• Based on Semiconductor Industry Associate (SIA), global semiconductor sales hit record high in 2017, an increase of 21.6% to US$412.2bn. The demand was underpinned by several key sectors such as automotive, industrial and storage markets.
• Malaysia’s export has grown 17.9% yoy RM82.9 in January driven by strong growth in manufactured goods. We believe the strong growth was supported by the increase in demand for global semiconductor products.

• Malaysian Outsourced Semiconductor Assembly and Test (OSAT) players under our coverage have all embarked on diversifying their respective revenue streams particularly making inroads or bigger headways into the automotive sector. ? We expect appreciation in ringgit and higher raw material cost (wafer and metal price) to be main challenges for Malaysian OSAT players to maintain their margins.

• We initiate coverage on the Tech sector with an Overweight with our recommendations on Inari (BUY, TP: RM3.25), Unisem (BUY, TP: RM3.20), MPI (BUY, RM11.25) and Globetronics (SELL, TP: RM3.10). Our top pick is Inari, bolstered by its sound business model which is reflected in its robust earnings growth and margins, as well as structural growth from its capacity expansion.

SIA – global semiconductor sales to continue grow

According to SIA, global semiconductor sales hit record high in 2017, an increase of 21.6% to US$412.2bn from US$335.2bn in 2016. The surge in semiconductor sales was underpinned by strong end-product demand across various segments ie. consumer, communication, automotive, industrial and medical devices

Malaysian OSATs to expand businesses towards automotive sector

Malaysian OSAT have started to expand their solutions and services towards the automotive sector for better margin products ie. Unisem (high-end microphone), MPI (sensors) and GTB (LED). This is in tandem with growing demand for automotive sector as indicated by IC Insight, i.e. the growth in IC components used in automobiles are forecasted to grow at 13.4% CAGR over 2016 – 2021.

Growth in OSAT business to meet market demand

Historical forward PE for Malaysian OSAT (MO) under our coverage trades at 15.5x ahead of US semiconductor companies at 13.7x. We believe this was due to higher demand for consumer products, automotive, industrial 4.0 and Internet of Things (IoT) which drives OSATs production.

Inari - our top pick

Inari (BUY, TP: RM3.25) is our top pick given its sustainable business driven by robust RF filter business worldwide, growing demand for 4G/LTE network, and connectivity technology. We also like Unisem (BUY, TP: RM3.20) and MPI (BUY, TP: RM11.25) underpinned by better performance and expansion into new business segment- automotive.

Global semiconductor industry remains strong

The Semiconductor Industry Association (SIA) noted that global semiconductor sales hit record high in 2017, a 21.6% increase to US$412.2bn (2016: US$335.2bn) (Chart 1). This was driven by strong growth from integrated circuits (IC) products (ie. memory, logic, micro and analog), representing over 80% of total sales, grew by 23% yoy. The growths from other product segments – discrete semiconductor (+18.3% yoy), optoelectronics (+16.4% yoy) and sensors (+16.2% yoy) – were also strong.

The sales across all regions were notably robust with China – the largest contributor towards semiconductor sales – maintained a solid growth of +22.2% to US$129.7bn due to strong internal demand and established value chain (Chart 2). The US also chalked the fastest growth in 2017 at 35% yoy followed by Japan Asia Pacific/others and Europe. The growth in these markets were underpinned by strong demand across various sectors as more and more electronic products incorporate semiconductor components.

Source: BIMB Securities Research - 2 Apr 2018