Inari Amerton sets up OSAT JV for China market

By ANIS HAZIM / Pic source inariberhad.com

INARI Amerton Bhd is setting up a new outsourced semiconductor assembly and test (OSAT) joint-venture (JV) with China Fortune-Tech Capital Co Ltd (CFTC) to target the domestic semiconductor industry demand in China. 

CGS-CIMB Securities Sdn Bhd (CGS-CIMB Research) analyst Mohd Shanaz Noor Azam said Inari Amerton will be responsible for providing expertise and operational leadership to expand Amertron Technology (Kunshan) Co Ltd (ATK) and also at new plant sites in China. 

“Inari Amerton will also provide technical assistance and knowledge relating to OSAT manufacturing operations to the JV. While, CFTC will assist to provide expertise, relationship and guidance to the JV on business opportunities, including sales, marketing strategy, business development and risks within the regulatory framework of China,” stated the analyst.

On Monday (Oct 18), Inari Amerton said it has entered into a memorandum of understanding with CFTC to set up the JV in China. To achieve the best outcome for the JV, CFTC will provide local leadership on the physical set-up of plants, health and safety, environmental compliance and secure human resources.

Besides, Inari Amerton will also contribute 100% of the equity shares of ATK and a new cash investment of 463 million yuan (RM301 million) as its capital contribution to the JV. 

Meanwhile, CFTC will contribute a new cash investment of 749 million yuan and 100% equity shares of Yiwu Semiconductor International Corp valued at 21 million yuan. 

“Upon completion, Inari Amerton will own a 55% equity stake in the JV and CFTC will own the remaining 45%. Inari Amerton will finance the new OSAT JV through internal funds given that it has healthy net cash of RM904 million as at end-June 2021,” the analyst said.

Moreover, Inari Amerton had also raised RM1 billion in proceeds from a private placement at the end-July 2021. 

“The proposed JV is subject to the execution of definitive agreements on terms and conditions to be negotiated and agreed upon by both parties. The group expects to complete the signing of definitive agree- ments within six months,” he noted. 

The analyst also gathered from manage- ment that it plans to leverage on the existing footprint at ATK to support China OSAT JV. 

“For example, the group plans to raise its production floor area at ATK from 50,000 sq ft to 100,000 sq ft by 2022F. This could double the contribution from ATK in the financial year of 2022 forecast (FY23F). 

“To recap, ATK contributed 8% to Inari Amerton’s FY6/20 revenue. The group also plans to set up a new plant in Yiwu to support future expansion for the China OSAT JV,” he added. 

CGS-CIMB Research has raised its FY22-24F earning per share by 2% to 5% to account for higher contribution from ATK following new capacity expansion to support the new China OSAT JV. 

“We reiterate our ‘Add’ call with a higher RM4.50 target price, as we roll over our valuation to end-2022. We peg our valuation to 34 times calendar year 2023 price-to-earnings, one standard deviation above its three-year historical mean,” he further said. 

The analyst noted that the potential re-rating catalysts for the stock are new earnings-accretive OSAT JV in China, stronger-than-expected radio frequency chip demand, consensus earnings upgrades, new customer wins and potential inclusion into FTSE Bursa Malaysia KLCI Index. 

Meanwhile, the key downside risks include slowing demand for 5G smartphones, ringgit appreciation versus US dollar and delays in customers’ wafer shipments due to supply shortages.