Caution against buying on Vitrox’s dip

Vitrox Corp Bhd has dropped from its 52-week high of RM5.90 in June to close at RM3.76 on Aug 6. Investors might be tempted to buy on dips following a global market sell down recently.

However, further weakness may follow in the coming weeks with intermittent rebounds in between. Traders may opt to reduce positions on rebounds here. More weaknesses are anticipated, barring a rally back above the RM4.14 level. Despite the expected weakness in share price, the investing community are still positive on its prospects.

Among the key catalysts include the higher share of its overseas revenue in the 1HFY24. Revenue for the 6-month period has risen 88% year-on-year from 84% a year ago. Meanwhile, local sales dropped 32% versus a decline of 5% for overseas sales a year earlier.

China accounted for the largest revenue segment, jumping to 44% in 1HFY24 vs. 33% in 1HFY23. Orders from China delivered impressive growth with 1HFY24 revenue rising 24% YoY. The country’s foundries are ramping up their capabilities against the backdrop of US chip export restrictions.

However, sales to US customers declined to 13% in 1HFY24 from 15% in 1HFY23, mainly due to overcapacity currently. While automated board inspection (ABI) operations accounted for the larger portion of 1HFY24 revenue. This segment faced sluggish recovery in semiconductor demand.

However, there is an order backlog of RM37mil with 3QFY24 revenue guidance of RM75-RM85mil, which translates to 55%-62% Vitrox’s 2QFY24 revenue. Surface mount technology orders remain slow with limited long-term visibility, mostly below 2 months.

Nevertheless, this could be cushioned by strong demand from China which is expected to contribute over 50% of 2HFY24 revenue. This could be further supported by robust demand from India, which accounted for 10% of 1HFY24 revenue.

Demand for machine vision system standard was robust in 1HFY24 and expected to be resilient over the next 6-12 months. This is premised on continuing efforts to penetrate the huge end user market given existing legacy systems of the industry.

Vitrox has secured purchase orders upgrades on 3D checking light sources with AI detect features for packages as well as new Chinese original equipment manufacturers (OEM). Moving forward, the group is confident in achieving steady growth and improvements in the semiconductor back-end sector.

Vitrox plans to invest in R&D aggressively to deliver cutting-edge solutions, capitalising on opportunities presented by Industry 4.0 and AI boom. The stock is expected to continue trading at a premium to historical average given the positive tailwinds from rising global semiconductor demand for advanced chips.

However, based on the current indicators, it could pay off if investors adopt a bit of patience.