AEM share price in new dawn?

The darker the night, the nearer the dawn. On 29 February 2024, AEM share price collapsed by nearly 20% following the release of the FY2023 financial result. The apocalyptic drop of AEM share price must have scared the living hell out of AEM investors. Question now is: will AEM share price see light at end of tunnel in 2024?

As predicted in my previous article, all hell broke loose after the management announced the halting of final dividend for FY2023. Instead of cash dividend, bonus shares will be issued to shareholders. This is, of course, subjected to shareholders’ approval at the AGM. Whilst the halting of final dividend is within my expectation, the ensuing market reaction totally caught me by surprise.

To be honest, the meltdown of AEM share price is truly sobering and humbling for me. After all, back in 2021, I had talked up the possibility of AEM share price smashing $10 upon a potential Nasdaq listing. Back then, I had been very bullish on AEM share price due to its robust business performances. Looking back, it felt so surreal as the sky was the limit for the semiconductor solution provider.

However, the wheels came off the wagon in double quick time in early 2022 as the semiconductor industry tanked in the aftermath of a global chip inventory glut. AEM share price was not spared from the devastating carnage. Consequently, many netizens have been blasting me for changing my narrative of AEM share price as my assessments since 2022 had been in stark contrast as compared to 2021. In this context, I would like to pen down some of my thoughts on AEM.

First thing first. I am not going to be defensive and claim that my thesis on AEM share price is correct all along. Readers of my blog may know that I am not a self-righteous person. Like many investors, I do have investment blindspot even after making the best effort in doing the necessary due diligence. In the case of AEM, I accept that I have underestimated the semiconductor industry downturn; as well as misjudging the ability of current AEM’s management to turn around the business.

Secondly, I would like to take this opportunity to relook my thesis on AEM share price and evaluate what exactly went wrong with my decision makings along the way. For sure, many AEM investors like me had a difficult journey in the last few years but I believe such self-evaluation would help me to become a better investor going forward. Obviously, I would not have the foresight to predict AEM’s US$20 million arbitration settlement to Advantest but I could have bolted at the first sign of trouble in February 2022 and cut loss.

Thirdly, I would be lying if I claim that my conviction is not shaken after the series of unfolding events in the past 6 months. However, I have been asking myself over and over again if this is really the end of the road for AEM share price. At the end of the day, my conclusion is that AEM is not a lost cause, at least not yet. And this is not based on blind faith. In this article, I will share my view on why I think that AEM share price may see light at end of tunnel in 2024.

In this blog, I have always maintained that on its day, AEM share price can be unbeatable. Conversely, when the tide goes against AEM share price, the counter can spiral out of control. In view of this, this counter is really not for the faint-hearted. Note that this is an opinion article and not meant to be a financial advice. Please do your due diligence or engage financial advisors before investing in the stock market. I am vested in this counter, so my views on AEM share price may be biased.

AEM share price looks to Old Guards

One major reason why I am still keeping the faith on AEM share price is that two of the previous core management team are still around – Mr. Loke Wai San (Chairman of the Board of Directors) and Mr. Chok Yean Hung (former Chief Executive Officer and Chief Operating Officer of the Group and current Non-Executive, Non-Independent Director).

Both men were pivotal in the turnaround of AEM’s business in 2012 when the previous leaders were embroiled in devastating corruption and immigration scandals that led to its former CEO being charged by CPIB. Those were really the dark days for AEM as the stock was placed in SGX Watch-list. And then Loke Wai San came along to invest in AEM and rescued the company from the brink of collapse. The rest is basically history.Loke Wai San and Chok Yean Hung were the key personnel turning around AEM back in 2012. So I am convinced that they have the required experience and capability to guide the company out of this current mess. As the saying goes, what don’t kill you will only make you stronger. In this regard, it is only fitting that Chok Yean Hung was appointed as the executive consultant to review and improve the process control systems.

Chok Yean Hung should be the right person to fix the current mess as he invested in AEM in 2011, and also took on the roles of VP Operations of AEM from 2012 to 2014 and becoming the COO from 2016 to 2018. Subsequently, he was also the CEO until 2020.

The return of Chok Yean Hung may also be a signal from the Board of Directors that their patience with CEO Chandran Nair could be wearing thin. It has been 4 years since Chandran took over the helm as CEO and AEM is showing signs of regression. Revenue in 2020 was $580 million but has slowed to $480 million in 2023. While the company has expanded its operations in overseas countries through various acquisitions in recent years, AEM is still heavily dependent on Intel for revenue. Incidentally, the previous COO has departed in October 2023 while the previous CFO has recently departed. Presumably, the CEO might be the next to be asked to resign if there is further hiccups in 2024.

