Investment Highlights

• July sales recorded the largest YoY growth in almost seven years. According to the Semiconductor Industry Association (SIA),global semiconductor sales in July continued to grow sturdily at 24% YoY to US$34bil, marking the largest annual increase since September 2010. On a MoM basis, growth accelerated from 2% in the previous month to 3% in July.
  
  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, especially crucial for logic and memory devices. We believe the transition would incentivise upgrades or replacements of devices such as smartphones and laptops due to better performance and storage. This would in turn benefit semiconductor players at large including Inari, MPI and Unisem.

• WSTS ups growth estimates. Meanwhile, the World Semiconductor Trade Statistics (WSTS) has raised its annual growth forecasts from 11% to 17% for 2017F and from 3% to 4% for 2018F. The largest upward revision is seen in the memory segment, which is expected to record a 51% growth in 2017F vs. the previous estimate of 30%. We believe this is to account for the transition from 2D NAND to 3D NAND flash memory. According to All About Circuits, major distributors of flash memories such as Samsung have started switching focus to the production of 3D NAND. In addition, there are numerous consumer 3D NAND SSDs being introduced to the market recently, including Intel's 600p Series, Western Digital's WD Blue and Toshiba's TR200 line, which are expected to fuel memory markets' growth.
  
  Similarly, WSTS has also lifted its growth projection for sales of analog integrated circuits (ICs) marginally from 7.5% YoY to 8% YoY. This augurs well for Malaysian Pacific Industries (MPI), Inari Amertron (Inari) and Unisem, which have considerable exposure in radio frequency (RF) testing.
   
• 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 registered sturdy wireless revenue growth of 27% YoY and 12% QoQ in 3QFY17. The company's CEO Hock Tan said the remarkable sales leap was driven by the start of a ramp from its North American smartphone customer (Customer A) ahead of their impending flagship product launches. In addition, the growth was further boosted by a significant increase in RF cellular and WiFi connectivity contents in Customer A’s new productsdue to rising adoption of newer-generation telecommunication technologies (i.e. from 2G to 3G, from 3G to 4G).

• Even better quarters ahead. According to Hock Tan, the rev-up of the new products has already gone into full stride currently. Therefore, he expects wireless revenue for the upcoming quarter (4QFY17) to record a staggering growth sequentially and YoY. On his outlook for 1QFY18 wireless revenue, unlike prior years, which would typically see QoQ slowdown, he foresees revenue would hold up sequentially due to expected pent-up demand for the new “anniversary” flagship product.Overall, signs are pointing toward a robust earnings momentum for Inari, which provides electronic manufacturing services (EMS) to Broadcom.

• 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. Inari, Unisem and MPI are currently trading at CY18 PE of 18x, 15x and 14x, vs. industry average of 14x.

Source: AmInvest Research - 7 Sept 2017