We reiterate our OVERWEIGHT stance on the technology sector as we move into 2H15. Nea-term sentiment will be supported by continued weakness in the MYR vs the USD while demand for smart devices stays resilient. The tablet market’s potential revival and the pick-up in demand for wearables, in our view, are prospective wildcards to help further re-rate sector interest. Our Top Buys are Inari and Globetronics.

• Favourable forex. The MYR’s continued weakness against the USD will likely help propel earnings growth for export -oriented technology counters under our coverage come their 2Q15 results release by July/August. The USD/MYR averaged at MYR3.66 for April-June, vis-àvis 1Q15’s MYR3.60 (+1.7% QoQ) and 2Q14’s MYR3.24 (+13.0 YoY). While our in-house 2015 USD/MYR forecast is at an average of MYR3.60, we do not discount the possibility of short-trm volatility on the upside. We estimate that every 1% depreciation in the MYR vs the USD could mean a potential earnings upgrade of 3-5% for the technology manufacturers under our coverage, ceteris paribus. That said, we believe the positive impact might not be fully felt , as we understand that most of the exporters’ customers are looking for potential price revisions to take advantage of the current forex environment.
• Smartphones to further propel growth. International Data Corp (IDC)expects worldwide smartphone shipments to grow at 11.3% in 2015. This is within our previous 10-15% expectations. We expect smartphone shipments to be driven by escalating demand from emerging economies such as India, South Africa, the Middle East and Latin America, leveraging on the transition from feature phones to smartphones. This ison the introduction of next-generation 4G networks in those regions. Sales within the premium segment remain brisk, as the latest flagship models ie Samsung Electronics’ (Samsung) (005930 KS, NR) Galaxy S6and S6 Edge look set to break the company’s previous annual sales record of 45m units while Apple’s (AAPL US, NR) iPhone 6 and 6 Plusregistered another solid quarter in 1Q15, with shipments of >60m units.
• Watch out for wearables. Although reviews of Apple’s Apple Watchhave thus far been mixed, we expect interest to pick up over time as the upcoming software update, known as Watch OS 2.0 (to be launched by September), will help to address some of the wearable’s existing shortcomings. Existing Android-based wearable brands, meanwhile,have all lined up new launches in 2H15. As such, we continue to believe the potential adoption of wearable electronic devices could help spur consumer spending on technology gadgets over the next 2-3 years. Our views are consistent with IDC’s latest findings that global shipments of wearables tripled YoY to 11.4m units in 1Q15. We foresee the growth momentum to further accelerate from 2Q15 onwards, given that the Apple Watch was only launched in April.

1Q15 a decent quarter Six out of the seven technology stocks under our coverage reported 1Q15 earnings that were within expectations. The only exception was Datasonic (DSON MK, BUY, TP: MYR1.29), as its MyKad delivery slowed to 1m in 1Q15 due to a slowdown in orders from the Government. On a positive note, both smart device-centric semiconductor players Inari Amertron (Inari) (INRI MK, BUY, TP: MYR4.35) and Globetronics Technology (Globetronics) (GTB MK, BUY, TP: MYR6.85) reported another stellar quarter. This was because the former continues to ride on its radio frequency (RF) division’s increased orders from customer Avago Technologies (Avago) (AVGO US, NR), while the latter witnessed higher volume loadings for both its sensor and timing and quartz devices segments. Unisem (M)’s (Unisem) (UNI MK, NEUTRAL, TP: MYR2.42) and Malaysian Pacific Industries’ (MPI MK, BUY, TP: MYR7.69) numbers too came within expectations, lifted by improved overall utilisation rates and favourable forex rates, which averaged MYR3.59 vs 1Q14’s MYR3.30. On the non-manufacturing tech space, Prestariang’s (PRES MK, BUY, TP: MYR3.03) and GHL Systems’ (GHLS MK, BUY, TP: MYR1.42) numbers were largely within our expectations too.

2Q15 earnings could surprise on the upside The majority of the technology companies listed in Malaysia are export-oriented, with over 90% of their products typically shipped to foreign countries and quoted in USD terms. As such, the MYR’s continued weakness against the USD will likely help to propel earnings growth for these players in 2Q15 results release, ie by July/August. The USD/MYR has averaged at MYR3.66 for April-June vis-à-vis 1Q15’s MYR3.60(+1.7% QoQ) and 2Q14’s MYR3.24 (+13.0% YoY).

We expect the current downtrend to persist over the immediate term, as the US Federal Reserve is widely anticipated to raise the country’s interest rates in due course. In our view, investors are also pricing in the potential downgrade of Malaysia's sovereign ratings by Fitch Ratings by end of this month. Our in-house 2015 USD/MYR forecast is at an average of MYR3.60. We do not discount the possibility of short-term volatility on the upside and estimate that every 1% depreciation in the MYR against the USD could mean a potential earnings upgrade of 3-5% for the technology manufacturers under our coverage, ceteris paribus. That said, we believe the positive impact might not be fully felt yet, as we understand that most of the exporters’ customers are looking for potential price revisions to take advantage of the current forex environment.

