The latest industry research and global trade statistics  corroborate  our view  of  an  improved  near-term  earnings  outlook  for  the  technology companies in Malaysia.  Nevertheless, we maintain our NEUTRAL sector call  and  advocate  investors  to  be  selective  in  stock  selection  amidst current  market  volatility.  We  deem  some  companies  are  fairly  valued following  the  recent  share  price  appreciation.  Our  Top  Buys  are  Inari and Datasonic.

Smart devices to  shine.  We reiterate our bullish stance on the tablets and mobile phones  segment  as we expect sales  to be driven by lower price points following the emergence of China-based manufacturers  with mass  market  offerings  from  as  low  as  MYR300-MYR400  persmartphone.  On  the  premium  segment,  the  successful  introduction  of flagship  models  such  as  Galaxy  Note  4  and  iPhone  6  with  im proved technical  specifications  as  well  as  enhanced  physical  designs ,  in  our view, will likely entice upgrades among existing smartphone owners.

Less positive on  PC and HDD segments.  Gartner estimates that the traditional  personal computer (PC)  market would continue its downtrend to register contraction of  6.7%  in 2014 and 5.3% in 2015. This coincides with  our view,  given that the touch-based Windows 8 platform has failed to live up to  user  expectations thus  far. By the same token, we expect hard disk drive  (HDDs) shipments to remain  lacklustre.  Although  on 30 September  Microsoft  is  anticipated  to  unveil  its  next  operating  systemcodenamed Windows 9, we believe official launching of this new platformis unlikely until 3Q15.  

Camera facing headwinds. We believe camera sales would continue to face headwinds due to the cannibalisation impact from the introduction of smartphones  equipped  with  relatively  sophisticated  camera specifications.  Notably,  the  Camera  &  Imaging  Products  Association (CIPA) reported a 27.3% y-o-y decline in global camera shipments in the first seven months of the year. 

Record  month  for  semiconductors.  The  Semiconductor  Industry Association  (SIA)  announced  that  worldwide  sales  of  semiconductors reached  USD28.1bn  in  July,  marking  the  industry’s  highest  monthly sales  ever.  On  the  other  hand,  the  book-to-bill  ratio  for  semiconductor equipment  stayed  at  parity  of  1.0x  as  of  May.  We  are  expecting  the positive  momentum  to  sustain  for  the  rest  of  the  year,  driven  by increased  appetite  for  technology  devices  on  an  improved  global economic outlook. 

Selective Plays Reiterated

PC market to remain sluggish
Gartner  research  projects  for  worldwide  shipments  of  electronic  devices  to  reach 2.4bn  units in 2014,  up  4.2%  from 2013  in July 2014.  Of note,  Gartner expects  the traditional  PC  market to continue its downtrend to register  a  contraction of 6.7% in 2014 and 5.3% in 2015. This,  however,  is  not a surprise  to us,  given that the touchbased Windows 8 platform has failed to live up to users’ expectations thus far. This is also evident in  the operating system’s sales, which hit  only  200m copies after more than 15 months of availability. This is  compared with Windows 7’s  240m  mark within its first 12 months on the market.  Although the end-of-sales date for PCs running the consumer-focused versions of Windows 7  has been set at 31  October,  we think that the transition  to Windows 8  will be gradual,  if at all,  as  most enterprises are holding back the upgrade  to Windows 8, given the high costs required to  retrain  workers to navigate the overhauled operating system.

Our bearish view on the PC market is reaffirmed by 2QCY14 global PC shipments of 75.8m units, marking their  ninth consecutive quarter of negative y-o-y growth.  By the same token, 1HCY14 HDD shipments for notebooks and desktops segment too shed 2.7% y-o-y.  Overall HDD industry sales,  however,  closed  marginally higher by 2.9% y-o-y as the negative impact from subpar PC sales was more than offset by growth in demand  for  HDD  in  the  consumer  electronics  segment.  We  attribute  this  to  the launching of gaming consoles  ie  Sony’s (6758 JP, NR)  Playstation 4 and Microsoft’s (MSFT US, NR)  Xbox One  at the  end-2013,  an impact which we expect to normalise come 2015.
 

Smart devices to outperform
On the other hand, Gartner maintains its bullish stance on the smart devices segment as sales of both tablets and mobile phones are expected to be driven  by both  lower price  points  (which  would  entice  first-time  smartphone  purchases)  as  well  asupgrades  among  existing  smartphone  owners  to  models  with  improved  technical specifications.  Gartner estimates that smartphone sales will represent 88%  of global mobile phone sales by 2018  (from 66%  in 2014).  This concurs with  our views,  taking into account that  China-based smartphone brands with the likes of Xiaomi, Huawei and Lenovo (992 HK, NR) are  all looking to expand their respective global presence. In particular, Xiaomi has set a target to boost phone shipments to 100m units in 2015 as  the company diversifies into new markets such as India, Brazil and Russia after outselling Apple (AAPL US, NR) in its home market of China.  Taking into account the emergence of affordable smartphone models from as low as MYR300-MYR400 per unit, we are of the view that the mass-market offerings of these  fast-rising Chinesesmartphone makers will accelerate conversion to smartphone ownership.

