$AEMULUS / 0181 (AEMULUS HOLDINGS BERHAD) - site visit to Aemulus Base.

Sometime in the middle of last month, I had the privilege to visit Aemulus Base in Penang. Invited a couple of stockbitors along, like John from @FIRLGuys. We met the CEO, talked to some of their staffs, and explore the facility. Here are some of my personal takeaways from the trip, combined with notes from previous briefings.


** The Tour **

- Aemulus Base is arguably one of the most iconic buildings in Bayan Lepas or even in Penang. It has got a “Google” feel to the workplace (open concept, gym, game room, rooftop turf with Penang airport runway view). Management places importance to work-life balance and employee satisfaction. A big PLUS in trying to get millennial talents to join your company these days vs traditional office set up of your peers. Workforce comprises of a youthful team. Good future and continuity ahead.

- On the tour, we went to "the Arsenal" and got an opportunity to see the “well known” Aemulus RF Testers (AMB 7300 / 7600). Aemulus testers are hot selling items in the market. If compared to their global MNC peers, their testers are much cheaper (could be up to 4x cheaper) as well as better customised in accordance with customer’s niche requirements (how many ports, slots, how many GHz, etc). Aemulus also have dedicated application engineers to specific clients to ensure better engagements.

- Aemulus's Arsenal is not big. Do not confuse them as a manufacturing company. They do not require massive floor space full of machines and equipments to make their testers. We walk through some of their labs and...

- Got to see the inventory room which is worth tens of millions of Ringgit. Inside is full of ICs, FPGAs, VGAs and other items. Aemulus have got 10-20% down payment / deposit from client upon PO (purchase order) – which enables them to stock up inventory. Their supply chain management is apparently well complimented by their clients. This is important during these day and age where supply chain is an issue.


** The Business **

- Aemulus makes testers. Aemulus tester is used to test functionality of various semiconductor applications. For instance, their RF tester is used to test fuctionality of electrical or wireless signal of devices which are part of RF front end module family. Their Enterprise Storage tester is used to test core IC embedded in the enterprise storage.

- So Aemulus is part of the ATE (automated test equipment) ecosystem. JFTECH's CEO tried to explain this in layman term such as this. AEMULUS tester is like the BRAIN of Superman. Whilst Vitrox vision inspection is like the eye, Penta handlers is like the hand and JFTECH's test socket is like the heart. They often synergize with one another to sell as a package to a common client, and are differentiated by means of end applications.

- So Aemulus make testers to cater for different applications:

1) Mobile Phone / Tablet - Radio Frequency.
Selling 5G RF testers to clients such as $UNISEM / 5005 (UNISEM (M) BERHAD), CARSEM ($MPI / 3867 (MALAYSIAN PACIFIC INDUSTRIES BERHAD) ) locally and many other foreign MNCs in US, Korea, Taiwan, etc… Name of testers are AMB 7300 and AMB 7600. This is their largest segment by far and will continue to grow. Alot had been spoken about this segment in various briefings including Stockbit's.

2) Automotive - LED
Aemulus is also well known for selling testers to $D&O / 7204 (D&O GREEN TECHNOLOGIES BERHAD), to test automotive LEDs. As D&O grow due to the rapid growth of automotive LED demand globally, they might sell double the number of testers they sell today. This is Stable and growing segment

3) Data Centre
Aemulus has a legacy model tester serving Broadcom. Selling several testers a year and include maintenance contract. Again, a stable segment

4) CIS - CMOS Image Sensor
Currently the smallest segment but one with the highest growth potential. In FY2022, this segment might be second contributor to topline. A CMOS sensor is an electronic chip that converts photons to electrons for digital processing. CMOS sensors are used to create images in digital cameras, digital video cameras and digital CCTV cameras. Name of testers here is the 5600 series. Recently, Aemulus received an order of USD5m over 3 years from a company indirectly linked to Omnivision (third largest player in this space with 10% market share). As China is ramping up their camera / facial recognition deployment for surveillance to cover more density in the tier 1 cities and starting to cover tier 2 to tier 5 cities, this could potentially be a big addressable market.


