According to Semiconductor Industry Association (SIA), global semiconductor sales in 2013 closed the year with a 4.2% YoY growth which narrowly exceeded the WSTS organisation’s industry growth forecast of c.2%. The strong growth was mainly driven by the US semiconductor market on the back of better consumer spending amidst a recovering economy. Meanwhile, SEMI’s book-to-bill ratio also remained healthy at 1.02x in December with decent growth seen on its December’s worldwide bookings and billings YoY and MoM. While all these indicators are pointing to the recovery of the semiconductor industry, we do not expect the general improvement to be reflected in all the companies under our coverage given the diverse product mix profile as well as the time-lag differential effects for each company. As such, we maintain our NEUTRAL rating for the sector. MPI remains as our preferred pick in the semiconductor space given its resilient outlook as well as its attractive potential net dividend yield of 4% in FY14. Global semiconductor sales in 2013 closed the year with a 4.2% YoY growth which

narrowly exceeded WSTS organisation’s industry growth forecast of c.2%. Delving deeper, this was mainly driven by the US semiconductor market where sales grew strongly by 12.1% on the back of better consumer spending amidst a recovering economy. On a YoY basis, December global semiconductor sales grew by 7.7% YoY to USD26.6b as the decent growth contributed by the Americas (+17.3%), Europe (+12.7%) and Asia Pacific (+7.1%) defied the impact of sharp decline in Japan (-8.2%, which was due to the devaluation of the Japanese Yen). Meanwhile on a MoM basis, global semiconductor sales marginally declined by 2.0% given the seasonality weakness. Of noteworthy, although semiconductor sales in 3Q are typically stronger than 4Q, sales in the Americas grew by 4.5% in 4Q, defying seasonal weakness.

SEMI’s book-to-bill ratio came in at 1.02x in December 2013. According to Semiconductor Equipment and Materials International (SEMI), the book-to-bill ratio for North America-based semiconductor equipment manufacturers in December came in at 1.02x, above the 1.0x parity. A ratio of 1.02x means that USD102 worth of orders were received for every USD100 of products billed for the month. On a closer look at the worldwide bookings and billings in December, the bookings were 11.1% MoM and 48.3% YoY higher while the billings figures were also 20.8% MoM and 33.8% YoY higher.

Outlook for 2014. On the semiconductor front, our observation showed that companies with higher exposure in 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, for Unisem which also has a decent exposure on these segments (with c.40%), its ongoing products rationalization exercises could continue to cause lower operational efficiency and suppress margin. Meanwhile 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 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).

Neutral call stays as we do not expect the general improvement to be reflected in all the companies under our coverage given the diverse product mix profile as well as the difference in time-lag effect in reflecting recovery for each company. MPI is the only OUTPERFORM call in the sector given its: (i) strategic product mix and production ramp in high-margin products, (ii) recent foray into new segments namely LGA & FBGA market for the low cost smartphone from China, MEMS for Automotive, (iii) higher operational efficiency after the line consolidation and product rationalisation, and (iv) attractive potential net dividend yield of c.4% in FY14, which appeal to investors who seek for refuge in the technology sector.

Source: Kenanga