Investment Highlights

• We downgrade our recommendation on the sector to NEUTRAL from OVERWEIGHT for 2021 as we believe that positive earnings outlook amid ongoing technological trends have been fairly priced in with little upside to valuations. Despite initial supply chain disruptions amid Covid-19 lockdowns and travel restrictions, the sector has rebounded to a new high as the pandemic has hastened the progress of technological change towards: (i) remote work and distance learning; (ii) the need for Industry 4.0 technologies such as big data, automation and internet of things (IoT) to build a more resilient supply chain; (iii) the adoption of 5G as well as investments in expanding 5G networks globally; and (iv) electric vehicles (EVs) with more interest on new technologies such as silicon carbide (SiC) and gallium nitrite (GaN).
• Our NEUTRAL view is based on the valuations of stocks under our coverage (Exhibit 8). For outsourced semiconductor assembly and test (OSAT) players, we cover Globetronics Technology (HOLD, fair value RM2.52), Inari Amertron (BUY, FV RM2.78) and Malaysian Pacific Industries (HOLD, FV RM23.23). Their target PEs range from 21X to 28x, pegged against our OSAT benchmark target forward PE of 28x, which represents a 20% premium above the sector’s 3- year historical forward PE of 23x. For automated test equipment (ATE) players, we cover Pentamaster Corp (HOLD, FV RM4.77) and ViTrox Corp (HOLD, FV RM11.48) with target PEs ranging 33–35x, pegged against our ATE benchmark target forward PE of 33x, a 50% premium above 3-year historical forward PE of 22x also due to the brightened prospects of the sector
• Covid-19 saw pushback in orders, rather than cancellations: The enforcement of lockdowns and travel restrictions locally had caused deferments in orders by a couple quarters rather than order cancellations in most of the companies under our coverage, with order pipelines remaining strong and intact.
• Some US-China tech war relief from Biden administration? We believe that US-China tech relations could see less uncertainties and thus an easing of tensions under Joe Biden’s administration. However, we note that Biden will be inheriting regulatory processes that had been initiated by former President Trump and so, policy adjustments might be in order. We also note that the US-China tech decoupling
• Global semiconductor market growth to accelerate in 2021: The World Semiconductor Trade Statistics (WSTS) released its updated forecast in December 2020, projecting a growth of 5.1% YoY in 2020 to US$433bil mainly from Americas and Asia Pacific regions. Growth is expected in all major product categories except for optoelectronics and discrete semiconductors which are forecasted to see 2.6% and 1.2% declines respectively The largest growth contributors are memory ICs (+12%) and sensors (+7%). For 2021, WSTS projects an 8.4% growth across all geographical regions and product categories, with double-digit growth expected for memory ICs and optoelectronics (Exhibit 1). Overall, the Covid-19 impact on the sector is less severe than expected, leading the WSTS to raise forecasts for 2020 and 2021.
• Meanwhile, the Semiconductor Industry Association (SIA) recorded US$39.0bil sales in October 2020 (+3% MoM, +6% YoY) showing the global semiconductor market’s resilience in light of Covid-19 and other macroeconomic factors with projections of moderate growth in 2020 and larger growth in 2021. Sales rose 14%, 6% and 5% YoY in October 2020 in the Americas, China and Asia Pacific/All Other but declined by 1% and 5% in Japan and Europe respectively (Exhibit 2).
• Global IT spending to grow 4% in 2021: On 20 October 2020, Gartner forecasted global IT spending to increase by 4% to US$3.8tril in 2021, with the strongest rebound expected from enterprise software (+7% YoY) to support remote working, to deliver virtual services such as distance learning and telehealth, and leveraging hyper automation to meet pandemicdriven demands. Data centres will experience the 2nd highest growth (+5% YoY) due to increased dependence on cloud services from businesses (Exhibit 3).
• For example, ViTrox which is expecting strong demand in its automated board inspection (ABI) segment, especially for servers and data centers due to increased work-from-home requirements. In 9MFY20, computing accounted for 31% of ViTrox’s revenue.
• This was echoed by MPI which saw higher demand for its copper clip products related to the server market which contributed to industrial revenue, accounting for 27% of its top line. PC and notebook sales also increased for MPI with a 12% contribution in 1QFY21 (vs. 9% in 1QFY20) as a result of increased remote work and distance learning requirements.
• In 3QCY20, global smartphone sales contracted 6% YoY to 366mil units as sales continued to be weak despite vendors introducing multiple 5G smartphone offerings and as lockdown measures eased likely due to consumers limiting discretionary spending and delays in 5G network upgrades due to the Covid-19 pandemic. Quarterly smartphone sales are starting to show recovery after two consecutive quarters of declines, owing to pent-up demand from previous quarters.
