HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 16 Aug 2019, 10:17 AM


Technology - Recovery in 2H May Not be Enough

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The initial optimism on sector disappeared as 1H19’s reality set in. Global sales and spending forecasts were cut implying a soft recovery in 2H19. Boost from stronger USD may be neutralized by higher commodity prices. Growth is expected to be driven by HPC and IoT while automotive takes a back seat. Tech focused trade war will disrupt overall supply chain if unresolved. Reiterate NEUTRAL with Frontken as our top pick.

Outperformed in 1H19. Despite the lacklustre worldwide semiconductor sales and equipment spending, KLTEC gained 9% vs KLCI’s 1% decline (Figure #1). Our initial strategy of being cautious and selective is rewarding so far.

Global semiconductor sales. 5M19 turnover fell 14% YoY to USD162bn (Figure #2) was a negative surprise and prompted consensus to cut estimates. However, this is in line with our expectation on the back of the downside risks highlighted earlier. From the initial expectation of 3% growth for 2019, the industry is now seeing an average of 4% decline (Figure #3) with lower demands from all regions in all products except discretes (Figure #4). The plunge of memory price was a major contributor albeit the recent reversion (Figure #5). The only silver lining is the industry is projected to return to expansionary mode in 2020 with an average of 6% growth (Figure #6).

Equipment spending. Capital investment plunged in tandem with 5M19 3MA billings tumbling by 24% to USD10bn from USD13bn in prior year (Figure #7). This is also within our expectation and validates our thesis of prolonged growth in capital spending outpacing sales’ will lead to industry-wide overcapacity. Based on SEMI’s latest forecast, global sales of semiconductor manufacturing equipment by OEM is projected to drop 18% to USD52.7bn in 2019 reflecting rising market uncertainty due in part to geopolitical tensions.

Stronger greenback. HLIB expects USD to be stronger in 2019 averaging RM4.05- 4.15/USD compared to 2018’s average of RM4.04/USD (Figure #8). As such, we expect tech firms to be marginally boosted thanks to their USD-denominated sales while partly offset by the USD cost items.

High input cost. Major raw material prices including gold, aluminium and copper remain elevated (Figure #9). Compounded by stronger USD projection, pricier commodities will exert pressures on margins for traditional packaging.

Segmental view. High-performance computing (HPC) is expected to be the major growth driver for global tech industry on the back of robust cloud investments and potentially cryptocurrency mining. Although IoT device generally has lower IC content, the sheer forecasted volume suggests that this market is too big to ignore. Smartphone demand waned due to longer replacement cycle and innovation stalemate. While, automotive is stuck in the low gear.

Tech-focused trade spat. We take comfort that the US and China are going back to the negotiation table while sanction on Huawei is lifted for now. Bad habits spread fast and Japan is waging another trade war on South Korea. While this may eventually benefit Taiwan, we opine that trade tensions among any of the tech leading nations is a bane due to their strong interdependence in the supply chain.

Maintain NEUTRAL. We reiterate our conservatism in the absence of near term catalyst and remain selective. Frontken (BUY, TP: RM1.67 pegged to 25x of FY20 EPS) remains our top pick. We expect multi-year growth ahead on the back of (1) sustainable global semiconductor market outlook; (2) robust fab investment; (3) leading edge technology; (4) O&G recovery; and (5) strong balance sheet.


Source: Hong Leong Investment Bank Research - 19 Jul 2019

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