Stars Microelectronics

Stars Microelectronics Plc (SMT)

New business plan. Yesterday, SMT arranged its first plant visit since the floods. The
rebuilding of the facility is nearly complete, with production lines being installed, to be
completed in November 2012. SMT’s recovery looks slow compared to other flood-hit
plants, as the company took this opportunity to revise its business plan and order new
machines (for IC packaging business) using the latest technology. The focus has
changed from trendy products (like touch-screen module for smartphones in the past)
to standard products, but with better production efficiency and quality.
Standard IC packaging to be a growth driver. With the touchscreen module losing
share to competitors and MEMS/sensors on the way down after clients moved orders
after the flooding – both key growth drivers in 2010 - SMT decided to move back to the
more stable standard IC business – which we estimate used to contribute <20% of
profit. Management believes the use of higher technology that will ensure high quality,
high efficiency and better cost structure (more automation, less manpower) will help
SMT expand market share in the standard IC packaging business.
But its 2013 goal looks too high. SMT targets a sharp recovery in 2013F to 2010’s
profit of Bt527mn, EPS of Bt1.4/sh, starring standard IC packaging. Management gave
a rough estimate of 2013F breakdown by business as follows: PCBA for hard disk drives
20%, manufacturing services for other products 15-20%, MEMS/sensor 6-8% and
standard IC packaging ~55%. Our calculations show that this means 2013F profit from
standard IC packaging would triple from 2010A, which was a very good year for
electronics. Although we agree that the new machines should significantly improve
production efficiency, we believe it is setting its sights too high.
Double our 2013F, still ~30% less than management target. Given the company’s
determination to improve its IC packaging business by the use of new, more efficient
production lines, we are raising our 2013F gross profit for IC packaging by 60%. This
then doubles our 2013F earnings projection for SMT to Bt353mn or Bt0.84/share. This is
still ~30% below management’s target.
Reiterate Sell despite mid-2013 TP upgrade to Bt8. Although SMT’s management
is very bullish about 2013F and standard IC packaging, we are more cautious. Firstly,
with the complete installation of the new production lines for IC packaging service still
two months plus away, it seems a bit premature to expect such a huge growth in
2013F. Secondly, though SMT management sees the new, top-of-the-line high-tech
machines as providing it with an edge, we note that competitors can obtain the same
machinery should they desire. Although our mid-2013 TP is doubled to Bt8 (from Bt4)
based on 11x PE, the sector’s ten-year historical average, we still Sell.