Heralding the Return of a Legend at Intel

• Intel’s latest developments such as 7nm issues being resolved, veteran Pat Gelsinger returning as CEO, and an unchanged focus on XPU strategy and advanced packaging, are all positive for AEM (SGX:AWX) with Target Price S$5.05.
• While risks of HDMT (High Density Modular Test) test handlers facing high-base effects in 2021 appear significant, we expect this to be cushioned by growth from new products.
• Our forecasts are unchanged pending AEM's FY21 guidance/4Q20 earnings. BUY AEM. We see upside drivers from accretive M&A and strong 2H20 cloud/5G spending momentum.

Takeaways From Intel Results Call

• We highlight takeaways from Intel’s earnings call, and our read-across to AEM.
• Pat Gelsinger, the outgoing CEO of VMware, will re-join Intel as CEO wef 15-Feb. Pat first joined Intel when he was 18, and is a 30-year veteran. He was also mentored by Intel pioneers Andy Grove, Gordon Moore and Robert Noyce. During the call, Gelsinger’s notable remarks included:
  • Intel intends to regain process technology leadership.
  • Gelsinger recounted that he was around when Intel’s market position was diminished, and when the chipmaker was late to multi-core chips. The team (including him) was instrumental in turning Intel’s fortunes around to leadership position during 2005-09.
  • There are ongoing changes in key leadership. Glen Hinton, an Intel senior fellow, is rejoining Intel to work on an “exciting high-performance CPU project”. More announcements on leadership are to be expected.
  • 7nm issues are fixed, and the majority of 2023 products will be manufactured in-house.
• Given this backdrop, we also took comfort from the fact that Intel’s core strategies remain consistent;
  • it intends to preserve its IDM advantage;
  • remains steadfast in its aim to deliver leadership products by decoupling process technology from design (7nm client products targeted for 1H23; server products in 2H23); and
  • remains focused on its CPU to XPU (i.e. multi-architecture) strategy.
• We believe these are favourable long-term drivers for AEM as:
  • Intel’s XPU strategy is to launch various types of chips across different architectures to capitalise inflections like 5G, AI and so on. We see Intel’s XPU strategy as a source of potential TAM expansion for AEM’s HDMT test handlers, and possibly even more AEM products. Refer to AEM Holdings - Maybank Kim Eng 2020-01-09: Better Than Expected Guidance for more details.
  • In driving leadership products, Intel reemphasised that apart from process technology, there are other key technologies such as advance packaging that are crucial. We believe AEM is a beneficiary of this. For instance, in heterogenous packaging, SLT (system level test) is able to capture faults that current “known-good-die” (KGD) approaches are not able to, due to difficulties in hot-testing pre-packaged chiplets, which is inherently more vulnerable than testing more resilient, fully packaged dies (refer to AEM Holdings - Maybank Kim Eng 2020-09-11: Buy The Dip for more details).
  • Additionally, we believe the new Hybrid test handler, slated for mass production in 2021, primarily caters to the burn-in needs for Intel’s Foveros 3D-packaged chips (refer to AEM Holdings - Maybank Kim Eng 2020-01-09: Better Than Expected Guidance for more details).
  • In report AEM Holdings - Maybank Kim Eng 2020-09-11: Buy The Dip, we argued that SLT at the wafer level could be one approach to overcome current KGD issues pertaining to chiplets, and help to minimise cumulative yield loss from defect chiplets affecting good chiplets that are packaged together. We further do not rule out that this may be an area that AEM can explore to solve given its capabilities in system-level-test and wafer probe.

M&A Key Theme in 2021

• We reiterate our view that we believe M&A is the fastest way to acquire capabilities in an increasingly competitive SLT market. We believe the vertical integration of CEI (SGX:AVV) allows AEM to provide rapid customisation for customers and potential customers.
• We think more M&A may be on the cards, both in software and hardware to further strengthen the value proposition of AEM’s end-to-end solutions.

Risks and Upside Drivers

• We currently believe the key risk to be HDMT test handlers facing high base effects heading into 2021. This is expected to be cushioned by new products (e.g. hybrid test handler) and customers (e.g. Huawei, new memory customer) etc.
• Further, we see upside risks if cloud/ 5G spending gains strong momentum heading into 2H21.

Source: Maybank Kim Eng Research - 27 Jan 2021