Latest sectorial developments still paint a rosy picture with both worldwide semiconductor revenue and equipment spending gaining momentums. The recently kick-started US-China trade war will negatively impact the sector. We opine that this will impact OSATs more than equipment suppliers. Nonetheless, the recent rebound of the greenback will benefit the players. Reiterate NEUTRAL stance for the sector.

Expansionary forecasts. After achieving an all-time high in 2017 by soaring past USD400bn, worldwide semiconductor sales growth is forecasted to be sustainable in 2018 with an average of 11.5% (Figure #1), creating a back-to-back record. Over the medium term, IC Insights projected the global revenue to top USD500bn by 2019 driven by memory, high-performance computing, IoT and automotive.

Strong capital outlay. Equipment spending in 2017 of USD57bn was also another new record after surpassing 2000’s USD48bn. Similarly, capital investment for 2018 is projected to be solid with 9% gain to reach USD61bn (Figure #2) supported by growths in all regions led by Korea (chiefly Samsung), except Taiwan.

Encouraging YTD Leading Indicators in 1Q18:

1. Global sales up 20% YoY reaching USD111bn; 2. Foundry sector revenue grew 9% YoY; 3. DRAM revenue rose against seasonality by 5.4% QoQ to a record high of USD23bn; 4. Wafer shipment increased 3.6% QoQ and 7.9% YoY, a quarterly record high; 5. Equipment billings soared 28% YoY to USD16.7bn.

Trade war impact. The escalating trade tension between US and China undeniably will send shocks to the global tech market. If this faceoff prolongs, we opine that this will impact OSATs more than equipment suppliers.

Tax dilemma. According to a warning from the Semiconductor Industry Association last week, US-based fabless semiconductor players such as Qualcomm, Broadcom and Skyworks may end up paying the tariff on their own products since majority of their ICs are fabricated in China. With the 25% higher cost, they may re-evaluate their outsourcing supply chain and bring the manufacturing back to US which will be easily justified if government incentive can be secured. After all, this is also aligned with Trump’s administration to create more jobs. If this materializes, it will negatively disrupt the OSAT ecosystem.

Less impact on equipment vendors. Majority of the players manufacture locally and export worldwide thus partially insulating them from this trade war. However, should the cost to source equipment from US surge or US restrict technology transfer to China, local suppliers may eventually enjoy higher demand.

Favourable forex. In-house USD/RM projection has been revised to 3.90-4.10 (previously 3.85-4.00) for the rest of the year. This will be beneficial to export-oriented tech companies with majority of revenue denominated in USD.

Forecast. Maintain for Now.

Maintain 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. There lacks near term catalyst while the sector will be impacted by higher material costs and trade war uncertainties.

Source: Hong Leong Investment Bank Research - 21 Jun 2018