Investment Merits

• Solid track record to support business expansion efforts
• Beneficiary of the US-China chip war
• Boosting income stream with intellectual property developments

Company Profile

Oppstar offers integrated circuit (IC) design services to a range of clients, including integrated device manufacturers, fabless companies, fab-lite firms, and electronic systems providers, among others. The group covers both front-end and back-end designs, as well as complete turnkey solutions, focusing on application-specific integrated circuits (ASICs), system on chips (SoCs), central processing units (CPUs), and field programmable gate arrays (FPGAs). Oppstar’s IC design services are generally on process node technologies ranging between 20nm and 3nm.

Highlights

A solid track record supports business expansion efforts. The group has established strong partnerships with various foundries, as it excels in adapting to diverse parameters and requirements unique to each foundry. By specialising in fin field-effect transistor (FinFET) designs, and successfully completing numerous turnkey projects across various process nodes, Oppstar has strengthened its market penetration capabilities. Recently, the acquisition of a Japanese design firm has advanced its regional growth strategy, which also aligns with the revitalisation efforts of Japan's semiconductor industry. Taiwan Semiconductor Manufacturing’s (TSMC) establishment of new wafer fab in the East Asian nation underlines the country’s significance in semiconductor manufacturing. Apart from Japan, Oppstar intends to expand its geographical footprint to India, Singapore, and Taiwan due to its close proximity to some global foundries such as TSMC, Intel and Qualcomm. The group’s India office also allows it to tap into talent there to upgrade its design capability and capacity. Additionally, Oppstar secured a new partnership with Samsung Group (Samsung) to manufacture industrial ICs, utilising Samsung's 14nm FinFET technology, marking a significant achievement for the group, as it will have access to the foundry’s process development kit or PDK. This positions Oppstar as an enabler – converting concepts into tangible products for fabless companies like Advanced Micro Devices or AMD, Broadcom, Nvidia, and Qualcomm.

Beneficiary of the US-China chip war. Notably, the US government's ban on exporting advanced artificial intelligence (AI) chips by IC design giants to China presents Oppstar with a strategic advantage. Since securing its initial ASIC projects from China clients in 2020, the group continues to attract inquiries for tailored designs and turnkey services.

In FY22-23 (Mar), China’s contributions to group revenue ranged between c.73% and 78%, ie an increase from FY20’s c.53%.

Developing new intellectual property (IP) to boost income stream. As Oppstar expands, it plans to develop its own IP in RISC-V-based SoCs, 3D-FPGA, and AI & machine learning. Such IPs should streamline the design process, shorten product development cycles, and optimise resource utilisation across multiple projects, in our view. Licensing such IPs could also boost earnings, while providing higher margins and recurring income. Furthermore, having silicon-proven IPs will give the group a competitive edge when bidding for future projects.

Company Report Card

Results highlights. 9MFY24 revenue increased by 3.3% to MYR44.9m – attributable to higher contributions from specific design services and the post-silicon validation divisions. However, core net profit saw a 5.4% dip to MYR14m on rising labour costs associated with the design engineering team’s expansion to accommodate business growth.

Strong net cash position. As of 3QFY24, Oppstar is in a net cash position of MYR102m, providing ample funds for business expansion via investments and acquisitions. Over the past three years, the group has consistently generated positive cash flow.

Dividends. Oppstar maintains a policy of distributing at least 25% of its earnings as dividends. For FY23, the group declared a DPS of 0.8 sen, implying a payout ratio of 25%. Assuming a consistent payout ratio, projected DPS for FY23-25 is in the 1-1.8 sen range, implying c.0.7-1.2% yields at the current price.

Management. Oppstar has an experienced management team. Executive Director and CEO Ng Meng Thai is responsible for the overall strategy and corporate direction of the group while Group CFO Chin Fung Wei has approximately 25 years of experience in finance and accounting-related fields. Chin also oversees Oppstar’s accounting and finance functions. The rest of the senior management team provide support to Ng and Chin, given that its members have extensive experience in their respective fields.

Investment Case

We like Oppstar for its unique position as the sole listed company in the IC design sector. Its growing footprint and broad client base in the frontend semiconductor domain underscores its capabilities. Moreover, the group’s continuous business expansion plans – including its pursuit of developing its own IPs – will further support Oppstar’s long-term growth trajectory, We ascribe a FV of MYR1.95 based on 35x FY25F P/E, which is at the lower end of its international IC design peer range of 30-70x – given its smaller market cap. The valuation is 0.5SD above its 12-month mean, which is warranted – given the group’s 3-year projected earnings CAGR of 30%.

Key risks include dependence on major customers, an industry-wide slowdown, and being dependent on its ability to retain and attract skilled engineers.

Source: RHB Securities Research - 15 May 2024