Highlights

Global  semiconductor  stocks  went  through  a  cold  reboot since  last  week after  Microchip  Technology Inc. lowered sales forecast  blaming  weak  demand  from  China  and  signaled  that another  major correction has begun.

Without  exception,  the  fear  of  a  sharp  downturn  has  spilled over  to  tech  stocks   under  our  coverage,  wiping  off  market value  of ~RM850m  just over  the past one week.

Comments 

Even  with  the  current  bearish  market  sentiment,  we  sense overreactions  and  opine  that  this  newsbreak  should  not  be reflected  on the whole sector.

A  deeper  look  into  Microchip’s  product  portfolio reveals that it has  limited  exposure  to  phablet  market,  the  main  industry growth  driver.  Rather  it  specializes  in  microcontrollers  for generic  applications,  such  as  automotive  braking  systems, industrial  machines,  thermostats,  p ortable  computers  and garage-door  openers.

We  believe  that  selective  segments,  such  as  smart  devices, telecommunication  and  IoT  will  continue  to  spur  the  industry. For example, iPhone 6/+ continue to create surprises: -  Record  sales  of  10m  units  in  first  3  days  (excluding  world largest market, China due to product certification   delay). -  Production of new iPad may be delayed till next year in view of the overwhelming  iPhone demand.

Cisco’s  IoE  prediction: 25bn devices connected to the Internet by  2015  and  50bn  by  2020.  Using  this  figure,  the  number  of connected  devices  per  person  jumps  from  1.84  in  2010  to 6.25 in 2020.

Even  the  worrisome  PC  segment  showed  a  modest  recovery based  on  Intel’s  record  quarterly  sales   along  with  forward guidance  which topped analyst  expectations.

Catalysts 

Technological  advancement  and  creation  of  new  electronics applications  for  emerging  trends  (IoT,   connected  cars,  big data, smart home  / city, etc).

Improved  consumer  confident.

Risks

• FOREX,  input  costs  (gold  and  copper),  weaker  consumer demand  and  stalemate in electronics innovation.

Forecasts

• Maintained.

Rating

Overweight

• Positives  –  Appreciation  of  USD,  proliferations  of  tablets, smartphones,  internet  of  things  (IoT),  wearable  techs  and hybrid / electric automobiles.
• Negatives  –  intense  competition,  lack  of  talent  /  retention, high  CAPEX,  rising  electricity  cost  /  wages,  unable  to  move into the high value  chain (design and development).

Top Picks 

Inari Amertron  (BUY, RM3.41) has indirect exposure to Apple. Currently  running  at full capacity implying voracious  demand.  

ViTrox  (BUY,  TP:  RM3.17)  poised  to  benefit  from  China’s enormous  investment  (Rmb1tr)  in  semiconductor  industry  and capital allowance  incentives  announced  in Budget 2015.

Unisem’s   (BUY,  RM  1.65)  turnaround  story  remains  intact after  successful  restructuring.  Relentless  focus  towards  highmargin-packages  for smartphone  market.

Source: Hong Leong Investment Bank Research - 17 Oct 2014