ASM Pacific's revenue predicted to soar 40% to HKD2.85-3b

Intense competition in wirebonding market looms.

According to Maybank Kim Eng, ASM Pacific's 2Q13 revenue is estimated to improve 35-40% QoQ (but be flat YoY) at HKD2.85-3.0b, with net profit of HKD326m (EPS: HKD0.82) (flat to up 5% YoY).

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We note ASMP reported a marginal profit of HKD8m in 1Q13. There are limited quarterly consensus earnings estimates on ASMP but our FY13 earnings forecast is >40% below current Street estimates (according to Bloomberg), which have fallen considerately over the past 12 months.

This reflects the challenges ASMP is facing – ongoing share loss in the competitive wirebonding market, soft demand in the SMT industry and escalating OPEX – all likely to weigh on profit margins and cash flow. Hence, we maintain our SELL rating and HKD60 target price (20x 2014 PER).

ASMP’s cyclical 2Q13 recovery is likely to be weak in terms of revenue and profitability. New orders at end-1Q13 were down 17% YoY (up 23% QoQ on seasonal recovery), relatively weak vs the 62% YoY rise in 1Q12 and 1.5x YoY growth in 1Q11.

This reflects the moderate increase in backlog orders, up 12% QoQ (to HKD2.3b) – a much shallower sequential seasonal recovery than is typical. If ASMP does not turn 2Q13 new orders fast enough, it could miss our revenue forecast of HKD2.89b.

Importantly, because the recovery is likely to be driven by the lowest-margin leadframes followed by higher-margin semi/LED tools, we believe the profit rebound may be capped.

Operations at SMT, which make up 30-35% of ASMP’s overall sales, are likely to be lacklustre because of weak industrial demand in the developed world, especially the European automotive market.

ASMP may also lose some share to its Japanese SMT peers such as Fuji Machine and Panasonic, who could use the 30% drop in Yen/USD rates to gain share.

Nevertheless, we expect ASMP’s GM/OPM to recover to the mid-30%/teens, similar to 2Q12 levels, up from the mid-20%/breakeven levels of 1Q13. Weaker-than-expected profit margins could lead to another round of significant FY13/14 Street downgrades.