We maintain our NEUTRAL call on the technology sector. The upcoming Budget 2015 to be presented on 10th Oct is expected to be generally neutral on the sector. Meanwhile, on the Goods and Services Tax (GST) front, we are of the view that the impact should also be neutral given that the companies under our coverage are mainly exporters (thus are to be zero-rated). On a broader perspective, while (i) the resilient sales momentum in the global semiconductor market and (ii) the current trend of strengthening of USD against MYR will continue to lend strength to the earnings of local semiconductor companies given their export-oriented earnings profile, we do not expect general improvement to be reflected in all the companies under our coverage given their different product mix profile. Our preference picks are still companies with high exposure in the high growth area such as Smartphone/Tablets (S/T) segment and Automotive segment. While both MPI (OP, TP: RM6.72) and UNISEM (MP, TP: RM1.64) have relatively high exposure to these segments (c.55% and c.46% respectively), we prefer MPI with its resilient earnings prospect premised on the strategic product mix which gives a balanced exposure of cyclical segments and defensive segments. Qualitative-wise, we also like the management’s ability to react timely ahead of the curve as well as streamlining affirmative action strategy for profitable growth. MPI is trading at 1.4x FY15 PBV which is at +1SD above three-year forward PBV and 15.1x FY15E PER which we deem to be still undemanding given its resilient earnings outlook as well as its potential net dividend yield of c.3% in FY15. Meanwhile, we also like VS (TB, TP: RM3.16) with investment merit backed by its (i) resilient earnings outlook which will be mainly driven by its new coffee brewing machine production ramp-up (+40%), also being the fat margin products driving up the group’s profitability and (ii) decent net dividend yield of 5.2% in FY15 on the back of min.40% dividend payout ratio.
Upcoming Budget 2015 is expected to be NEUTRAL to the Technology/Semiconductor companies under our coverage. Meanwhile, on the (GST) front, we view that the impact should also be NEUTRAL, as according to the draft version of the GST general guide from Royal Malaysian Customs, an exporter can zero rate his supply of goods at the time when the goods are exported. While goods and services acquired in order to make the final products for the tech companies will incur GST which is referred to as input taxl under the GST rules, a manufacturer is allowed to claim input tax credit on any GST incurred on his purchases which are input to his business.
Resilient momentum continues in global semiconductor sales. Global semiconductor sales in July 2014 maintained its strong momentum, with a decent growth of 9.9% YoY with overall improvement seen in all countries and continuous uptick of 2.4% MoM. July marked the highest ever monthly sales which remain on track for a record year in 2014, according to Semiconductor Industry Associate (SIA). Meanwhile, all regions posted both MoM and YoY increases for the third straight month – the first time this has happened over four years - and sales increased in July across all semiconductor product categories, signifying the market’s broad and consistent strength. Meanwhile, looking at the other noticeable indicator, namely the SEMI book-to-bill, the ratio came in at 1.07x which pointed to stronger demand. Notably, this also marked the seven consecutive month of the ratio staying above the 1.0x parity. With improvements seen in bookings and billings over the same period, this suggests continual industry capital spending.
S/T and Automotive segments still catalysts going forward. Worldwide combined shipments of devices (PCs, Tablets, Ultramobiles and mobile phones) are projected by Gartner to reach 2.4bn units in 2014, a 4.2% increase from 2013. The growth are forecasted to be led by Tablets (+24%) and Mobile Phones (+3.1%), with the expectation of worldwide traditional PCs shipments to register a smaller decline of 6.7% YoY (compared to c.10% in 2013). We see both our stock coverages, namely MPI and Unisem, to benefit from the upcycle of S/T trend given that both MPI and Unisem have relatively high exposure of c.43% and c.28%, respectively, to these segments. Of noteworthy, on MPI latest briefing, we gather that the group is currently ramping up its volume production on 802.11ac FEM to gear up for a major phone release by fall season, of which the impact to earnings should be reflected in the next quarter. On the PC front, while we see no major impact to MPI and Unisem as their revenue exposures are only c.13%-15%, respectively, we are cautious with the HDD outlook as the Desktop HDD and Mobile HDD (commanding c.76% of the total market share for total HDD shipments) are heavily dependent on the PC demand. Hence, we see no immediate catalysts for earnings upgrade to Notion VTec (c.35% exposure). Besides the high growth area, we also see the defensive segment namely Automotive to fuel the earnings growth of both MPI and Unisem going forward. This will be driven by the continual strong orders for Tire Pressure Monitoring System (TPMS), in conjunction with the mandatory requirement of having TPMS by the European Union in all new passenger vehicles, starting from 1st November 2014. Note that that both MPI and Unisem have sizeable exposure of c.22% and c.18%, respectively, to this segment.
Source: Kenanga
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