Global semiconductor sales in July declined for the first time after posting 26-consecutive months of YoY growth. While the YoY decline of 0.9% in July was a meagre fall with YTD15 global sales still recording a healthy growth of 4.5%, we do not discount that the industry slowdown could have already been in the making; with growth tipping off from the high base alongside with the softening demand from major economies. Recall that the last two rounds of industry downcycle [from October 2008 to October 2009] and [from July 2011 to October 2012] shared similar patterns where trends of YoY growth were seen tapering off at the first phase, following by the first YoY decline setting in before further developing into an industry downturn. Additionally, we are also cognisant that the industry experts, i.e. Semiconductor Industry Association (SIA), World Semiconductor Trade Statistics (WSTS) and Gartner, all have marginally trimmed down their growth forecasts for the worldwide semiconductor market (to low single-digit from mid-single previously) for 2015 and 2016. Nevertheless, there are still bright spots worth focusing such as Smartphones and Automotive segments, which are expected to grow albeit at a slower pace. For the local semiconductor players, we still believe that those with wide exposure to the segments mentioned above will still see growth at least in the near future (up to 1-year timeline). Besides, we also see the strong USD trend as the silver living that will continue to suppport the profitability of the local semiconductor players (given their export-oriented earnings profile). Among our coverage, our Top Pick remains MPI (TP: RM8.28) which offers the strategic product mix in the high growth (Smartphone) and Defensive (Automotive) segment as well as trading at an undemanding valuation. We also like its management’s foresight in embracing various tech-cycles. In terms of valuation, MPI is currently trading at 9.6x FY16 PER which is at a 23% discount to the industry forward PER of 12x. Meanwhile for the sector, we downgrade our OVERWEIGHT call to NEUTRAL due to the softening industry outlook coupled with MARKET PERFORM ratings outweighing the OUTPERFORM rating, in the total market capital of our stocks coverage universe.

More cautious outlook ahead. Global semiconductor sales in July 2015 came in weaker at -0.9% YoY which marked the first decline after posting 26 consecutive months of YoY growth. Meanwhile on MoM basis, total sales also came in softer at minus 0.4%. The slower sales in July were attributed to the softening demand, normal market cyclicality and currency devaluation in some regional markets. Outlook-wise, while World Semiconductor Trade Statistics (WSTS) and Gartner are still forecasting a moderate YoY growth for 2015, we observed that the growth quantum forecast for 2015 from these industry experts have been lowered to low single-digit (from mid-single digit forecasts previously). We understand that the marginal downgrades were mainly due to the lower forecasts on the major applications (PCs, smartphones, and tablets) that drive the semiconductor markets as well as the currency devaluation of other major economies against USD. Meanwhile, at the front-end of the semiconductor value chain, our channel checks also reveal that the equipment manufacturers have started experiencing slower sales with part of its customers putting their capital investment on hold.

Smartphones and Automotive segments still growing, albeit at a slower pace. Worldwide sales of smartphones to end-users were reported to record 330m units (-1.9% QoQ- being the slowest quarterly growth; and 13.5% YoY) in 2QCY15, according to Gartner’s report. While demand for lower-cost 3G and 4G smartphones continued to drive growth in emerging markets, overall smartphone sales remained mixed region by region. Amongst all, Emerging Asia/Pacific (ex.China), Eastern Europe and Middle East and Africa were the fastest-growing regions, with China (contributed 30% of the total sales) being the exception (declined for the first time by 4% YoY owing to the economic poor performance). Outlook-wise, worldwide combined shipments of devices (PCs, Tablets, Premium ultramobiles and Mobile Phones) are projected by Gartner to reach 2.45bn units in 2015, at a positive growth of 1.5% increase (vs. previous growth forecast of 2.8% back then March) to be led by Ultrabook (premium, +33.5%) and Mobile Phones (+3.2%). On the other hand, traditional PCs and Tablets expected to decline by 9.4% and 5.3%. Back home to the local players, although both MPI and Unisem have exposure in the PC segment (at 12% and 15%, respectively), we still expect net growth at sales by both of the companies, to be superseded by robust Smartphone segments, which are still the lion’s share contributor to their respective revenue (at c.38% and c.32% respectively). Note that both MPI and UNISEM are still in the expansionary mode (with some in max-ramp volume production) for their Smartphones customers. Meanwhile, the automotive semiconductor outlook is also forecasted to register promising growth; of high single-digit YoY by IHS and a 5- year CAGR of high-single digit by Technavio. The growth will be on the back of: (i) more sensor components being installed for safety measures, and (ii) higher electronics content with new models rollout. On the local players, we understand that both MPI and UNISEM’s Automotive segments (with exposure of c.22% and c.16%, respectively) are currently being driven by the continual strong orders for different pressure and impact sensors.

Strong USD trend continues to fare well for the earnings of export-oriented local semiconductor companies. While we see moderate sales growth going forward in USD terms for the export-oriented semiconductor companies under our coverage, favourable currency translations to MYR terms, however, are bossting earnings. Based on our sensitivity analysis, every 1% fluctuations in the USD will impact our FY16E NPs for UNISEM and MPI by 1% respectively. Recall that nearly 100% of their revenue are denoted in USD, with natural hedge from its raw materials purchases (mainly in USD) which constitute about c.40% of total costs as well as the 50% hedging on the net receivables (in some companies). Note that our team of economists has recently come out with a new set of projection for USD/MYR at an average of RM3.96/USD for 2015 and RM4.20/USD for 2016. We were previously assuming currency base rates of RM3.57-RM3.80/USD (different FY) for the companies under our coverage. Hence, to be in-line with our in-house forecasts, we have imputed similar assumption of an average of RM3.96/USD for 2015 and RM4.20/USD for 2016 (compared to previous forecast of average RM3.80/USD for both 2015 and 2016) for the Tech companies under our coverage.

Valuation and earnings revision. For UNISEM, we have trimmed our sales growth assumption in USD terms to low single digit (from previously midsingle digit) for FY2015 and FY2016 to reflect our conservative stance; the similar quantum of our MPI sales forecast in USD terms. Meanwhile, we have also readjusted back its share base from 842.7m to 733.8m (which is its latest share base) by taking out the outstanding unexercised warrants which have already expired. For MPI and NOTION, we made no changes to our revenue drivers as we have already factored in conservative forecasts for both companies previously. Meanwhile for the adjustment of currency assumption, the net bottomlines (NP) impact of the respective companies under our coverage are all positive with UNISEM: +5% for both FY15/FY16, MPI: 11%/10% for FY16/FY17 and NOTION: +11% for both FY15/FY16.

Source: Kenanga Research - 7 Oct 2015