We reiterate our NEUTRAL stance on the technology sector as we think valuations  aptly  reflect  the  industry’s  current  prospects  with  no concrete  re-rating  catalysts  expected  in  the  horizon.  In  the  HDD component space, JCYH (FV: MYR0.45) remains  a SELL while NVB (FV:MYR0.74)  is  a  NEUTRAL.  In the semicon  sector, we keep our  BUY call on MPI (FV: MYR3.67) but remain NEUTRAL on Unisem (FV: MYR0.95).

• S&T stays  on top of the game.  We expect the slump in the  personal computer (PC) market to persist in 2014 as the product still lacks appeal due to competition from mobile devices.  As a result, the hard disk drive (HDD)  industry  will  likely  enter  a  soft  patch  given  that  65-70%  of  the global shipments of HDDs are for PCs. The small screen market (tablets and phablets) should  continue  to  dominate  electronic gadget  sales  this year.  The gloomy outlook of the  PC market is a reflection of the change in consumer trends and appetite but there will  still be  a  need to replace aging PCs.
• Cameras lose their “click”. The camera market is another sector that is succumbing  to the fast-growing  smartphone and tablet (S&T)  sector. In 2014,  we  expect  smartphones  with  sophisticated  built-in  cameras  to continue to cannibalise the sales of dedicated photographic devices. We are  seeing  a  growing  trend  where  users  now  place  connectivity  (ie instant sharing capabilities) above picture quality.
• Semiconductor sector not entirely out of the woods. Although recent industry statistics have been encouraging and could be interpreted as a structural recovery for the semiconductor sector, we are still cautious on the industry’s medium-  to longer-term outlook. We  hold the view that the sector’s  visibility remains short  as uncertainties  still prevail.  Thus, going forward,  semiconductor companies  will have  to  adopt the  right product mixes and strategies to be profitable.
• Maintain  NEUTRAL.  Overall,  we  maintain  our  NEUTRAL  view  on  the tech sector. In the local HDD component space, we think the recent price run-up  in  JCY  International  (JCYH  MK,  FV:  MYR0.45)  shares  is unjustifiable as the sector’s  fundamentals remain weak. We reiterate our SELL  call  on  the  stock  as  its  business  depends  solely  on  the  HDD market.  Meanwhile,  we  are  NEUTRAL  on  Notion  VTec  (NVB  MK,  FV: MYR0.74) as we find it fairly valued. In the semiconductor assembly and test  services  sector,  we  believe  Malaysian  Pacific  Industries  (MPI  MK, FV: MYR3.67)’s earnings have turned around  and  hence,  have a BUY call on the stock. We are NEUTRAL on Unisem (UNI MK, FV: MYR0.95) as the stock currently lacks the merits to prompt a re-rating.

Mixed Outlook: Some Good, Some Bad

• We believe the S&T industry will continue to flourish and outshine the mature PC sector in 2014
• The camera market will be in the doldrums this year 
• Recent statistics are pointing north but we are erring on the side of caution as sector visibility remains poor
• Maintain NEUTRAL on the sector. Our only BUY is MPI (FV: MYR3.67)

Small screen devices continue to dominate
We do not expect the personal computer (PC)  market to recover from the slump  this year  simply  because  such  products  still  lack  the  appeal  and  innovation  that  will induce  take-up.  The  9M13 data show that  global  shipments of  PCs  contracted  10% while  smartphone  sales  surged  45%  y-o-y  (see  Figures  1  &  3).  To  everyone’s disappointment,  Microsoft’s  touch-optimised  operating  system  (OS),  Windows  8(W8),  failed  to create excitement  and  redefine the PC world. Traditional big-screen devices were typically used for productivity-focused activities but  since  W8 was not ergonomically designed for this vital aspect of computing, its predecessor Windows 7(W7) remains the preferred OS (see Figure 2).

It is, however,  not all doom and gloom for the PC market. The expiry  of Microsoft’s support for Windows XP  (WXP) in April may  be a silver lining  for  the industry as  this would mean that  users  will look to upgrade their seasoned PCs. However, we think that the transition will be gradual, and thus, should not significantly lift PC shipment in the  interim.  All  said,  we  expect  the  refresh  cycle  for  notebooks  and  desktops  to remain lengthy.

