• April sales recorded the largest YoY growth in more than six years. According to the Semiconductor Industry Association (SIA),global semiconductor sales in April continued to grow sturdily at 21% YoY toUS$31bil, marking the largest annual increase since September 2010. On the MoM basis, while sales edged up by a mere 1%, it is still stronger than April's average MoM growth of 0.6% in the past 5 years. From our industry sources, the strong growth can be attributed to a structural transition in chip design from twodimensional (2D) to three-dimensional (3D). This comes in the wake of a growing thirst for high-performance chips and lower power consumption. The transition is particularly evident in the logic and memory devices market. We believe the availability of 3D memory would incentivise upgrades or replacements of devices such as smartphones and laptops due to greater and faster storage. This would in turn benefit semiconductor players at large including Inari, MPI and Unisem.

• Sales increased across all regions, with China continuing to take the lead. Regionally, semiconductor sales increased YoY across all regions, with the largest growth coming from China, which expanded 30%, followed by the Americas with 27%, Asia Pacific/Others with 14%, Europe with 13% and Japan with 12%. On the MoM basis, sales in Asia Pacific/Others and Americas grew 2%, while all other regions registered a 1% increase.

• WSTS revised growth estimates upwards. Meanwhile, the World Semiconductor Trade Statistics (WSTS) has upped its annual growth forecasts from 6% to 11% for 2017F and from 2% to 3% for 2018F. The largest upward revision is seen in the memory segment, which is expected to record a 30% growth in 2017F vs. the previous estimate of 13%. We believe this is to account for the transition from 2D NAND to 3D NAND flash memory. For this reason, the largest growth is expected to come from Asia Pacific and Americas, as these regions house the top memory producers in the world, namely Samsung, SanDisk, Micron, Intel and Toshiba. On the other hand, we note that WSTS has marginally lowered its growth projection for sales of analog integrated circuits (ICs) from 7.8% YoY to 7.5% YoY. While slower analog growth is negative for Malaysian Pacific Industries (MPI), Inari Amertron (Inari) and Unisem given their considerable exposure in radio frequency (RF) testing, we believe the downward revision is due to housekeeping reasons and hence the outlook for the companies remains intact.

• MPI and Unisem stand to benefit from memory transition. Malaysian Pacific Industries' (MPI) and Unisem's product portfolios cover packages suitable for use by memory chips. For instance, MPI's Ball Grid Array (BGA) and Thin Small Outline Package (TSOP) are among the most common packages used for NAND flash. For this reason, we believe there are two possible outcomes for MPI and Unisem: i. more advanced Outsourced Semiconductor Assembly and Test (OSAT) companies may decide to discontinue older packaging technologies due to deteriorating margins, in which case such jobs could be redirected to Malaysia; or ii. the memory transition may imply that packaging players need to extend its packaging solutions to cover 3D integration technologies such as Through Silicon Via (TSV) and package-on-package (PoP), thereby opening up new revenue streams. Either way, we view the transition positively as the replacement of low-performance and high-power chips could set forth another high-growth trajectory for the semiconductor industry. This trend is already visible in the semiconductor equipment manufacturing industry in which sales began to pick up. For example, SÜSS MicroTec saw its revenue expand 19% in 2016, compared to only 3% in 2015 amid higher uptake of its 3D-enabled equipment. Rising equipment orders signal companies' confidence in future semiconductor sales.

• Broadcom's wireless 2QFY17 revenue jumped 45% YoY. The company's CEO Hock Tan said the remarkable sales leap was attributed to significant increase in RF cellular and WiFi connectivity contents, which are boosted by the increasing adoption of newer-generation telecommunication technologies (i.e. from 2G to 3G, from 3G to 4G). QoQ, however, sales inched down 2% as the quarter coincided with the end of the annual product cycle at its major client, Apple. Overall, the result is pointing toward a strong earnings momentum for Inari, which provides electronic manufacturing services (EMS) to Broadcom. In April/May 2017, Skyworks and Qorvo also posted sturdy revenue growth in the mobile segment, signalling positives for their supplier Unisem.

• Billings saw a staggering growth of 49%. Semiconductor Equipment and Materials International (SEMI) reported that billings of North American semiconductor equipment manufacturers soared 49% YoY and 5% MoM to US$2,026mil in April. Moving forward, we expect billings growth to remain strong in 2017F, underpinned by increased investments in memory products and foundry equipment.

• Malaysian exports boosted by strong demand for electronic ICs and piezoelectric crystals and parts. Malaysian exports of semiconductor products in April 2017 grew by 24% YoY to RM13bil, outpacing the growth of global semiconductor sales amid a cheap ringgit environment. The growth was mainly driven by a 30% YoY rise in exports of electronic ICs as well as a 19% YoY surge in piezoelectricity crystals and parts, while other segments (which include sensors)grew at a slower rate of 10% YoY. On a MoM basis, Malaysian semiconductor exports was down 9% in April due to seasonality. In comparison, the average MoM decline in April over the past 5 years was steeper at 10%. Moving forward, we believe Malaysian semiconductor exports will continue to trend higher as major smartphone makers normally launch their flagship models in the 2H.

• US semiconductor industry's capacity utilisation. In the US, the Federal Reserve reported that capacity utilisation of semiconductors and related electronic components in April dipped 1ppt MoM to 67% (preliminary), which is lower than the long-term (1972-2016) average of 79%. We believe this coincided with increased investments over the past few quarters – especially in the automotive and industrial sub-segments – to cater to growing semiconductor content in automobiles and rising uptake of smart manufacturing solutions such as cyber-physical systems. This, again, could benefit MPI in the medium term given its exposures in the automotive and industrial segments.

• IoT to benefit Inari and MPI. Moving forward, Semiconductor Equipment and Materials International (SEMI) expects slower overall growth in the semiconductor market, but asserts that several segments will have significantly higher growth driven by the adoption of Internet of Things (IoT). IoT applications that could drive growth in the global semiconductor market include: 1) increasing use of sensors in the automotive industry; 2) surging demand for data storage to house higher quality contents, which boosts the memory segment; and 3) faster-than-expected LTE-A adoption to facilitate seamless communications between connected devices, which spurs orders for analog ICs. This is positive for Inari and MPI as the companies provide testing services for radio frequency chips.

• Maintain NEUTRAL. Although signs are pointing towards stronger semiconductor sales, we are maintaining our NEUTRAL stance on the sector as valuations appear uncompelling.

• Global selldown on technology counters supports our view. Over the past few days, the Philadelphia Semiconductor Index has fallen by close to 5%. Meanwhile, the FANG (Facebook, Amazon, Netflix and Google), which are often viewed as the bellwether of the technology sector, has retraced by 4-9% since last week. In our view, the selldown signals that valuations in the technology sector may be overheated and further supports our view.

Source: AmInvest Research - 13 Jun 2017