PUBLIC INVESTMENT BANK PublicInvest Research Company Initiation Wednesday, December 16, 2020 KDN PP17686/03/2013(032117) MI TECHNOVATION BERHAD Outperform 1 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 1 of 16 DESCRIPTION MI Technovation is principally involved in the in- house design, development, manufacture and sale of wafer level chip scale packaging (WLCSP) sorting machines. 12-month Target Price RM4.33 Current Price RM3.65 Expected Return +18.6% Market Main Sector Technology Bursa Code 5286 Bloomberg Ticker MI MK Shariah-compliant Yes SHARE PRICE CHART 52 Week Range (RM) 1.32 - 4.88 3-Month Average Vol (‘000) 2,124.3 SHARE PRICE PERFORMANCE 1M 3M 6M Absolute Returns Relative Returns 6 .6 7.9 22.2 40.9 114.4 91.1 KEY STOCK DATA Market Capitalisation (RMm) 2,722.9 No. of Shares (m) 746.0 MAJOR SHAREHOLDERS % Oh Kuang Eng Lim Ka Kian Sim Ah Yoong 67.2 3.7 2.2 Chong Hoe Leong T 603 2268 3015 F 603 2268 3014 E chonghoeleong@publicinvestbank.com.my Riding on Technology Boom We initiate coverage on MI Technovation (MI) with an Outperform recommendation. Our TP of RM4.33 is pegged to 40x FY21 EPS, a 14% premium to the industry, which we deem justifiable given the i) higher-than- average margins, ii) lower vulnerability to downturns given its ownership of the intellectual property for its equipment, iii) ability to secure Tier-1 OSAT customers, a telling testimonial of its product quality and performance and iv) opportunities for its autobotics products as it can diversify beyond the semiconductor sector and play a significant role in industry 4.0 revolution. Its establishment of manufacturing centres in the North East Asian region is a timely move to capture the strong investment spending by the top three semiconductor markets. § Background. Formerly known as MI Equipment Holdings and established in 2012, MI is a semiconductor equipment maker based in Penang and was listed on the main board of Bursa Market in June 2018. It is principally involved in the design and manufacturing wafer level chip scale packaging machines and proving inspection and testing capabilities for the semiconductor industry, which is telecommunication-related and widely used in i) Analog & Mixed Signal, ii) Wireless Connectivity, iii) Opto, iv) Misc Logic & Memory and v) MEMs & Sensors. The company’s main product is the MI series machine, which contributes more than 75% to Group sales. As the first WLCSP manufacturer in Malaysia, it successfully broke into the international scene with its assembly & packaging (Mi, Li and Ai) vision inspection (Vi) and final test (Si) equipment products, occupying a spot in the field of OSAT and IDM, with customers across 10 countries, including Taiwan (59%), China (16.5%), Korea (13.7%) and US (3.4%) § High entry barrier. Being an equipment developer cum owner, its superior proprietary technology would act as an effective barrier to entry and shield his company- which has been granted four patents, with 22 pending- from the duplication of its designs, systems and methods by potential competitors. The niche position will give the company wider market exposure as well as warrant a higher earnings margin given its patent ownership in the intellectual property. § Tremendous growth in autobotics arm. The autobotics arm was started in 4Q 2019 and has since moved into a new plant recently, Home 2 in Batu Kawan with a bigger production space of 90,000 sq ft. Albeit seeing only a small contribution over the last few quarters, we see tremendous growth in this segment given the industry 4.0 revolution, which will upgrade the automation to a more efficient level for various industries. It currently has three products under the autobotics, namely, Kobot Series, Oto Series and Engeye Series (targeted to be launched soon). Management has recently revised up its target for the capacity utilization rate from 25% to 40% by year-end, which is a strong signal to the encouraging demand in the near- term. KEY FINANCIAL SUMMARY FYE Dec (RM m) 2018A 2019A 2020F 2021F 2022F CAGR Revenue 160.3 191.1 208.0 318.1 419.6 27.2% Gross Profit 74.1 92.9 93.6 143.1 188.8 26.3% Pre - tax Profit 44.4 59.5 54.8 82.5 107.6 24.8% Core Net Profit 42.2 60.8 54.0 81.2 106.0 25.9% EPS (Sen) 5.6 8.1 7.2 10.8 14.1 25.9% P/E (x) 65 2 4 5 1 5 0 7 3 3 8 2 5 9 DPS (Sen) 3.3 2.7 2.7 2.7 2.7 Dividend Yield (%) 0.8 0.7 0.7 0.7 0.7 Source: Company, PublicInvest Research estimates - 1.00 2.00 3.00 4.00 5.00 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 2 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 2 of 16 PUBLIC INVESTMENT BANK BERHAD Listed on 20 June 2018 Is an emerging leader in equipment manufacturing for advanced semiconductor packaging based in Penang It has two manufacturing plants in Penang, Home 1, Bayan Lepas and Home 2, Batu Kawan It is the midst of expanding its technology centres in Taiwan, Korea and China by setting up the manufacturing facilities Taiwan (Vi Series), Korea (Ai Series), China (Si Series) and Malaysia (Mi Series) Company Background Founded in 2012, MI is an emerging leader in equipment manufacturing for advanced semiconductor packaging, which is the engineering support company for the global outsourced semiconductor assembly and testing (OSAT) and integrated device (IDM) manufacturers. To spearhead its manufacturing capacity expansion for Mi Equipment and to start off a new facility for MI Autobotics and establish manufacturing facilities for overseas technology centres, the company went for a public listing on the Main Market of Bursa Malaysia on 20 June 2018, raising RM191m to fund the expansion plans. Subsequently, the company renamed itself as from Mi Equipment to Mi Technovation to better reflect its corporate identity. It stands out as an exclusive player in the manufacturing of wafer-level chip-scale packaging (WLCSP) machines and the sole public listed manufacturer in Malaysia. A key value-add of Mi’s machinery to IDM and OSAT customers has been the flexibility of its machines to sort integrated circuit (IC) packages of varying sizes and specifications, including bare die and flip chips, while providing for elective value-added functionalities such as side wall inspection, infrared inspection and open/short test. This allows customers to rapidly adjust their mix of IC products without taking on operational hiccups. In our view, MI’s machine flexibility and technological offerings are key towards the company’s ability to source and retain customers across various functional segments. Mi Equipment S/B is the backbone of the company that contributes most of the revenue. The Group has established two manufacturing plants in Penang, locating in Bayan Lepas and Batu Kawan, respectively. To be at the forefront of the evolving technology trends in the top three technology markets, it has re-allocated RM45m from its IPO proceeds to be deployed towards building engineering centres in Taiwan, China and Korea. These overseas technology centres that come with manufacturing facilities are tasked to undertake the development of its new series under the semiconductor equipment business unit. Based on the company’s 10-year business roadmap, every operating country will have its own specialization on the respective equipment product. The Malaysian plant @ Home 1, Penang will focus on Mi Series (die sorting equipment). Meanwhile, its first overseas production facility, which will be in Hsinchu, Taiwan, is slated to be operational in early-2021. The 55%-owned Taiwan operations will focus on Vi Series (wafer inspection equipment). Its 85%-owned engineering centre in Suwon, Korea will focus on Ai Series (LAB & LCB equipment). Lastly, it is in the midst of finalizing its plans for its technology centre and manufacturing facilities in Suzhou, China and target to commence operations by the 1H 2021. The technology centre in China will specialize Si Series (FPT & SLT Handler). The Group is currently under the helm of Executive Director/ Group CEO, Mr. Oh Kuang Eng, who is also the biggest shareholder in the company with a 69% stake. Figure 1: Corporate Structure Source: Company, PIVB Research Mi Technovation Assembly & Packaging (Mi, Ai, Li) Spare parts & Components Vision Inspection (Vi) Final Test (Si) Autobotics 3 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 3 of 16 PUBLIC INVESTMENT BANK BERHAD Revenue Breakdown: Semiconductor Equipment Business Unit (97.9%) and Automation & Robotics Business Unit (2.02%) Semiconductor Equipment Business Unit: MI Series, Ai Series and Li Series (Assembly packaging equipment) Vi Series (Vision inspection equipment) Si Series (final test equipment) Automation & Robotics Business Unit: Oto Series: (specialized in AI enabled machines) Kobot Series (mobile robot) Engeye Series (an AI product to perform data mining, decision-making and operations) Business Overview Semiconductor Equipment Business Unit: Operated under the name of MI Equipment, the operations are sitting in a 5-storey plant in Bayan Lepas known as Home 1, which was completed in May 2019. It has a gross production space of 90,000 sq ft, which saw a 4-fold increase in capacity to 45 machines per month. Management has targeted to hit 50%-60% utilization rate by end-2020. The bread and butter business is mainly involved in the sales of its wafer-level chip scale packaging machines as well as providing after sale services. Its flagship products are the Mi Series WLCSP sorting machines, which make up more than 90% of its total machine sales. Management guided that its current order visibility is around 8 weeks and it has 15 demonstration units in the market, which is mainly used to penetrate new clients and widen its market share. Under the Mi series, four models have been developed and commercialized; Mi15, Mi20, Mi30 and Mi40. The Mi40 series, which is the latest model, was launched in May 