Global Testing: Hungry

Trough in 4Q06: Global Testing (GTC) expects a 5-10% decline in 4Q06 revenue due to sharp inventory digestion at its key customers. However, given an end to inventory digestion and a possible Microsoft Vista led revival in PC demand, management expects strong 10% QoQ revenue growth in FY07.

20%+ growth in FY07: Following the acquisition of handheld devices business from Intel, GTC’s largest customer Marvell plans to migrate the process technology from Intel to TSMC by 2Q07, which GTC management believes could lead to a production increase of 12k-15k 8” wpm. If GTC can secure 75-80% of this business, the management estimates that it could account for 5-8% revenue growth in FY07.

LBO benefits: According to GTC management, NXP (ex Philips) contributes about 7% to GTC revenue. After its LBO, NXP plans to double the percentage of backend business that is outsourced (currently 7%).

Acquisition-led growth: GTC has commented that it may augment its core growth via acquisitions in the wafer sorting/final testing area.

Industry implications: While we have long maintained that most of the industry’s excess inventory is likely to be digested by 1Q07, GTC is one of the first companies in Asia to have confirmed it. Such an inventory reduction should result in a lower-than-normal sequential revenue decline for Asian Foundry and IC A&T industries.

Valuation: Despite 20% earnings growth, GTC is trading at a P/E multiple of 7x based on FY06 consensus forecasts. Furthermore, with ROE of 12%, the stock is trading at a P/BV of 1.0x.

Extracts fm Lim and Tan report dated 1-Nov-06, 

Results And Outlook Weere Below Expectations, But Valuations Are In Line With Peers

Key points from an analyst briefing:

• 3Q ended Sept 2006 sales rose 2.4% qoq to US$18.75mln, at the lower end of management’s guidance of 2-6% qoq growth reflecting higher than expected inventory levels at major customers such as Marvell (23%), TSMC (16%), Sunplus (14%), Philips (7%) and Realtek (3%).
  
• Looking ahead into 4Q ending Dec 2006, management is guiding for sales to decline a further 5-10% from 3Q2006, reflecting the continued high inventory levels of their major customers as well as unexpected cut backs from some new customers (eg. Marvell). This is worse than STAT’s 1-6% qoq growth in 4Q2006 as well as UTAC’s 0-5% qoq growth in 4Q2006. We believe this reflects Global Test’s 70% exposure to the consumer electronics sector which is undergoing greater than expected pricing pressures and order cut backs.
  
• As a result of the worse than expected results and outlook, management is revising down their full year net profit guidance of US$22-24mln (consensus expectations as well) to US$20-21mln, implying 4Q2006 net profit of US$4-5mln, down from 3Q2006’s net profit of US$5.8mln and 4Q2005’s net profit of US$7.4mln.
  
• Global Test’s forward PE based on management’s guidance is about 8x which is in line with peers such as King Yuan (in Taiwan) as well as UTAC’s 9x. We do not have a rating on Global Test as this is the first time we have written on the company, but given its sizeable profit of S$32-33mln and market cap of S$260mln, it could be an interesting stock to watch.
  
• As valuations are in line with its peers, we believe it would eventually benefit when the tide turns for the sector. Management believes that it could be sometime next year, ahead of the 2008 Beijing Olympics. While management is optimistic that 1Q2007 outlook would improve from 4Q2006, we believe given the weak sentiment towards semiconductor related stocks currently, the market would most likely adopt a wait and see stance (as well, 1Q is usually a seasonally weak period for the consumer sector where Global Test has 70% exposure to).

Outlook should brighten by 1Q07

Sales growth at the lower end of guidance. GTC reported 3Q06 results that were at the lower end of its guidance. Net profit was affected by lower utilization and selling prices as some of its customers were still undergoing an inventory adjustment exercise. The lower gross margin is indicative of lower selling prices and utilization rates during the quarter while higher than expected tax expenses affected net income.

