AEM Holdings - Boom or Bust?

By Mihir Gupta and Karan Pathak (University College London)

Stock Name: AEM Holdings Ltd.

Ticker: SGX:AEM

Sector: Semiconductors, Automation Solutions, 5-G

CMP: SGD 3.660 (as on 18/09/2020)

Recommendation*: a) Investors in the trade - Sell b) Investors wanting to enter the trade - Wait and Buy on Dip

Duration - 1 - 1.5 weeks

* Our recommendation has been made from a long side perspective, not a short side perspective.

Company Overview

  • AEM Holdings is a global leader in offering application specific intelligent system test and handling solutions for semiconductor and electronics companies that are meant to serve advanced computing needs.

  • Their core business model is centred around three main aspects:

  1. Taking advantage of their strong competitive advantage and differential manufacturing capabilities in order to provide advanced manufacturing solutions.

  2. Functioning in 5G end markets such as advanced microchips, internet of things devices, and high-speed communication which entail demanding manufacturing, high volume and rapid growth - thereby providing the company to make use of a diversified growth opportunity.

  3. Driving forward with long term partnerships with their customers with the ability to provide end to end solutions and serve global manufacturing networks across the entire factory lifecycle from design to operations and upgrades, respectively.

  • Revenue for the six months ended June 30 rose 81.7 per cent to S$273.7 million, as all its business segments recorded higher revenue due to an increase in sales orders from existing and new customers.

Product Offerings Snapshot

AEM Holdings’ main product offerings are as follows are:

  1. Equipment Systems Solutions (ESS) - providing bespoke solutions for customers in the area of automated handling machinery and GUI design. This is by far the largest contributor to AEM’s top line, amounting to 95% of 2019 gross income. ESS revenues rose 22% y-o-y in 2019. With the rise of 5G technology the applications of AI and automated technology in a number of industries has exponentially increased which is likely a large factor contributing to growth in this segment.

  2. System Level Test and Inspection (SLT-I) - providing automated system testing technology. AEM is aiming to become a leader in knowledge-based testing where system-level testing can be automated by using a base of knowledge by the testing system to learn from past tests and fix the system accordingly. Revenues from this segment almost doubled at 91% in 2019.

  3. Micro-Electro-Mechanical Systems (MEMS) - minimising the cost-of-test by offering extensive probing of tiny micro-level systems and wafers of semiconductor chips. AEM acquired Afore Oy in 2018 to further its efforts in this segment. Revenues from MEMS testing rose 6.9% from 2018.

  4. Test and Measurement Solution (TMS) - this involves production and R&D of advanced communications and industrial testing solutions for ethernet and fiber cables, among others. This area’s revenues rose about 200% from $979,000 (2018) to $2,915,000 (2019)

Technical Outlook for the Stock

Support and Resistance

Graph 1: Support and Resistance analysis for AEM Holdings ( as on 18/09/2020)

AEM Holdings’ stock price closed at SGD 3.660 after having gained 2% at the end of the trading day on 18th September, 2020. As shown in Graph 1, the stock price for AEM Holdings has been dwindling around its immediate resistance level on the basis of our analysis that is at SGD 3.750 (as highlighted by the yellow rectangle on the upside). Moreover, we believe that the immediate support for the stock is at SGD 3.360 (as highlighted by the yellow rectangle on the downside in Graph 1). Historical analysis suggests that is an extremely important level. This is highlighted because of the multiple testing of the level in the form of a resistance, before the price finally broke out of it. Furthermore, this has also been the level that the bears were unable to break on 10th September, 2020, when the price fell by approximately 12.5% in a single trading day.

Providing our bearish view on the stock, we believe that if the immediate support was to be broken then the next couple of levels that the stock could trail down to are SGD 2.920 (as highlighted by the orange rectangle on the downside in Graph 1) and SGD 2.640, respectively. In fact, the fall from SGD 2.920 to 2.640 may indeed be extremely rampant because of the unfilled gap (the significance of which has been talked about in detail later in the report).

On the upside, we believe that if the stock was to get some bullish momentum, then achieving SGD 3.980 (as highlighted by the orange triangle on the upside in Graph 1) mustn't be tough for the stock as there is no predetermined level between the immediate resistance and that level. Beyond that we believe the next target would ideally be SGD 4.300 (as highlighted by the blue rectangle on the upside in Graph 1).

Pattern and Trend Analysis

Graph 2: Trend analysis and Descending Triangle Breakdown for AEM Holdings ( as on 18/09/2020)

As per our analysis, we believe that AEM Holdings has established patterns that signify a bearish outlook for the stock. Firstly, as highlighted by the black lines in Graph 2, although the stock gapped up on 4th August, 2020 followed by constant hovering between the SGD 3.975 and 4.270 levels, it began to create a descending triangle. What followed was a clean descending triangle breakdown between 4th and 8th September 2020.

Furthermore, what furthers the case of a trend reversal is the breaking of an extremely strong trendline on the upside and a subsequent rising wedge (as highlighted by the blue lines in Graph 2). As it can be seen in Graph 2, the bulk selling that came on 10th September 2020 was extremely significant. Particularly so, because the trendline breakdown was accompanied with the breaking of the immediate support, that too with large amounts of volume. Hence, we believe that unless the price movement comes about to break into this rising channel again, the stock must only be bought on dips.