2019. The integrated Ai features in addition to higher throughput capability over Mi30. Four additional series, namely, Li, Ai, Vi and Si have also been developed and commercialized throughout the period. Mi, Li and Ai series are mainly the assembly and packaging sorting machine. Vi series is focused on the inspection machine and Si in the final test machine. The Li series is a fan-out wafer level package (FOWLP) and/or bare die sorting machine, with non-flip wafer to wafer process. FOWLP technology is considered to be an upgrade over the standard WLCSP and is also regarded as one of the most advanced packaging technologies commercialized in the market. The Ai series is a bonder machine for prevision chips or optical components. The Vi series is an infrared inspection system meant for inspection of internal structures and defects on wafer-level packaging, enabling the detection of metal layer delamination, chips and cracks. The Si series incorporates WLCSP post-saw final test and inspection machines and represents a non-cannibalizing, horizontal play within the testing, assembly and packaging segment. Automation & Robotics Business Unit: Housed under the Home 2 in Batu Kawan plant, which also has a production space of 90,000 sq ft, the automation, robotics and artificial intelligence business unit under the Mi Autobotics is seen gaining tractions amongst the global OSAT players. Under the segment, it has three products, namely, Oto Series (specialized in artificial intelligence enabled machines), Kobot Series (a mobile robot) and Engeye Series (an AI product to perform data mining, AI analysis and decision-making to assists engineers and operations to respond to and prevent the possible excursions), which is targeted to launch by end of this year. The new segment has started churning sales since 4QFY19 albeit it was relatively small. For the first 9 months of 2020, the sales totaled RM3.3m, contributed by the newly launched KOBOT series and OTO series with customers from 5 of the world’s top 10 OSAT companies (mainly for their sites in Taiwan and US) and a US-based company. It has recently revised up its capacity target for Home 2 to 40% by end-2020 as momentum picks up for its KOBOT series, and OTO series. Apart from cross selling to its existing OSAT customers, management is planning to expand its customer base to other industries next year given the autonomous future under the evolution Industrial 4.0. Semiconductor Materials and Components Business Unit: This unit has not yet seen any contribution to the group sales as it is still in the midst of restructuring the business unit. On 8 Oct 2020, the Group has inked a Memorandum of Understanding (MoU) with Taiwan-based Accurus Scientific Co and its shareholders related to the group’s proposed acquisition of all or part of the equity interest in Accurus to widen its product portfolio within the advance packaging field. Accurus’ principal activities are manufacturing of solder spheres, which are widely used for Advance Packaging such as Ball Grid Array and wafer level packaging in the semiconductor industry. Its solder sphere capacity in 4 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 4 of 16 PUBLIC INVESTMENT BANK BERHAD Taiwan is almost 220bn spheres per month while its new manufacturing plan t in Ningbo, China can produce up to 100bn spheres per month. Besides, Accurus also involves in metal surface treatment, metal forming of aluminum, copper and tin-based solders, as well as electronic parts and components assemblies. The MoU will be in force up to 31 st 2021 for due diligence purpose. Figure 2: Manufacturing Plants In Penang Production space: 90,000 sq ft @Home 1 Bayan Lepas, Penang (MI Equipment) Production space: 90,000 sq ft @ Home 2 Batu Kawan, Penang (MI Autobotics) Source: Company, PIVB Research Figure 3: 9MFY20 Revenue Breakdown Source: Company, PIVB Research Semiconductor Equipment 98% Automation & Robotics 2% 5 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 5 of 16 PUBLIC INVESTMENT BANK BERHAD Based on the 9M 2020 results, export market contributes more than 96% to the group sales Taiwan, China and Korea made up 86.7% of the Group sales Mainly involved in the back-end equipment for the OSATs and IDMs Figure 4 : Revenue Breakdown By Region Source: Company, PIVB Research Semiconductor equipment business unit contributed more than 97.9% to the Group for the first 9 months of 2020. The sale of Mi Series contribute more than 90% to this segment while the spare parts, accessories and upgrade contributed to the remaining income. It markets its equipment to more than 10 countries with more than 90% derived from the export markets. Its equipment are sold directly to customers as well as through appointed sales agents and subsidiaries in Taiwan, Suzhou, US, Singapore, which were established to support the sales and marketing function and provide after sales support. Taiwan has