Highlights

• Outperformed in 2015 with technology index appreciating by 52.4% while related stocks yielded 61.7% return led by MPI and Inari Amertron (HLIB top pick).

• Despite the outperformance, global sales forecasts have been continuously revised downward throughout 2015, from 8.1% to 1.8%. Global semiconductor market is forecasted to be flattish in 2016 given the current fluxes in macro outlook and end application markets.

• Equipment market continued to slow in 4Q15, posting 2 consecutive below parity monthly data. Equipment spending is expected to decline hampering the hope for strong growth.

• USD boost was unique to Malaysian tech. 2016 will be a year of 2 halves as strong USD will still come into play despite the seasonally weaker 1H16.

• Aluminum is a new cheaper alternative. Raw material prices are expected to remain in prolonged recession trend, protecting industry’s margin.

• Demand for IC in telco equipment is expected to remain solid as telcos embrace 4G/LTE and fibre optics solutions.

• Smartphone market weakened but still growing, acting as a strong base for semiconductor demand.

• PC market is not out of the woods yet while waiting for the combination of Windows 10 and Intel Skylake to excite.

• Automotive market is a great potential for chip makers but may not be the time yet, we believe.

• IoT / M2M market looks promising. Although M2M device generally has lower IC content, the sheer forecasted volume suggests that this market is too big to ignore.

• Mega M&A year in search of efficiency improvement and CAPEX rationalization which may lead to some pain before gain although consolidation would benefit the sector over the long term through innovation and productivity improvements.

Catalysts

• Technological advancement and creation of new electronics applications for emerging trends.

• Improved consumer confident.

Risks

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

Forecasts

• Maintained.

Rating

• OVERWEIGHT

Positives

• - strong USD, adoption of smartphones, internet of things (IoT), wearable techs and hybrid / electric vehicles.

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, RM4.12) - uniquely positioned with great exposures to growing end application markets leading to visible and resilient earnings growth.

Source: Hong Leong Investment Bank Research - 6 Jan 2016