• Initiating coverage with a BUY and Target Price of S$2.38, representing a potential upside of 39%.
• Key customer is increasing capex and production capacity.
• New technology structurally increases test times, leading to higher demand for test handlers.
• Diversification of revenue stream through new projects and customers.

Leveraging on Increasing Capex for Key Customer

• Intel has guided for a record-high capex of US$16bn in FY19 on the back of developments in new technology. The company intends to continue to increase its 14-nm and 10-nm production capacities by 25% each in 2020 to meet customers’ demand. This should drive demand for test handlers, where AEM HOLDINGS (SGX:AWX) is believed to be the sole supplier.

New Technology to Drive Longer Test Times, Leading to Higher Demand for Test Handlers

• As technology nodes shrink, longer test times are required to perform more complex tests. In addition, systems and devices used in safety-critical markets such as automotive (driverless vehicles), industrial, and medical equipment, will require more stringent system level tests. These would lead to higher demand for test handlers.

Diversification of Revenue Through New Projects and Customers

• AEM is working with its key customer to develop hybrid extensions for the customer’s existing handlers as well as new technology used in quantum computing testing. Other initiatives include supplying cable testing solutions for Huawei’s 5G rollout.

Source: DBS Research - 29 Nov 2019