been its largest market, contributing more than 48.1% to the Group sales. China took the second spot, with contribution of 20.7% followed by Korea’s 17.9%. US took fourth position with sales of semiconductor equipment and the OTO series from its Automation & Robotics Business Unit. Lastly, Malaysian market made up only 2.45% with sales of its new series, Vi series and Li series under the semiconductor equipment business unit. Figure 5: Revenue Breakdown By Countries Source: Company, PIVB Research Semiconductor Value Chain In the semiconductor industry value chain, the company is mainly involved in the test, assembly and packaging segment, which is in the back-end process. It acts as an engineering support company to provide the assembly and test equipment for OSAT and IDM players, which are established to provide outsourced services, such as assembly, packaging and testing to multi-national companies, namely, Broadcom, Infineon, Intel, Osram, AMD, Qualcomm, Samsung, Apple and Huawei. In-short, the assembly & test process is the process of encasing a die (chip) in materials such as plastic or metal. It prevents physical damage and 58% 62% 85% 83% 85% 91% 96% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2014 2015 2016 2017 2018 2019 9M2020 Overseas Local Taiwan 48% China 21% Korea 18% US 5% Mexico 4% Malaysia 2% Others 2% 6 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 6 of 16 PUBLIC INVESTMENT BANK BERHAD Wafer-level chip scale packaging is one of the most advanced forms of packaging used in the semiconductor industry corrosion and supports the electrical contacts, which connect the device to a circuit board. Figure 6: MI is mainly involved in the Test & Vision, Assembly and Packaging segment of the semiconductor industry Source: Company, The Edge, PIVB Research Proprietary Technology Figure 7: Semiconductor Front End Process Source: Infineon, PIVB Research What is wafer-level chip scale packaging? The focus on heterogeneous integration and wafer-level packages has prompted the chip industry to lay a new set of solutions, collectively known as advanced packaging. Wafer-level chip scale packaging (WLCSP) is one of the most advanced forms of packaging used in the semiconductor industry. It is currently the smallest size packaging that is equivalent to die size, which is widely used in smartphones, tablets and other applications that requires high functionality and lower power consumption in small form factor. The traditional process of packaging ICs involved sawing the die from the silicon wafer, attaching it onto a leadframe or substrate carrier, and then overmoulding to form the final package. In WLCSP, the bare die is processed to have solder balls attached directly to the printed circuit board, removing the need for external casing and wiring, which enables it to be space saving and cost effective. This is vital as the demand for smaller mobile devices in today era. Technological advantage of wafer-level packaging over conventional packaging. The shift towards next-generation mobile products has driven the need for thinner packages. Technological advancement in electronic packaging from conventional packaging to wafer-level packaging has provided more efficient and reliable electrical interconnect solutions for electronic products, driving the demand for wafer-level packaging. One of the many advantages of wafer-level packaging as compared to conventional is the better thermal and electrical performance that it offers. Heat dissipation and power consumption are important factors to be taken into account of in developing mobile products. Wafer-level packaging is able to address these issues with its properties of higher package density but high heat dissipation ability and lower power Core Process Assembly & Packaging Final Test & Inspection Engineering Support Companies Electronic design automation software IC design house Wafer fabrication equipment manufacturers Wafer processing equipment manufacturers Assembly and packaging equipment manufacturers Test & vision equipment manufacturers Electronic manufacturing service providers Equipment and tool suppliers MediaTek, Apple, Qualcomm, Broadcom, Intel, AMD, Oppstar Technology, HiSilicon, Infinecs Systems TSMC, SMIC, UMC, Global Doundries, SilTerra Malaysia ASE, Amkor, UTAC, STATS ChipPAC, JCET, ChipMOS, Inari, Globetronics, MPI, Unisem, KESM Fabless companies Core Value Chain Integrated Circuit (IC) Fabricator (foundry) Outsourced Assembly and Test Companies (OSATs) End Customers Sales and Marketing Integrated Device Manufacturers (IDMs) Design Fabrication 7 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 7 of 16 PUBLIC INVESTMENT BANK BERHAD Wafer-level packaging vs conventional packaging: i) Better thermal and electrical performance ii) Better heat dissipation iii) Reducing the risk of cracks iv) More cost-effective v) Less time consuming as tests can be carried out on