Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/mediatek-inc" target="_blank" data-smartkarma-citation="entities:772:1" rel="noopener">Mediatek Inc (2454 TT)</a> delivered a strong set of 2Q21 results, beating sell-side consensus estimates on both the top and bottom-line and delivering numbers at the top-end of management’s guided ranges, which, in conjunction with a continued strong demand environment, has led to an increase in growth and profitability guidance for the remainder of FY2021.Further short-term share price weakness, based on supply constraint concerns, along with a continuation of the earnings upgrade cycle, has resulted in MediaTek trading on a 13.8x NTM PE ratio, which is more than one standard deviation below its historical average trading range. MediaTek also currently trades on an extremely attractive 6.3% NTM dividend yield with little risk of a negative surprise to dividend payments given the ongoing earnings upgrades, and MediaTek having generated NT$28bn in Operating Cash Flow, during 2Q21, which helped its Net Cash balance increase further to NT$191bn, now 13% of its Market Cap. In this insight, we look at MediaTek’s 2Q21 results, its medium- and longer-term growth outlook and current valuation levels. This insight is also a follow-up from our more-detailed analysis of MediaTek (<a href="https://www.smartkarma.com/insights/mediatek-high-quality-5g-beneficiary-with-a-tremendously-attractive-dividend-yield" target="_blank" data-smartkarma-citation="insights:53096" rel="noopener">MediaTek: High-Quality 5G Beneficiary with a Tremendously Attractive Dividend Yield</a>) last month.

Mediatek Inc (2454 TT) delivered a strong set of 2Q21 results, beating sell-side consensus estimates on both the top and bottom-line and delivering numbers at the top-end of management’s guided ranges, which, in conjunction with a continued strong demand environment, has led to an increase in growth and profitability guidance for the remainder of FY2021.Further short-term share price weakness, based on supply constraint concerns, along with a continuation of the earnings upgrade cycle, has resulted in MediaTek trading on a 13.8x NTM PE ratio, which is more than one standard deviation below its historical average trading range. MediaTek also currently trades on an extremely attractive 6.3% NTM dividend yield with little risk of a negative surprise to dividend payments given the ongoing earnings upgrades, and MediaTek having generated NT$28bn in Operating Cash Flow, during 2Q21, which helped its Net Cash balance increase further to NT$191bn, now 13% of its Market Cap. In this insight, we look at MediaTek’s 2Q21 results, its medium- and longer-term growth outlook and current valuation levels. This insight is also a follow-up from our more-detailed analysis of MediaTek (MediaTek: High-Quality 5G Beneficiary with a Tremendously Attractive Dividend Yield) last month.

MediaTek: Results Beat, Increased Guidance, Earnings Upgrades… and a Lower Share Price

<a href="https://www.smartkarma.com/entities/mediatek-inc" target="_blank" data-smartkarma-citation="entities:772:1" rel="noopener">Mediatek Inc (2454 TT)</a> is the world’s 4th largest global fabless semiconductor company and powers more than 2 billion devices a year. Global smartphone shipments are expected to grow at a 6.9% cagr to 1.7 billion units in 2025. With MediaTek’s leading market share in 5G SoC, they are likely to experience an outsized benefit from the replacement trend brought by technology upgrades to 5G and Wi-Fi 6, Bluetooth, and ARM-based SoCs that integrate wireless communication. 
This is a high-quality global technology company that is expected to expand its ROE to above 20% driven by increased asset turns and margin expansion whilst the net cash on the balance sheet has nearly doubled to roughly $5.9bn over the past 2 years. 
Given the lack of meaningful acquisitive growth opportunities over the past 5 years, MediaTek has allocated nearly half of its Free Cash Flow generated toward dividend payments. Following their 1Q21 results, the company’s board of directors approved raising the dividend payout ratio to 80-85%, up from 60-70%, with the policy to take effect next year. On top of that, MediaTek has budgeted NT$100 billion over the next four years for special cash dividends. MediaTek currently trades on a forward dividend yield of 5.2%, which should continue to provide share price support, especially considering a continued low-interest-rate environment. 
This insight is also a natural follow up from an idea generated through our, machine learning-driven, proprietary GEM screening model, which takes a three-pronged approach to find the best medium-term long ideas within the top100 largest stocks in the MSCI GEM Index: <a href="https://www.smartkarma.com/insights/screening-for-gems-june-2021" target="_blank" data-smartkarma-citation="insights:52406" rel="noopener">Screening for GEMs: June 2021</a>.