On the flip side, we believe the smartphone and tablet (S&T) industry will continue to flourish  and  outdo  the  mature  PC  sector  in  2014  as  affordability  as  well  as  a preference for small screen devices will fuel consumer demand. Furthermore, S&T is fast gaining popularity in the document-laden working environment.

HDD sector to mimic tepid PC market
Apart  from  the  PC  market,  we  also  expect  the  hard  disk  drive  (HDD)  sector  to  be sluggish given  that  ~65%  of  HDD  shipments  are  for  big  screen  devices.Nevertheless, we  think  the impact will be partially  mitigated  by robust growth in the enterprise division, buoyed by demand for affordable bulk data storage equipment. In 9M13,  total HDD shipment  fell  8% y-o-y  while  that in the enterprise division  jumped 18% y-o-y.

Cameras lose their appeal
The  camera  market  is  another  segment  that  has  lost  out  to  the  fast-growing  S&T sector.  For  2014,  we  expect  smartphones  with  sophisticated  built-in  cameras  to continue  to  cannibalise  dedicated photographic device  sales.  We  observe a growing trend where users value connectivity (instant sharing capabilities)  more than picture quality.  This  trend  is  apparent  from  the  waning  popularity  of  cameras  with interchangeable lens (CIL). In the first  11  months of 2013, global shipments of  CIL slipped 14% y-o-y while the overall camera market slid 31%. Worse still, shipments of the  two  deviated  significantly  from  forecasts  by  the  Camera  &  Imaging  Products Association (CIPA) for the year (CIL/camera market: +13%/-6% y-o-y).

Is the worst over for semiconductor players?
Although recent industry statistics have been encouraging and could be interpreted to mean that the semiconductor sector may be in for  a structural recovery, we are still cautious on the industry’s medium- to longer-term outlook. We opine that the sector’s visibility  remains  short  as  uncertainties  prevail.  That  said,  we  are  getting  mixed signals  from  independent  market  researchers  on  2014  global  sales  growth  (see Figure 9).  Nevertheless, we think this year is likely going  to be  lacklustre,  similar to FY13, given that there are no major developments within the industry. Thus,  going forward, semiconductor companies will have to adopt the right product mixes and strategies to be profitable.

In  November,  global  chip  sales  ticked  up  by  7%  y-o-y,  marking  the  seventh consecutive month of positive growth but for the year up to end-Nov 2013, it grew by only  a  mere  4%.  On  the  other  hand,  the  semiconductor  equipment  industry’s November book-to-bill ratio stayed above parity at 1.1x as bookings accelerated 73% y-o-y while billings climbed 23% y-o-y.

Maintain NEUTRAL on the sector

In  the  local  HDD  component  space,  we  think  the  recent  price  run-up  of  JCY International  (JCYH  MK,  FV:  MYR0.45)  shares  is  unjustifiable  as  sector fundamentals remain weak. We reiterate our SELL recommendation on the stock a s its  business  depends  solely  on  the  HDD  market.  On  the  other  hand,  we  are NEUTRAL on Notion VTec (NVB MK, FV: MYR0.74) as we think it is fairly valued for now, and there are no near-term catalysts to prompt an upgrade or downgrade. In  the  semiconductor  assembly  and  test  services  sector,  we  believe  Malaysian Pacific Industries (MPI MK, FV: MYR3.67)’s earnings have turned around. The group chalked up two consecutive quarters of  robust  results  with strong utilisation rates  of 80-85%. We have a BUY call on the  stock as we believe its successful transition to high-margin  businesses,  stringent  cost  controls  and  planned  exit  from  the  lossmaking  stamped  lead  frame  business  should  keep  it  in  the  black  going  forward. 

Elsewhere,  we are NEUTRAL on Unisem (UNI MK, FV:  MYR0.95) as the stock still lacks re-rating merit  –  we saw the company widen  its losses  in  9M13 and  it  is still operating  at  low  utilisation  rates  (60-65%).  However,  we  hold  the  view  that  these negatives  have  been  priced  in  and  downside  risk  is  now  minimal.  Note  that  the company will also incur some non-recurring losses (MYR15m) in 4Q13 as  it  intendsto trim headcount at its Batam unit and shut down its Europe plant. Overall, we maintain our NEUTRAL view on the tech sector.

Source: RHB