the layer of multiple dies instead of the individual die consumption. In addition, wafer - level packaging also offers high density interconnection and is able to integrate multiple heterogeneous dies in a cost- effective package, leading to better electrical performance as compared to conventional packaging. Wafer-level packaging is also more reliable than conventional packaging. Since packaging is done the wafer form before the sawing process to produce individual die, the risk of cracks on a die during the saw process can be minimized. Sawing the wafer to obtain individual die before packaging it will exposure the wafer to greater risks of cracks. As compared to conventional packaging, wafer-level packaging is also able to produce die in smaller form factor. The die being packaged at wafer-level instead of the conventional die- level reduces the thickness of a die as the top and bottom outer layers of packaging, as well as the solder bumps, are attached to the ICs while still in wafer form, in contracts to attaching the die after it has been individually packaged. These advantages lead to wafer-level packaging being more cost efficient than conventional packaging of lower packaging costs and lower test costs. Wafer- level facilitates multiple die being in a single package, reducing cost of packaging as the packaging is not done on individual die. Furthermore, cost can be reduced when testing is done on wafer-level instead of die-level, where tests can be carried out on the layer of multiple dies on the packaged wafer instead of testing the individual die before being packaged. The technological advancement has enabled wafer-level packaging to have superiority over conventional packaging in meeting the need for thinner packages for mobile electronics, driving demand for wafer level packaging, leading to demand for WLCSP sorting machines to facilitate the processes. Advanced packaging technology has evolved to minimize the cost involved and enhance the overall throughput and performance of ICs. Further, with the augmented adoption of semiconductor ICs in automobile, smart devices, the demand for advanced packaging devices has increased considerably in recent years. Figure 8: Packaging Process Source: Brewer Science, PIVB Research 8 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 8 of 16 PUBLIC INVESTMENT BANK BERHAD Source: Yole Development, PIVB Research Figure 9: In-House Developed Series of Equipment Source: Company, PIVB Research Equipment category Series name Country Description Assembly & packaging Mi MY Mi Seris is used for die sorting from wafer to carrier tape for bare die, bump/flip chips and WLCSP Li MY Li series is a wafer reconstruction machine for fan out wafer level package Ai KR Ai series is a bonder machine for prevision chips or optical components Vision Inspection Vi TW Vi series is a semiconductor inspection system equipped with visible/invisible light & laser inspection system designed for internal structures and defects inspection Final Test Si CN Si series is a final test machine for WLCSP, fine pitch high density substrate & ball grid array. This machine filters defective dies caused by sawing as the die goes through the final test process 9 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 9 of 16 PUBLIC INVESTMENT BANK BERHAD Strong presence among the global OSAT markets Has the ability to secure three Tier-1 OSAT customers Very high barrier entry as it requires rounds of qualification and rigorous final testing Figure 10: In - House Developed Series of Autobotics Source: Company, PIVB Research Investment Merits Clientele base. MI has a strong presence among the global OSAT markets. It has been able to secure three Tier-1 OSATs, notably, ASE, Amkor, and UTAC. Local OSAT customer under their belt includes Unisem. The Group also has a strong presence amongst the IDMs from US with their production facilities in China, Mexico and US. As at end-2019, MI have approximately 53 active customers, comprising OSATs and IDMs. Its five largest customers accounted for 59.5% of its FY19 revenue. Certain of these OSATs and IDMs have been MI’s customers since the commencement of business through repeat orders. It has recurring machine orders from five of its customers, which have contributed more than 50% to the Group’s total revenue. In our view, the success in securing and retaining global customers is a testament of its product quality, customer service and proven industry track record. High entry barrier. Once an equipment manufacturer passes the numerous rounds of qualification and rigorous final testing, it usually becomes part of the “Approved Vendor List”. This not makes the business relationship a strong bonding but also one where the working relationship is 2-way as co-development becomes essential. Ultimately, most equipment vendors will become either the sole source or dual source at best, to accelerate new