Mediatek Inc (2454 TT) is the world’s 4th largest global fabless semiconductor company and powers more than 2 billion devices a year. Global smartphone shipments are expected to grow at a 6.9% cagr to 1.7 billion units in 2025. With MediaTek’s leading market share in 5G SoC, they are likely to experience an outsized benefit from the replacement trend brought by technology upgrades to 5G and Wi-Fi 6, Bluetooth, and ARM-based SoCs that integrate wireless communication. 
This is a high-quality global technology company that is expected to expand its ROE to above 20% driven by increased asset turns and margin expansion whilst the net cash on the balance sheet has nearly doubled to roughly $5.9bn over the past 2 years. 
Given the lack of meaningful acquisitive growth opportunities over the past 5 years, MediaTek has allocated nearly half of its Free Cash Flow generated toward dividend payments. Following their 1Q21 results, the company’s board of directors approved raising the dividend payout ratio to 80-85%, up from 60-70%, with the policy to take effect next year. On top of that, MediaTek has budgeted NT$100 billion over the next four years for special cash dividends. MediaTek currently trades on a forward dividend yield of 5.2%, which should continue to provide share price support, especially considering a continued low-interest-rate environment. 
This insight is also a natural follow up from an idea generated through our, machine learning-driven, proprietary GEM screening model, which takes a three-pronged approach to find the best medium-term long ideas within the top100 largest stocks in the MSCI GEM Index: Screening for GEMs: June 2021.

MediaTek: High-Quality 5G Beneficiary with a Tremendously Attractive Dividend Yield

Semiconductors, Memory and SSDs Specialist, Objective Analysis

Jim Handy

Semiconductors, Memory and SSDs Specialist

Objective Analysis

Objective Analysis offers third-party independent market research and data for the semiconductor industry and investors in the semiconductor industry.

Semiconductors, Memory and SSDs

Thematic (Sector/Industry)

The SIA has posted the semiconductor market's year-end total.  Revenues were up 6.5% over 2019, impressively above the industry's 3.9% average annual growth.  This is even more impressive given that the year started off with a consumer slump as the pandemic emerged.

The SIA has posted the semiconductor market's year-end total.  Revenues were up 6.5% over 2019, impressively above the industry's 3.9% average annual growth.  This is even more impressive given that the year started off with a consumer slump as the pandemic emerged.

European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

On 8 February, <a href="https://www.smartkarma.com/entities/renesas-electronics-corp" target="_blank" data-smartkarma-citation="entities:15933:1" rel="noopener">Renesas Electronics (6723 JP)</a> <a href="https://www.dialog-semiconductor.com/sites/default/files/danube_full2.7announcement_final.pdf" target="_blank" rel="noopener">announced an agreement</a> to acquire <a href="https://www.smartkarma.com/entities/dialog-semiconductor-plc-664a1f83-2a21-4690-a91f-fb971832e7ad" target="_blank" data-smartkarma-citation="entities:21607:1" rel="noopener">Dialog Semiconductor (DLG GR)</a>, supplier of Apple.
Consideration. €67.5 per share, in cash, adjustable for dividends or capital distrubutions at the discretion of Renesas. To be conducted though a scheme of arrangement (document to be published on or before 8 March).
<ul>
<li>This values 100% of the equity capital of Dialog at €4,886 mn (as reported), for an implied EV of €4,556.5 mn.</li>
<li>This represents 3.7x EV/Fwd Revenue (vs. historic average of c 1.6x), 17.4x EV/Fwd EBITDA and 22.2x P/Fwd E (vs. historic average of 8x), (please see other recent transaction multiples further down).</li>
</ul>
The shares of Dialog shot up by 16% vs. the prior day, with c. €353 mn traded.
I believe the deal makes strategic sense, as the offer underlines the relevance of both power and low power connectivity to the automobile and industrial semiconductors.
The median implied valuation across multiples is €65.07 per share. On this basis, the price offered by Renesas seems fair.
Bloomberg has reported the interest of STM in Dialog, nevertheless, STM has already exposure to Apple and I doubt it would be willing to pay up to increase it.
Gross spread is c. 3.3%, with a high volume traded on today's (9 March session). The deal is expected to become effective in H2 2021.
With high chances for the deal to complete, recommendation is Long DLG GR.

On 8 February, Renesas Electronics (6723 JP) announced an agreement to acquire Dialog Semiconductor (DLG GR), supplier of Apple.
Consideration. €67.5 per share, in cash, adjustable for dividends or capital distrubutions at the discretion of Renesas. To be conducted though a scheme of arrangement (document to be published on or before 8 March).

