Highlights

• In our recent tech forum, we were privileged to have Mr. Ng Kai Fai, President of SEMI Southeast Asia to share more clarity on the sector’s outlook and insight.

• Although worldwide semiconductor 3-month moving average (3MMA) sales fell by 0.9% yoy in July 2015, its first decline since April 2013, SEMI is not overly concern and attributed this to normal market cyclicality and major currency devaluations. Analyzing based on unit trend (without FOREX influence), the industry continue to grow strongly yoy (see Figure #1). Similar positive development is also exhibited by worldwide wafer area shipment index (see Figure #2).

• Generally, the industry is still expected to expand healthily in 2015 (see Figure #3) albeit initial forecasts being lowered. SEMI estimates for 3-4%. With projections ranging 3%-12%, 2015 is earmarked for another record year.

• Book-to-bill ratio dipped marginally below parity in May and June but rebounded firmly in July and August with 1.02 and 1.06, respectively.

• YTD spending is flat (see Figure #4) and expected to be so for the rest of 2015. Some major players have announced CAPEX reductions, including TSMC by USD2bn and Intel by USD1bn in view of efficiency improvements rather than cut back in expansions. However, this will be cushioned by higher investments by Sony into image sensor and Samsung into its new plant in Pyeongtaek.

• DRAM pricing stabilized after plunging circa 21.8% since the beginning of year (see Figure #5). The sharp correction was in anticipation of declining PC / notebook sales, large capacity expansions ahead as well as fear surrounding the proposed takeover of Micron by Tsinghua.

• Southeast Asia accounts for more than 30%, while Malaysia making up circa 12% of the installed global semiconductor assembly, packaging and test productions.

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, copper and silver), 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, RM3.79) has indirect exposure to Apple. Currently running at full capacity implying voracious demand.

Source: Hong Leong Investment Bank Research - 21 Sep 2015