Disappointing guidance. GTC’s guidance is also disappointing. It is lower than what some of its peers have guided but in line with the guidance from both TSMC and UMC, both of which account for about 16% and 5% of GTC’s sales. Both foundries are expecting approximately 9% and 8% q-o-q decline in revenues respectively in 4Q06. More specifically, the most significant dampener to sales growth outlook in 4Q06 is key customer Marvell. Although GTC reported that Marvell’s loading had continued to remain strong even after its disappointing mid quarter guidance, GTC had not anticipated no loading at all in October. Sunplus orders are, however, expected to strengthen due to higher demand for digital TV chips in 4Q06.

Cutting estimates to reflect subdued outlook. We have revised down our estimates by 17% and 25% in FY06 and FY07 respectively to reflect lower utilization rates and lower selling prices. The lower selling prices is due to increased capacity and higher competition.

Outlook should brighten post inventory adjustment. Despite the lowered expectations, we reiterate our belief that the inventory adjustment should be completed by end 1Q07 and some of GTC’s customers should resume normal loading. Also, with GTC demonstrating success in new customer acquisitions and the possibility of orders flow from the enlarged unit of Marvell, GTC at current levels remain attractive. Even as we reduce our target price to S$0.37 from S$0.48, GTC remains a BUY given the 62% target price upside. Our target P/BV is pegged to 1.4x P/BV, the mid range of GTC trading band over the last 18 months.

Extracts fm Frasers Report dated 16-Oct-06,

Global Testing (24 cents) - near complete retracement of rise from 19.5 cent low to 39 cent high causes stock to resume long decline but showing signs of recovery 

After 7 weeks of finishing unchanged or lower, the second longest stretch since a year ago when it hit a record 19.5 cent low, the stock edged up last week after appearing to hold up at this year’s 22.5 cent low.

This low was first recorded last July prior to a rebound to the half way mark (29 cents) between 39 cents and 19.5 cents which came about quickly after it managed to move near the 38.2% recovery (27 cents) reaching 26.5 cents about 2 weeks earlier.

Failure to clear 29 cents brought out sellers but after a drop to 25.5 cents, it moved back briefly to 27.5 cents on Sep 6. Since then it was a long road down but somehow the counter managed to hold at 22.5 cents, which was tested for 6 days this month.

This protracted defence of 22.5 cents seemed to assure traders that another rebound to 27-29 cents is on the cards thus lifting the daily lows in the last 3 trading days to 23 and 23.5 cents and to 24 cents today.

Given the near 2 month decline from 29 cents on Aug 17 and the heavy volume of 37.3m shares on Oct 11 when it moved up from 23 cents to 24.5 cents, the stock should be able to break the 24-25 cent resistance and reach 27 cents this month.

Since the May plunge from 39 cents to 27.5 cents, the monthly trading range has been between a minimum 4.5 cents (last month) and 6 cents. So far this month it has moved only 2 cents between 22.5 cents and 24.5 cents.

If it repeats last month’s 4.5 cents range, which should not be a problem since it has just come out from a long 2 month fall, then 27 cents would be the first target and if the trading band widens to 6 cents we should see 28-29 cents.

Net profit lifted by strong show in Q2

TESTING services company Global Testing Corporation yesterday reported a doubling in second-quarter net profit to US$5.18 million, lifting the bottom line for the first half to more than US$10 million. 'The improvement was led by the growth in testing volume, a better product mix, and higher machine utilisation,' said the company. Revenue for the period ended June 30, 2006 was up 56.1 per cent at US$18.31 million. This was led by a 'recovery in the semiconductor industry which drove higher volume for final testing and higher wafer testing of major customers, such as Marvell', said Global Testing. For the first half of the year, net profit more than quadrupled to US$10.21 million, as turnover grew 78.4 per cent to US$35.71 million. Earnings per share came to 1.1 US cents, while net asset value per share totalled 15.79 cents as at June 30, 2006.

