There Are Mitigation Factors to Intel 7nm Delay; BUY

• In our view, Intel’s 7nm delay is a headwind to AEM Holdings (SGX:AWX) in FY21E. However, we believe mitigating factors are:
  1. continued growth of AEM’s new products in FY21E; and
  2. our potential underestimation of FY21E equipment demand as a result of Intel’s new product launches.
• As such, maintain BUY and ROE-g/COE-g Target Price of SGD4.04 (4.8x blended FY20-21E P/B).
• Given AEM’s strengths in system level test SLT, we re-emphasize AEM as an attractive M&A candidate.

Assessing Impact of Intel 7nm Delay

• Intel announced its first 7nm chips will be delayed by six months to late-2022 or early-2023. 7nm yields are trailing around 12 months relative to its internal target. On balance, we believe this is a negative development to AEM in the near to medium term. All things equal, we believe there is insufficient clarity to determine the long-term impact.
• In 2Q18 management discussion and analysis, AEM highlighted factors driving HDMT equipment demand from Intel. We evaluate the impact of these drivers relative to the latest update in Fig1 in the PDF report attached below.
• We believe the news will have little to no impact on our FY20 forecasts, as our revenue estimate is firmly within guidance that we see is highly achievable, and we believe our margin assumptions are conservative. Our FY21E EPS growth of 7% y-o-y is predicated on tailwinds (e.g. growth from new product launches) being offset by some headwinds (e.g. weak macro environment, and then risk of 7nm delay, which has now materialised).
• Importantly, our checks suggest no delays in future AEM product launches for Intel despite the 7nm delay. We reproduce our fair value sensitivity analysis of FY21E earnings outcomes towards current fair value.

AEM Remains An Attractive M&A Candidate

• Since identifying system-level test as being at an inflection point in Jun-19 (see report: AEM - Maybank Kim Eng 2020-06-18: System level test – At an inflection point), we observe several developments that reinforce our view that AEM remains an attractive M&A target.
• First, industry recognition for SLT has grown significantly, driven by trends such as:
  • heterogeneously packaged 3D chips;
  • requirement for adequate fault coverage in increasingly complex mission-critical chips (such as in mobile, AI, cloud and ADAS);
  • strong need for thermal management (such as in 3D and ADAS chips). Examples of SLT markets are found in Fig3 in report attached below.
• Second, M&A activity remains rife to boost SLT capabilities. Following the acquisition of Astronics Test Systems to access its SLT handlers, Advantest bought US-based Essai for its capabilities in active thermal control and high socket count. Advantest believes these, in addition to its breadth of customer reach, are key reasons why its SLT offerings are now more superior to peers’. However, Advantest believes a mitigation factor to their current claim is if peers “engage in business tie-ups to fill in gaps in their portfolios”. While this may infer collaboration such as JVs, we do not rule out M&A.
• In that regard, we re-emphasize AEM’s strengths in ATC, and its solid track record in serving Intel, which pioneered SLT since the early 2000s as being key propositions complementary to peers with strong access to chipmakers as customers.
• Even if M&A does not happen, we believe a long-term opportunity for AEM is that it does not need to worry about potential cannibalisation of the ATE business that other peers, such as Advantest and Teradyne have to consider (see previous report: AEM Holdings - Maybank Kim Eng 2019-10-02: Good Signs). In our view, this frees up AEM to position SLT as a key area to drive testing costs lower. This contrasts peers’ positioning of SLT as being “additive” to ATE, which adds additional costs.
• AEM too has been acquiring new capabilities, such as Mu-Test (for tester capabilities) and DB-Design (for near 24-hour R&D service and improved consumables design capabilities) to strengthen its position.

Key Risks to Our View

• In our view, this delay does not affect our FY20E earnings, as the current orderbook is > 90% of our revenue forecast. Our AEM Target Price of SGD4.04 infers FY21E EPS growth of 7%, as tailwind from growth of new products balances out headwinds from challenging macro conditions and the 7nm delay.
• Key risk to our view is if Intel’s delay stretches beyond 6- 12 months, and/or if Intel’s market share loss is faster than expected.

Source: Maybank Kim Eng Research - 27 Jul 2020