KUALA LUMPUR: Kelington Group Bhd's (KGB) business activities are expected to improve in the third quarter (Q3) as its Malaysian operations back to full swing, said Affin Hwang Capital.
Affin Hwang said besides that, KGB's Singapore labour efficiency had improved from 30 per cent to 70-75 per cent since mid-August, while China activities were stronger on higher Semiconductor Manufacturing International Corp (SMIC) job execution.
The firm said KGB's liquid carbon dioxide plant is now operating at 40 per cent, a vast improvement from the 14 per cent level seen in Q2 2020, due to the Movement Control Order (MCO).
"This would suggest a sequential gradual recovery from its Singapore operations.
"China activities are also expected to gradually ramp up with the second batch of SMIC contracts secured in August," it said in a note today.
On Monday, it was reported that the US government was considering imposing export restrictions on SMIC over accusations of aiding China's military and defence apparatus.
SMIC has since rebutted this with a statement citing false accusation.
"Amid this negative development, we understand that KGB's current contracts with SMIC are still ongoing (35 per cent of its current order book).
"If the US ban does take effect, we gather that SMIC may source the tools and equipment from Japan and Korea as an alternative for its 14 nanometres (nm) and 28 nm chips," Affin Hwang said.
It added that SMIC's expansion timeline for the seven nm chips might, however, be delayed as such tools were still largely sourced from the US.
"But fortunately, its existing contracts are not affected by the seven nm, though the company may face long-term order book replenishment risks due to the potential expansion timeline delay," it said.
Affin Hwang has downgraded KGB to "hold" from "buy" on the looming uncertainty over near-term outlook with 35 per cent of its order book derived from SMIC.
"With more than one-third of KGB's order book exposed to a single customer (SMIC) currently under scrutiny, this may put KGB's near-term earnings at risk," it said.
Its target price remains unchanged at RM1.22.
At 9.50am, KGB is one sen lower at RM1.12.