PETALING JAYA: China’s reopening will unlikely realise the benefits Malaysian Pacific Industries Bhd (MPI) had been hoping for, says Kenanga Investment Bank Bhd.
It said Q3 FY2023 would be “challenging” for the semiconductor manufacturer, owing to weaker order replenishment at its Suzhou plant despite the easing of restrictions in China.
Utilisation in the plant fell to 30% from 41% in Q2 FY2023. The trend is likely to continue, with utilisation remaining far below the breakeven level of 70%, it said in an investment note today.
In light of that, MPI has deferred the completion of its new plant in China to April 2024 from December this year as customers delayed their order replenishment.
This is driven largely by weakened consumer electronic demand, with global smartphone shipment falling 8.3% year-on-year in the holiday-laden second quarter.
In a filing last week, the group announced a net profit for Q2 FY2023 at RM18.33 million, 65.2% lower than the RM52.69 million in the preceding quarter.
On a year-on-year basis, net profit plummeted 78.5% from RM85.32 million a year ago, weighed down by lower demand in the consumer electronics market.
“The board expects demand in China to improve as it enters the endemic phase (of Covid-19),” the company said.
However, the jury appears to be out against MPI on the impact of China’s reopening on their business.
CGS-CIMB Research echoed these sentiments in a separate note today.
“We see an appreciation in the ringgit against the US dollar, delay in customers’ wafer replenishment and a prolonged worker shortage in Malaysia as key de-rating catalysts,” it said.
One of the biggest challenges for the group in the coming year will be a tougher operating environment due to higher electricity tariffs and increased wages.
The higher energy tariff is expected to add an additional RM10 million to costs each quarter, with wages tacking on RM1 million.
Silver lining for MPI
Whilst the groups’ plants in China are struggling, Kenanga notes that utilisation rates at its Ipoh plants remain healthy, despite marginal dips in orders.
The slight fall-off is attributed to the slew of layoffs in the tech sector, particularly with data centre players like Google, Microsoft and Amazon.
On a brighter note, MPI’s automotive order book, which contributes to 43% of group revenue, remained stable.
Kenanga continues to like MPI for its potential growth in the automotive segment, their first mover advantage in technology using silicon carbide and gallium nitride, and expertise in chip packaging for data centres.
The investment bank noted that MPI’s continued focus on advanced packages in the automotive space, and expansion in the value-enhancing module business will propel the company up the value chain.
These factors paint a positive picture of the firm’s long-term prospects, despite a cloudy medium-term forecast with sub-optimal plant utilisation.
Kenanga has maintained their “underperform” call on MPI stock with an unchanged target price (TP) of RM20.
Similarly, CGS-CIMB retained its “reduce” rating with a RM24 TP.
At the close of trade today, MPI’s share price fell RM1.18 or 3.81% to RM29.80, giving it a market capitalisation of RM6.25 billion.