Excerpts from CGS-CIMB report

Analyst: William Tng, CFA

Buying opportunity 

lokewaisan11.17aAEM chairman Loke Wai San owns 1,345,161 shares of AEM, or a 1.993% stake. 
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■ Bloomberg reported that Apple is looking to use its own chips for its Mac computers beginning as early as 2020.

■ Bloomberg estimates Apple contributes c.5% of its current chip supplier’s revenue.

■ We see the share price weakness as a buying opportunity as AEM’s major customer is already targeting new growth areas beyond the computing business segment.

AEM

Share price:
$6.13

Target: 
$8.19

Source: CIMB

Bloomberg article

● According to a Bloomberg news article, Apple Inc (AAPL US, Not Rated) is planning to use its own chips in Mac computers beginning as early as 2020, replacing processors from its current chip supplier.

● The initiative is still in the early developmental stages but comes as part of a larger strategy to make all of Apple’s devices – including Macs, iPhones, and iPads – work more similarly and seamlessly together.

● According to Bloomberg’s own analysis, this chip supplier generates about 5% of its annual revenue from Apple. 

What we think
● If true, this would represent lost sales for AEM’s major customer from 2020 onwards.

● At this juncture, we estimate that AEM has either not started or only started limited unit shipments for the computing business segment of its customer.

● In any case, according to Gartner, an industry forecaster, the computing market has been facing unit shipment declines for the past 6 years.

● AEM’s major customer has been building up its presence in other segments, such as server chips, given the sustained decline in the computing market.

● The greater worry is the possibility that other customers may also adopt an approach of designing their own chips. However, this threat is mitigated by the fact that not many companies have the resources to do so.

● The most important thing is for AEM’s major customer is to continue to be at the forefront of processor technology and develop the ability to roll out its products quickly.

What you should do
williamtng4.14William Tng, CFA, analyst, CGS-CIMB.● We see the share price decline as a buying opportunity for new investors.

● As a reference, AEM’s recent vendor placement price was S$6.10.

● There are also no changes to AEM’s FY18 guidance of a pretax profit of at least S$42m, which excludes the contribution from recent acquisitions.

● Maintain Add and target price, based on 10x FY19F EPS (17% discount to peer average).

● Potential re-rating catalysts include stronger-than-expected customer orders. Downside risks include order delays or cancellations.

Stock

Price
(lcl curr)

Target Price
(lcl curr)

Market Cap
(US$ m)

P/E
CY18F

P/E 
CY19F

AEM Holdings

6.13

8.19

310.5

9.1

7.5

UMS Holdings

1.13

1.31

462.5

10.8

12.2

           

Cohu Inc

22.23

NA

634.7

13.5

11.8

Xcerra Corp

11.51

NA

632.1

12.2

10.4

Simple average excl AEM

     

12.2

12.0


Full report here. 


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