Highlights

• Technology index outperformed the KLCI after adding 27% YTD vis-à-vis the latter’s 5% expansion. All tech stocks under coverage rallied, led by our top pick Unisem (+25%), followed by ViTrox (+20%) and Inari Amertron (17%).

• After the surprised 1.1% yoy growth, global semiconductor sales ended 2016 with record high at US$339bn (see Figure #1). As a result, WSTS raised its 2017 sales forecast growth from 3.3% to 6.5% to reach US$361bn and up another 2.3% in 2018 to US$369bn. In 2017, all regions and products are expected to grow with largest gains coming across sensors, analog and memory. Jan 17 sales was bullish, +12.7% yoy.

• Magnificent 2016 for equipment market where both 3MA bookings and billings grew 10.1% and 7.9% yoy respectively (see Figure #2). This has boosted FY16 book-to-bill ratio to 1.04 surpassing FY15’s 1.02. According to SEMI, it is poised to strengthen 9.6% to reach US$41.5bn in 2017 driven by foundries (both 3D NAND and DRAM), MPU, power and investments in China.

• We expect RM to undergo a more stable trading range in 2017 with house forecast of RM4.30-4.55/US$ and full year averaging RM4.40/US$ (see Figure #3). As such, we do not expect tech stocks to enjoy significant US$ booster in 2017 and focus will be on their core operational excellence.

• Since our last upgrade on 14 Feb 2017, Unisem has gained 10% on the back of sequentially stronger 4Q16 while guiding for healthy FY17 top line growth. As such, we downgrade it from BUY to HOLD considering the narrowed upside (2%) to our TP of RM3.00 . While it remains our favorite OSAT, we opt to reassess our call after the seasonally weak 1Q17.

• US$ appreciation was not helpful to Inari Amertron ( HOLD ,

RM1.70 ) who saw top line falling qoq which may imply near term challenges in RF. While we are positive on prospects of infrared LED and confident in its execution, we are worried about the possibility of inventory buildup since the global recall of Samsung Note 7 and no wide adoption was observed from the recent MWC17.

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

• ViTrox ( BUY , RM4.70 ) is poised to win more market share in the advent of global semiconductor growth leveraging on its technology leadership in machine inspection, especially in 3D-AOI and AXI. A beneficiary of stronger USD too.

Source: Hong Leong Investment Bank Research - 14 Mar 2017