OPPSTAR is collaborating with Samsung to produce integrated circuits (ICs) including using Samsung’s 14nm FinFET technology. This is significant as it comes with access to the foundry’s process development kit (PDK), transforming OPPSTAR into an enabler (i.e. converting concepts into tangible products) for fabless tech players. While we maintain our forecasts, TP of RM1.72 and OUTPERFORM call, we take note that investors are willing to pay premium valuations for IC designers with collaboration with semiconductor foundries.

OPPSTAR is collaborating with Samsung to manufacture industrial ICs including using Samsung’s 14nm FinFET technology foundry process. This represents a significant milestone given that it comes with access to the foundry’s PDK, which includes proprietary library files and manufacturing methodology. Typically, access to such resources will only be granted after rigorous qualification processes, including assessment of design capability, company track record, and secure dedicated network. OPPSTAR’s success with Samsung speaks volume for its credentials. Samsung is the second- largest semiconductor maker in the world with an estimated 14% share in 2023.

The access to wafer foundries transforms IC design houses like OPPSTAR into enablers (i.e. converting concepts into tangible products) for fabless tech players such as Nvidia, Qualcomm, Broadcom, AMD, and MediaTek.

The demand for customised IC design is strong on the back of the proliferation of IoT devices, autonomous vehicles, and artificial intelligence (AI) applications. Meanwhile, statistics from Market.us reveal that the 14nm node (part of the "14nm/16nm" family) holds the largest share of global process nodes at c.28%. This dominance stems from the well-established nature of the 14nm process node, boasting high yield rates at a comparatively affordable price compared to leading-edge nodes. Moreover, the 14nm node remains highly capable for modern-day applications, as evidenced by products such as the Exynos 8 Octa, Nvidia GTX1080, and Tesla UBQ01B0 full self-driving processor, offering an ideal balance between performance and affordability.

We are highly positive on OPPSTAR’s latest development. While the earnings impact may not be immediate, we notice that investors globally are willing to pay an average CY24F PER of c.54x for IC designers with collaboration with semiconductor foundries (see Page 2), vs. OPPSTAR’s FY25F (Mar) PER of only 25x.

Nevertheless, the latest development aside, we anticipate an upswing in OPPSTAR’s earnings (after a soft patch recently) on the back of the doubling of its order book to RM24.7m (as of Feb 2024) on recurring turnkey design jobs from its existing customer, Xiamen KirinCore, as well as the addition of orders from the recently acquired design company in Japan.

Forecasts. Maintained.

Valuations. We keep our TP of RM1.72 based on an unchanged 30x FY25F PER, a c.45% discount to global peers’ forward average (see Page 2) due to the substantial disparity in revenue size between OPPSTAR and its global counterparts. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We like OPPSTAR for: (i) its foothold and growing presence in the front-end semiconductor space with high entry barriers, specifically, stringent qualification requirements, (ii) its strong design capabilities in leading-edge process nodes, and (iii) its diverse customer base, i.e. both from the East and the West given its strong working relationships with various foundries. Maintain OUTPERFORM.

Risks to our call include: (i) longer-than-expected gestation period for its regional expansions, (ii) single customer concentration risk with c.60% group revenue derived from Xiamen KirinCore, (iii) economic downturn resulting in customers slowing down the development of new ICs.

Source: Kenanga Research - 2 May 2024