Price Action Analysis

Graph 3: Wide-Ranging Days for AEM Holdings ( as on 18/09/2020)

Wide-ranging days are days that experience huge volatility and tend to finish the day far from where they opened. They’re usually indicators of a trend reversal. However, from Graph 3 we can see that over the bull run for AEM since mid-March, there have been at least 2 notable wide-ranging days in early May and mid-July which failed to materialise into a reversal and continued the rally. On 10th September there was a bearish wide-ranging day which saw downward price action of about 13% of the day’s open. Now, this could be a trend reversal however history clearly proves that for this stock a continuation of the pattern is more likely here; we would expect the price to hit one of the above-mentioned support levels.

Graph 4: Runaway gaps for AEM Holdings ( as on 18/09/2020)

Another noticeable pattern is the occurrence of runaway gaps in the stock. Runaway gaps are gaps that are caused on high volume by traders who get impatient and enter a position on the stock rather than waiting for a pullback. Gaps can be very good continuation patterns however we must be careful to observe the gap type.

Common gaps are frequent and meaningless and are hence often filled very quickly however runaway gaps or breakaway gaps are usually backed by strong sentiment and are thus not generally filled so easily. As can be seen in Graph 4 there have been two gaps, on 8th May and 4th August, both stemming from established bull runs and accompanied by high volumes suggesting they are runaway gaps. The August gap was filled between 4th and 8th of August. A filled bullish runaway gap can be a strong bearish indicator as it shows that the initial sentiment which propelled the uptrend has been exhausted and there is potential weakness in the stock.

Bollinger Band Analysis

Graph 5: Bollinger Band analysis for AEM Holdings ( as on 18/09/2020)

The stock price finished consolidating on the 3rd September in what was a Bollinger Squeeze - low volatility pulls the bands inward - which was followed by the beginning of the current downtrend. On the 7th and 8th we saw two candles of the same colour (red) creep below the lower bound of the Bollinger Band.

Provided that the Bollinger Band is formed by taking the 20 DMA and creating a range of 2 standard deviations on both the upside and downside, two candles of the same color emerging out of their respective standard deviation mark, is always looked upon as an extremely strong signal for the emergence of a bullish or bearish trend especially after a continued period of price action consolidation (commonly referred to as a squeeze).

Resultantly, the implication here is that even though sellers were aware on the 7th that the price was below the average range and breaking down from it’s lower Bollinger Band bound, they continued their bearish stance and pushed the price down even further down on the 8th suggesting very strong bearish sentiment for this stock.

Moving Average Analysis

Graph 6: 20-5 DMA (Blue - 20, Brown - 5) for AEM Holdings ( as on 18/09/2020)

20 Day - 5 Day MA Analysis

In our MA analysis for AEM, beginning with the 20-5 DMA observation, we can see from Graph 6 that there was a dead cross (where the shorter-term MA falls below its longer-term counterpart) on 31st August, signalling what is likely a secondary trend reversal - given the short-term nature of both of these MAs. Neither MA has really shown itself as a particularly significant line of resistance or support, so their utility is restricted in this stock to identifying changes in the trend.

Graph 7: 21-8 day EMA (Blue - 21, Red - 8) for AEM Holdings ( as on 18/09/2020)

21 Day - 8 Day EMA Analysis

The pattern for the 21- and 8-day EMA is largely the same as the 20-5 DMA. It is not as sensitive as the Simple MA so does not show as many crossovers which helps reduce the number of false signals. Notwithstanding this, there is a clear negative crossover between the two EMAs solidifying our bearish outlook formed by the simple MAs.

Stochastic and RSI Analysis

Graph 8: Stochastic and RSI of AEM Holdings ( as on 18/09/2020)

The first indicator in Graph 8 is the Relative Strength Index (RSI) of AEM Holdings for a 14-day period. As per our analysis, bulk buying on the 10th September, 2020 led to the stock breaking down the 44.6 level which had been an extremely strong support for the past sessions. Provided that we are of the belief that the stock is going to witness some buying (in order to test the 20 MA) before continuing to trail downwards, it may be the case that this level is tested. However, we are not of the belief that this level is going to be broken on the upside very convincingly.

The second indicator shown Graph 8 is the stochastic oscillator. The blue line is the stochastic line and the red line is the 3-Day MA. As is evident from the movement of the lines itself, some buying was bound to come as the Stochastic had already highlighted the stock to be oversold. Given that the two lines are back in the normal range, this furthers our case that we may witness little volumes of buying, before taking the toll on the downside.

News Event Box

  • AEM Holdings is a beneficiary of Singapore’s Scale-Up SG Initiative which aims to support high-growth businesses with their cash flows in the pandemic.

  • The company was one of six Singapore firms that made it into the Forbes top 200 APAC companies.

  • AEM has appointed 20-plus-year semiconductor industry veteran Samer Kabbani as their new Chief Technology Officer.

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