The Apple impact on Inari Amertron

IT is still unclear what the full impact of Apple Inc’s recent decision to make more in-house microchips for its devices will have on companies that are in the tech giant’s supply chain.

In Malaysia, one key company in that supply chain is Inari Amertron Bhd, a company with a RM10bil market capitalisation, operating as a outsourced semiconductor assembly and test (OSAT) player.

Inari makes radio frequency (RF) chips for the United States fabless chip designer Broadcom Inc.

Here is a recap of what transpired recently.

On Jan 9, Apple said it plans to replace Broadcom’s Wi-Fi and Bluetooth chips with homegrown components by the end of 2024 or early 2025. Apple is also swapping out modem chips from Qualcomm Inc.

The iPhone maker is working on an in-house chipset that will combine cellular modem, Wi-Fi and Bluetooth capabilities into a single component.

This is not Apple’s first attempt at pushing for proprietary components, in a bid to gain greater control over its manufacturing processes.

In 2020, Apple supplanted Intel Corp’s processors from its Mac computers with its own creation, known as Apple Silicon. Chip making giant, Taiwan Semiconductor Manufacturing Company Ltd (TSMC) is Apple’s manufacturer for its self-designed chips.The day after the Jan 9 news broke, Broadcom’s shares fell by 4.7% to US$574.9 (RM2,460) apiece, before paring their decline. The same goes for Inari, which saw a drop of 4.6% to RM2.67 in morning trade on Jan 10. Broadcom’s shares have slid more to US$563.2 (RM2,410) a share now, while Inari’s price closed on Friday at RM2.68 a share.

Sales from Apple made up 20% of Broadcom’s total revenue for the financial year 2022 (FY22).

Analysts have pointed out that Broadcom’s profits are likely to take a hit from the loss of business from Apple. Investor sentiment on Broadcom will also likely suffer, considering how significant Apple’s revenue contribution to Broadcom has been, Bloomberg reported.

In the case of Inari, the company has yet to comment on the impact of Apple’s recent announcement. Inari also has never disclosed the amount of revenue that it derives from its business with Broadcom.

An analyst with a local brokerage who covers Inari opines that revenues related to Apple-Broadcom chips accounted for more than RM300mil for Inari’s top line in FY22. Inari reported a revenue of RM1.5bil and profits of RM391mil for FY22.

“Inari has never disclosed its exact business exposure with Apple-Broadcom. Based on our reverse calculation, and by assuming all of Inari’s sales from Singapore are coming from Broadcom, Inari’s business exposure for Apple-Broadcom chips accounted for 17% to 20% or RM266mil to RM301mil of revenue in FY22,” he comments.

“If Apple decided to drop Broadcom chips from its devices by 2025, Inari’s 5G-RF segment would be the most affected given the direct exposure of the business to iPhone products.

“We expect Inari’s margins to shrink with the loss of Apple-Broadcom chips as Inari enjoys solid (profit) margins thanks to the higher average selling price (ASP) for iPhone models versus peers.

“We expect the FY22 margins for earnings before interest, depreciation and amortisation, profit before tax, as well as profit after tax to be at 30%, 29%, and 25% respectively,” he says.

On a more positive note, the analyst states that Inari should be able to cushion the impact of losing orders from Broadcom by securing new customers and orders in these two years. This is because Inari has a proven track record, the analyst points out.

Interestingly, the analyst says that there is the potential of Apple granting Inari a direct contract award. “In addition, we also believe the increase in Inari’s contribution from the automotive segment would eventually offset any margin pressure in the future,” he adds.

It should be noted that after the Jan 9 announcement by Apple, most local research houses downplayed any negative impact that Inari would suffer from the new development.

CGS-CIMB Research in a Jan 11 report noted that Inari will not be affected by Apple’s move to field its own combination Wi-Fi/ Bluetooth chip, as the group is producing Broadcom’s flagship film bulk acoustic resonator, which has a set of different applications than the Wi-Fi and Bluetooth solutions.

“Overall, we believe Inari’s RF division growth prospects are intact as our channel checks indicate the group is already working on new processes technology to support new generation smartphone models,” says the research house.

It also added that should Apple succeed in designing in-house RF chips, the consumer electronics giant will need a few years still to secure alternative suppliers to meet the American smartphone makers’ volume. This was due to the fabrication of RF wafers that are carried out at specialised wafer fabs.

Kenanga Research also remains optimistic on Inari’s outlook with regards to Apple’s intended development. The research outfit states that the RF filters, produced by Inari, are complex in design. As such, the components are unlikely to be replaced in the short term.

“Based on the trend seen, it will be more than five years, since the acquisition of Intel’s cellular modem arm in 2019, before the US smartphone manufacturer finally implements its own design in 2025 that is able to compete with what Qualcomm is already offering,” says the research house.

While both research houses maintain a “buy” call for Inari, Kenanga Research has trimmed its target price by 8.7% to RM2.60. CGS-CIMB Research’s target price remains unchanged, at RM3.

Another trigger for Inari’s loss of momentum in share price is the bearish sentiment that is sweeping across the semiconductor market on the back of inventory correction that is taking place amid demand certainty.

“While the reopening of China could spur demand, the weakness is expected to carry through in the coming quarters amid weakening demand and inventory corrections. In fact, some of the major foundries showed sequential weakness as the second half is typically seasonally stronger,” points out RHB Research.

The research house also notes that further divergence that is expected to take place as major economies adopt protectionism and self-sufficiency policies, will exacerbate the situation through overcapacity issues, and higher pricings in electronic devices. For the near-term, vehicle electrification and computing-related chips segments are the few areas that will sustain growth.

“Non-semiconductor players should see brighter prospects, given the domestic-focused business and full reopening of borders. Their solid balance sheets and relatively healthy US dollar to the ringgit should cushion exporters from the demand slowdown,” says the research house.

On the whole, the World Semiconductor Trade Statistics predicts a 4.1% contraction in global semiconductor sales this year.

Last week, TSMC slashed its capital expenditure for 2023 to US$32bil to US$36bil (RM137bil to RM154bil) from US$36.3bil (RM156bil) in 2022. It also warned that its first quarter revenue would decline by 5% amidst the economic downturn.

TSMC added that growth would rebound in the second half of this year driven by new product launches such as artificial intelligence-enabled goods.

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Apple , Inari , broadbank , chipset , TSMC


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