• Upgrade to TRADING BUY from Neutral, new MYR0.70 TP from MYR0.68, 37% upside. On 21 Nov 2024, Globetronics Technology entered into a services agreement with ChipMos Technologies Inc (ChipMos) to provide packaging, testing, and backend services for memory integrated circuits (IC) with an estimated value of MYR145m, for a 3-year period from 21 Nov 2024. While we like the strategy to diversify into new products in search for growth avenue, execution and achieving optimal production yield in a new packaging platform would be key in this new development.

• By partnering GTB, ChipMos can strategically diversify into ASEAN with minimal capex, ensuring the continuity of supply and mitigate the growing risks from the intensified US-China Trade War. ChipMos is an outsourced semiconductor assembly and test (OSAT) player listed on the Taiwan Stock Exchange, offering products and services in multi-chip packaging, thin small outline packages (TSOP), ball grid array (BGA) packaging and chip on film (COF) packaging services, as well as wafer bumping, wafer-level chip-size packaging, and wafer-overpackaging technologies. ChipMos’ packaged and tested products are mainly used in automotive, information, communication, mobile phone, wearable and consumer electronics-related products.

• Under the agreement, ChipMos will furnish GTB with the necessary wafers, detailed specifications, manufacturing procedure, and production forecasts to facilitate efficient processing. On the other hand, GTB shall be liable to ChipMos for the damage and loss of the services, finished products, semifinished products, and non-conforming products. Prices of services are subjected to a <5% adjustment on a quarterly basis from the prevailing price unless in the event of significant change in FX and market situations. FY24F25F total capex is budgeted at RM43m.

• Potential earnings of MYR2-6m bottomline in FY25F-27F assuming an estimated net margin of 8-10% with the expectation of a gradual ramp-up in 2H25 with no major loss in yield. We keep FY24F but raise our FY25F-26F earnings by 3-8% as we have previously factored in some contributions from the new product. Note that we also take the opportunity to raise our MYR/USD forecasts for FY25 to 4.30 from 4.05, mirroring the latest FX assumption from RHB Economics and our FX team. Consequently, our TP is raised marginally to MYR0.70, based on an unchanged 20x FY25F P/E, at its 5-year mean, inclusive of a 2% ESG discount, given GTB’s ESG score of 2.9.

• A tactical TRADING BUY. We tactically upgrade the stock to a TRADING BUY given the positive development and share price weakness may have reflected the negatives on the resignation of auditors, change of top management and ownership, as well as business strategy. However, the structural change in the company strategy and management remains a key risk. Key downside risks: i) Further weakening of smartphone and peripheral sales, ii) stronger MYR vs USD, iii) major product and/or customer losses, and iv) major changes in the current management team.

Source: RHB Securities Research - 22 Nov 2024