Weak smartphone shipment numbers suggest softening RF sales
CGS International’s (CGS), in its Company Note today (Apr 25), cited recent data from International Data Corporation (IDC) showed that the global shipments of the US brand smartphone fell by 9.6% yoy in the Mar 2024 quarter, as the mid2023 introduction of Huawei 5G handsets slowly chipped away the market share of the US brand smartphone.
In CGS’s view, this could impact Inari’s RF testing utilisation rate through lower volume loading, partially negating higher service charge per unit due to higher RF content.
CGS has cut Inari’s FY24-26F EPS by 3-9% as the factor in lower utilisation rate for its RF segment. They also tweaked their EBITDA margin lower given the ramp-up of new businesses that carry lower margins vis-à-vis its core businesses.
Other segments
The group’s other segments should perform relatively better in the coming quarters, in CGS’s view, partially cushioning the near-term RF softness. According to key network component supplier Coherent, the 800G components, including switches and transceivers should see a strong ramp-up from 2024F onwards as hyper scalers increase their investments in high performance servers, aligning with growth in AI demand.
CGS understands that Inari’s backend processes for 400G optical transceivers are moving to high-volume manufacturing (HVM), while the 800G transceivers recently qualified for low-volume manufacturing for a major global server player. This aligns with the group’s expansion plan of its new CK3 plant in the Philippines, which will add c.230k sq ft of floor space by endCY24F.
Meanwhile, the automotive segment should see some stabilisation in the coming months as the group is undergoing various stages of qualification for its auto-related sensors and optocouplers. Its memory business is also ramping up, with the 4-stack die moving into HVM with additional production lines by 4QFY24F, opening opportunity for new project wins for 8 and 12-stack memory die.
Overall, CGS has pencilled in non-RF segment revenue to grow marginally by 3% in FY24F, with strong ramp-up only by FY25F, together with the ramp-up of its 54%-owned Yiwu Semiconductor in China, as it obtains more qualification for packaging projects. The foray into these new growth areas could be margin dilutive in the near term as they go through gestation periods.
Reiterate Hold
CGS reiterates Hold on Inari with a higher GGM TP of RM2.90 (WACC: 9.5%, TG: 5.5%) as they roll valuations forward. At 28.8x FY25F P/E, the stock is trading on par with its 10-year mean of 29x, and we think re-rating potential is being capped by risks of RF slowdowngiven the shipment volume weakness, while other segments may take some time to ramp up meaningfully.
Downside risks include a slowdown in the demand for 5G smartphones.
