• SEMI expects global semiconductor equipment spending to grow in FY20-22F to reach ~US$80bn by FY22F.
• We see UMS benefitting from this trend via its exposure to major customer Applied Materials.
• We reiterate our ADD call on UMS with a higher target price, based on upcycle peak P/BV multiple.

SEMI Sees Strong Equipment Demand

• In its quarterly World Fab Forecast report (Mar 2021), Semiconductor Materials and Equipment International (SEMI) noted that the COVID-19 pandemic has led to higher demand for electronics devices. This has also led to a rare three consecutive years of record highs in fab equipment spending in the global semiconductor industry with a 16% y-o-y increase in 2020, followed by
• SEMI’s forecast gains of 15.5% y-o-y increase in 2021 and 12% y-o-y increase in in 2022. SEMI highlighted that fabs worldwide will spend about U$10bn on equipment in each of these years leading to its equipment spending forecast of ~US$80bn by 2022. The demand drivers are expected to be from electronics usage in segments such as communications, computing, healthcare and online services.
• Historically, fab equipment spending has been cyclical. The last upturn in fab equipment spending was in 2016-18. SEMI expects the bulk of fab equipment spending in 2021 and 2022 to be from the foundry and memory sectors.
• On 23 Mar 2021, Intel announced plans to build two new wafer fabs in the US for an estimated US$20bn. The company also commented that within 2021, it will announce further capacity expansion in US/Europe or other global locations. (see also report: AEM Holdings - CGS-CIMB Research 2021-03-24: Intel Capex Beneficiary)

We See UMS as An Indirect Beneficiary

• We believe that such strong projected semiconductor equipment spending by SEMI will benefit Applied Materials (AMAT US) which is the leader in materials engineering solutions used to produce virtually every new chip. As AMAT is a major customer of UMS (SGX:558), this will in turn support our earnings expectations for UMS in FY21-23F.

Reiterate ADD With An Upcycle Target Price

• Given current chip invalidated as UMS's share price may retest the high P/BV of 2.893x achieved in the FY16-18 upcycle.
• We switch our target FY21F P/BV multiple (on FY21F book value per share of S$0.53) to 2.893x (the peak P/BV achieved over the FY16-18 upcycle), leading to a higher target price of S$1.53. Our previous Gordon growth derived P/BV multiple was 2.46x.
• Re-rating catalysts are stronger-than-expected COVID-19 outbreak worsens and higher than expected tax rate due to expiry of pioneer tax status for a Malaysian subsidiary.

Source: CGS-CIMB Research - 25 Mar 2021