• Malaysia’s outsourced semiconductor assembly and test (OSAT) market value has declined 25% in 2018 and set a bearish trend to trade at 4-year mean forward PE of 16.4x; contrastingly, the sub-sector was trading above +1-sigma of 21.5x, an all-time high in Oct 2018.

• We expect the OSATs’ earnings to remain subdued in 2019 amidst: i) softening smartphone demand; ii) uncertainty over the US-China trade tension; and iii) supply crunch for silicon wafers.

• We downgrade the sub-sector to UNDERWEIGHT (from NEUTRAL) as we pare down our FY19-20F aggregate earnings estimates further by 20-40%. Over this period, we expect earnings to contract by 20-50%.

• SELL call on all OSATs under our coverage, ie Inari (TP: RM1.45), GTB (TP: RM1.55) and Unisem (TP: RM2.50). MPI has been classified as non-rated after its exclusion from the SAC’s Shariah list at end Nov 2018.

Moderate growth for global semiconductor sales in 2019

We expect 2019 earnings growth for the OSAT companies under our coverage to be subdued in view of anaemic global semiconductor sales trend, forecasted by the World Semiconductor Trade Statistics (WSTS) to expand at 2.6% (2018E: 15.9%). The drastic slowdown is due to price correction for memory products (ie. DRAM and NAND) amidst the slowdown in cryptocurrency mining and easing smartphone sales c.32-35% of semiconductor sales. WSTS expects sales growth in 2019 to be driven by data centre and automotive segments (higher international vehicle safety standards). However, these segments collectively contribute c.20-25% of semiconductor sales, which we expect to only mitigate the easing sales growth of memory products.

Unfavourable outlook for M’sia OSATs

We downgrade our sub-sector weighting to UNDERWEIGHT (from NEUTRAL) given the negative earnings prospects and what we view as valuations being fairly rich. While the sub-sector’s market value in 2018 has fallen 25%, we fear further earnings downside risk could weigh on share prices. In part, its exposure to the non-Android based smartphone segment is huge (c.40-60% of revenue). The segment’s sales growth has been sluggish as limited evolution between key models have failed to measure up to its premium pricing. This has been made worse with Android-based smartphones flooding the market at less than half the price whilst having similar, if not better features. Then, there are uncertainties from the US-China trade tensions, higher input costs from weaker ringgit as well as shortage in silicon wafer supply.

SELL call on Inari (TP: RM1.45), GTB (TP: RM1.55), Unisem (TP: RM2.50)

We cut FY19-21F earnings estimates for the OSATs under our coverage by 20-40% mainly on lower sales assumed. While diversification into the automotive segment have started to gain traction, the smartphone segment remains the biggest earnings contributor. We downgrade all our stock calls to SELL for Inari, GTB and Unisem; MPI is now non-rated after its exclusion from the SAC’s Shariah list. We see limited bottom up re-rating catalyst as the appeal of non-Android based smartphones wane, prolonging its replacement cycle. On the broader scale, we also note that adoption of other consumer gadgets (ie. IoT) remains limited as the current ecosystem remains very much smartphone-centric.

Source: BIMB Securities Research - 14 Feb 2019