We recently visited 5 technology companies in Penang – INARI, PENTA, ELSOFT, MMSV, and PIE. The tone was uninspiring for the near term, but the companies were more sanguine about the prospects for 2HCY19. The general view on 5G was that more clarity and meaningful positive impact will only be seen in 4QCY19-1QCY20. Additionally, the consensus was that 5G will enable a myriad of new applications, which not only signifies new products for the technology companies but also further proliferation of existing products, especially those relating to data infrastructure, radio frequency (RF) and sensors. Meanwhile, we believe the general semiconductor sector is besieged by several challenges in the near term, led by: (i) lacklustre smartphone sales given minimal feature upgrades in recent models and the high price point of the recent Korean flagship smartphone models, (ii) muted vehicle sales in China amid trade war and in the EU due to the introduction of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP). All-in, we would recommend devising a strategy which entails taking positions in equipment makers first (after May 2019’s results season), and subsequently switching over to OSAT players like INARI (end-3QCY19). For investors who would like to gain exposures to the sector at this juncture, we reckon that MMSV offers appealing reward-to-risk ratio given potentially stronger 1Q19 results (on a QoQ basis).

Looking ahead to 2HCY19. We visited 5 technology companies in Penang – Inari Amertron Berhad (INARI), Pentamaster Corporation Berhad (PENTA), Elsoft Research Berhad (ELSOFT), MMS Ventures Berhad (MMSV) and PIE Industrial Berhad (PIE). The tone was uninspiring for the near term, but the companies were more sanguine about 2HCY19. The general view on 5G was that more clarity and meaningful positive impact will only be seen in 4QCY19-1QCY20, but equipment makers such as PENTA, ELSOFT and MMSV could receive orders/indication 3-6 months ahead as OSATs/IDMs prepare for ramp-up. Positively, the consensus was that 5G will enable a myriad of new applications, which not only signifies new products for the technology companies but also further proliferation of existing products, especially those relating to data infrastructure, radio frequency (RF) and sensors.

Equipment makers yet to benefit from trade diversion. On the trade war front, while PIE’s managing director Alvin believes all Malaysian EMS players should have received many new enquiries/jobs by now, most of the equipment makers have yet to see major trade diversion towards their end. For INARI individually, while it has received several interesting enquiries, which are in preliminary talks, orders from some prospective/existing customers might have been pushed back as the latter take a wait-and-see approach until the trade war outcome is clear.

Near-term challenges dampen excitement. We believe the general semiconductor sector is besieged by several challenges in the near term, led by: (i) lacklustre smartphone sales given minimal feature upgrades in recent models and the high price point of the recent Korean flagship smartphone models, (ii) muted vehicle sales in China amid trade war and in the EU due to the introduction of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP). Just days ago, a major Korean smartphone maker issued a profit warning for its 1QCY19 results due to slumping demand for the memory chips and display panels it makes for electronic devices, which we believe is mainly tied to slowdown in the smartphone industry. This further strengthens our view that 1HCY19 will likely be unexciting for the sector. Having said that, we believe that equipment makers are generally less susceptible to the temporary slowdown in the general semiconductor sector (both smartphone and automotive-driven) given less elastic demand (in relation to chips volume) for equipment/machines and longer order book visibility vs. outsourced semiconductor assembly and test (OSAT) players’ current just-in-time (JIT) system.

Equipment maker first, then OSATs. All-in, we would recommend devising a strategy which entails taking positions in equipment makers first (after May 2019 results season), and subsequently switching over to OSAT players like INARI (end- 3QCY19). For investors who would like to gain exposures to the sector at this juncture, we reckon that MMSV offers appealing reward-to-risk ratio given potentially stronger 1Q19 results (on a QoQ basis).

Source: Kenanga Research - 29 Mar 2019