• AEM (SGX:AWX)’s major customer Intel reported its 3Q20 results. Key negative from Intel’s results was the 10% y-o-y decline in its data-centric revenue.
• In regards to Intel’s manufacturing challenges, we assume any outsourced production will still be packaged and tested by Intel internally.
• We also see system-level test (SLT) opportunities for AEM to diversify its customer base.

Intel Reported 3Q20 Results

• Intel reported its 3Q20 results yesterday. Key highlights from the results are:
  1. FY20 revenue guidance raised slightly, and
  2. Intel’s 10nm (nanometer) facility at Arizona is now fully operational.
• Intel guided that it currently has three high-volume fabs producing 10nm products to meet customer demand.
• The key negative in the 3Q20 results was the 10% y-o-y decline in its data-centric revenue. Our US partner Raymond James thinks Intel is about three months away from a decision on whether it will move to outsourcing in whole or in part its 7nm related chip production. Raymond James thinks that it would be difficult for Intel to not outsource its chip production to TSMC for at least some of its requirements as it may be too risky to rely on its internal capabilities solely.
• Our base case assumption is that even if Intel outsources its advanced chip production needs, the company will still package and test these products in-house. We note that in its earnings call, Intel reiterated its intention to continue investing in advanced packaging capabilities.

System-level Test Opportunities

• As semiconductor chips get more complex and chips addressing different applications are packaged together as a solution, the need for system-level test (SLT) has increased. According to VLSI Research, global SLT revenue could grow at a compounded annual growth rate of 21.6% over 2019 (US$1.2bn) to 2024F (US$3.2bn).
• AEM already has SLT capabilities serving its major customer's SLT requirements. Through a series of acquisitions in recent years, AEM, we believe, is now also able to offer customisable and cost-competitive SLT solutions to other potential customers in the semiconductor industry.
• On 25 Aug 2020, AEM further strengthened its technical capabilities with the appointment of an industry veteran as its Chief Technology Officer.

Reiterate ADD on AEM

• We reiterate our ADD call on AEM with target price based on Gordon-Growth derived P/BV multiple of 6.09x.
• Potential re-rating catalyst: better-than-expected profit margin.
• Downside risks are delivery delays due to the resurgence of COVID-19 cases and loss of competitiveness by its key customer.
• AEM will provide a voluntary 3Q20 business update (after market closes) on 3 Nov. Given some COVID-19 related production impact in 2Q20, 3Q20F performance should be better q-o-q.

Source: CGS-CIMB Research - 23 Oct 2020