Why ChipMOS has an attractive asymmetric advantage (NASDAQ:IMOS)

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ChipMOS (NASDAQ: IMOS) has a lot to offer. Its dividend declared on May 27, 2022, the payment of which yields 16% over today’s share price of $18.21. The leading provider of outsourced semiconductor assembly, testing and replacement services is not immune to the downturn. In the past two months, the company has announced income goes down.

After a negative 48% return in 2022, ChipMOS is a compelling tech company to consider from here.

Convincing dividend yield

In the shipping sector, Zim Shipping (ZIM) has rewarded investors with regular and special dividends. The market didn’t care. ZIM stock closed near its low of under $24 after the company distributed its cash flow. ChipMOS suffers from the same dynamic. It pays a generous dividend, higher than that offered by Intel (INTC) and its yield of 5.8%. Broadcom (AVGO) pays a dividend yielding 3.81%. The company, however, is smaller in market capitalization. He is also based in northern Taiwan.

Escalating tensions between the United States and China have deterred investors from buying Taiwan-based companies. Taiwan Semiconductor (TSM), a supplier to AMD (AMD), Intel and Nvidia (NVDA), is down 47.3% this year.

ChipMOS has a small size to maneuver through multiple headwinds. Investors should ignore the Chinese threat to invade Taiwan for a while. Semiconductor supply disruption and weak demand are the pressing issues.

Lower income

ChipMOS hasn’t seen growth since May 2022, when revenue grew 2.5% sequentially. In June, revenues began to decline. In July, the decline in income intensified. It fell 19.4% to $65.1 million. That month, the company said a change in macro demand had hurt ChipMOS’ Display driver IC (DDIC) business. It offset this weakness with continued strength in its memory products business.

In August, revenue fell 28.5% year-on-year and 12% month-on-month. The company cited weak near-term demand and inventory adjustments. These factors harm the entire semiconductor industry.

Second Quarter 2022 Joint Report

The company has already reported weak demand in the DDIC segment in the second quarter. Still, its high-end DDIC testing capability has grown. Overall usage decreased to 75%. The company has shown a downward trend in its utilization rate since the peak in Q2/2021:

Using ChipMOS

Presentation ChipMOS

After a sharp decline from Q3/2021 to Q4/2021, the Assembly unit is showing signs of improving utilization. It will need testing and slice replacement activities to compensate for persistent low memory.

Memory products accounted for 40.5% of ChipMOS’ total revenue. DRAM and flash sales are down compared to the previous year. Revenue from the company’s IC-related products benefited from a price increase in March. Additionally, it increased its high-end testing capacity in the second quarter. This compensates for the weakness of smartphones and TV panels.

Opportunity

OLED is a small opportunity for ChipMOS. Although it accounts for around 5% of DDIC’s revenue in Q2, its pace of growth is expected to continue. OLED benefited from strong demand in the automotive sector. Manufacturers use this product for car display panels. The electronics and industrial markets also need OLED.

ChipMOS and the semiconductor industry overcome the impact of Covid lockdown in China. Although China’s zero-covid tolerance policy is inconsistent, the country will eventually ease restrictions. ChipMOS is among the companies that will benefit from increased production, reducing inflationary pressures.

In the second quarter, ChipMOS worked with its long-term commercial customers to push testing. It is moving its high-end testing capacity to 2023. By lowering its capital expenditure, the company reduces the risk of overspending. It can monitor the demand for electronics to improve first. Customers can optimize their product line using ChipMOS take or pay contracts.

Third Quarter Revenue and Fiscal 2022 Revenue Outlook

In the third quarter, ChipMOS posted revenue of $165.3 million. This figure is lower than the estimated revenue of $193.23 million, as shown below.

IMOS revenue in the third quarter

Looking for Alpha

The decline is consistent with reduced spending plans for Micron (MU). Micron is a memory and storage chip supplier that is the bell for the semiconductor industry. Although it is spending $100 billion on a manufacturing facility in New York, it plans to cut wafer manufacturing expenses by up to 50%.

Chart
Data by YCharts

In the stock chart above, ChipMOS stock tended to track Micron stock closely. For example, when MU stocks sold off in the summer, IMOS stocks soon followed.

Analysts expect flat revenue for the year. They expect revenues of NT$25.575 billion for the year.

IMOS Revenue Forecast

simplywall.st

Risks

Covid on and off shutdowns in China are impacting inventory levels. China’s unpredictable policy will add uncertainty to the IMOS stock. However, at a price/earnings ratio of 4.0 times, the stock is priced above these risks.

Rating and Related Investments

Seeking Alpha’s Quant system does not offer scores for IMOS stocks. Yet, semiconductor stocks I’ve researched or observed before have similar “holding” ratings.

IMOS Stock rating

Premium SA

In the ratings above, ASE Technology (ASX) has a holding rating. ASE is a semiconductor assembly and testing services company. Like ChipMOS, the head office is in Taiwan and has 65,695 employees.

ASE stock is trading at a P/E of 4.3 times, which is also the same as IMOS stock.

Ultra Clean Technology develops ultra-high purity cleaning and analysis services for the chip industry. The company is headquartered in California. UCTT shares are trading at a forward P/E of 5.94 times.

Himax Technologies (HIMX) is not a semiconductor testing company. However, its P/E is also around 4 times. HIMX stock pays a dividend of $1.25 which yields 23.6%.

Your takeaway meals

Geopolitical risks between the United States and China are making headlines. This has an impact on the semiconductor industry. Investors will need a thorough understanding of the strain. Fortunately, ChipMOS is not a heavily followed stock with only 3,620 followers on Seeking Alpha. Some of the biggest benefits come from actions few people consider. ChipMOS is one of them.

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