October 2023 Global Semiconductor Sales +3.9% MoM & -0.7% YoY

Into October 2023, the semiconductor industry had displayed further recovery. According to the Semiconductor Industry Association, global semiconductor sales during the month stood at US$46.6bn (+3.9% MoM, -0.7% YoY), versus September 2023’s US$44.9bn (+1.9% MoM, -4.5% YoY). This marked monthly sales recovering MoM for the 8th consecutive month. And of note, the pace of YoY decline has drawn closer to positive territory, signalling that the semiconductor sector is on the brink of a new upcycle. Meanwhile, the latest monthly data had brought YTD sales to US$427.3bn (-12.4% YoY). The decline reflects weaker chip demand against the backdrop of inventory correction (which followed pent-up demand for electronics during the pandemic) and macroeconomic headwinds (inflationary pressures, interest rate hikes, and recessionary fears).

Given the slightly better performance in 2QCY23 and 3QCY23 alongside improvements in certain end-markets, the World Semiconductor Trade Statistics organisation had revised slightly upward its forecast for global semiconductor sales with 2023’s now at US$520.1bn (-9.4% YoY) – previously US$515.1bn (-10.3% YoY). As for 2024, sales are projected to rebound to a new record high of US$588.4bn (+13.1% YoY) – previously US$576.0bn (+11.8% YoY), fuelled by robust double-digit growth from memory and single-digit growth from discrete, sensors, analog, and logic.

MoM Sales Growth Driven by All Regions

By geography, October 2023’s sales growth of 3.9% MoM was driven by all regions with accelerated growth from China (+6.1% MoM), Asia Pacific (All Others) (+4.9% MoM), Americas (+2.9% MoM), and Japan (+0.6% MoM). Meanwhile, the month’s moderated sales decline of 0.7% YoY versus September 2023’s decline of 4.5% YoY was on the back of growth from Europe (+6.6% YoY) and Asia Pacific (All Others) (+0.4% YoY), and softer pace of decline from Americas (-1.6% YoY), China (-2.5% YoY), and Japan (-3.1% YoY).

Global Fab Equipment Spending Projected to Rebound in 2024 In 2023, SEMI forecasts spending on global fab equipment for front-end facilities to contract 15% YoY, off the record high of US$99.5bn in 2022, to US$84bn. The decline is attributed to the softening of chip demand and elevated inventory of consumer and mobile devices. However, a rebound in projected for 2024, with an increase of 15% YoY to US$97bn, driven in part by the conclusion of the chip inventory correction in 2023 and growing demand for chips in the high-performance computing and memory segments.

Maintain Neutral

In all, we reiterate our NEUTRAL stance on the semiconductor sector. While the semiconductor industry is turning the corner, within our universe, outsourced semiconductor assembly and test providers including MPI and UNISEM have continued to echo cautiousness into 4QCY23 with nearterm visibility clouded by uneven demand recovery across end-market segments and fluid customer forecasts amid ongoing market uncertainty.

We have recommendation of BUY on INARI (TP: RM3.25; 30.0x CY24F EPS) and MPI (TP: RM30.00; 26.0x CY24F EPS), HOLD on ELSOFT (TP: RM0.58; 24.0x CY24F EPS), and SELL on UNISEM (TP: RM2.45; 22.0x CY24F EPS). Note that we have upgraded our recommendation on INARI from HOLD to BUY given the stock’s improved risk reward potential following recent share price weakness. Our top pick is INARI which we like for its growth prospects with catalysts from the 5G theme, traction with customer diversification efforts, and above-industry average profitability.

To recap, post 3QCY23 results, we project our semiconductor universe CY23F/CY24F earnings growth at -34.3%/+56.5%. Our expectations for CY23F earnings contraction, largely from MPI and UNISEM, reflects the impact of inventory correction and weaker demand amid macroeconomic headwinds. Thereafter, we foresee CY24F earnings expansion to be underpinned by the ongoing recovery in chip demand with catalysts from secular trends including 5G, artificial intelligence, highperformance computing, the Internet of Things, and vehicle electrification, as well as opportunities from localisation and trade diversion amid ongoing US-China trade tensions. Key downside risks include: i) heightened geopolitical tensions weighing on economic growth and disrupting supply chains, ii) weaker-than-expected sales, and iii) weakening of the USD against the Ringgit.

Source: TA Research - 12 Dec 2023