1H19 Ahead of Our Expectation; Maintain BUY

• AEM HOLDINGS LTD (SGX:AWX)'s 2Q19 PATMI rose 65% y-o-y to SGD15.7m, largely driven by HDMT and STHI test handler (TH) sales to its key customer. 1H19 PATMI accounts for 65% of our FY19E forecast, surpassing our expectation.
• For comparison, prior 1H periods made up 39%/53% of FY17-18 PATMI.
• We maintain earnings forecasts pending further clarity on FY20E. New projects for existing and new customers could provide FY20 upside to our estimates.
• Maintain BUY and ROE-g/COE-g Target Price of SGD1.40 (1.4x blended FY19-20E P/BV).
• Risks to our view include a sharp demand drop in its key customer’s chips.

Strong Revenue Growth and Good Cost Control

• AEM's strong 2Q19 was driven by:
  1. better-than-expected revenue growth of 35% y-o-y;
  2. improved gross material margins of 34.5%, up 3.5ppts y-o-y due to a better product mix and higher engineering revenue; and
  3. cost-control.
• The rollout of its customer’s 10nm chips was a key catalyst for increased orders.
• As system-level test gains significance for its customer, we see a possibility of higher FY19E revenue guidance from AEM. Our unchanged FY19E revenue of SGD272m is at the midpoint of its SGD265-280m guidance range.
• See also recent report: AEM Holdings - Maybank Kim Eng 2019-07-29: Addressable Market Maintained.

Hybrid Project & Huawei May Provide FY20E Upside

• Based on the latest updates, production ramp ups for AMPS equipment for its memory customer, the hybrid project for its key customer, and the optical fibre test solution for Huawei are on track. The latter two contributions are not yet in our estimates due to insufficient visibility.

Risk: Sharp Demand Drop for Customer’s Chips

• Given the importance of maintaining technology and market leadership for its key customer, the latter may aggressively push towards 7nm chips by 2021. This may result in frontloading of FY21E HDMT orders to FY20E.
• Because of AEM’s small size relative to its customer’s capex budget (consensus estimate is USD15b for FY20) we think constraints for HDMT Test Handler orders are unlikely to be a lack of financial resources. Instead, we believe a severe demand decline for the customer’s chips, possibly as a result of a macroeconomic shock is a key risk, as this could prompt the customer to delay equipment orders due to slack capacity.

Source: Maybank Kim Eng Research - 14 Aug 2019