On September 12,  Apple has unveiled its flagship iPhone 6 in two sizes ie  4.7-inch and  5.5-inch  screens.  Responses  have  thus  far  been  overwhelming,  with  a  record number of overnight pre-orders registered  at 4m, doubling that of  the  iPhone 5 two years  ago. Currently, the waiting period  for a 4.7-inch iPhone 6 purchased directly from the Apple store in US ranges from two to three weeks, while the 5.5-inch iPhone 6  Plus  is  clocking  in  an  average  delivery  period  of  more  than  a  month.  Google Trends, which measures relative Google search interests, shows that iPhone 6 is the most-Googled  iPhone  to-date.  Judging  from  these,  we  expect  the iPhone  6  to become Apple’s best seller and will likely beat its previous sales record of 9m iPhone 5S smartphones sold over  the handsets' first weekend of sales  back  in Sept 2013.On  a  side note,  Samsung  (005930  KS,  NR)  confirmed  that  its  recently  announced flagship model Galaxy Note 4 will be released by mid -October. Professional gadget review  websites  such  as  www.engadget.com,  www.techradar.com,  and www.gsmarena.com  all  have  positive  remarks  on  the  latest  Android-based widescreen model. Ultimately,  the  successful  introduction  of  these  premium  models  with  improved technical specifications  as well as enhanced physical designs, in our view,  will entice upgrades among existing smartphone owners.

Cameras remain lacklustre

On a side note, we believe camera manufacturers  would continue to face headwindsdue to the cannibalisation impact from the introduction of smartphones equipped with relatively sophisticated camera specifications.  Notably,  CIPA  reported a 27.3% y-o-y decline in global camera shipments in the first seven months of the year.  Previously, professional  cameras  with  interchangeable  lens  (CIL)  were  deemed  to  be  a  “safe haven” for  camera players given their relatively more advanced specifications vis-àvis cameras on smartphones. Nonetheless, shipments for CIL  products  too declined by 15.1% y-o-y.

Recovery on track for semiconductor industry
Moving  on  to  the  semiconductor  industry  SIA  announced  recently  that  worldwide sales  of  semiconductors  reached  USD28.1bn  in  July.  We  are  encouraged  by  the continued signs of improvement, as this  marks  the industry’s highest  monthly sales ever. On the other hand, the book-to-bill ratio for semiconductor equipment stayed at parity  of  1.0x  as  of  May.  YTD  bookings  were  up  16.9%  y-o-y,  while  billings  too climbed 25.1% y-o-y. We are expecting the positive momentum to sustain for the rest of  the  year,  driven  by  increased  appetite  for  technology  devices  on  an  improved global economic outlook.

Maintain NEUTRAL on the sector with selective buys

Within  the  smart  devices-centric  semiconductor  assembly  and  test services sector, we  prefer  Inari  (INRI  MK,  BUY,  FV:  MYR3.82)  over  Globetronics  (GTB  MK, NEUTRAL,  FV:  MYR4.75)  as:  i)  the  former  offers  relatively  more  exciting  growth prospects at CAGR of 23%, underpinned by growth in demand for its major customer Avago’s (AVGO US, NR)  radio frequency-related  products  and ii)  diversification into new businesses such as fiber optics and  electronics test & measurement segment to boost its recurring earnings base over the long term.Amongst the semiconductor players in general, we  like Unisem (UNI  MK, BUY, FV: MYR2.16) as we expect a sharp rebound in  its  2HFY14 performance  on improving utilisation rates, while current valuation of FY15F P/E of 12.5x remains undemanding. Although Malaysian Pacific Industries’  (MPI MK,  NEUTRAL,  FV: MYR6.40)  earnings visibility  has  vastly  improved  too,  recent  share  price  appreciation  leaves  limited upside and hence warrants our neutral stance. 
In  the  local  HDD  and  camera  component  space,  we  continue  to  foresee  earnings headwinds for Notion VTec (NVB MK,  SELL,  FV: MYR0.49)  as sector fundamentals remain weak. On the non-manufacturing technology stocks, we  continue to advocate investors to accumulate  on  Datasonic  (DSON  MK,  BUY,  FV:  MYR2.50)  as  we  expect  the Government to  potentially  implement  fuel  subsidy  rationalisation.  This,  in  our  view, could benefit Datasonic if the MyKad is chosen to be the platform to help roll out the program.  Our cautious stance on Prestariang (PRES MK, NEUTRAL, FV: MYR2.00), meanwhile,  remains  for  now  as  we  believe  slower-than-expected  contract  flows  in1HFY14 could potentially trigger further earnings disappointment come 2HFY14. Overall, we maintain our NEUTRAL view on the tech sector with Inari and Datasonic as our Top Buys.

Source: RHB