Vitrox Corp Bhd
(Oct 3, RM2.80)
Upgrade to “buy” with target price of RM3.17. After going through the heavy industrial and manufacturing revolution, China is entering the
semiconductor era to fuel its economic growth as well as reduce its heavy reliance on others for semiconductor components and capabilities.

According to McKinsey & Co Inc, Chinese officials have convened a unique task force charged with setting an aggressive growth strategy.This group helped develop a policy framework that is targeting a compound annual growth rate for the industry of 20% between 2015 and 2020, with potential financial support from the government of up to one trillion yuan (RM556 billion) over the next five to 10 years.

Investments will be made by the National Industry Investment Fund and provincial-level entities. These entities will invest across multiple categories. This development will have mixed impacts on the whole sector. However, we think this will be a boon to Vitrox as a semiconductor equipment supplier.

This enormous investment will allow China to create national champions over the whole spectrum, including research, design, manufacturing, assembly and test. Thus, this may lead to potential multi-year high demand of Vitrox products.

We are confident that Vitrox has the upper hand over competitors and can win more market share, especially when 20nm and below chips are becoming an industry norm.

Its presence is well established and it has been increasing both sales channel partners and customers in China. After achieving its historical record-breaking results in second quarter of financial year 2014, the second half of 2014 is traditionally weaker due to seasonality.  Nonetheless, we are confident that because of its swift industry recovery coupled with this new opportunity, Vitrox will continue to grow strongly.

Risks to our call include foreign exchange, downturn in semiconductor demand and equipment spending, patent infringement and technology imitation. We raised our revenue forecast along with margin improvements due to economies of scale. As a result, financial year 2015 (FY15) and FY16 earnings per share (EPS)  were revised upward by 6.7% and 7.3% respectively while FY14 EPS remained unchanged.

The positives are undisputed three-dimensional (3D) automated optical inspection (AOI) and advanced X-ray inspection system  technology leader, great potential in winning more market share in the advent of global semiconductor recovery. Negatives are machine vision system, sales are dependent on single  customer, majority of sales are nonrecurring, highly competitive 2D-AOI market and prone to rapid advances in technology. — Hong Leong Investment Bank Bhd, Oct 3

This article first appeared in The Edge Financial Daily, on October 7, 2014.