Highlights

• Outperformed in 2017 with technology index appreciating by 89.7% while related stocks yielded an average 121.2% return. Equipment makers fared better.

• Global semiconductor sales were outstanding in 2017 with an average growth of 18.6%, far exceeding initial forecast of 4.1% thanks to memory’s explosive gain. Consensus is projecting a solid 10.6% growth in 2018. However, we rather be more conservative and expect gain to be pedestrian without memory.

• Spectacular 2017 for equipment industry where YTD17 3MA billings grew 40.1%. Again, we are cautious and only expect a flattish 2018. Expansion in capital spending should not outpace sales growth on the long run and may lead to industry-wide overcapacity.

• We expect RM to be stronger and trade with at full year average of RM4.10/US$. As such, we expect tech firms to be negatively impacted due to their US$-denominated sales and partly cushioned by the savings from US$ cost items.

• Raw material price levels are elevated and margins for traditional packaging may experience some pressure.

• 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 is projected to be resilient with 5% gain. With the uprising of Chinese brands, we strongly believe that they will gradually source their components domestically. Thus, OSATs with China presence may benefit from this development going forward.

• PC market has been witnessing shipment declines over the past few years and not out of the woods yet.

• 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.

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 ( ↔ )

• While global sales and capital spending are expected to see moderate growth, we prefer to be more cautious as stock valuations are very rich. Lack of near term catalyst while the sector will be impacted by stronger RM and higher material costs.

Top Pick

• Unisem (HOLD, RM3.39) 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 - 17 Jan 2018