Outperformed the broader index despite dismal industry data . Both global sales and spending forecasts are pointing north for 2020 but only with moderate expansions. Boost from stronger USD may be neutralized by higher commodity prices. Growth is expected to be driven by smartphone, communication, HPC and IoT while automotive takes a back seat. Maintain NEUTRAL but roll forward all stock valuations to CY21. As valuations reach such heights with lingering downside risks, vertigo may eventually kick in for Inari, Unisem and ViTrox.

Outperformed in 2019. Despite the lacklustre global semi sales and equipment spending, KLTEC gained 29% vs KLCI’s 6% decline (see Figure #1). Our top picks were sectorial top gainers: UWC (+290%), Frontken (+225%) and Revenue (+90%).

Global semiconductor sales. As anticipated, 2019 was a slump where the average projection was consistently revised downward throughout the year, from the initial +3% to the latest’s -14% (see Figure #2-4). 10M19 turnover fell 14% YoY to USD339bn due to the plunge in memory prices (see Figure #5). For 2020, the industry is projected to return to expansionary mode with an average of 7% growth see (Figure #6) driven by optoelectronics (+13%), followed by logic (+7%), sensor/analog/micro (+5%) and memory/discrete (+4%). In concurrence, we believe that the sector will turnaround next year chiefly stimulated by 5G adoption if trade hostility remains. However, we only foresee a more moderate gain of circa +5%.

Equipment spending. Capital investment fell in tandem with 11M19 3MA billings tumbling by 15% to USD22bn (see Figure #7). This is also within our expectation and validates our thesis of prolonged growth in capital spending outpacing sales’ will lead to industry-wide overcapacity. Based on SEMI’s latest forecast, equipment sale is likely to chart 6% increase to USD61bn in 2020 fuelled by advanced logic and foundry, new projects in China and to a lesser extent, memory. More upside is likely if the macro economy improves and trade tensions subside.

Stronger greenback. HLIB expects USD to be stronger in 2020 averaging RM4.15- 4.20/USD compared to 2019’s average of RM4.14/USD (see Figure #8). As such, we expect tech firms to be marginally boosted thanks to their USD-denominated sales while partly offset by the USD cost items.

High input cost. Major raw material prices remain elevated (see Figure #9), especially gold (+15% YoY) as investors fled to this safe-haven asset during market uncertainties. Compounded by stronger USD projection, pricier commodities will exert pressures on margins for traditional packaging.

Segmental view. Recovery in smartphone along with communication segments are expected to be the major growth driver on the back of 5G proliferation. Next would be high-performance computing (HPC) supported by the robust cloud investments by global tech giants. Although IoT device generally has lower IC content, the sheer forecasted volume suggests that this market is too big to ignore. Lastly, automotive is still stuck in the low gear as global car sales has yet to see any material uptick.

Maintain NEUTRAL. We stay conservative in the absence of near-term catalyst and take into consideration of the seasonal weakness in 1Q20. We take this opportunity to roll forward all our stock valuations to CY21 while maintaining our calls respectively . At this juncture, we are not recommending investors to up the ante, instead we have 3

SELL calls, namely Inari (25x FY20 EPS), Unisem (20x FY20 EPS) and ViTrox (31x FY20 EPS). When valuations stand at such high altitudes (rich premium over established rivals) with lingering downside risks, vertigo may eventually come into effect.
 

Source: Hong Leong Investment Bank Research - 6 Jan 2020