We maintain OVERWEIGHT on the TECHNOLOGY sector as we see: (i) healthy global industry outlook, (ii) strong USD vs MYR trend, and (iii) the export-oriented earnings profile of local semiconductor companies that made least affected by GST, as investment merits for investors seeking refuge in the challenging local economic landscape. However, due to share price outperformance in the sector, current valuations may be stretched with risk-reward ratio seen as less favourable. Hence, we see the BOTTOM-FISHING approach as especially apt for the sector, specifically companies with good financial fundamentals. Screening through the semiconductor value chain, we see VITROX (TB, TP: RM3.84), being the leading solution provider of automated vision inspection systems, which is positioned in the front-end of the semiconductor value chain, to continue benefiting from the increasing complexity of semiconductor packages. Meanwhile moving over to back-end semiconductor players, we are still POSITIVE on the OSAT players given their high exposure in the Smartphone/Tablets (S/T) and Automotive segments, which enjoy surging demand. Our Top Pick remains MPI (with a higher TP of RM7.60 after we pegged its targeted PER at the industry’s forward average of 15.5x from 14x previously), premised on its investment merits of: (i) strategic product mix which gives a balanced exposure of high growth segments and defensive segments, (ii) management’s ability to react timely ahead of the tech cycle curve and streamlining affirmative action strategy for profitable growth as well as (iii) undemanding valuation, currently trading at 13.6x FY16 PER, a 13% discount to its peers.

Global semiconductor industry’s outlook remains bright in 2015. Global semiconductor sales in January 2015 maintained its strong momentum, with a decent growth of 8.7% YoY, which marked the 21th consecutive month of yearon- year increase. Outlook-wise, Semiconductor Industry Association (SIA) expects continued growth in 2015, with World Semiconductor Trade Statistics (WSTS) sharing the same optimism, expecting the worldwide semiconductor market to grow steadily, at 4.9% to USD352b in 2015 and 3.1% to USD363b. Looking at another crucial indicator, which tracks equipment spending (indicates the industry capacity expansion), SEMI, SIA and WSTS concurrently expect a high-single to mid-teens digit growths on the worldwide equipment sales in 2015. At the front-end of the semiconductor value chain, inspection equipment suppliers are expected to do well amid the high volume and increasing complexity of semiconductor packages. For the end-market, automotive and communications (especially wireless) are expected to grow stronger than the total market whereas consumer and computer segments are assumed to remain almost flat

Resilient demand in the Smartphones/Tablets (S/T) and Automotive segments to continue driving tech companies earnings. Worldwide combined shipments of devices (PCs, Tablets, Ultramobiles and Mobile Phones) are projected by Gartner to reach 2.5bn units in 2015, at a higher growth of 3.8% YoY increase (vs 1.9% YoY growth in 2014) to be led by Tablets (+7.9%) and Mobile Phones (+3.7%) with PCs expected to register flat growth of 0.9% in 2015. We see both of our core coverages, namely MPI and Unisem, to continue benefiting from the trend given that they have relatively high exposure of c.38% and c.32%, respectively, to the above-mentioned segments. We gather that both MPI and Unisem, are in expansionary mode in view of the max-ramp volume production for their Smartphones customers. As for Notion Vtec, although its foray into the smartphone glass manufacturing is still in check, the group is targeting another entry to get exposure to the S/T segment by setting up an online smartphone-selling business. Meanwhile, the automotive semiconductor outlook for 2015 is also forecasted to register a promising growth of 7.5% YoY by IHS, underpinned by growth from: (i) more sensor components being installed for safety measures, and (ii) higher electronics content with new models rollout. We understand that both MPI and Unisem’s Automotive segments (with exposure of c.22% and c.17%, respectively) are currently being 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 its new passenger vehicles, starting from 1st November 2014.

Export-oriented semiconductor companies to benefit from the adverse local economic landscape. While Malaysia’s economic landscape is facing more challenges in light of the weaker Ringgit and falling oil prices, all these, being double-edged swords, are also benefiting export-oriented companies, especially the Technology/Semiconductor players under our coverage. Our economics team is projecting an exchange rate of USD vs MYR at an average of RM3.57/USD in 2015. Based on our sensitivity analysis, every 1% fluctuations in the USD will impact our FY15E NP in UNISEM, MPI and VITROX by 0.5%, respectively. Meanwhile, on the GST front, these players are expected to be least affected (based on the draft general guideline issued by Royal Malaysian Customs) due to the zero rated status.

Risks. Touching base on the sustainability of the tech upcycle, data from SIA shown that the last round of industry upcycle (from November 2009 to July 2011) lasted 20 months before YoY growth tapered off and further developed into an industry downturn. The key culprits then were the weaker consumer demand amidst: (i) fears of contagion of the European sovereign debt crisis in Spain and Italy, and (ii) concerns over the slow economic growth of the United States with its credit rating being downgraded. On our take on this current cycle, we see favourable macro factors fuelling the growth on the industry. Note that our assumptions are premised on: (i) the continuation of gradual improvement in the global economy with the US leading on firmer expansion of its domestic economy, and (ii) Europe putting more emphasis on growth rather than austerity, and (iii) Japan is expected to maintain its upwards trend. Should there be any unforeseen adverse macro factors such as global economy slowdown, adverse currency fluctuations or financial crisis, it could alter/deviate our positive convictions on the sectors and stock picks.

Source: Kenanga