Inari To Benefit From AI, New Cycle and China Expansion: Kenanga

Inari Amertron Bhd’s (Inari) is likely to gain from the rising global chip demand due to artificial intelligence (AI), upcoming replacement cycle, and expansion in the Chinese market, according to Kenanga Research.

Kenanga maintained its 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 more than 20% compared to its peers of single digit.

“Our TP imputes a 5% premium to reflect its 4-star ESG rating as appraised by us,” it said in its Company Update today (Jan 22).

The research house said the country’s leading outsourced semiconductor assembly and test (OSAT) services provider will benefit from global chip demand that is 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 and 2025.

“(This is due to) its current virtual assistant, ‘Siri,’ is starting to feel outdated as compared with the generative AI features of products from peers such as Microsoft, OpenAI and Google.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,” it said.

Kenanga said another catalyst for Inari is the likely positive demand outlook for smartphones as it is the moving into a replacement cycle.

“Replacement cycle 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 risks.

“Consequently, the supply chain may need to respond swiftly and scale up production if the smartphone market performs even slightly better than expected,” it added.

The research house added Inari’s radio frequency (RF) segment is expected to show quarter-on-quarter (QoQ) improvement in the December quarter (2QFY24) after addressing inefficiencies in the previous quarter.

It also said the firm’s strategy of ‘China for China; Penang for the West’ positions the group to benefit from the smartphone upcycle in both regions.

“Inari is riding on the smartphone market in China via its Semiconductor International Corporation JV (YSIC JV) expansion in Yiwu.

The 54.5% owned YSIC-JV expansion, featuring a 500,000 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 1 billion yuan in revenue and listing status within three years.

Kenanga likes Inari for it being the closest proxy to 5G adoption, being highly responsive to the market demand with the roll-out of new technologies, and its significant expansion in China, capitalising on the aggressive push for semiconductor self-sufficiency.

The risks to Kenanga’s call include a soft global smartphone market, new offerings not well-received by key customers, supply-chain disruptions, and delays in its expansion in China.

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