Institutional investors keep the faith

Another key reason for my conviction in AEM, albeit shaken, is that the various institutional investors have not fled. Currently, their stakes amounted to nearly 50% of AEM. Thus, this suggests that the recent plunge in AEM share price should not be attributed to institutional investors cashing out their investments in AEM. Rather, it should be the work of the short-sellers.

On 29 Feb 2024 short sale on AEM swelled to 4.5 million shares, which was 10 times the daily average. Subsequently, short-selling volume against AEM dropped to 1 million, leading to order being partially restored for AEM share price. The reason for the decline in short-selling volume should be due to the fact that most short-sellers would close their positions before the weekend to reduce their risk exposure. As such, AEM share price is not out of the woods yet.

Notwithstanding the volatility of AEM share price, the fact that key institutional investors remain vested in AEM speaks volume. At the point of writing, both Temasek Holdings and Malaysia’s EPF has not reduce their stakes (which amounted to about 23%) in AEM. This suggests that they continue to believe in the long-term potential of AEM. In particularly, Temasek Holdings is not a sleeping shareholder of AEM. In Russell Tham, Temasek has a non-independent director in AEM.

My biggest concern now is whether Temasek Holdings would pounce on minority shareholders and acquire AEM on the cheap. Its average entry price was probably around $3.60. Based on its entry price, any takeover offer bid from Temasek Holdings should be about $3.00 at most. This is the worst scenario which I hope will not come true as I have entered at $5.22. A hostile takeover by Temasek Holdings would definitely hit my portfolio left, right and centre.

Financial performance of AEM

Let me be frank about it: this is not the first time that I have caught a falling knife. Back in 2009, I have lost money investing in China Enersave. However, the situation for AEM is vastly different from China Enersave. For AEM, it has actually made a profit before tax excluding exceptional items of $38.3 million. Even if the exceptional items are included, the pre-tax profit amounted to $7.6 million. In view of this, it is likely that AEM will be back into black for FY2024, barring unforeseen circumstances.

On the halting of final dividend, I actually support this move as I share the same view that the fund should be used to invest in new customer programs. In 2023, the management doubled down on investments in research and development as expenses increased 5% year-on-year to reach $24 million. The investments yielded 9 patents in 2023, and helped to win several new customer engagements in 2023.

Unlike China Enersave, AEM’s management has always been prudent in its financial management. So far, the company has not issued rights issue to finance its business activities. This is unlike China Enersave, which had raised several rounds of rights to stay afloat. In fact, even after accounting for the exceptional items, the balance sheet for AEM remained strong. Current assets amounted to $492 million while current liabilities stood at $177 million. Cash holdings amounted to $101 million.

One thing that should be noted is the high inventory of $328 million. Out of this amount, the raw materials constituted $169 million while finished goods were valued at $99 million. Although inventories had decreased due to consumption during the current period, the amount is still high, suggesting that AEM has problem selling its products. This is presumably due to the lack of volume ramp demand from Intel.

Based on the presentation slides for the latest financial results, ramp of products is expected to be in late 2024 given current visibility around customer product release schedules. In the meantime, the management provided a “1HFY2024 guidance of $170M to $200M due to the timing uncertainties for new product ramps from the Group’s multiple customers”.

Conclusion

The past 2 years had been nothing short of a nightmare for many AEM investors as the share price plummeted more than 50% to reach current $2.25. Those who had sold off their stakes in AEM were either disillusioned with the business performances of the company or moved on to other counters which may provide better returns. I would be lying if I said that the thought of exiting this counter has not crossed my mind but cutting losses is not an option for me as the losses that would be incurred would be substantial.

Time is running out for AEM. Even though the management claims that they are “in an enviable position to capitalize on the opportunities to address the test demand for newly developed AI devices”, the matter of fact is that they are not the sole System Level Test (SLT) supplier in the semiconductor industry. Their competitors like Advantest and Teradyne also have SLT capabilities. Given that the recent fiascos might have dented AEM’s reputation, AEM is living on borrowed time as their competitors are gaining market share.

That said, is this really the end of the road for AEM? Honestly, I do not think so. While the downturn in the semiconductor industry has led to a crisis of confidence in AEM share price, the Group has pivoted itself as a technology company that thrives on innovation (parallel testing and thermal control). In this regard, the long-term potential is there but existing investors need to have strong holding power to withstand this winter. I am cautiously optimistic that 2024 should be a positive year for AEM with the recovery of the semiconductor industry in full swing. Till then, enjoy the ride.