HLBank Research Highlights

Author: HLInvest   |   Latest post: Tue, 11 May 2021, 4:59 PM


Technology - Supercharged

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Outperformed the broader index after a remarkable recovery from Mar’s plunge. Although our sector upgrade was untimely, our top pick UWC was a lead gainer. Both global semiconductor sales and spending forecasts are pointing north for 2021. However, weaker greenback outlook may dent the sector’s prospect. We are not overly concern on the rising input prices as tech players are believed to be able pass through the additional costs. Growth is expected to be driven by smartphone, communication, HPC, IoT and auto. We maintain OVERWEIGHT stance and tactically in favour of frontend players. However, on top of Frontken and UWC, we also include Inari Amertron as one of our top picks leveraging on iPhone 12 super cycle.

Outperformed in 2020. After a rapid recovery from Mar’s plunge, KLTEC gained 84% vs KLCI’s 2% increase (see Figure #1). Although we did not upgrade the sector timely enough when market sentiment turned, our top pick UWC was one of the lead gainers in the sector with +359%.

Global semiconductor sales. Despite 10M20’s 6% growth to USD358bn (see Figure #2), the latest industry average growth projection of 4% (see Figure #3) is perceived to be rather conservative. We think the industry will end 2020 closer to our earlier projection of circa +5%. As for 2021, the sector is expected to ramp up an even stronger average growth of 9.6% (see Figure #4). While all product categories are expected to experience expansions (see Figure #5), memory (+13%) leads the pack, followed by opto (+10%), analog (+9%), sensors (+8%), discrete (+7%), logic (+7%) and micro (+1%). The driver behind memory bullish outlook is due to the strength in memory prices (see Figure #6).

Equipment spending. Capital investment was strong in 11M20 with 24% gain in 3MA billings to USD27bn (see Figure #7). Based on SEMI’s latest forecast, there will be 13 new fab constructions (China×4, Taiwan×4, Americas×2, SEA×2 and Others×1) in 2020 with a total investment of USD38bn yielding additional installed capacity of 473kwpm (200mm equivalent). For 2021, 7 new fabs will be developed (Americas×2, China×2, Taiwan×1, Korea×1 and Others×1) with total capex of USD37bn with a total capacity of 289kwpm. This projection validates our view on frontend’s vigorous capex ahead and reinforces our bullishness on this sub segment.

Weaker greenback. HLIB expects USD to be softer in 2021 averaging RM4.00/USD compared to 2020’s average of RM4.20/USD (see Figure #8). As such, we expect tech firms to be marginally impacted as their sales are majority denominated in USD terms while partly cushioned by the USD cost items.

Higher input costs. Gold, aluminium, copper and steel prices are on the upward trajectories (see Figure #9) and may spell bad news for tech players. While partly offset by weaker USD projection, pricier commodities will exert pressures on margins for packagers and equipment makers. However, we are not overly concerned as industry wide capacity constraint positions tech players with stronger bargaining power to pass through higher material costs.

Segmental view. Recovery in smartphone along with communication segments are expected to be the major growth driver on the back of 5G proliferation. Next would be high-performance computing (HPC) supported by the robust cloud investments by global tech giants. Although IoT device generally has lower IC content, the sheer forecasted volume suggests that this market is too big to ignore. Lastly, demand from automotive is expected to be solid as electric/autonomous vehicle require significantly higher semiconductor content.

Reiterate OVERWEIGHT. We expect tech sector to experience multiyear earnings growths supported by fundamental exponential demand. Our forecasts reflect that majority of the companies under coverage (Frontken, UWC, Inari and ViTrox) will likely deliver all-time high earnings in the upcoming quarterly results. We maintain our tactical position in favour of frontend players as many countries have rushed to develop their semiconductor capabilities, especially in leading edge (≤7nm) frontend fabrication (foundry) to be self-sufficient on the back of national strategic and security interests. However, on top of Frontken and UWC, we also include Inari Amertron as one of our top picks, leveraging on iPhone 12 super cycle.

Frontken. Reiterate BUY with higher TP of RM4.61 (previously RM4.10) as we raise its PE valuation multiple from 40x to 45x, pegged to mid-FY22 EPS. It has a unique exposure to world’s leading-edge semiconductor frontend supply chain which is currently in high demand on the back of national strategic and security interests. Furthermore, we opine that its operation is largely shielded from the reintroduction of MCO as majority of revenues (>80%) are generated from Taiwan and Singapore, where the pandemic is under full controls. We like Frontken for its multi-year growth ahead on the back of: (1) sustainable global semiconductor market outlook; (2) robust fab investment; (3) leading edge technology (5/3/2nm); and (4) solid balance sheet (net cash of RM263m or 25 sen per share) to support its Taiwan semiconductor expansions.

UWC. With its increasing exposure to semiconductor front end supply chain and solid demand for its products, we raise FY21-23 earnings by 8%, 5% and 8%, respectively. In turn, our TP is lifted from RM8.88 to RM10.28 as we elevate its PE valuation from 38x to 42x, pegged to FY22 EPS. Maintain BUY. The escalating trade intensity may eventually benefit UWC which provides a one-stop solution as more companies shift productions out of China to avoid import tariffs.

Inari Amertron. Reiterate BUY with unchanged TP of RM3.28, pegged to 35x of FY22 FD EPS. iPhone 12 super cycle is likely to boost Inari back to its glory days while opto division is expected to improve with more customer diversifications and partnerships. Our view is reinforced by two recent news flow: (i) Nikkei Asia reported that Apple’s plan to boost iPhone production by 30% for 1HCY21; and (2) DigiTimes claimed that iPhone 12 sales in China exceeded expectations with 18m unit shipment or over 20% market share in 4Q20 (3Q20: 8% by Counterpoint)

Source: Hong Leong Investment Bank Research - 13 Jan 2021

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