We are reiterating our NEUTRAL view on the technology sector. Latest data showed that global semiconductor sales in June 2013 inched up by a marginal 0.8% MoM on the back of decent growth in the Americas (+3.5%) which helped offset pallid sales in Japan (-0.9%). While the global semiconductor sales are improving modestly led largely by the Americas, frail economic conditions  in Japan and Europe continue to drag the overall sales momentum. Meanwhile on another indication, the book-to-bill ratio for North America-based semiconductor equipment manufacturers inched up higher to 1.10x in June compared to 1.08x in May. Although the ratio remains above the 1.0x parity which indicates stronger demand, a  YoY comparison in terms of absolute bookings and billings numbers still suggest that both orders and billings remain relatively soft, likely due to the ongoing pressure of the prevailing global economic uncertainties. While modest improvements continue to be seen in these main indicators, we prefer to stay prudent and err on the side of caution in our view for the local semiconductor companies. We believe their YoY bottom line growth could remain generally subdued given the high base effect in 2012 (strong demand post Thai flood in 2012) and cost-push impact from the minimum wage policy.

Global semiconductor sales in June 2013 continue to inch up on YoY and MoM basis. According to Semiconductor Industry Association, global semiconductor sales in June 2013 continued to inch up by 0.8% MoM to US$24.9b. This was mainly on the back of decent growth in the Americas (+3.5%) which helped offset pallid sales in Japan (-0.9%). On YoY basis, despite the continuation of sharp decline in Japan sales (-20.8%, which also reflect in part the devaluation of the Japanese yen), the June global semiconductor sales managed to climb by 2.1% helped by Americas (+10.6%), Asia Pacific (+5.4%) and Europe segments (+0.8%). While it is our understanding that the global semiconductor sales are improving modestly led largely by the Americas, frail economic condition in Japan and Europe continue to put a dampener on the overall sales momentum.

SEMI’s book-to-bill ratio came in at 1.10x in June  2013.  According to Semiconductor Equipment and Materials International (SEMI), the book-to-bill ratio for North America-based semiconductor equipment manufacturer was slightly higher in June at 1.10x from 1.08x in May. A ratio of 1.10x means that USD110 worth of orders were received for every USD100 of products billed for the month. Delving deeper MoM, June’s bookings and billings remained relatively unchanged at +1% and -1%. Meanwhile, on YoY basis, June’s bookings and billings are still in a declining trend, lower by 7% and 21% respectively. That said, although the ratio of 1.10x points to a stronger demand, a YoY comparison on absolute bookings and billings numbers suggest that both orders and billings are still weak and we reckon that this could be due to the ongoing pressure from a frail global economy. 

Review of tech companies’ results under our coverage. Unisem’s 2Q13/1H13 results still came in below expectations, although the group managed to narrow its LBIT with the rationalization of certain low margin and unprofitable product line. The main culprit was the weaker top line performance (-13% YoY, -1% QoQ) dragged by decreased sales volume and lower average selling price. If we were to take the latest result of this semiconductor incumbent as indicators, other tech companies’ 2QCY13 results under our coverage could likely be under pressure, on the back of lackluster sales momentum  amidst the prevailing global economic uncertainties.

Still keeping our conservative stance unchanged. While modest improvements continued to be seen in these main indicators, we stay prudent and prefer to err on the side of caution for the local semiconductor companies. We believe their YoY bottom line growth could remain subdued given the high base effect (post the Thai flood in 2012) as well as the costs impact from the minimum wage policy. Maintaining our NEUTRAL view on the sector with unchanged calls on Sam Engineering (OP, TP: RM2.83), MPI (MP, TP: RM2.59), Notion VTec (MP, TP: RM0.77), Unisem (UP, TP: RM0.95) and JCY (UP, TP: RM0.54).

Source: Kenanga