product development while minimizing the risk of intellectual property loss. In addition, the high switching costs coupled with drawn-out qualification phases and integration of machine specification into production lines also deter new entrants joining the race. Riding on Tier-1 clientele’s widening exposure. Having Tier-1 customers not only elevates the profile of the company, it also helps in attracting new customers. MI will be able to benefit from these OSATs’ diversified exposure to various semiconductor fields, including mobile devices, telecommunication, logic & memory, sensors and opto through their clients. Figure 11: Tier-1 OSAT Customers Source: Prospectus, PIVB Research Autobotics Series name Description Automation Oto Specialised artificial intelligence enabled machines Robotics Kobot It is a mobile robot and will be ready to launch by mid-2020 AI Engeye It is an artificial intelligence product, which is used to perform data mining, AI analysis and decision-making to assist engineers and operations to respond and prevent the possible excursions. It is targeted for launch by the end-2020. It can be used for various industries, namely, manufacturing, hospitality, healthcare and education 10 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 10 of 16 PUBLIC INVESTMENT BANK BERHAD Ownership of the intellectual proprietary is the key to its high margins and shielding itself from the new peers Chip manufacturing equipment is forecasted to hit USD70bn (+10.7% YoY) in 2021 Figure 12 : World Top - 10 OSAT Companies in the 2Q 2020 ( by market share) Source: TrendForce, Aug 2020, PIVB Research Superior proprietary technology would act as an effective barrier to entry and shield the company from potential competitors duplicating its designs, systems and methods. To-date, it has been granted 5 patents, 21 patents pending and 2 patents in drafting stage. Being the intellectual property owner in the equipment, the margins are significantly more attractive given its exclusive rights of the technology and have wider exposure to the growing markets, such as telco, cloud computing and memory. Figure 13: 5 Patents Granted & 21 Patents Pending Source: Company, PIVB Research Promising Industry Outlook US-based Semiconductor Equipment & Materials International (SEMI) forecast that chip manufacturing equipment are expected to rise by 6% to USD63.2bn in 2020 from USD59.6bn in 2019 before logging a record high sales of USD70bn in 2021. SEMI expects the assembly and packaging equipment segment to grow 10% to USD3.2bn in 2020 and 8% to USD3.4bn in 2021, driven by advanced packaging capacity build-up. It also said the semiconductor test equipment is expected to increase by 13%, reaching USD5.7bn in 2020 and to continue the growth momentum in 2021 on the back of 5G demand. In terms of region, SEMI expects China, Taiwan and South Korea to be the top semiconductor manufacturing equipment markets in 2021 with total investments of USD48.4bn, which makes up 68.7% of the global semiconductor markets. Robust spending in China in the foundry and memory sectors is expected to 21.8% 18.5% 14.4% 13.4% 10.3% 6.4% 5.7% 4.0% 2.9% 2.7% 0% 5% 10% 15% 20% 25% 0 11 17 20 21 3 3 3 4 5 0 5 10 15 20 25 2016 2017 2018 2019 9M2020F Pending Granted 11 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 11 of 16 PUBLIC INVESTMENT BANK BERHAD China: -4% YoY Korea: +29.2% YoY Taiwan: +9.6% YoY Collectively, it makes up 68.7% of the global semiconductor investments in 2021 Expecting annual average earnings growth of 30% for FY21-23 vault the region to the top in total semiconductor equipment spending totaling USD17.3bn and USD16.6bn in 2020 and 2021, respectively. As for Taiwan, after seeing a staggering growth of 68% for equipment spending in 2019, SEMI expects the country contract this year but bounce back with 10% growth to USD15.9bn in 2021. It also expects South Korea to rank third with a total semiconductor investment growth of 24% in 2020 before hitting stronger growth of 29% next year to USD15.9bn, which is on par with Taiwan. Figure 14: SEMI Mid-Year Total Equipment Forecast by Region Source: SEMI July 2020, PIVB Research Figure 15: Advanced Packaging Market Size Source: Mordor Intelligence, PIVB Research Financials Expecting annual average earnings growth of 30% for FY21-23. The Group has set targets of gross profit margin of 40%-50% and profit before tax margin of 20%-30% for each financial year. Despite the bumpy earnings, it has been achievable over the last 3 years. It is worth noting that the Group saw record earnings of RM65m in FY17 with an impressive net profit margin of 37%, thanks to the 14 units of leased machines converted to sales, which yielded higher margins as these machines were substantially depreciated. In the subsequent year, the Group’s earnings dipped 25% YoY to RM44.3m, dragged by higher overheads, staff cost and marketing expenses to promote new series of equipment following the commercialization of Ai, Li, Si and Vi series. It also included a one-off listing expense amounting to RM8.1m. Despite mounting tension over US-China trade war, the Group reported record sales of RM191m with a strong gross margin of 48.8%, owing to strong demand from its customers in Taiwan and China as a result of the increased investments from OSATs in advanced packaging/wafer level chip scale packaging. 