This values 100% of the equity capital of Dialog at €4,886 mn (as reported), for an implied EV of €4,556.5 mn.
This represents 3.7x EV/Fwd Revenue (vs. historic average of c 1.6x), 17.4x EV/Fwd EBITDA and 22.2x P/Fwd E (vs. historic average of 8x), (please see other recent transaction multiples further down).

The shares of Dialog shot up by 16% vs. the prior day, with c. €353 mn traded.
I believe the deal makes strategic sense, as the offer underlines the relevance of both power and low power connectivity to the automobile and industrial semiconductors.
The median implied valuation across multiples is €65.07 per share. On this basis, the price offered by Renesas seems fair.
Bloomberg has reported the interest of STM in Dialog, nevertheless, STM has already exposure to Apple and I doubt it would be willing to pay up to increase it.
Gross spread is c. 3.3%, with a high volume traded on today's (9 March session). The deal is expected to become effective in H2 2021.
With high chances for the deal to complete, recommendation is Long DLG GR.

Dialog Semiconductor - Renesas Electronics Recommended Cash Offer

Micron reported earnings above guidance in its first fiscal quarter, and told of a new effort to increase its share of industry profits without changing its share of industry gigabit sales.  Although the company was hit in early December by both a power outage and an earthquake, production has not been substantially reduced.  Customer demand is currently somewhat constrained by shortages of chips that Micron does not produce.

Micron reported earnings above guidance in its first fiscal quarter, and told of a new effort to increase its share of industry profits without changing its share of industry gigabit sales.  Although the company was hit in early December by both a power outage and an earthquake, production has not been substantially reduced.  Customer demand is currently somewhat constrained by shortages of chips that Micron does not produce.

Micron Reports Solid 1QFY21, Adds New Twist to Strategy

United States

KLA-Tencor Corporation manufactures yield management and process monitoring systems for the semiconductor industry.  The Company's systems are used to analyze product and process quality at critical steps in the manufacture of circuits and provide feedback so that fabrication problems can be identified. KLA-Tencor operates sales, service, and application centers worldwide.

Monolithic Power Systems Inc specializes in high-performance, integrated power solutions. The Company provides small, highly energy efficient, easy-to-use power solutions for systems found in industrial applications, telecom infrastructures, cloud computing, automotive, and consumer applications.

ON Semiconductor Corporation supplies analog, standard logic, and discrete semiconductors for data and power management. The Company's products include integrated circuits, and analog ICs. ON also offers discrete semiconductors in a variety of surface mount and standard packages.

Skyworks Solutions, Inc., a wireless semiconductor company, designs and manufactures radio frequency and complete semiconductor system solutions for mobile communications applications.  The Company provides front-end modules, radio frequency subsystems, and system solutions to wireless handset and infrastructure customers worldwide.

Microchip Technology Incorporated designs, manufactures, and markets microcontrollers, related mixed-signal and memory products, and application development systems for high-volume embedded control applications. The Company also designs, develops, and markets linear/mixed-signal, power management, and thermal management products.

Entegris Inc. provides materials management products and services to the microelectronics industry on a worldwide basis.  The Company provides products such as wafer shippers, wafer transport and process carriers, pods, and work-in-process boxes.  Entegris also provides chemical delivery products such as valves, fittings, tubing, pipe, and containers.

Teradyne, Inc. designs, manufactures, sells, and supports semiconductor test products and services on a world wide basis. The Company's test equipment products and services include: semiconductor test systems, military/aerospace test instrumentation and systems, circuit-board test and inspection systems and automotive diagnostic and test systems.

First Solar, Inc. designs and manufactures solar modules.  The Company uses a thin film semiconductor technology to manufacture electricity-producing solar modules.

MA-COM Technology Solutions Holdings Inc. provides high performance analog semiconductor solutions. The Company supplies semiconductors, active and passive components, and sub-assemblies for use in radio frequency, microwave, and millimeter wave applications. MA-COM Technology Solutions serves customers throughout the United States.

MKS Instruments, Inc. develops, manufactures, and supplies instruments and components used to control and analyze gases in semiconductor manufacturing and similar industrial manufacturing processes. The Company's products are used to manufacture flat panel displays, magnetic and optical storage devices and media, solar cells, fiber optic cables, and diamond thin films.

