Highlights

• Although Apple delivered stellar 3QFY15 (2QCY15) results beating market expectations, share price was down 7% in after-hours trading on last Tuesday, erasing about USD60bn in market value.

• This was largely attributed to Apple’s 4QFY15 (3QCY15) guidance of sequentially flattish revenue along with weaker GP margin, putting consensus’ revenue/GP margin expectations at high end/midpoint of guidance.

Comments

• We are not overly concern and keep our overweight stance on Malaysian tech sector, especially those with exposure to Apple’s supply chain.

• 4QFY or 3QCY is a traditionally flat/softer quarter for Apple (except 4QFY14 due to iPhones debut in China) as consumer hold back their purchases for next generation iPhone 6S/6S+ which are expected to hit the shelves by year end or 4QCY.

• Besides iPhone, more flagship smartphones (Samsung S6 Edge Plus, Galaxy Note 5, Nexus, etc) are expected to be launched in 2H15 which will further persuade consumers to wait-and-see ahead of the traditional festive 4QCY.

• Unexciting revenue growth guidance may also due to the stronger USD. As of 3QFY15, circa 60% of sales originated outside of Americas.

• Ahead of new product launch, Apple may embark on tradein/ buyback programs to clear existing stocks leading to weaker GP margin.

• Apple is very confident that new iP6S/6S+ will draw stronger demand than their predecessors and is considering third assembler, Winstron Corp along with the existing two, namely Hon Hai and Pegatron.

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

• Unisem’s (BUY, RM2.82) operational transformation was a success. Relentless focus towards high-margin-packages for smartphone market.
• Inari Amertron (BUY, RM3.67) has indirect exposure to Apple. Currently running at full capacity implying voracious demand.

Source: Hong Leong Investment Bank Research - 27 Jul 2015