13.1 13.4 17.3 16.6 17.7 9.9 12.3 15.9 10.2 17.1 14.5 15.9 9.4 6.2 7.0 7.9 5.8 8.1 7.1 7.3 4.0 2.5 2.6 3.0 4.2 2.4 2.4 3.9 0 10 20 30 40 50 60 70 80 2018 2019 2020F 2021F USDbn Europe SEA North America Japan Taiwan Korea China 3,716.1 7,677.3 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 2019 2025 USDm 12 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 12 of 16 PUBLIC INVESTMENT BANK BERHAD Dividend policy: Minimum 20% payout Strong balance sheet with net cash of RM109m Entitled to MITI’s pioneer status for both Mi Equipment and Mi Autobotics For the first 9 months of 2020, MI’s revenue jumped 31% YoY to RM161.4m following the commercial operation of the new Bayan Lepas plant, which raises the annual production capacity from 102 to 540. However, gross margin fell from 50.2% to 42.8% while core earnings were marginally lower at RM39.6m, dragged by an increase in i) fixed costs on new factory at Bayan Lepas and Batu Kawan, ii) higher R&D spend and iii) commission payable to external sales agent (due to change in geographical sales mix). For the full-year, we expect the Group’s earnings to be lower by 11% YoY to RM54m. Going forward, we expect an annual average earnings growth of 30% for FY21- 23 on the back of increased spending by the North East Asian OSAT players on advanced packaging equipment as well as explosive sales growth the Mi Autobotics, driven by KOBOT series and OTO series and wider market exposure beyond semiconductor. Minimum dividend payout policy of 20%. MI is committed to a minimum 20% dividend payout policy. With the consistent annual i) positive operating cash flows, ii) net cash position and iii) small committed R&D amount of less than RM1m, the company has been able to declare higher payout ratio, averaging 30%-50% for FY18-19. With smaller maintenance capex of RM14m for FY20 (Mi Equipment: RM10m, Mi Autobotics: RM4m), we do not rule out the possibility of higher dividend payout in the next few years. Unconstrained balance sheet. The company has retained a “clean” balance sheet with net cash of RM109m. Part of the cash is earmarked for the overseas expansion in China, Taiwan and Korea as well as for the acquisition of a 73.1% stake in Taiwan-based Accurus Scientific Co. Entitled to tax incentive. The Group’s Mi Equipment has secured full tax break for second term from 18 Jan 2019 to 19 Jan 2024 as a recipient of MITI’s pioneer status license for the design, development and manufacturing of vision inspection and taping equipment as well as the related components. It has also been granted approval-in-principle by MIDA for the design, development and manufacturing of die bonding systems and related modules for a total tax relief period of 10 years from the manufacturing date. Meanwhile, its Mi Autobotics has recently granted approval-principle by MIDA for the factory automation systems, robotics systems and related modules for a total tax relief period of 10 years. Figure 16: Earnings Trend Source: Company, PIVB Research 74.3 105.1 57.1 173.3 160.3 191.1 161.4 29.0 40.9 27.2 93.3 74.1 92.9 69.1 39.0 38.9 47.6 53.8 46.2 48.6 42.8 0 10 20 30 40 50 60 0 50 100 150 200 250 2014 2015 2016 2017 2018 2019 9M2020 (%) RMm Revenue Gross profit GP Margin (%) 13 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 13 of 16 PUBLIC INVESTMENT BANK BERHAD Investment Risks Sensitive to foreign exchange exposure. The MI’s sales are predominantly priced in US dollar and it has been a beneficiary of the US dollar strength over 2016-2019. Based on the sensitivity analysis, every 10% change in US Dollar will affect the Group’s bottomline by about RM10.7m or 15%-18% of our FY20 estimated earnings. Requires constant R&D for new innovation. Failure to keep up with industry’s R&D and new development could see them to be phased in the technological race. Highly dependent on the semiconductor spending. Weak consumer confidence and slowdown in the 5G roll-out would force the fabless companies and integrated circuit fabricators to push back their capex spending, resulting in excess capacity for the back-end companies. Stiffer competition. The Group could see margin pressure for its machinery in the event there is new entrant or change of packaging equipment in the technology field, resulting in negative impact on its profitability. Fluctuations in material costs. The Group’s cost of sales mainly comprises raw materials, direct labour costs, subcontractor costs and factory overheads. Raw materials accounts for at least 60% of the total cost of sales. The raw materials consist of i) high speed and precision motors, ii) cameras and lenses, iii) maintenance free grade sliders and bearings, iv) precision fabrication parts for both aluminum and steel tool. It can be sourced from both local foreign suppliers. The prices of these raw materials are mainly influenced by the overall market supply and demand conditions. 