We are reiterating our NEUTRAL view on the technology sector. Latest data showed that global semiconductor sales in July 2013 inched up 2.6% YoY underpinned by sales in the Japan (+7.9%) and the Americas (+5.4%). On YTD basis, while the global semiconductor sales are improving modestly (+1.9% YTD) led largely by the Americas and Asia Pacific (+5.6% and 6.2% respectively), frail economic conditions in Japan and Europe continued to put a dampener on the overall sales momentum. Meanwhile on another indication, although the SEMI book-to-bill ratio remains above the 1.0x parity (July at 1.0x) which indicates stronger demand, a YoY comparison on absolute bookings and billings numbers painted a different picture where both orders and billings are still soft. All in, we still remain NEUTRAL on the sector as we understand that the earnings visibility of the industry remains weak (not more than 3 months) from recent meetings with the local players. For now, we have only selective OUTPERFORM calls for the sector which is MPI as well as Notion Vtec. We like MPI particularly as we think that its current trough valuation (trading at 0.7x PBV which is at -1.0SD below its 3-year mean at similar level to the underperformers) is unjustified given its: (i) recovering sales underpinned by the still robust growth smartphones/tablets segment; ii) fatter margin from the portfolio shifts into high margin products; and (iii) attractive dividend yield of c.8% in FY14.

Global semiconductor sales in July 2013 continue to inch up on YoY and MoM basis, while YTD July sales grew by 1.9%. According to the Semiconductor Industry Association, global semiconductor sales in July 2013 continued to inch up by 2.6% MoM to US$25.5b. This was helped by growth in all markets with Japan (+7.9%) and Americas (+5.4%) taking the lead. On YoY basis, despite the continuation of sharp decline in Japan sales (-18.6%, which also reflected in part the devaluation of the Japanese yen), the July global semiconductor sales managed to climb by 5.1% mainly helped by Americas (+21.5%). While it is our understanding that the global semiconductor sales are improving modestly (with YTD sales of +1.9%) led largely by the Americas and Asia Pacific (YTD sales of +5.6% and 6.2% respectively), 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 1.0x in July 2013. According to Semiconductor Equipment and Materials International (SEMI), the book-to-bill ratio for North America-based semiconductor equipment manufacturers was lower in July at 1.0x from 1.1x in June. A ratio of 1.0x means that USD100 worth of orders were received for every USD100 of products billed for the month. On a closer look MoM, July billings continued to increase by 5% while bookings headed south with the same quantum as well. Meanwhile, on YoY basis, although July’s bookings had started to show improvement with a 3% growth, billings were still in negative territory at -12%. That said, although the ratio of 1.1x points to stronger demand, a YoY comparison on absolute bookings and billings numbers pointed that both orders and billings are still soft and this suggest that the industry recovery remains modest.

2QCY13 results review of tech companies under our coverage. For the quarter, tech industry players under our coverage generally reported a mixed set of results with MPI (OP, TP: RM2.94) and Notion (OP, TP:RM0.98) being the outperformers for the quarter. Despite the modest improvement seen in the global semiconductor sales, MPI rebounded strongly from the recovering sales in its high margin products namely high density (HD) leaded, micro lead frame package (MLP) and its turnkey test business thanks to the growing smartphones/tablets segment. Meanwhile, Notion’s good performance was helped by the higher than expected EBIT margin on the back of better operational efficiency. On the other hand for underperformers such as JCY and Sam Engineering, their earnings continued to be dragged down by weak HDD sales on the back of pallid PC sales. Meanwhile, Unisem continued to suffer losses with decreased sales volume seen mainly on its PC segment and lower average selling price generally.

NEUTRAL call remains unchanged. We remain NEUTRAL on the sector as we gather that the earnings visibility of the industry still remains weak (not more than 3 months) from the recent meeting with the local industry players. For now, we have selective OUTPERFORM calls for the sector which is MPI as well as Notion Vtec. We like MPI as its current trough valuation (trading at 0.7x PBV which is at -1.0SD below its 3-year mean at similar level to the underperformers) is unjustified given its: (i) recovering sales underpinned by its high margin products in smartphones/tablets segment; and (ii) attractive dividend yield of 8% in FY14.

Source: Kenanga