Favourable Industry Signs; Maintain BUY

• A tech industry publication says that AEM HOLDINGS LTD (SGX:AWX)’s key customer is stepping up orders for EUV equipment. This suggests the customer’s 7nm chips are on track for 2021, as EUV is a critical enabler for this node.
• Aside, semiconductor players like Qualcomm are increasingly aware of the benefits of system-level test (SLT) and may become potential AEM customers.
• We see EPS upside for AEM for FY20-21E, from:
  1. frontloading of some equipment to 2020; and
  2. contributions from its hybrid project and Huawei.
• Maintain BUY and ROE-g/COE-g Target Price of SGD1.50 (3.2x blended FY19-20E P/BV).

Customer Stepping Up Preparations for 7nm Chips

• In Sep 2019, AEM’s key customer reiterated its optimism on the launch of 7nm chips in 2021. A Digitimes’ report dated 20 Sep 2019 corroborated this, suggesting that this customer has been stepping up orders for EUV equipment since Aug 2019.
• EUV requires an order lead time of 18 months, according to manufacturer ASML (ASML NA). As AEM has seen increased equipment orders at its customer’s new nodes, we think some 2021 orders may be front-loaded to 2020 (link to scenario analysis). HDMT equipment’s order lead time is around five months.

Industry Waking Up to the Need for SLT

• Separately, Qualcomm (QCOM US) is hiring system-level test (SLT) engineers. This comes shortly after its Mar 2019 announcement that it may introduce high-volume system-level test “in the future”. Qualcomm apparently believes that test costs can be optimised if:
  1. enough content can be shifted from functional tests to system-level test; and
  2. if the system-level test approach is massively parallel.
• AEM’s AMPS accommodates both functional and system-level tests and is also massively parallel.

AMPS’ Value Proposition Vs Peers’

• AEM believes that the most effective way of lowering testing costs is by reducing or potentially eliminating functional tests in the long run. This contrasts with its competitors’ approach, which currently positions system-level test as an “additive” process to functional tests – so that their system-level test offerings do not cannibalise presently-lucrative traditional businesses.
• A risk to our forecasts is any severe drop in demand for AEM’s key customer’s chips while strong FY20E guidance could be a catalyst.

Source: Maybank Kim Eng Research - 2 Oct 2019