We keep our OVERWEIGHT call on the technology sector going into 3QCY20 as we remain excited for the upcoming Apple iPhone and strong recovery in automotive sales in the second half of the year. We anticipate the upcoming flagship smartphone by Apple to be well received due to the revamp of its operating system and the inclusion of 5G connectivity. Of the new software offerings unveiled during WWDC last month, we outlined 3 key features, (i) app library, (ii) widgets, and (iii) picture-in-picture which we deem will offer a long awaited fresh experience that iOS users have envied Android users for. In fact, our channel checks indicated that even some loyal Android users may likely consider Apple as their next smartphone upgrade owing to the new offerings from iOS 14. On the automotive side, China being the first to flatten the Covid- 19 curve has displayed a strong rebound in car sales from -48% YoY in March to +7% YoY in May. With easing restrictions in the EU, we expect car sales recovery at similar momentum. Macro view-wise, we gather that both front-end and back-end semiconductor players are continuing to see growth despite the lingering Covid-19 pandemic and US ban on Huawei. This is possible thanks to the adoption of 5G which will continue to see a rise in components per handset coupled with the uptick in EVs as car manufactures are pivoting away from fuel combustion engine. Our top picks are JHM (OP; RM2.00) and MPI (OP; RM13.30).

Firing on all cylinders. We reiterate our OVERWEIGHT call on the technology sector going into 3QCY20 as companies have returned to full workforce post movement control order (MCO) to fulfil order backlogs. We gather that there was no cancellation of orders, if fact, some of the orders is being rushed for delivery in 3Q. Putting the largely expected weak 1HCY20 behind us, we believe that 2HCY20 will be filled with excitement coming from the new flagship smartphone from Apple that will have support for 5G coupled with the recovery in the automotive space as car sales have picked up strongly in China, while Europe and US is anticipated to trend similarly.

Upcoming iPhone with new software offerings will likely be well received. We anticipate the upcoming flagship smartphone by Apple to be well received due to the revamp of its operating system and the support for 5G connectivity. During the Worldwide Developer’s Conference (WWDC) event last month, Apple unveiled the brand new iOS 14 that will ship together with its new flagship device estimated to be launched during late 3Q. Of the new software offerings, we outlined three key features; (i) app library, (ii) widgets, and (iii) picture-in-picture which we deem will offer long awaited fresh experience that iOS users envied Android users for. In fact, our channel checks indicated that even some loyal Android users may likely consider Apple as their next smartphone upgrade owing to the new offerings from iOS 14. With the top three iPhone models in circulation still comprising older models like the iPhone 7 (2016), iPhone 6s (2015) and iPhone 8 (2017), we believe that the replacement cycle is long due and the 2020 iPhone model will likely be the go-to choice for a future-proof upgrade.

Flagship 5G smartphone to spur demand for more RF filters. In line with market trend, Apple is expected to adopt 5G in its upcoming flagship models. Such move is crucial for Apple to keep up with competition and retain market share given that its closest rivals, Samsung and Huawei, have already launched their flagship series (Galaxy S20 and P40 respectively) with support for 5G connectivity. We believe the radio frequency (RF) space to be a notable beneficiary of 5G. With the peak transfer rate estimated to jump from 150Mbps (4G) to >1Gbps (5G), the need for antenna will also increase from 2x2 MIMO (multiple input, multiple output) to 4x4 MIMO. To facilitate such speeds, the amount of frequency band support in each handset will likely doubled from the current support of 15 bands. As such, RF filters will also rise in tandem in order to maintain a good signal to noise ratio which becomes more challenging when moving up to higher frequency bands (eg. mmWave). Overall, similar to previous generations, 5G will result in more RF components and higher content per device due to increased complexity.

Macro development showing positive trend ahead. The market leader in the OSAT space, ASE Technology Holdings (ASE), saw its monthly revenue remaining resilient despite the Covid-19 outbreak. For the most recent three months from Mar-May 2020, ASE’s monthly revenue grew at a range of 18.9%-28.1% YoY, signalling a steady demand for chip packaging. The same trend can be observed in the front-end semiconductor space where global wafer fabrication leader, TSMC, recorded a monthly revenue growth of 16.6%-42.4% YoY from Mar-May 2020.

While there are concerns with regards to US restriction on Huawei’s access to wafer fabrication house, we gather that the excess capacity in wafer fabrication houses have been being promptly absorbed by the likes of Apple and AMD which are on the forefront of advancing Moore’s Law with many of their respective products relying on the 7nm process node and some even exploring the feasibility of 5nm. Apple has also announced in the WWDC event that it will begin designing its own laptop processor chip (Apple Silicon) based on ARM’s architecture, a move that is unprecedented among laptop makers. Apple Silicon promises better performance without the unnecessary heat generation from Intel’s x86 architecture, resulting in more powerful computing in a thinner form factor. While the transition will be phased across two years, such big leap signifies that the semiconductor space still has a good amount of new development to look forward to even in the mature laptop market.

Source: Kenanga Research - 8 Jul 2020