In 1QCY19, smartphone-related companies may enjoy some positive trading sentiment potentially driven by Samsung’s S10 launch that comes with more exciting features, but this may not be sustainable as RF content growth has likely reached a plateau. Meanwhile, short-term prospects of automotive-centric players are dampened by new emission standards in the Europe. In the EMS space, we see potential opportunity for SKPRES to capitalise on the loss of jobs by one of its local competitors recently, while PIE should higher orders from its telecommunication, industrial printing, medical and raw cable customers in FY19. Maintain NEUTRAL with preference for EMS players, namely (i) SKP (OP; RM1.25) due to potential margins enhancement and new contracts in the pipeline post PCBA-line commencement, while the company only trades at FY19E/FY20E PER of 11.3x/9.4x; and (ii) PIE (OP; RM1.70) due to its higher NP margin relative to its peers, more advanced manufacturing capabilities as well as its strong parentage support from Foxconn Technology Group, and we see good value proposition at current price level with its FY19E PER at only 10.7x. We also like MPI (OP, TP:RM13.00) as profit margins are expected to improve after weak-margin products have been weeded out and replaced with higher-growth/margin sensor packages, while the company trades at an attractive FY19E ex-cash PE of 8.2x. We have cut TP for (i) SKPRES from RM1.35 to RM1.25, (ii) PIE from RM2.00 to RM1.70 and (iii) KESM from RM10.20 to RM8.00; and downgraded D&O from OP to MP after reducing TP from RM1.00 to RM0.750.

Unenthused about the developments in the technology sector over the next three months. First quarter has historically been a soft season for both semiconductor and EMS industries owing to shorter working months and seasonally lower consumer spending. In 1QCY19, there could be some positive trading sentiment for companies with meaningful exposure to smartphones (MPI and Unisem), as the launch of Samsung’s new flagship smartphones with more exciting features are expected to incentivise upgrades. However, this may not be sustainable given that generic modules in smartphones such as radio frequency (RF) chips have likely reached a saturation point, before 5G could potentially bring it up another notch from 2020 onwards. Meanwhile, short-term prospects of automotive-centric players (KESM and D&O) continue to be dampened by the recent introduction of new emission standards in the Europe. In the EMS space, we see potential opportunity for SKPRES to capitalise on the loss of jobs by one of its local competitors recently. For PIE, while an industry-wide component shortage continues to be a hurdle to production in the near term, we remain sanguine about its FY19 growth prospects due to potentially higher orders from its telecommunication, industrial printing, medical and raw cable customers. As such, we maintain NEUTRAL on the sector with preference for EMS players, namely SKP (OP; TP: RM1.25) and PIE (OP; TP:RM1.70). We also like MPI (OP; RM13.00) given its attractive FY19E ex-cash PER of 8.2x.

1Q generally a weak season for semiconductor, and the long growth streak is nearing its end. From our historical observation, first quarter is typically a soft season for the semiconductor industry. According to data from the Semiconductor Industry Association (SIA), global semiconductor sales (GSS) staged an average sequential decline of 3% in the first quarter of the past five years. In addition, we believe that the semiconductor industry is at the tail-end of the current growth cycle, given that it is already in the 27th consecutive month of YoY growth. This is the longest growth streak in a decade, outlasting the previous growth cycle in May 2013-Jun 2015, which lasted for 26 months (see Exhibit 1). In fact, looking at the raw monthly data instead of the widely-tracked 3-month moving average, Oct 2018 GSS has already slowed to the single-digit region (+6.4%) vs. >20% in May 2018 (see Exhibit 2). Also notably, the World Semiconductor Trade Statistics (WSTS) has recently revised its 2019 growth forecasts downwards from 5.2% to 2.6% as it now expects Memory to register a slight decline after enjoying extraordinary growth in 2017 and 2018. Otherwise, GSS growth is expected to be fuelled by Optoelectronics (e.g. LED, optocoupler) with 6.8% growth and sensors with 5.1% growth. This bodes well for D&O, which predominantly produces automotive LED.

Source: Kenanga Research - 4 Jan 2019