To The Moon

The semiconductor sector outlook is turning negative near term. However, $GRAND VENTURE TECHNOLOGY LTD(JLB.SI)$seems to be a stock worth watching despite the general downtrend experienced by semiconductor stocks recently.

The technology sector is the worst performer among all the other sectors. The technology sub-sector is down 41.6% YTD vs. STI's decline of 2.6%. Semiconductor players were the main culprits owing to mounting macro headwinds. The weakness for end-market demand persists. Among the various segments (ie. PC, tablet, phone, server), server is the only bright spot, while the rest of the segments are affected by cuts in discretionary spending.

Due to the near term weakness for semiconductor, the downtrend will be shorter than the upcycle. The worldwide semiconductor shipments growth is expected to dip further and enter into negative growth territory over the next few months. However, based on historical trends, the upcycle (positive y-o-y gain) usually lasts longer than the downtrend. We should expect a similar trend this time round, supported by the structural shift in demand post-pandemic. Semiconductor revenue overall is expected to drop 3.6% y-o-y in 2023.

Downstream trading are at attractive valuation of below -1SD PE. For the downstream players (eg. Aztech, Nanofilm, and Venture), valuations have dipped below -1S.D. of its five-year average PE, presenting favourable risk-reward opportunity. Grand Venture seems to fare better given its diversification in terms of customers and product mix. It should be able to weather the macro headwinds better than others. A successful entry into the front-end semiconductor space could open up significant growth opportunities for Grand Venture.

Semiconductor shipments are at inflection point; they are likely to fall further. The year started strong with y-o-y growth rates for semiconductor shipments above the 20% range. As of the latest reported figure in August 2022, it stood at a paltry 0.1%, in accordance with the decelerating growth rates. Semiconductor shipments are expected to fall further in the next few months due to the ongoing macro headwinds.

Semiconductor capex is forecasted to decline by 10% in 2023. Semiconductor capital spending is expected to peak at US$169bn in 2022, followed by a 10% decline to US$152bn in 2023. Semiconductor companies seem to be bracing for the chip glut, with companies such as TSMC and Micron reportedly slashing capital expenditure by 10% and 30%, respectively. The end market weaknesses and abating chip shortage are likely contributing to the capex decline in 2023.

The chip industry appears to be on a cusp of a downturn with shipments and capex likely to shrink in the following year. This will be a headwind for Grand Venture's semiconductor segment as it navigates the semiconductor market glut. Capex cuts by semiconductor players will likely lead to a lower demand of semiconductor equipment. Moving through the value chain, players like GVT that supplies the components and key modules for the equipment will experience some softness in demand.

The ongoing macroeconomic headwinds could be a key reason for the delays in potential key front-end customer acquisition. Despite ongoing macroeconomic headwinds causing the delays, Grand Venture's business diversification is a mitigation factor with resilience in the life sciences and medical segments. Compared to the semiconductor segment, the life sciences and medical segments are expected to remain relatively stable, as these sectors are typically less cyclical. Moreover, product lifecycles are generally long in the life sciences segment, which should alleviate overall near to mid-term weaknesses in the semiconductor segment.

Improvement in margins is expected in FY23. Although the supply chain situation is improving, the utilisation rates have not picked up significantly at this moment, so gross margins are likely to stay flat at c.27% in FY22. In FY23, however, there are expectations that margins will improve, owing to easing supply chain disruptions and higher utilisation rates. Gross margins are estimated to tread higher at 29% in FY23 on the back of easing supply chain disruptions and higher contributions from the life sciences segment, which has a higher margin.

Notwithstanding near-term volatility, there is a secular long-term uptrend in the semiconductor segment, which makes up around 70% of Grand Venture's revenue in FY21. McKinsey projects that the semiconductor industry will become a trillion-dollar industry by 2030 and Gartner estimates that semiconductor revenue by end use industry will grow a further 11.2% and 11.1% in 2024 and 2025, amounting to US$663bn and US$737bn, respectively. All of these point to a bright long-term semiconductor market outlook that Grand Venture will benefit from.

Having Grand Venture in the portfolio could be a profitable investment in the long run. I am not vested yet but I feel this is a stock worth watching. Due to the fact that this is a penny stock, I will be careful before making any decisions to add into my portfolio. Always DYODD before making any trading decisions.