Tokyo Electron Limited manufactures and sells industrial electronics products, such as semiconductor manufacturing machines, computer system, and electronic components.  The Company products are sold in US, Taiwan, and others as well as in Japan.

ASE Technology Holding Co., Ltd. offers assembly and testing services. The Company provides outsourced assembly, semiconductor testing, semiconductor packaging, and other related services. ASE Technology Holding operates in Taiwan.

MediaTek Inc. is a fabless semiconductor company for wireless communications and digital multimedia solutions. The company provides SOC system solutions for wireless communications, high-definition TV, optical storage, DVD and Blu-ray products.

Lasertec Corporation develops, designs, manufactures and markets photomask inspection systems to make semiconductor devices, confocal scanning laser microscopes and liquid crystal display (LCD) inspection systems.

United Microelectronics Corporation designs, manufactures, and markets integrated circuits (ICs) and related electronic products.  The Company's main products are consumer electronic ICs, memory ICs, personal computer peripheral ICs, and communication ICs.

NXP Semiconductors NV operates as a global semiconductor company. The Company designs semiconductors and software for mobile communications, consumer electronics, security applications, in-car entertainment, and networking.  NXP offers its products to the automotive, identification, wireless infrastructure, lighting, mobile, and computing applications.

LONGi Green Energy Technology Co., Ltd. develops, manufactures and sells silicon rods and silicon wafers. The Company's main products include 6 inch, 6.5 inch and 8 inch monocrystalline silicon rods and wafers.

LONGi Green Energy Technology (601012 CH)

Semiconductor Manufacturing International Corporation operates a semiconductor foundry. The Company provides integrated circuit foundry and technology services including the testing, development, design, manufacturing, packaging, and sale of integrated circuits. Semiconductor Manufacturing International offers its products and services around the world.

Semiconductor Manufacturing International Corp (SMIC) (981 HK)

Semiconductor Manufacturing International Corp (SMIC)

DISCO CORPORATION manufactures abrasive and precision industrial machinery for cutting and grinding purposes.  The Company's products are applied in the semiconductor, electronics, and construction industries to produce consumer goods such as personal computers, digital cameras, video game systems, and Digital Video Disc (DVD) players.

Renesas Electronics Corporation researches, develops, designs and manufactures electronic components such as semiconductors and integrated devices.

Marvell Technology, Inc. develops and produces semiconductors and related technology. The Company offers security and networking platform, secure data processing, networking, and storage solutions. Marvell Technology serves customers worldwide.

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Marvell Technology (MRVL US)

MediaTek: High-Quality 5G Beneficiary with a Tremendously Attractive Dividend Yield

MediaTek, the world’s 4th largest global fabless semiconductor company with a leading market share, should benefit from technology upgrades to 5G,...

Wium Malan, CFA

2020 Semiconductor Revenues Up 6.5%

How did the semiconductor market size up in 2020? This Insight shows that, despite COVID, the market enjoyed above-average growth, and appears...

Jim Handy

Dialog Semiconductor - Renesas Electronics Recommended Cash Offer

I believe the deal makes strategic sense, the price offered seems fair. Gross spread is c. 3.3% (complexion exp. H2 2021). With high chances for...

Jesus Rodriguez Aguilar

Micron Reports Solid 1QFY21, Adds New Twist to Strategy

Micron reported better-than-expected earnings in its January 7 earnings call, with a new strategy and technology leadership to improve...

Jim Handy

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MediaTek: Results Beat, Increased Guidance, Earnings Upgrades… and a Lower Share Price

In this insight take an updated look at MediaTek, its medium- and longer-term growth outlook and current valuation levels, following its 2Q21 results.

Wium Malan, CFA

MediaTek: High-Quality 5G Beneficiary with a Tremendously Attractive Dividend Yield

MediaTek, the world’s 4th largest global fabless semiconductor company with a leading market share, should benefit from technology upgrades to 5G,...

Wium Malan, CFA

2020 Semiconductor Revenues Up 6.5%

How did the semiconductor market size up in 2020? This Insight shows that, despite COVID, the market enjoyed above-average growth, and appears...

Jim Handy

Dialog Semiconductor - Renesas Electronics Recommended Cash Offer

I believe the deal makes strategic sense, the price offered seems fair. Gross spread is c. 3.3% (complexion exp. H2 2021). With high chances for...

Jesus Rodriguez Aguilar

Micron Reports Solid 1QFY21, Adds New Twist to Strategy

Micron reported better-than-expected earnings in its January 7 earnings call, with a new strategy and technology leadership to improve...

Jim Handy