14 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 14 of 16 PUBLIC INVESTMENT BANK BERHAD Initiating with an Outperform call and TP of RM4.30 Valuations Initiating an Outperform call and TP of RM4.30. We initiate coverage on MI with an outperform recommendation and target price of RM4.33, pegged to 40x FY21 EPS. Our target PE multiple is in 15% premium to the industry average PE, which we deem justifiable given the i) higher-than-average margins, ii) less vulnerable to downturns given its ownership of the intellectual property for its equipment, iii) ability to secure Tier-1 OSAT customers, a telling testimonial of its product quality and performance and iv) tremendous opportunities for its autobotics products as it can diversify beyond the semiconductor sector and play a significant role in industry 4.0 revolution. Figure 17: Peer Comparison Source: Bloomberg, PIVB Research Price (RM) @ Mkt Cap 15-Dec (RMm ) 2020F 2021F 2020F 2021F 2020F 2021F 2020F 2021F Autom otive D&O Green Tech 1.83 2,196.4 2.9 4.7 3.6 62.0 63.1 38.9 8.2 11.6 JHM 1.80 1,002.1 5.5 8.5 -8.3 54.5 32.7 21.2 13.8 19.1 Average 4.2 6.6 -2.4 58.3 47.9 30.1 11.0 15.4 ATE Vitrox 14.24 6,719.9 22.3 27.5 29.6 23.3 63.9 51.8 20.4 21.4 Pentamaster 5.08 3,618.5 11.2 14.8 -4.3 32.1 45.4 34.3 16.1 17.7 Greatech 8.26 5,170.8 12.5 22.0 50.0 76.0 66.1 37.5 28.6 33.5 Aemulus 0.65 390.0 -0.8 1.4 >100 -275.0 -80.6 46.1 -5.8 10.1 Elsoft Research 0.62 416.6 2.4 4.2 -7.7 75.0 25.8 14.8 14.0 21.1 Average 9.5 14.0 16.9 -13.7 24.1 36.9 14.7 20.8 OSAT Inari Ametron 2.46 8,049.1 7.1 8.7 57.8 22.5 34.6 28.3 18.5 21.7 MPI 24.98 5,240.8 86.6 95.0 34.2 9.7 28.8 26.3 11.9 11.9 Unisem 6.01 4,410.1 12.6 16.2 40.0 28.6 47.7 37.1 7.1 8.4 Globetronics 2.67 1,787.3 8.0 10.3 15.9 28.8 33.4 25.9 18.9 24.0 KESM 11.60 4,206.2 26.7 42.0 66.8 57.3 43.4 27.6 2.8 2.2 Average 28.2 34.4 42.9 29.4 37.6 29.0 11.8 13.6 MI Technovatio 3.65 2,737.5 7.2 10.8 -8.7 50.5 50.7 33.7 13.0 17.1 EPS (sen) EPS Grow th (%) P/E (x) ROE (%) 15 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 15 of 16 PUBLIC INVESTMENT BANK BERHAD KEY FINANCIAL DATA INCOME STATEMENT DATA FYE Dec (RMm) 2018A 2019A 2020F 2021F 2022F Revenue 160.3 191.1 208.0 318.1 419.6 Gross Profit 74.1 92.9 93.6 143.1 188.8 EBIT 44.7 59.7 55.0 82.6 107.7 Net finance income/ (cost) - 0.3 - 0.2 - 0.2 - 0.2 - 0.2 Pre-tax Profit 44.4 59.5 54.8 82.5 107.6 Income Tax - 0.1 - 0.4 - 0.8 - 1.2 - 1.6 Effective Tax Rate (%) 0.2 0.7 1.5 1.5 1.5 Core Net Profit 42.2 60.8 54.0 81.2 106.0 Growth Revenue (%) - 7.5 19.2 8.8 52.9 31.9 Gross Profit (%) - 26.5 33.6 - 7.9 50.4 30.4 Core Net Profit (%) - 25.3 33.4 - 8.7 50.5 30.4 Source: Company, PublicInvest Research estimates BALANCE SHEET DATA FYE Dec (RMm) 2018A 2019A 2020F 2021F 2022F Fixed Assets 57.6 90.9 98.8 105.9 112.2 Other Long - term Assets 0.1 27.0 27.0 27.0 27.0 Cash At Bank 203.4 162.9 179.2 172.0 195.1 Other Current Assets 117.8 149.3 166.2 254.1 335.2 Total Assets 378.9 430.1 471.2 559.0 669.6 ST Borrowings 2.4 2.5 2.5 2.5 2.5 LT Borrowings 4.4 1.6 1.6 1.6 1.6 Trade payables 35.7 43.2 50.3 77.0 101.5 Other Liabilities 5.6 3.0 3.0 3.0 3.0 Total Liabilities 48.1 50.3 57.4 84.1 108.6 Shareholders’ Equity & Minority 330.8 379.8 413.8 475.0 561.0 Total Equity and Liabilities 378.9 430.1 471.2 559.1 669.6 Source: Company Prospectus, PublicInvest Research estimates PER SHARE DATA & RATIOS FYE Dec (RMm) 2018A 2019A 2020F 2021F 2022F Book Value Per Share 0.4 0.5 0.5 0.6 0.7 NTA Per Share 0.4 0.5 0.5 0.6 0.7 EPS (Sen) 5.6 8.1 7.2 10.8 14.1 DPS (Sen) 3.3 2.7 2.7 2.7 2.7 Payout Ratio (%) 59.2 32.9 20.0 20.0 20.0 ROA (%) 11.7 13.7 11.5 14.5 15.8 ROE (%) 13.4 15.6 13.0 17.1 18.9 Source: Company Prospectus, PublicInvest Research estimates 16 Important disclaimer is provided at the end of this report. | PUBLIC INVESTMENT BANK Page 16 of 16 PUBLIC INVESTMENT BANK BERHAD RATING CLASSIFICATION STOCKS OUTPERFORM The stock return is expected to exceed a relevant benchmark’s total of 10% or higher over the next 12months. NEUTRAL The stock return is expected to be within +/- 10% of a relevant benchmark’s return over the next 12 months. UNDERPERFORM The stock return is expected to be below a relevant benchmark’s return by -10% over the next 12 months. TRADING BUY The stock return is expected to exceed a relevant benchmark’s return by 5% or higher over the next 3 months but the underlying fundamentals are not strong enough to warrant an Outperform call. TRADING SELL The stock return is expected to be below a relevant benchmark’s return by -5%