Industry woes chip away at ASMPT, with little relief in sight 

The chip packaging equipment maker’s profit nearly evaporated in the third quarter, marking its fifth consecutive quarter of declines

Key Takeaways:

• ASMPT’s profit fell 98% in the third quarter, and is unlikely to rebound in the short-term as demand for electronic goods remains weak
• The chip packaging equipment maker estimated its fourth-quarter revenue will total between $390 million and $460 million, down 23.2% year-on-year at the midpoint

By Ken Lo

Leading Chinese chip packaging equipment maker ASMPT Ltd. (0522.HK) is getting caught in the latest downdraft sending a chill through the global chip sector after two bumper years during the pandemic. The company’s sales fell 23.8% year-on-year to HK$3.47 billion ($443 million) in the third quarter, as weak demand hit its two businesses in semiconductor and surface mount technology (SMT) solutions, according to its latest results published last week. The weakness nearly wiped out its profits, which plunged to just HK$12.8 million, down 97.9% from the previous year and off by a similar 95.9% from the second quarter.

The company’s latest quarterly report was a chorus of other downers as well, led by an 18.3% year-on-year decline in widely-watched new orders to HK$2.96 billion. The figure was also down 1.8% quarter-on-quarter, in sharp contrast to the 6% quarter-on-quarter increase a year earlier. At the end of September, its total backlog of orders totaled $922 million. 

The company’s latest gross margin also slid to 34.2% from 40.1% in the second quarter due to weak demand that left capacity idle, as the company also took provisions for building inventory that may ultimately go unsold. Much of the woes were concentrated in its semiconductor solutions segment.

ASMPT’s stock rose slightly in the trading day after the results came out, but gave back those gains and were down over the next few days. The shares are down about 20% from a peak in July, and have lost nearly half their value from a 2021 peak.

The global chip sector entered a “super cycle” in 2021, propelled by strengthening demand after the first year of the pandemic. Many Chinese chip makers and their customers also rushed to replenish their inventories after the U.S. blocked Huawei from acquiring cutting-edge chips, afraid that they could fall victim to similar measures. Manufacturers throughout the chip-making chain, from giants like TSMC (TSM.US; 2330.TW) down to supporting players like ASMPT, ramped up their spending, adding new capacity to meet demand. 

ASMPT’s packaging equipment business boomed with the times, sending its revenue and profit to record highs of HK$22 billion and HK$3.18 billion, respectively, in 2021.

But demand began to ebb in 2022 just as quickly as it boomed, hit by rising geopolitical tensions, trade frictions and inflationary pressures. ASMPT looked to growth sectors to maintain its momentum, turning its focus to areas like 5G communications, artificial intelligence, autonomous driving, smart home and high-performance computing applications that were raising demand for a new generation of chip integration and packaging technologies. 

Sensing an opportunity, the company pivoted to the higher-growth and less-crowded advanced packaging (AP) market. Today, it boasts the industry’s most comprehensive range of advanced packaging solutions, including semiconductor and SMT products.

In the third quarter, its semiconductor solutions segment revenue fell 28.7% year-on-year to HK$1.57 billion, posting a HK$110 million loss. The segment’s total new orders fell 10.9% year-on-year to approximately HK$1.33 billion. The only good news in the otherwise-underwhelming report was a modest 4.4% quarter-on-quarter increase in the value of total new orders. But management openly admitted that demand was still weak and a full recovery was not in sight just yet.

During the quarter, the company’s stronger SMT solutions segment also began to flag, with revenue down 19.3% year-on-year to HK$1.9 billion and profit off by an even larger 44% to HK$258 million. The value of total new orders also decreased by 23.5% year-on-year to about HK$1.64 billion. The company blamed the segment’s declines on lower sales from chipmakers in the high-end hardware and printing equipment sector. It said the declines could have been worse if not for growth from its advanced packaging (AP) equipment segment. 

In terms of end-market applications, new orders for semiconductor solutions during the quarter came mainly from advanced packaging and automotive end-market applications. Automotive and industrial applications together accounted for nearly half of SMT solution sales, and made up the biggest share of ASMPT’s overall revenue. Demand for AI-related server applications also grew.

Sound long-term prospects 

In comments after the report’s release, management said the company was receiving new orders from industry leaders and was continuing to see demand for advanced packaging equipment from generative-AI-related customers in the fourth quarter. They added that growth is likely to continue over the longer term as global demand for generative AI and high-performance computing applications develop. 

But in the short term, current market weakness is likely to continue as customers of chipmakers clear out their inventory, leading chipmakers to limit their equipment purchasing. Given those factors and seasonal effects, the company said it expects its fourth quarter revenue to be between $390 million to $460 million, whose midpoint represents declines of 23.2% year-on-year and 4.2% quarter-on-quarter, respectively.

With its unique and broad product portfolio, the company remained optimistic about its prospects and growth potential. It said development of sectors like electric vehicles, smart factories, green infrastructure, 5G, IoT and generative AI will all drive growth for high-performance computing, providing longer-term demand for ASMPT’s products and services. It added a recent drive by companies to diverse their global supply chains could also play to its advantage by driving capital expenditure growth for new chip-making plants that use its equipment.

ASMPT trades at a forward price-to-earnings (P/E) ratio of 14.3 times, slightly lower than TSMC’s 15.2 times, and well behind domestic champion SMIC’s (0981.HK, 688981.SH) 41.3 times. The company’s lower visibility due to its more supporting role in the chip space could make it a more promising value stock among the three. But given the industry’s current woes, only investors with big risk appetite might consider buying the company’s stock right now.

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