Looking ahead, Global Testing expects to post a quarter-on-quarter increase in revenue of about 2-6 per cent for the third quarter. Said Paul Yang, Global Testing president and chief executive officer: 'The outlook for certain consumer sectors remains positive, driving demand growth for multi-media application chips such as TV controller chips, set-top-box chips and gaming chips.'

While demand for DVD controller chips slowed in Q2 2006, Global Testing expects volume to pick up from the middle of Q3 2006 as a result of the seasonal pick-up in anticipation of the Christmas demand. 'Orders from existing customers such as Marvell remain strong. We have secured a new IDM and a new fabless customer, which is expected to translate to increased orders,' added Mr Yang. 'We are confident that increased orders are expected to continue to support our top and bottomline growth in the quarters ahead.'

In June, Global Testing refinanced its existing syndicated loan by raising a new syndicated loan facility for NT$3 billion (S$144.6 million). It has also deferred its principal repayment schedule by another 3 1/2 years.

Extracts fm Kim Eng Report dated 25-Apr-06,

Share placement announced - Global Testing and its major shareholders are placing out 245m shares @ S$0.3125. 175m are new shares and the rest are vendor shares from the three largest shareholders. They will not be allowed to sell more shares in the next 6 months.

Proceeds for expansion in new markets - The placement will raise S$52.6m (~US$33m) to meet additional capex needs as it expands in new market segments. The company originally expected to spend US$30m this year to increase capacity by 22%. Now, it intends to spend another US$30m to add a further 22% capacity to cope with the overwhelming demand for 12” bumped wafers. This will position it well for growth beyond 2006.

Full year growth momentum intact - Our update with management indicated robust industry momentum and continued capacity tightness in the testing segment. Higher loading from existing customers and commencement of new customers are on track. Global Testing started to test 12-inch bumped wafers for TSMC in March and the set-up of test centres for both home video IC (for Agilent) and CMOS image sensor (Inter Action) is progressing well.

Q1 results on track - Near term, we believe strong demand could push Q1 sales ahead of management guidance of a 4-8% sequential dip. However, bottomline may not grow as fast because of a delay in tax credits for new machinery. For the full year, management remains bullish with sales expected to rise more than 40% yoy.

Maintain BUY - Although the placement could dampen sentiment in the immediate term, the stock remains undemanding at 8.3x FY06 fully diluted earnings. Its peers STATS ChipPac and UTAC are trading at 21.3x and 11x current year earnings respectively. We recommend investors to accumulate the stock on weakness.

Extracts fm CIMB Report dated 5-Apr-06,

Pure play Taiwanese testing house 

• Story: Taiwan-based GTC provides testing services to global integrated design manufacturers (IDMs), IC designers and foundries such as Philips, Sunplus and TSMC. Its competitive advantage rests on its focus in mixed signal logic (MSL) chips that are widely used in consumer electronics and communication devices such as LCD monitors, hard disk drives and DVD players.
  
• Point: Demand for independent testing services remains high due to tight capacity amid a slew of new consumer electronics products introduction, IDMs’ sustained trend of outsourcing testing services, and the proliferation of IC designers. Supported by its strong engineering capabilities, GTC is expanding into new testing services for CMOS image sensors, Home Video IC and 12” bump wafers.
  
• Relevance: With projected 27% growth and sustainable ROE of 16-17% between FY06 and 08, we believe GTC should converge towards our target price of S$0.42 within the year. We are initiating coverage of GTC with a BUY recommendation and S$0.42 target price, based on 1.9x forward P/BV. This is similar to our valuation methodology for UTAC.

Extracts fm Agilent News,

Global Testing Corp. Strengthens its Position in Home Video IC Test with Agilent Technologies’ Comprehensive Support

New Agilent 93000 Compact Test Head Testers Deliver High-Quality, Low-Cost Wafer Sort and Final Test Solution

SHANGHAI, SEMICON China, March 21, 2006 -- Agilent Technologies, Inc. (NYSE: A) today announced that Global Testing Corporation (GTC) (Singapore SE: SES:G31.SI), one of the largest independent testing services companies in the Asia-Pacific region, has selected the Agilent 93000 Pin Scale Compact Test Head (CTH) solutions as the development platform for its Home Video Integrated Circuit (IC) Test Engineering Center in Taiwan. The engineering center is the world’s first center adopting the new 93000 CTH for home video IC testing with Agilent’s advanced technical support.

