Highlights

• Underperformed in 2016 with technology index depreciating by 13.7% while related stocks yielded -9.4% return led by Globetronics and MPI. Equipment makers fared better.

• Our conservatism paid off as global semiconductor sales ended 2016 flat vs. initial forecasts of 3.6% yoy growth. Consensus is forecasting for a moderate positive growth in 2017 averaging 4.0% yoy. However, we opine that there are more downsides ahead and prefer to remain cautious.

• Spectacular 2016 for equipment industry where both YTD16 3MA bookings and billings grew, boosting book-to-bill ratio to 1.04. Poised for a robust rebound in 2017 supported by sustainable capacity expansions and capital spending.

• Trumponomics created US$ strength in 2H16, yet favorable FOREX did not spur the market. We expect RM to trade with a full year average of RM4.30/US$. As such, we do not expect tech stocks to enjoy significant US$ booster in 2017 and focus will be on their core operational excellence.

• Raw material price levels are still manageable for OSATs and margins for traditional packaging are expected to be stable in 2017.

• Automotive is expected be the major growth driver for global tech sector which led to auto-themed mega mergers. Tech firms with exposure to automotive will have an upper hand.

• Smartphone growth was anemic with tragedies. We estimate that smartphone market to be rather flat in 2017 due to the lack of new “must-have” features.

• 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&As extended in 2016 and it is likely to see some pain before gain. Do not discount that this would to spill over to domestic scene in order to remain competitive.

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

NEUTRAL ( ↔ )

• Positives - strong US$, 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 Pick

• Unisem (HOLD, RM2.60) for its (1) exposure to the automotive sector; (2) strategic presence in China’s booming tech market; (3) rewarding dividend yield; and (4) healthy balance sheet.

Source: Hong Leong Investment Bank Research - 5 Jan 2017