• Only Xiaomi and Samsung showed growth, up by 2% and 35% YoY respectively, with Samsung benefiting from its strong position amongst Android users while Xiaomi gaining from Huawei’s loss and due to strong performance in China leading it to move ahead of Apple to #3 in terms of market share. Apple’s slight sales decrease was due to delayed shipments of its new-gen 2020 iPhone by four weeks (Exhibits 4 & 5).
• We believe that companies such as Globetronics benefited from the pent-up demand as its 9MFY20 core profit of RM33mil (+12% YoY) was underpinned by stronger volume loadings for its three key sensor products i.e. light, gesture and motion sensors on the higher demand of smart devices e.g. PCs, smartphones, tablets and wearables as well as Bluetooth devices. The smart sensors division accounted for 61% of Globetronic’s top line in 3QFY20 and is still expected to be a key growth driver for the group going into FY21F. Meanwhile, Inari’s radio frequency (RF) division’s higher revenue boosted the group to its highest ever quarterly PAT, with a core profit of RM70mil in 1QFY21. The group’s RF ramp-up since June 2020 caters to 5G phones’ demand, and this is expected to translate to strong FY21F earnings supported by an expansion to 22 systemin-package (SiP) lines, increasing YoY SiP lines by 2.75x in FY21.
• Global auto sales recovery in 2021 pinned on China: On 17 September 2020, S&P Global Ratings lowered its forecasts for global vehicle sales, expecting sales to fall by nearly 20% to ~73mil units in 2020 (vs 90.3mil units in 2019) – where the US, China, Europe and the rest of the world are expected to see YoY declines of 20–22%, 6–9%, 20–25% and 25% respectively. Forecasts for all regions were more pessimistic except for China which saw signs of improvement in 2QCY20. S&P Global Rating forecasted 2022 total sales to still be below 2019 volumes, but China has the potential to resume moderate long-term growth and may be the only market likely to recover to 2019 volumes by end-2022.
• Global EV sales to reach 2.9mil in 2020: According to EV-volumes.com, global EV sales are expected to rise to 2.9mil in 2020 (+38% vs 2.1mil in 2019) which we believe is due to recovery in China and continued EV uptake in Europe. The EV market was affected by the Covid-19 impact to a lesser extent compared to the overall passenger car market in 1HCY20, where sales declined by 14% YoY versus 28% YoY decline seen in the total light vehicle market. China lost its supremacy in global new EV (NEV) sales in 1HCY20, where its share of global sales shrank to 39% in 1HCY20 (vs. 57% in 1HCY19) after a 42% YoY decline in EV sales amid reduction of subsidies and more stringent technical requirements for EVs
• Meanwhile, the US and Japan sales dropped by 38% and 25% respectively. On the other hand, Europe NEV sales soared 57% YoY despite its vehicle market sales sliding by 37% YoY while its NEV market share rose from 24% to 42% due to the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) effective September 2018 which calculates fuel consumption and CO2 emissions, changes in national vehicle taxation, and increase in grants. On the local front, MPI saw a higher demand for EV-related products from the US and the EU in 1QFY21. The group has been investing in SiC and GaN technologies to focus on growing its power packaging segment with its customers.
• China leads global auto recovery in 2020 amid Covid-19:
  • China: The China Association of Automobile Manufacturers (CAAM) car sales rising 12.6% YoY to 2.77mil units in November 2020, the eighth consecutive month of increase while NEV sales surged 104.9% YoY to 200K, its fifth month straight of increase as the pandemic eased and EVs won more users.
  • EU: The European Automobile Manufacturers Association (ACEA) reported that EU new car registrations dropped 7.8% YoY in October 2020 to 94K units as several European governments reimposed restrictions to battle a second wave of Covid-19. Demand fell markedly in Spain (-21% YoY) while losses were posted in all EU markets. Meanwhile, YTD demand contracted 26.8%.
  • USA: Toyota, Hyundai and Mazda saw sales shrinking by 1%, 9% and 10.8% YoY respectively in November 2020, leading JD Power to project a 14.6% YoY decline in sales for the month. Adjusting for less selling days in November 2020 compared to the previous year, JD Power estimated that sales only dropped 3.5% YoY. Note that sales numbers for companies such as General Motors, Nissan and Fiat Chrysler were unavailable as these automakers reported only quarterly sales. Despite the negative data, the auto industry continues to improve from the lows of April 2020.
• We have a NEUTRAL recommendation on the sector. However, we may upgrade our sector recommendation to OVERWEIGHT if: (i) companies under our coverage secure significant jobs and/or major customers; (ii) strengthening USD outlook; (iii) faster-than-expected adoption of technological trends such as 5G, spurring high demand for end products; and (iv) improvement in US-China trade relations which will help to reduce market uncertainty. We may downgrade our stance on the sector to UNDERWEIGHT if: (i) weak economic conditions caused by the delay in containing Covid-19 cases globally, weighing down the demand for end products; (ii) margin erosion in the face of a weakening USD; and (iii) worsening trade war ties between the US and China, specifically relating to technology and intellectual property.

Source: AmInvest Research - 5 Jan 2021