard deviation P/E.

  • For the downstream players, all the stocks in our coverage – Aztech, NanoFilm Technologies and Venture Corp – have dipped below -1 standard deviation of their 5-year average P/E, presenting favourable risk-reward opportunities. Among them, our top pick is Venture Corp.
  • For Venture Corp (SGX:V03), so far order momentum remains strong and there is no major pushback in orders from customers. This could be attributable to the product mix and customer base.
    • Venture Corp's products, especially from the life science, instrumentation and medical divisions, tend to have longer shelf life and hence not as vulnerable to economic slowdown. The bulk of Venture Corp’s customers are from the B2B as compared to the B2C segment, hence less volatile to change in consumer sentiment. Venture Corp’s order visibility is about six to 12 months, thus can expect good momentum till around 1H23, unless there is any major adverse development on the macro front.
    • In line with the further de-rating of the technology sector, we have lowered our target price for Venture Corp to S$20.10 from S$23.20, pegged to a 5-year average P/E of 15x on FY23F earnings, reduced from 19x previously.
    • Overall, given the diversification in terms of customers and product mix, Venture Corp should be able to weather the macro headwinds better than others.
  • Aztech (SGX:8AZ) is supported by its strong orderbook.
    • Aztech's orderbook as at 25 July 2022 stood at S$827m, of which S$450m is planned for completion in FY22. However, given its exposure to the consumer electronics segment, Aztech could be vulnerable to the weakening consumer sentiment. Hence, we lowered our valuation peg to 8x from 11x. Target price for Aztech is reduced to S$1.02 from S$1.18.
  • NanoFilm Technologies (SGX:MZH) has various growth strategies in place.
    • These include gaining wallet share from existing customers, and targeting new customers in other industries besides the 3Cs (Consumer Electronics, Communication, & Computers). Others include the latest venture into EV batteries and also the entry into the hydrogen economy. Smooth execution of these strategies would be key drivers for growth.
    • However, given the growing uncertainties on the macro front, we have pegged our target price for NanoFilm to a lower valuation of 20x, from 30x, and reduced it to S$2.54. No change in our BUY recommendation.
    • NanoFilm Technologies is well positioned to capture a higher market share with the investments made in the new Shanghai Plant 2. Leveraging on its nanotechnology solutions, which are adaptable for use across a wide range of industries, we believe there is ample room for the group to gain new customers.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | 2022-10-18
SGX Stock Analyst Report BUY MAINTAIN BUY 20.10 DOWN 23.200

Read also DBS Research's most recent report:
2022-04-18 Aztech Global - Strong Orderbook To Drive Growth

Target prices by 2 other brokers at Aztech Target Prices.
Listing of broker reports at Aztech Analyst Report.

Relevant links:
Aztech Share Price History,
Aztech Announcements,
Aztech Dividends & Corp Actions,
Aztech News Articles


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