KUALA LUMPUR (Dec 16): Hong Leong Investment Bank (HLIB) Research has maintained its "buy" call, but trimmed its target price for Dagang NeXchange Bhd (DNeX) by 13.9% to 93 sen from RM1.08 to reflect the scarcity premium of a listed wafer fab foundry on the local stock exchange. 

DNeX slipped to a low of 48 sen a share in Friday (Dec 16) morning trade, down 7.7% from the previous day's close at 52 sen. At the time of writing, the third active stock of the day had fallen two sen or 3.85% to 50 sen. It saw some 40.94 million shares traded, with a market capitalisation of RM1.58 billion. The stock has fallen 38.27% year-to-date.  

DNeX announced on Thursday that Beijing Integrated Circuit Advance Manufacturing and High-End Equipment Equity Investment Fund Center (Limited Partnership)  (CGP) — via its special purpose vehicle Tethystronics Technologies Company Ltd — had decided to commence arbitration proceedings against DNeX Semiconductor Sdn Bhd and SilTerra.  

This development came on the heels of the appointment of four new directors of SilTerra by DNeX, which CGP deemed as illegal, invalid and void.  

On Thursday, DNeX hosted an analyst briefing after the announcement. 

“From the announcement, we understand that unless otherwise unanimously agreed upon by CGP and DNeX in writing, SilTerra’s board shall consist of not more than five directors, and the composition of the board shall be mutually agreed upon by both parties in writing, and SilTerra’s board shall at all times comprises two persons appointed by DNeX and three persons appointed by CGP. From the analyst briefing hosted, we highlight that DNeX has appointed four new directors to SilTerra’s board,” said HLIB. 

The research house said that according to DNeX’s management, the development will not impact SilTerra’s ongoing operations, as it is an issue involving the board. So, it is not clear whether the latest development would have a quantitative impact on SilTerra's earnings guidance.

“We think that both arbitrations are reasonable, with equitable ways for both parties to resolve the underlying issues in an amicable manner,” said HLIB. 

Additionally, the announcement also stated that DNeX, which controls 60% of SilTerra, and its subsidiaries have legal authority and basis to appoint additional directors, and the appointment of the four new directors was in accordance with the prevailing terms of the constitution.

“We are taking the opportunity to reduce SilTerra’s price-earnings multiple to 15 times (from 20 times) — still at a premium to TSMC’s (Taiwan Semiconductor Manufacturing Company Ltd) current forward multiple of 13 times to reflect the scarcity premium of a listed wafer fab foundry on the local stock exchange,” HLIB said. 

DNeX has been in a legal dispute with CGP over its 60% stake in SilTerra since November. The issue was that one of the conditions for DNeX's acquisition of SilTerra was that SilTerra had to be 55%-owned by a Malaysian company, or else its manufacturing licence would be revoked.