Thesis Playing Out; Maintain BUY

• SEMI’s year-end update for 2020 global semiconductor manufacturing equipment sales of USD60.8b is 3.4% higher than its mid-year estimate; it also sees a new high in 2021. Further, SEMI sees upside if macro conditions improve and trade tensions ease. We believe this validates our bullish thesis on UMS (SGX:558), a beneficiary of sustained logic/foundry equipment spending, with memory to follow.
• Maintain BUY with ROE-g/COE-g based UMS Holdings Target Price (2.2x FY20E P/B).

SEMI Sees Rosy 2020; New High in 2021

• SEMI (Semiconductor Equipment & Materials International) expects global semiconductor manufacturing equipment sales to grow 5.5% y-o-y to USD60.8b in 2020, following an estimated 10.5% drop in 2019. SEMI attributes the recovery to spending in advanced logic and foundry, new projects in China, and to a lesser degree, memory.
• SEMI expects equipment spending to reach a new high of USD66.8b (+9.9% y-o-y) in 2021, as memory investment recovery hits full swing. SEMI sees upside if the macro economy improves and trade tensions subside in 2020. If this plays out, we see bull case fair value of SGD1.31 for UMS.

Proxy to a Structural Need to Innovate Chipmaking

• To enable the data economy, UMS’ key customer Applied Materials (AMAT, Not Rated) cites chips have to improve power efficiency by 1,000x. However, its logic, foundry and memory customers are now facing a slower rate of scaling. AMAT remains optimistic of its long-term competitive position to enable chipmakers to overcome this problem through a combination of architecture, structure and materials innovation. In turn, we expect UMS, having been AMAT’s supplier since 1999, to be a beneficiary of AMAT’s positive long-term prospects.

Boosting Competitiveness at JEP

• In a The Edge article in December, UMS’ founder and CEO Mr. Andy Luong (also CEO of 39%-owned associate JEP (SGX:1J4)) expressed that JEP has the potential to grow faster than UMS. A key strategy to court customers is to boost price competitiveness. Thus far, only 15% of JEP's operations have been shifted to Malaysia, where Mr. Luong cites an average engineer costs SGD1,500 a month compared to SGD3,500 in Singapore.

Source: Maybank Kim Eng Research - 2 Jan 2020