** Things to be excited about **

a) Aemulus 5600 series of CIS tester was only launched within 1 year, and they have managed to secure orders from third largest player in the space.

b) Aemulus's China sale contribution was at 40% in FY2021 - this was on the backdrop zero travel. This shows that the team can make things happen and reflects upon a good start to the JV.

c) As reported in latest CGSCIMB report, Aemulus recently shipped a few units of RF Gallium Nitride (GaN) chips tester for Wolfspeed going into 5G base stations in China End client here is Huawei. This is an exciting new verticals in 5G infrastructure.

d) Aemulus is also innovating and creating their own VNA, a major expensive component in their tester. This will help to cut cost as well as reducing the % of component that is "made from US", to serve the China market. Apart from using it for their own usage, they could also sell this outside as a standalone hence this could potentially be a new market as well. More on VNA, it's a difficult instrument to design which is why there's only a few players in the market such as Keysight and National Instrument. To be able to venture in this space speaks volume of how much skills and experience that the team has, after working within the RF space for decades.

e) Aemulus also won a contract to test graphic chip developer - AMD's microprocessor. If there are any legs to this, Aemulus would also be around the verticals of metaverse and bitcoin mining.


** More Business Insights and Financials **

- Aemulus will be able to maintain recent quarter’s net margin as they approach a cost-plus model. Gross Margin came down as Chinese sale have lower margin from their higher volume. Overall, GPM from Aemulus range from 40% to 70% depending on customers.

- Latest orderbook sits around RM60m (includes recent USD5m over 3 years for CIS). In FY2021, 40% of sale coming out of China were all in RF segment. In 2022, some will be from CIS. CIS will see the highest contribution jump of around 4x from FY2021 to be 2nd largest contributor by application. In the future sale breakdown should range about 50% from China and 50% from rest of world.

- Recent money raised from private placement will be used to extend Aemulus Base’s working floor area across the side car park lot. They will also look to hire more than 10 application engineers. This will enable Aemulus to increase max revenue capacity by 50%.


** Personal Analysis on Valuation and Fair Value **

- Aemulus set to release result before Tuesday. There’s only 1 analyst covering the name, CGSCIMB, of which they assume RM82m topline and RM18m bottom line for FY2022. I think this is a very reasonable target, if at all on the conservative side; considering they currently have RM60m orderbook as of the start of the year. According to management, their current facility can cater revenue of RM80-90m, whilst the recent private placement was to be utilised for facility extension mean Aemulus could cater up to RM120m of revenue per annum. CIMB’s FY23 target of RM103m/RM26m also looks reasonable considering potential revenue growth from capacity expansion - which from *things to be excited about* are catalysts to fill up revenue, as well as any potential contribution from China manufactured products.

- As for Target Price, it’s up to the market really… In traditional textbook context, it does look expensive but in the eye of Malaysia tech sector – it can be justified. Aemulus has a historical median PE of 36x since its IPO inception. As of today, Aemulus is trading at 35x CIMB’s FYe22 and 24x CIMB’s FYe23 profit figures. The company might look EXPENSIVE if compared to its global peers (Teradyne / Chroma / Advantest) of whom are much larger, but in local setting, its peers in ATE (PENTA, MMSV, VIS, MI, ELSOFT, JFTECH, VITROX, FPGROUP) has a 3 year median PE valuation of 44x and 5 years median PE valuation of 36x. CIMB's TP of RM1.50 looks decent and hence I will be putting up CIMB’s Target Price up to see what the community thinks.

- Aemulus will release its result in a few days, and the result may move the consensus upwards or downwards.


** Risks **

- I think everyone needs to read this piece on Aemulus on their down years. link: https://bit.ly/3smxhsk to see where it went wrong with them previously and judge if the same can happen again (lack of ability to sell, etc)

- Market risk, in inflationary environment - Mr Market might not be so generous in high valuation to 'tech stocks' in Bursa

- Talent risk - Penang is currently very competitive spot when it comes to engineering talents. Missing some key personnel might pose a big issue for Aemulus.


** Verdict **

5G phones, automotive LEDs, China's 5G infrastructure, China's deploying cameras for surveillance, augmented reality / virtual reality... these are are some of the key theme which could lead to more needs for Aemulus's testers.

Furthermore, the market may be undermining how sellable Aemulus testers are. It's cheaper (by a distant), and more customisable. I personally have heard from 3 CEOs in the industry who had vouched for Aemulus's testers.

All in all, this is an interesting, young and growing Malaysian company that you can look to invest into if the price, valuation and margin of safety suits your investment goals.

As always, just sharing my 2 cents.