We are reiterating our NEUTRAL call on the technology sector due to the lack of immediate re-rating catalyst of the sector. On the HDD front, while it is our understanding that the dwindling demand will partly be cushioned by the Enterprise HDD (with its total market share of c.12% of total HDD shipments) amidst the increasing demand for enterprise/cloud storage, we believe the growth will likely remain flat in 2014 in light of the overall slower consumer spending in Desktop HDD and Mobile HDD (commanding c.65% of the total market share for total HDD shipments). All in, this could translate into flat earnings to the HDD segment of the companies under our coverage such as Notion VTec (c.35% exposure) and Sam Engineering (c.25% exposure). On the semiconductor front, while we believe that it has already stepped into the recovery phase, we do not expect general improvement to be reflected in all the companies under our coverage given the different product mix profile of each company. Our observation showed that companies with high exposure on resilient products such as the S&T segment and Automotive segment tend to be on the recovery forefront. In this case, MPI is well poised to benefit from the positive spillover effect given its c.55% exposure on these segments. Coupled with the recovering sales underpinned by its high-margin products as well as the attractive dividend yield of 7% in FY14, MPI remains our only OUTPERFORM for the sector.

3QCY13 results round-up. The technology companies under our coverage reported mixed sets of results with MPI (OP, TP: RM3.80) being the only outperformer for the quarter. Despite the modest improvement seen in the global semiconductor sales, MPI’s PATAMI registered double-digit growth underpinned by: (i) the recovering sales in its high-margin products namely HD leaded, MLP and its turnkey testing thanks to the growing smartphones/tablets (S&T) segment, (ii) better-than-expected EBIT margin on the back of higher operational efficiency as well as (iii) favourable product mix. On the other hand, despite the strengthening of USD towards MYR which favours the semiconductor exporters, Unisem and Notion reported subpar results on pallid sales volume coupled with lower operational efficiency. Meanwhile, Sam Engineering’s performance was on par with expectation, helped by healthy earnings growth in its Aerospace segment.

Worldwide PC shipments experienced its lowest volume since 2008 in 3QCY13. According to Gartner, the PC industry is still in the doldrums with S&T absorbing the former’s demand amidst the consumer preference shift to the latter. Volume-wise, preliminary worldwide PC vendor unit shipment for 3Q13 came in at 80.3m (-9% YoY; 5% QoQ) of which the improvement on a QoQ basis reflected the “Back-to-School” season which lent strength to the quarter. Similarly, the same quantum of improvement was also seen in the HDD shipments on a QoQ basis (+1% YoY; +5% QoQ) according to data extracted from Trendfocus. On our take, our concern remains on the HDD outlook as demand could continue to be overshadowed by the gloomy PC outlook (with expectation of consumer preference skewed more towards the S&T). While it is our understanding that the overall dwindling HDD demand will partly be cushioned by the Enterprise HDD (with its total market share of c.12% of total HDD shipments) amidst the increasing demand for enterprise/cloud storage, we believe that the growth of HDD shipment will likely remain flat in 2014 in light of the overall lower consumer spending in Desktop HDD and Mobile HDD (commanding c.65% of the total market share for total HDD shipments). All in, this could translate into flat earnings to the HDD segment of the companies under our coverage such as Notion VTec (c.35% exposure) and Sam Engineering (c.25% exposure).

Outlook for 1Q14 and 2014. According to the Semiconductor Industry Association, global semiconductor sales in November 2013 continued to inch up by 1% MoM and 7% YoY to US$27.2bn (or YTD gain of 3.9% to US$276.9b) with overall improvement seen in all the segments (save for Japan on a YoY basis due to the devaluation of the Japanese yen). While we believe that the semiconductor industry has stepped into the recovery phase, we do not expect general improvement to be reflected in all the companies under our coverage given the different product mix profile of each company. Our observation showed that companies with high exposure on resilient products such as the S&T segment and Automotive segment tend to be on the recovery forefront. In this case, MPI is well poised to benefit from the positive spillover effect given that c.55% of its total revenue is expected to be derived from these segments. On the other hand, while Unisem also has a decent exposure on these segments (with c.40%), the ongoing products rationalization exercises could continue to cause lower operational efficiency and suppress margin.

In summary, in view of the still short-term earnings visibility (less than three months) as well as the lack of immediate re-rating catalyst for the local semiconductor sector, we are keeping our NEUTRAL rating. For now, we only have OUTPERFORM call on MPI. Although its share price has surged by 26% 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) encouraging sales underpinned by its high-margin products in S&T segment, and (iii) attractive dividend yield of 7% in FY14.

Source: Kenanga