Highlights

• Demote the sector to NEUTRAL as we downgraded our only top pick post 4QCY15 earnings.
• Despite the hyped forecasts early FY15 with expectations for a back-to-back record breaker, global semiconductor market actually fell 0.2% yoy. However, Malaysian tech continued to flourish uniquely due to USD boost.

• While it is expected to range bound in 1H16, several positive factors will support MYR, including GLC fund repatriations, abated foreign selling, resilient growth and BOP position and easing domestic issues (1MDB and political glitches).

• As headwinds are gradually eliminated and macro policies are proven effective to safeguard growth and fundamentals, we see potential for MYR to strengthen in 2H16 with yearend forecast of RM3.80-4.00/USD.

• Though 1Q16 is traditionally the weakest quarter, guidance thus far has been lower-than-expected (except ViTrox) with qoq contractions as high as double-digit. Cautiously, this may be a prelude to further softness ahead while order visibility remains short.

• Smartphone market which used to be the main driver for the sector has lost growth momentum with projection of only low single digit yoy growth in FY16. Even from the recent CES and MWC, newly launched smartphones lack of new “musthave” features to further stimulate demand.

• Jan’s bill-to-book ratio of 1.08 did not excite us, attributing this to seasonality while both bookings and billings figures actually declined mom and yoy. Orders may be placed in advance of the peaks in 2Q and 3Q as customers bring forward their launches of “me-too” products.

• Mega M&As in 2015 in search of efficiency improvement and CAPEX rationalization which may lead to some near-term consolidation before reaping long-term benefit through innovation and productivity improvements.

Catalysts

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

• Improved consumer confidence.

Risks

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

Forecasts

• Maintained.

Rating

NEUTRAL

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).

Stocks

Inari Amertron (HOLD; TP: RM3.57)

Unisem (HOLD; TP: RM2.39)

ViTrox (HOLD; TP: RM3.16)

Source: Hong Leong Investment Bank Research - 3 Mar 2016