Frontken

Frontken is among the top 3 largest companies by market cap within the semiconductor sector in Malaysia. It is seen as the best proxy to front-end semiconductors (fabs), as most of its peers are back-end packaging OSAT’s and/or equipment makers (capital goods) for the sector. The stock is well-institutionalized with EPF holding almost 10% of the stock. On the other side of the coin, the stock is tightly held by institutions and is relatively illiquid. In turn, Frontken trades on premium valuations of >30x PER - even higher than TSMC's high teens PER.

Frontken is the best domestic exposure to semiconductor front-end in Malaysia. It boasts more stable and persistent secular drivers, due to its leverage to leading edge processes and customer stickiness. It is also more defensive through the cycle compared with OSAT peers and not exposed to dollar weakness. Frontken's premium valuations is also further justified by the option to match TSMC's capcity expansion into new regions as well as potential to montize intellectual property.

• High customer concentration risk. While the probability is very low, any
  operational mistakes/lapses that result in the loss of confidence by the
  customer poses steep financial risk to FRCB.
• High expectations for earnings delivery - having been consistently profitable since 2016. We anticipate there could be strong negative share price reaction if there is a significant miss to earnings and/or steep downgrade in guidance.
• Geopolitical risk: Frontken is highly exposed to the broader Taiwanese front-end semiconductor ecosystem. Any structural shocks to the industry would pose significant downside risk to both profitability and valuations.