We are maintaining our NEUTRAL rating on the sector despite the further mild improvement in the global semiconductor sales and SEMI’s book-to-bill ratio recently. The latest global semiconductor sales in February 2013 inched up a small 1.4% YoY. The sales growth momentum was underpinned by the America and Asia-Pacific region, which was offset by weaker sales in Europe and Japan. Meanwhile, on a MoM comparison, the global semiconductor sales declined by 3.8% amid a weak seasonal trend. Using a separate measure, the book-to-bill ratio for North America-based semiconductor equipment manufacturers came in slightly lower at 1.10x in February compared to 1.11x in January. Although the ratio remains above the 1.0x parity which indicates a stronger demand, a YoY comparison basis still suggests that both orders and billings remained relatively soft, likely due to the pressure of a frail economic condition. Although most of the tech stocks under our coverage are trading at their respective floor valuations, we reckon that the market could continue to remain volatile in the next few weeks in light of concerns over the General Election outcome. Thus, we prefer to remain prudent at this juncture on the sector’s prospect.

Global semiconductor sales in February 2013 improved further YoY but declined MoM amid a weak seasonal trend. According to the Semiconductor Industry Association, global semiconductor sales in February 2013 inched up by 1.4% YoY to US$23.3b. In terms of the regional sales performance breakdown, improvements continued to be seen in America (+1.5% YoY) and Asia Pacific (+6.5% YoY) while weaker sales in Europe (-1.5% YoY) and Japan (-15.7% YoY) remained as the drag on the overall sales growth momentum. On a MoM basis, the global semiconductor sales in February 2013 declined by 3.8% amid a weak seasonal trend. This was on the back of weaker sales in Americas (-6.2%), Japan (-5.0%) and Asia Pacific (-3.6%). While the global semiconductor sales did register its fourth consecutive month of improvements, we are maintaining our just cautiously optimistic view on the recovery as we believe that the prolonged economic headwinds in the Eurozone could still derail the overall sales growth momentum later.

SEMI’s book-to-bill ratio came in slightly lower at 1.10x in February 2013. According to Semiconductor Equipment and Materials International (SEMI), the book-to-bill ratio for North America-based semiconductor equipment manufacturers came in slightly lower at 1.10x in February compared to 1.11x in January. A ratio of 1.10x means that USD110 worth of orders were received for every USD100 of products billed for the month. Delving deeper, on a MoM basis, February’s bookings registered a flat growth while billings inched up by a mere 1%. On a YoY basis, February’s bookings and billings both declined by 20% and 26% respectively. That said, although the ratio remained above the 1.0x parity, which indicates a stronger demand, a YoY comparison basis suggests that both orders and billings still remained relatively soft and we understand that this could be due to the ongoing pressure from a frail global economy.

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 market volatility could continue to remain high in the next few weeks in light of the concerns over the General Election outcome. Recall that four out of the six companies under our coverage namely MPI, Unisem, Notion Vtec and Sam Engineering’s intraday lows fell by as much as -3% to -6% during the previous GE campaign period and as much as -5% to -10% one month after the last 12th GE.

Still keeping our conservative stance unchanged. While mild improvements were seen in the main indicators above, we are still being prudent and prefer to err on the conservative side in light of the weak market sentiment amid the prolonged global economic uncertainties coupled with concerns over the General Election outcome. In our view, any light at the end of the tunnel could only be seen in 2HCY13, most likely to be backed by a catch-up in the global chip demand amid a better global economic condition.

Source: Kenanga