The center is targeted to support the increasing numbers of Taiwanese fabless companies that are driving a large percentage of the world production of home entertainment devices. The center will provide a production-ready environment to develop test applications in wafer sort and final test, and to improve the research capability for home video IC test applications such as LCD TV, DVD, MP3, MP4, set-top boxes and game consoles.

“Our collaboration with Agilent will enable us to deliver high-quality and low-cost test solutions and improve time-to-market for our customers in the home video and entertainment markets,” said Paul Yang, president and chief executive officer of GTC. “The Agilent 93000 CTH system is well aligned with emergent design service activities seen in Taiwan, and provides us with high-performance and lower testing costs to meet the needs of our customers and in turn enhance our competitiveness.”

The Agilent 93000 CTH is focused on the low-end automated test equipment (ATE) category, addressing digital and mixed-signal consumer SOCs at both final test and wafer sort. The “zero footprint” 93000 CTH takes up little floor space, because its power and PC components are fully integrated, and four compact test heads can share a single cooling unit. The Agilent 93000 CTH delivers high test quality at lower cost while ensuring the maximum level of compatibility with the 93000 installed base.

“The 93000 Pin Scale system provides scalability, flexibility and lower cost-of-test to the global semiconductor industry,” said Pascal Ronde, vice president of Agilent’s Semiconductor Test business. “Our new Compact Test Head is designed for the low-end ATE segment, including wafer sort, without sacrificing the performance of our 93000 solutions. We are happy to strengthen our long-term relationship and to help GTC meet its expanding customer demand by supporting its new engineering center with the 93000 Pin Scale CTH solutions and Agilent’s technical support.”

Looking attractive again

1Q06 tracking expectations. We expect revenue to increase 103.5% yoy to US$16.9m in 1Q06 due to strong demand from Consumer applications, such as DVD chipsets (Sunplus), LCD TV controllers (MStar) and set-top boxes (Sunplus). Revenue is, however, 3% lower on a sequential basis due to fewer working days in February. Global Testing will expand account share for existing customers such as Marvell, Sunplus and TSMC. It participates in most new products at Marvell and will expand scope of work for communications chips beyond wafer sorting to final testing. New customers secured include MStar and Techwell for LCD TV controllers. Capacity utilisation is high at 85-90% for Jan and Feb 06 and will hit above 90% in Mar.

Huge potential from bumped wafer testing. Global Testing has achieved qualification by a major Taiwanese foundry for 12-inch bumped wafer testing, which commands better pricing due to higher technical complexity (requires vertical probe cards) and longer test time (involves 12-inch wafers). Few test houses have capabilities to provide wafer sorting for bumped wafers. Global Testing has commenced pilot production for testing of 12-inch bumped wafers for PC chipsets and graphics chips.

More new projects. Global Testing is exploring opportunities to establish JV/alliance to expand into new areas such as multimedia applications and CMOS sensors. It also plans to establish new plant in China in 3Q06 to support Taiwanese foundry and fabless customers.

No adverse impact from changes in interest rates. Global Testing has total borrowings of US$70m and net debt/equity ratio of 0.42x as at Dec 05. 88% of its borrowings are denominated in NT Dollars. The average base lending rate for all banks in Taiwan edged up slightly from 3.7% in Jun 05 to current 3.9% and will not have any significant impact on cost of borrowings. Global Testing plans to progressively reduce the level of gearing through internally generated cash flow. Recent correction has brought valuation to a very attractive level with retracement of 20%. Global Testing trades at FY06 PE of only 7.5x (STATS ChipPAC: 33.6x, UTAC: 10.7x). Our target price of S$0.43 is based on FY06 EV/EBITDA of 5.5x.

