Key Beneficiary of Rising System Level Test (SLT) Trend; BUY

• System level test is gaining traction, due to rising complexity of chips, and the need to test mission-critical devices reliably. We continue to see AEM (SGX:AWX) as a key beneficiary of this trend, on the back of its strong know-how and track record in this area.
• We also see FY21E as a growth year for AEM, driven by new products across several customers.
• Maintain BUY on AEM and target price of S$5.05 (14x FY21E P/E).

Increasingly Complex Testing Needs Boon for System Level Test (SLT)

• The rollout of 5G enables increased complexity in mission-critical applications – in turn creating unprecedented challenges in chip testing. As semiconductor nodes decrease and heterogeneous packaging becomes mainstream, the need for system level test (SLT) is likely to increase.
• We see AEM as a beneficiary of this given their first-mover advantage and strong track record serving Intel. VLSI Research projects SLT to grow at a 4.4x faster pace than wafer sort and functional test in 2020-24, driven by the need to increase test coverage reliably in chips where design-for-test techniques leave hundreds of millions of transistors untested.

New Products Are AEM's FY21E Drivers

• We project AEM's FY21E to be a growth year, driven by continued momentum for new products introduced in 2020 – including for Intel (hybrid project), Huawei (TMS) and the memory customer (AMPS). This is offset by our own assumption of reduced HDMT equipment shipments due to potential high-base effects in 2020.
• AEM will announce FY21 guidance in Jan-21.

AEM - Valuation and Risks

• As normalising seasonality patterns may create difficult y-o-y comparisons in 4Q20 and 1Q21, we see risks of near-term share price volatility. We believe these are opportunities to BUY on dips, given AEM’s favourable long-term growth prospects.
• As SLT gains traction, we also see AEM as an M&A candidate.
• AEM's share price is trading at 5.8x FY21E EV/EBITDA, which compares favourably to the 7.8x that peer Cohu bought Xcerra for in 2018.
• Key risk to our view is if Intel loses more market share than expected, which may result in lower demand for AEM’s equipment.

Source: Maybank Kim Eng Research - 21 Nov 2020