Highlights

Last  week  in  the  AEC  summit ,  US  and  China  announced  a deal  to  drop  tariffs on a wide range of tech products   based on the expanded  Information  Technology  Agreement   (ITA).

Enforced by WTO in  1997, ITA is aimed to lower all taxes and tariffs  on  IT  products  to  zero,  but  China had been reluctant to honor  the treaty due to protectionism.

According  to  WSJ,  it  is  estimated  that  this  pact  could  cover USD1tr  in  trade.  The  new  technology  deal  would  include  200 different  categories.  Among the products that would see tariffs eliminated  are  next  generation  semiconductors  (25%  levied), MRI (8% levied)  and GPS devices (8% levied).

Set  pace  for  a  rapid  conclusion  to the  broader negotiations in Geneva,  Switzerland  whereby  this  will  be  presented  to the 54 economies  for  ratification  in  Dec.   Formally,  ITA  members must offer  the same treatment deals to all WTO members.

Comments 

If  materialize,  this  will  be  a  major  catalyst  to  the  whole  tech sector, benefiting  all stakeholders  in the supply chain.

The  tariff  is  widely  perceived  to  be  a  barrier  to  the  take up of imported  goods  averting  buyers  to  domestic  production,  and in  some  cases  inferior  imitations.  To  compare,  an  outright iPhone 6 (16GB)  would  cost 33% more in China  than US.

In  the  absence  of  the  tariff,  imported IT goods will be cheaper and  more  affordable  in  China,  who  is  already  the  largest consumer  of  semiconductor  by  far,  accounting  for  ~45%  of the worldwide  demand  for chips.

This  will  spur  greater  demand  for  more  advance  and  high quality  technology  gadgets  from  first -time  users  as  well  as existing users who would  shorten product  replacement  cycle.

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,  RM2.02)  operational  transformation  was  a success.  Relentless  focus  towards  high-margin-packages  for smartphone  market.

Source: Hong Leong Investment Bank Research - 18 Nov 2014