We maintain our NEUTRAL call on the technology sector. Although the immediate catalysts would be: (i) the current trend of strengthening of USD against MYR that will positively enhance the earnings of the semiconductor companies given their export-oriented earnings profile as well as (ii) the technology sector upcycle, 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. 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 for the HDD segment of the companies under our coverage such as Notion VTec (c.35% exposure). MPI (OP, TP: RM4.68) is our top pick for the Tech/Semicon sector given its resilient earnings outlook as well as its attractive potential net dividend yield of c.5% in FY14. Notably, the stock is also a proxy to the S&T boom amidst the technology sector upcycle as 55% of its total revenue is expected to be derived from these segments. Meanwhile out of our universe coverage, we like PIE Industrial Bhd, of which we have a TRADING BUY call (TP: RM9.20) for our retail product segment with the investment merits of: (i) the group’s deepened capability as a turnkey player which is also translating into bigger orders from existing clients, (ii) fruition from the efforts in integrating its supply chain, which has allowed the group to lift efficiency and in turn helped to gain businesses from new and existing customers and (iii) strong parentage support from Foxconn.

4QCY13 results round-up. Industry players generally reported mixed sets of results with MPI and SAM being the outperformers for the quarter, thanks to the better-than-expected margins on the back of higher operational efficiency. Of noteworthy, while UNISEM’s full year EBIT was spot on our estimates, its below-than-expected NP was deviated by higher tax rate. On the other hand, NOTION reported subpar results, dragged down by lower-than expected sales in SLR camera barrel due to the muted consumer spending as well as the shift of consumer preference to S&T. Post results, we have downgraded NOTION to UP (from MP) following the lower earnings assumption to account for lower sales and margins.

Outlook for CY2Q14. Global semiconductor sales in January 2014 started the year with a decent growth of 8.8% YoY to US$26.3bn, with overall improvement seen in all the segments (save for Japan due to the devaluation of the Japanese yen). While MoM sales were marginally down by 1.4%, this was reflective of the seasonal weakness. While the global semiconductor sales continue to show solid recovery momentum, 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. We are keeping our conviction that the companies with high exposure on resilient products such as the S&T segment and Automotive segment will likely to continue benefiting from the tech upcycle. Delving deeper, we view that 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. Having said that, while Unisem also has a decent exposure on these segments (with c.40%), we view that the ongoing products rationalization exercises could continue to suppress its profitability.

Lacklustre PC demand to drag down the HDD shipments. To recap, worldwide PC shipments experienced the steepest YoY decline in 4QCY13, which also marked the seventh consecutive quarter of shipment decline. Volume-wise, preliminary worldwide PC vendor unit shipment for 4Q13 came in at 82.6m (-7% YoY; 3% QoQ) of which the improvement on a QoQ basis was reflecive of the seasonal strength (holiday seasons). As for the whole year, PC shipments were down by 10% YoY, which was marked as the worst decline in PC market history, equal to the shipment level in 2009. 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. Similarly, HDD shipments also mimicked the declining trend which came down by 5% YoY according to data extracted from Trendfocus given its lion share in the PC segment. On our take, our concern remains on the HDD outlook as demand could continue to be overshadowed by the gloomy PC outlook (with an 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 growth for the HDD segment of the companies under our coverage such as Notion VTec (c.35% exposure).

In summary, although the current trend of strengthening of USD against MYR would positively enhance the earnings of the semiconductor companies under our coverage given their export-oriented earnings profile, we are keeping our NEUTRAL rating as we do not expect general improvement in the tech cycle to be reflected in all the companies under our coverage given the different product mix profile of each company. MPI (OP, TP: RM4.68) is our top pick for the Tech/Semicon sector with its resilient earnings prospects premised on: (i) production ramp in high margin products (namely HD leaded, MLP and turnkey test), (ii) recent foray into new segments such as LGA & FBGA market for the low cost smartphones from China and MEMS for Automotive, and (iii) higher operational efficiency after the line consolidation and product rationalisation coupled with the attractive potential net dividend yield of c.5% in FY14. Notably, the stock is also a proxy to the S&T boom amidst the technology sector upcycle as 55% of its total revenue is expected to be derived from these segments. While we still have an UNDERPERFORM rating on Unisem (TP: RM0.88), it could turn out to be a dark horse should the company rationalisation exercise ends earlier than expected with breakeven seen in the coming quarter.

Source: Kenanga