Latest industry data showed that global semiconductor sales in September 2013 continued to inch up modestly, by 3.3% MoM with positive sales growth seen in all markets. On YTD basis, while the global semiconductor sales are improving (+3.3% YTD) led largely by the Americas and Asia Pacific (+9.7% and 6.9% respectively), frail economic conditions in Japan and Europe continued to put a dampener on the overall sales momentum. On our local front, while we believe the positive spillover effect from the improving global semiconductor sales has started to be reflected in the local semiconductor players’ earnings, we believe the quantum of the improvements in 2H2013 would not be as great as 2H2012 on a YoY basis due to the high base effect (post Thai-flood in 2012) and the minimum wage policy. All in, we are still NEUTRAL on the sector in light of the absence of immediate re-rating catalyst as well as poor earnings visibility. On our stock picks, for MPI, although its share price has surged by 21% since our OUTPERFORM recommendation back in end August, we continue to favour the stock given its: (i) strategic product mix, which continued to lift its margin, (ii) recovering sales underpinned by its high-margin products in smartphones/tablets segment, and (iii) attractive dividend yield of 7% in FY14. Despite its limited total upside of 8.3%, we are keeping our OUTPERFORM rating for now pending the release of its results next week.

Global semiconductor sales in September 2013 continue to inch up on YoY and MoM basis, while YTD September sales grew by 3.3%. According to the Semiconductor Industry Association, global semiconductor sales in September 2013 continued to inch up by 3.3% MoM to USD27.0b on growth in all markets with America (+5.7%) and Japan (+3.8%) taking the lead. On YoY basis, despite the continuation of sharp decline in Japan (-12.9%) which was due to the devaluation of the Japanese yen, the September global semiconductor sales managed to climb 8.7% mainly helped by growing strength in Americas (+24.3%). While it is our understanding that the global semiconductor sales are improving modestly (with YTD sales of +3.3%) led largely by the Americas and Asia Pacific (YTD sales of +9.7% and 6.9% respectively), frail economic condition in Japan and Europe continued to put a dampener on the overall sales momentum.

SEMI’s book-to-bill ratio came in at 0.97x in September 2013. According to Semiconductor Equipment and Materials International (SEMI), the book-to-bill ratio for North America-based semiconductor equipment manufacturers in September came in marginally lower at 0.97x compared to 0.98x in August. A ratio of 0.97x means that USD97 worth of orders was received for every USD100 of products billed for the month. On a closer look MoM, September billings continued to decrease by 7% while bookings headed south on similar quantum as well. This reflects the seasonal weakness of the industry. Meanwhile, on YoY basis, although September’s bookings rebounded by 7%, billings remained soft, lower by 14%, referring the near-term deferral in industry capital spending.

Outlook for 4Q. While we believe that the semiconductor industry has entered into a seasonally strong quarter, we do not expect any spectacular improvement on a YoY basis as we believe that the frail economic condition in Japan as well as the recent U.S. government shutdown could continue to put a dampener on the overall sales momentum. Meanwhile back to the local front, while we believe the positive spillover effect from the improving global semiconductor sales has started to be reflected in the earnings of local semiconductor players, we believe the quantum of the bottom line improvements in 2H2013 would not be as great as 2H2012 on a YoY basis due to the high base effect (post Thai-flood in 2012) and the minimum wage policy.

NEUTRAL call remains unchanged. We remain NEUTRAL on the sector as we see no immediate rerating catalyst and also due to the still poor order visibility. For now, we only have selective OUTPERFORM calls; MPI and Notion VTec. Notion VTec (OP; TP RM0.96) is our preferred stock for exposure to precision components manufacturing as compared to JCY (UP; TP: RM0.50) given its more resilient sales orders in the camera and auto sectors as well as its favourable product mix, which gives better margins.

Source: Kenanga