Brokers' take: Maybank KE positive on semicon manufacturing suppliers as Lam Research expands in Asia

MAYBANK Kim Eng is positive on a number of semiconductor manufacturing suppliers after attending Lam Research's suppliers briefing, it said in a report released on July 2.

Analysts Lai Gene Lih and Kevin Wong noted that the wafer fabrication equipment (WFE) manufacturer's expansion in Asia and its push for localisation could create growth opportunities for its suppliers in the region. Industry association SEMI, formerly known as the Semiconductor Equipment and Materials International, expects 29 high volume fabs to break ground next year, of which 20 will be in Asia.

As such, the analysts like that Lam Research "has made Malaysia a manufacturing centre of excellence" as its Batu Kawan plant in Penang began production in May this year.

To support their growth in Asia, the analysts predict that UMS Holdings, Frencken Group and Venture Corporation are potential beneficiaries from this expansion as they already have a presence in WFE precision engineering or assembly.

Furthermore, their strong track records serving blue-chip customers as well as their environmental, social and governance standards make these companies attractive suppliers for Lam Research, the analysts said.

Maintaining "buy" on UMS, Venture and Frencken with target prices of S$1.80, S$22 and S$2 and price upsides of 21 per cent, 18 per cent and 10 per cent as per their Friday closing prices respectively, the analysts noted that partnering Lam Research could "help suppliers cushion negative cyclicality, depending on the timing and size of opportunity secured".

"As successful localisation appears a key priority for Lam to drive its Asia expansion, we believe this is just the beginning of Lam's supply chain buildout in Malaysia and across this region," the analysts said.

As for the firms cited, the analysts like UMS's strong net margins of 20 to 30 per cent, which suggests its precision and engineering capabilities represent a robust value proposition to its customers. While UMS already serves Applied Materials, another WFE player, they are confident that the firm will be able to segregate its resources to prevent intellectual property leaks as cited by Lam Research.

Similarly, the analysts noted that Frencken is also serving other WFE players and could potentially serve Lam Research as well. Its diversified revenue base and strong balance sheet suggest that it would be well-positioned to take advantage of any growth opportunities.

Venture, with its strong capabilities in assembly, has also created value in life sciences and medical technology equipment. With its recent penetration into semiconductor equipment supply chains, the analysts are confident that the firm will be able to expand into the field, even if any near term positive impact would not be outsized.

On June 29, RHB had also upgraded its call on Venture to "buy" from "neutral", while raising its target price to S$20.70 from S$19.60 after the company's recent share price weakness, which analyst Jarick Seet said was unwarranted given the stock's favourable fundamentals as well as expectations of stronger Q2 FY2021 financials.

Shares of UMS closed flat at S$1.53, Frencken closed down 1.09 per cent at S$1.82 while Venture closed up 0.37 per cent to S$19.10.