• Grand Venture Technology (SGX:JLB)'s 1Q results came in weaker than expected as S$32.5m revenue and S$3.6m net profit make up 20% and 15% of our FY22E projections. Nevertheless, 1Q revenue grew 41% y-o-y (Semiconductor: +34%, Life sciences: +29%, Electronics, medical, aerospace, etc: +94%) and net profit increased by 9% y-o-y.
• Gross margin fell 4ppt to 28% on higher material and energy costs.

Pressure on Margin to Persist Near Term

• Slowed economic activities in China are expected to lower utilization rate for Grand Venture Technology’s own Suzhou factory as well as that of its newly acquired subsidiary, JDragon, which contribute to the Group’s aerospace business.
• Electricity tariff surcharge of 3.7sen/kWh imposed in Malaysia contributed to higher energy costs in 1Q. The surcharge extends till June 22 and will be revised thereafter. Given the surge in oil prices above US$100/barrel in early 1H (+55% y-o-y), we expect higher surcharge rate being levied in 2H22.
• Likewise, elevated raw material costs continue to weigh on Grand Venture Technology’s margin although some can eventually be passed on to customers.
• Grand Venture Technology is likely to ramp up its semiconductor component production from 2Q onwards with TSMC ready to commence 3nm chip production in 2H22. Teradyne, a main customer of Grand Venture Technology, supplies to TSMC.
• On top of growing wallet share with current back-end customers, Grand Venture Technology is in talks with new customers from the front-end space. Successful acquisition of these new customers would be a strong catalyst for long term growth via a wider and more diversified customer base as well as anchoring a stronger foothold in the semiconductor supply chain.

Maintain BUY

• Maintain BUY rating on Grand Venture Technology with a account for margin pressure.

Source: SAC Capital Research - 13 May 2022