Extracts fm Kim Eng Report dated 12-Jan-06,

Hitch a Ride for the Semiconductor Upswing

• Buy Global Testing to ride the semiconductor up-cycle - We are initiating coverage on Global Testing with a BUY recommendation. We believe the stock offers the best exposure to the current upswing in the semiconductor cycle given its focus on test services, which offer high operating leverage.
  
  
• Company offers highest margins and ROE - Operating margin surged to 44% in 3Q05 as the company ran its facilities at 90% capacity utilization. This is the highest among its listed peers in Singapore. As such, ROE is expected to reach a healthy 16% in FY05, which is a rarity in the industry.
  
  
• Unique business model - The company tends to engage its customers in the early design phase, which enables it to lock in orders for the volume production phase. It also focuses on only a few test platforms, which allows it to specialise in a few equipment. This helps to improve its efficiencies in terms of operations and maintenance.
  
  
• Strong growth due to outsourcing trend - We expect the company to post 50% in earnings growth this year on the back of 38% increase in revenue, driven by both upswing in the semiconductor industry as well as the outsourcing trend for back-end services. The company is gaining more orders from its existing customers such as Sunplus and Realtek, as well as winning new customers, such as UMC, Philips, Techwell and Himax.
  
  
• Valuation most attractive among listed peers - Global Testing has the added attraction of having the lowest valuation among the 3 test and assembly companies in Singapore. The stock is currently trading at 1.5x book value compared to 2.4x and 2.9x respectively for UTAC and STATS ChipPac. With its strong profit growth, PE would drop to 7.5x based on FY06 earnings from 11.2x on FY05.

Extracts fm UOBKayHian Report dated 28 -Oct-05,

3Q05: Operating leverage boosted margins

Global Testing reported net profit of US$6.4m (+103.8% qoq, +159.4% yoy) on revenue of US$16.1m (+37.4% qoq, +32.8% yoy) in 3Q05. ?The results were 30.6% above our net profit forecast of US$4.9m.

Operating leverage boosted margins. Revenue increased by 37.4% qoq to US16.1m, exceeding guidance of 25-30% sequential growth. EBITDA margin expanded from 66.1% in 2Q05 to 75.8% in 3Q05. This is due to higher capacity utilisation of 90% (3Q05: 80%) and higher volume of wafer sorting and final testing orders from major customers such as Marvell (19% of sales in 9M05) and TSMC (18%). High-margin wafer sorting business expanded from 31% of sales in 1H05 to 38% of sales in 3Q05. It also secured larger allocation from fabless customers such as Realtek and Sunplus.

Maintain sequential growth in 4Q05. Global Testing guided sequential revenue growth of 3% to 7% in 4Q05. Capacity utilisation is expected to exceed 90% in 4Q05. ASP is expected to increase 1-2% in 4Q05 due to capacity constrain for test platform such as Agilent 93000.

Global Testing will benefit from increased orders from Marvell for HDD controllers and wireless baseband & RF chips used in portable game console. There is strong demand for consumer and wired communications applications such as DVD (Sunplus), set-top box (ALi), MP3 (ALi) and LAN (Realtek). Global Testing has completed test programme development for new customer Philips and will commence mass production for testing of TV controller chips in 4Q05. It has also secured new customers such as Fortemedia for multimedia chips and Himax for LCD controllers. It started testing 12-inch wafers for TSMC in Oct 05.

Global Testing will add five testers in 4Q05 to bring total number of testers to 135. Management plans to invest US$30m in capex in FY06, which will add 30 testers and expand capacity by about 22%. We have raised our FY05 net profit forecast by 6.5% to US$14.7m to reflect the strong performance in 3Q05. ?Global Testing is under-valued. It trades at P/B of 0.93x (STATS ChipPAC: 2.1x, UTAC: 1.2x), FY05 EV/EBITDA of 3.6x (STATS ChipPAC: 6.2x, UTAC: 3.4x) and FY05 PE of 6.2x (UTAC: 14.9x).

BUY
Current Price: S$0.205
Target Price: S$0.40