We are reiterating our NEUTRAL view on the technology sector despite the mild improvement seen in the global semiconductor sales and the SEMI’s book-to-bill ratio. To recap, the technology companies under our coverage have generally reported subdued 4QCY12 results with four out of the six stocks’ results coming in below our expectations. The main culprits were mainly on the lower shipment of orders amid the global economic uncertainties as well as thinner margins caused by higher operating costs recorded. Generally, the overall industry performance was partly cushioned by the stronger US sales only. The weak market sentiment amid the prolonged economic uncertainties at the Euro side remains a drag on the industry. We concur with the industry players that any lights at the end of the tunnel could only be seen in 2HCY13 as demand is expected to catch up with supply coupled with a possible better global economic condition. Although most of the companies (under our coverage) are already trading near to their respective bear valuations, we believe that the market volatility could remain high (mostly downside bias) in the next few weeks in light of the impending General Election. As such, we prefer to err on the conservative side for now but will review our sector and stock ratings again thereafter.

4QCY12 results round-up. Generally, the technology companies under our coverage reported subdued 4QCY12 results with four out of the six stocks’ results coming in below our expectations. These were mainly due to lower shipment of orders amid the global economic uncertainties coupled with thinner margins caused by higher than expected operating costs incurred. Major downgrades by us were on MPI, Unisem, Notion and JCY, which reported net losses in 4QCY12. Post the results, we maintained our MARKET PERFORM calls on Unisem (TP: RM0.99), MPI (TP: RM2.59), Sam Engineering (TP: RM2.54), and Kelington, (TP: RM0.53) but have downgraded Notion VTec (TP: RM0.60) and JCY (TP: RM0.58) to UNDERPERFORM ratings in view of the bleak HDD segment outlook.

Industry recovery still uncertain although main indicators have shown slight improvements. According to the Semiconductor Industry Association (SIA), the global semiconductor sales in January 2013 grew by 3.8% YoY, marking an improvement for the third consecutive month. Delving deeper, although decent sales were seen in America (+10.5% YoY) and Asia Pacific (+7.8% YoY), the overall growth momentum was offset by the weaker sales in both Europe and Japan (-4.9% YoY and -12.3% YoY respectively). Meanwhile, the SEMI book-to-bill ratio for North America-based semiconductor equipment manufacturers has improved further to 1.11x in January from 0.92x in December. While the latest ratio was the first time above the 1.0x parity since May 2012, a YoY comparison basis suggests that both orders and billings still remain relatively soft and we understand that this could be due to the persisting gloomy global economic outlook. As a result, we are only mildly positive on the improvements in the abovementioned indicators at this juncture.

Light at the end of the tunnel could only be seen earliest in 2H2013. We concur with the industry players that any lights at the end of the tunnel could only be seen in 2HCY13 backed by a catch-up in global chip demand amid a possible better global economic condition. Margin-wise, we reckon, however, that the higher labour cost from the recent minimum wage policy could continue to suppress the companies’ profits. Meanwhile, on the currency front, we continue to maintain our RM/USD forecast of RM2.97 for CY13, in line with our in-house economic team estimate.

Market volatility could remain high in the near term and could keep share prices trading sideways. Although most of the companies (under our coverage) are already trading near to their respective bear valuations, we believe that the market volatility could be high (mostly downside bias) in the next few weeks in light of the impending General Election. Recall that four out of the six companies namely MPI, Unisem, Notion Vtec and Sam Engineering’s intraday lows fell as much as -3% to -6% during the previous GE campaign period and as much as -5% to -10% post one month after the last 12th GE (please refer to graph below).

In summary, judging from the abovementioned headwinds, we believe that most tech stock share prices will be trading sideways ahead with a downside bias. As such, we prefer to err on the conservative side before we relook to upgrade our sector rating and earnings estimates later. Maintain NEUTRAL.

Source: Kenanga