Global chip demand will be buoyed by the AI supremacy race among mega-tech names. The prominent US smartphone maker is poised to unveil a major AI technology breakthrough. Moving into a replacement cycle, the demand outlook for smartphones appears positive. INARI is also riding on the smartphone market in China via its YSIC-JV expansion in Yiwu. We keep our forecasts, TP of RM4.17, OUTPERFORM call and INARI as one of our top tech sector picks.

1. Generative AI to spur demand. Global chip demand will be buoyed by the AI supremacy race among mega-tech names. We expect the prominent US smart phone maker to unveil a major AI technology breakthrough during its upcoming smartphone launches in 2024/2025, as its current virtual assistant, 'Siri,' is starting to feel outdated as compared with the generative AI features of products from peers such as Microsoft, OpenAI and Google. The trend towards AI-powered smart phones has also manifested itself in positive reviews for recently launched Samsung Galaxy S24 featuring a slew of innovative AI features.

2. Approaching another replacement cycle. This is especially significant as the shipment of the US-branded smartphone has been consolidating over the past eight quarters, and a rebound is anticipated in 2024. The potential upswing could be rapid, considering the consolidation in the overall smartphone market has depleted inventories, suggesting limited downside risk. Consequently, the supply chain may need to respond swiftly and scale up production if the smartphone market performs even slightly better than expected. INARI’s RF segment is expected to show QoQ improvement in the December quarter (2QFY24) after addressing inefficiencies in the previous quarter.

3. Riding the wave on both ends. INARI's strategy of “China for China; Penang for the West” positions the group to benefit from the smartphone upcycle in both regions. The 54.5% owned YSIC-JV expansion, featuring a 500k sq ft plant in Yiwu, set to be operational by mid-2024, positions the group to tap into the China smartphone market with an ambitious goal of achieving RMB1b in revenue and listing status within three years.

Forecasts. Maintained

Valuations. We also keep our TP of RM4.17 based on an unchanged FY25F PER of 32x. Our valuation reflects a 10% premium on peer’s forward mean, justified by the company's superior net margins of >20%, (vs. peers of single digit). Our TP imputes a 5% premium to reflect its 4-star ESG rating as appraised by us (see Page 4).

Investment case. We like INARI for: (i) it being the closest proxy to 5G adoption, (ii) being highly responsive to the market demand with the roll-out of new technologies such as double-sided moulding (DSM) and system-onmodule (SOM), and (iii) its significant expansion in China, capitalising on the superpower’s aggressive push for semiconductor self-sufficiency. Maintain OUTPERFORM.

Risks to our call include: (i) a soft global smartphone market; (ii) new offerings not well-received by key customers, (iii) supply-chain disruptions, and (iv) delays in its expansion in China.

Source: Kenanga Research - 22 Jan 2024