Industry experts cautiously optimistic on 2015 outlook Both the Semiconductor Industry Association (SIA) and the World Semiconductor Trade Statistics (WSTS) are forecasting for semiconductor sales to grow at 3.4% in 2015, driven by the smartphone and automotive segments. Although this implies a substantial slowdown from the 10% growth registered in 2014, we expect growth momentum for our local technology players to outpace the industry as a whole, given our relatively smaller base. To illustrate this, the combined revenue share of the semiconductor players under our coverage makes up less than 0.5% of the global semiconductor sales reported by SIA for 2014. We also take into consideration the ongoing diversification by local peers to penetrate into new sub-segments and products within the semiconductor supply chain.

Industry smartphone shipments to grow, albeit at a slower pace IDC, on the other hand, expects worldwide smartphone shipments to grow at 11.3%in 2015, vis-à-vis 27.6% YoY growth registered in 2014. This is because the Chinesesmartphone market (which accounted for over 35% of total industry shipments in2014) is gradually hitting saturation. This is within our previous expectations of 1015% growth and is evident in Xiaomi Corp’s recent move to penetrate the overseasmarket in its quest for higher growth opportunities. Going forward, we expecsmartphone shipments to be driven by escalating demand from emerging economiessuch as India, South Africa, the Middle East and Latin America, leveraging on thetransition from feature phones to smartphones. This is on the introduction of next generation 4G networks in those regions.

Within the premium segment, we continue to expect sales momentum to be driven by upgrades on improved hardware specifications as well as migration towards latest operating systems. Samsung’s latest flagship devices, ie the Galaxy S6 and curved Galaxy S6 Edge, have received rave reviews from professional technology blogs. Counterpoint Technology Market Research estimates that the South Korean handset maker shipped about 6m units in the first three weeks since the launch on 10 Apr and pointed out that the group was on track to break its previous annual sales record of 45m units. Interest in Samsung’s phone-tablet (phablet) line-up is expected to be revived with the impending launch of the Galaxy Note 5, which the market is expecting to take place in mid-September. Apple’s iPhone sales, meanwhile,registered another solid quarter in 1Q15, with shipments of >60m units. IDC is forecasting for a significant annual shipment growth of 23% YoY in iPhones, which we attribute to the widely anticipated launch of its iPhone 6s and 6s Plus series come September. The recent introduction of Apple’s next-generation operating system, ie the iOS 9, convinced market observers that the launch of iPhone 6s line-up was imminent, considering the company’s tendency to release new iOS software alongside new iPhone hardware.

On the mass market side, we believe the proliferation of models at lower price points will continue to entice take-ups. This will likely be driven by cheaper and more competitive offerings from Chinese handset makers such as Xiaomi, HuaweiTechnologies (Huawei) (002502 CH, NR) and Lenovo (992 HK, BUY, TP: HKD14.80) penetrating into new growth regions. Of note, Xiaomi recently launched a mid-rangeproduct line, with its first model Mi 4i priced at an affordable sub-MYR800 per unitlevel.

Potential revival of the tablet market Global tablet sales, meanwhile, have marked a second consecutive quarter of YoY decline. Based on IDC’s compilation, 1Q15 shipments declined 5.9% YoY to 47.1m. We attribute the continued weakness to the cannibalisation impact from the introduction of bigger-screen phablets and a lack of new launches over the past 6-12months. IDC, however, pointed out that cellular-equipped tablets, as well as 2-in-1 detachable tablets, showed remarkable growth in 1Q15 as Taiwanese vendors like Asustek Computer (ASUS) (2357 TT, NR), Acer (2353 TT, NR) and EFUN Technologies (3523 TT, NR) are going to the market with more affordable low-end products. Meanwhile, Microsoft (MSFT US, NR) is tapping into the high-end business segment with its flagship tablet, the Surface Pro 3.

Overall, we are hoping for a potential revival of interest in tablet purchases come 2H15. This is on launches of new models with bigger screen sizes as well as improved technical specifications. Of note, Apple is reportedly looking to launch a big-screen iPad by end-2015. Local media reports suggest that this variant was initially scheduled for unveiling in end-2014, but this has since been delayed to end-2015 as component manufacturers attempt to improve production yield. Within the Android camp, we expect renewed demand for tablets from enterprise users, taking into account that Microsoft’s proprietary Office solutions will soon come pre-installedon Android tablets following a partnership deal signed between Microsoft and the major tablet vendors.

Source: RHB Research - 12 Jun 2015