We are still NEUTRAL on the technology sector as we think valuations already reflect current industry prospects. We also see few catalysts that could lead to an upgrade. In the semiconductor space, we are NEUTRAL on MPI (FV: MYR2.76) and UNI (FV: MYR0.95). In the HDD component space, JCYH (FV: MYR0.45) is a SELL while NVB (FV:MYR0.74) is a NEUTRAL.

- PC industry still in the doldrums. The mature personal computer (PC) market remains lacklustre while the smartphone and tablet (S&T) industry continues to flourish. The strong demand for S&T is fueled by its affordability and consumers’ preference for smaller-screen devices. Although S&T is primarily used for content consumption, it is fast gaining popularity in document-laden and work environments. Hence, the PC market may face further headwinds moving into the future.

- HDD market mirrors the sluggish PC industry. The lacklustre PC industry has, in turn, dragged down hard disk drive (HDD) sales. Going forward, this phenomenon should continue to pressure the HDD market given that approximately 65-70% of HDD shipments are for PCs.

- Camera business weakens. Like conventional digital cameras, we think the cameras with interchangeable lens (CIL) and interchangeable lens (IL) segments gave way to new smartphone models with sophisticated built-in cameras. Consumers are now turning away from dedicated photographic devices, while the popularity of CIL wanes.

- Semiconductor figures improve. Recent industry data for semiconductors has been encouraging. That said, it is still too early to regard this as the beginning of a structural recovery for the sector. Overall, we are still cautious on its medium- to longer-term outlook, and think that the bottomline growth of semiconductor companies will depend largely on their product mix and strategies going forward.

- NEUTRAL. Overall, we are still NEUTRAL on the technology sector. In the semiconductor space, we are downgrading Malaysian Pacific Industries (MPI MK) to NEUTRAL from a Trading Buy, given its recent share price run-up, but our FV is unchanged at MYR2.76. Similarly, Unisem (UNI MK, FV: MYR0.95) stays as a NEUTRAL. In the local HDD component space, we still advocate a SELL on JCY International (JCYH MK, FV: MYR0.45) given that its business depends solely on the HDD market while its high opex is eroding profitability. In the meantime, while we are cautious on Notion Vtec (NVB MK)’s recent investment into an unrelated silver production company, we think it is fairly priced for now. Hence, we remain NEUTRAL on the stock, with its FV at MYR0.74.

Short On Stimulus

Global PC industry still in the doldrums

The global PC market continues to be sluggish, as S&T has absorbed some of the former’s demand. 3Q, regarded as a back-to-school season, showed little sign of recovery as PC shipment figures contracted by 9% y-o-y (9M13: -10% y-o-y). Microsoft’s touch-optimised operating system (OS), Windows 8 (W8), failed to excite consumers into replacing their old desktop PCs and notebooks. Typically, traditional big-screen devices were used for productivity-focused activities but W8 failed to be supportive of this crucial element of computing.  Since the OS was introduced almost a year ago, it still faces difficulties assimilating into the market, with only an 8% share.

The latest Microsoft OS, Windows 8.1 (W8.1) will be a free update to address some its predecessor’s shortcomings but we see limited positive overflow into the mature PC market given the lack of revolutionary applications to spur take-up. Thus, the refresh cycle for notebooks and desktops should remain lengthy.

Also, the proliferation of S&T had caused the slowdown in the PC market. In 1H13, smartphone sales surged 45% y-o-y. The strong demand for S&T is fueled by its affordability and consumers’ preference for smaller-screen devices. Although S&T is primarily used for content consumption, it is fast gaining popularity in the document-laden and work environments. Hence, the PC market may face further headwinds moving into the future.

Global HDD market mirrors the sluggish PC industry

The lacklustre PC industry has, in turn, dragged down HDD sales. However, the negative impact on the HDD market (1H shipments: -12.0% y-o-y) was somewhat mitigated by the robust growth in the enterprise segment (1H shipments: +13.0% y-o-y). We expect the PC market to remain subdued going forward, which should put pressure on the HDD market - given that approximately 65-70% of HDD shipments are for PCs. HDD industry leaders Western Digital (WDC US, NR) and Seagate (STX US, NR) have guided for 3Q13 shipments to rise 2-6% q-o-q (flat y-o-y) on the back of a seasonal uptick in gaming and branded products.

Camera business weakens

In August, shipments of CIL and IL fell 15% and 19% y-o-y respectively. On a YTD basis, their combined shipments contracted 16% y-o-y, falling far short of the expected 13% y-o-y growth forecast by the Camera & Imaging Products Association (CIPA) for 2013. Like conventional digital cameras, we think the CIL and IL markets gave way to that of new smartphone models that come with sophisticated built-in cameras. Consumers are now turning away from dedicated photographic devices while the previous popularity of CIL is waning. Nikon (7731 JP, NR), a leading camera maker, pared its forecast for the industry’s global shipments by 7% for its FYE 31 March 2014, citing reasons like decelerating growth for non-reflex cameras and the slower economic recovery in China.

Improvement in semiconductor sales

Recent industry data for the semiconductor sector has been encouraging. In August, global chip sales rose 7% y-o-y, marking the fourth consecutive month of positive growth. YTD, it was 2.5% higher y-o-y, in line with World Semiconductor Trade Statistics (WSTS) forecasts, while the semiconductor equipment industry’s book-to-bill ratio in August was slightly below parity at 0.98x. During the month, bookings and billings declined by 3% and 19% y-o-y respectively.

Although there were slight improvements, these are still not concrete enough to be considered as the beginning of a structural recovery for the sector. Furthermore, YTD growth remains subdued and WSTS is only forecasting 2014 industry sales to rise by only 5% y-o-y. Overall, we are still cautious on the sector’s medium- to longer-term outlook. That said, the bottomline growth of semiconductor companies will depend largely on their product mix and strategies going forward.

Still NEUTRAL on the sector

We continue to be NEUTRAL on the semiconductor companies under our coverage as we think they are fairly priced and see few rerating catalysts. That said, we are downgrading MPI to a NEUTRAL from a Trading Buy given the recent run-up in its share price for the past two months (+19%). Our FV is unchanged at MYR2.76, based on 0.8x CY14 P/NTA (40% discount to the historical 5-year sector average of 1.4x). Similarly, UNI stays as a NEUTRAL, with a MYR0.95 FV, pegged to 0.7x CY14 P/NTA (50% discount to the historical 5-year sector average of 1.4x). MPI deserves a higher valuation given its efforts in turning around and expanding its business. From our latest meeting with their respective management teams, both MPI and UNI have guided for flat q-o-q sales in 3Q13. In the local HDD component space, we still advocate a SELL on JCYH with our FV at MYR0.45, pegged to 0.9x CY14 P/NTA (representing -1SD from the domestic sector’s mean). This is because its business depends solely on the HDD market, while high opex is eroding its profitability. Meanwhile, we are cautious on NVB’s recent investment into an unrelated silver production company but think it is fairly priced for now. Hence, we remain NEUTRAL on the stock, with our  FV at MYR0.74, premised on a 8.0x CY14 EPS and in line with its 7-year historical P/E.

Source: RHB