We are reiterating our OVERWEIGHT rating on the
semiconductor sector. Post-Thai flood in Oct 2011, the current ASP of hard disk
drive (HDD) has been rising and the market expects this trend to be sustainable
until 2014. Pricing of HDD will still remain stable with HDD’s shipments
expected to rise by another 10% in 3QCY12. Coupled with the consolidation of
the five top players in the industry to just three now, this will also give
more a stable pricing foundation for HDD. Our
recent study on the industry suggests that the YoY growth trend of the
global semiconductor sales may also serve as an alternative indicator (apart
from the well-adopted book-to-bill ratio indicator) to predict the
semiconductor sales trend. Based on our observation, the industry cycle will likely
reach a peak when GSS growth reached a +45% YoY (+2SD from its mean) while a
bottom is suggested when it falls -28% YoY (-2SD below its mean). Our study suggests that the
inflection point of the semiconductor cycle will likely appear when the GSS and
book-to-bill ratio are recorded at more than 40% YoY and 1.2x respectively. We
reckon that this inflection point is likely to appear between Jan 2013 and Mar
2013 based on historical trends. However, it may only be reflected in the
semiconductor companies’ earnings results in three to six months after the time of inflection since these
companies are assembly manufacturers, who will only be affected in the later stage
of the industry’s turning point. Meanwhile, to align our forecasts to our
latest inhouse change of the USD to RM forex rate forecast (new average rate of
RM3.12 and RM3.06 for CY12 and CY13 respectively as compared to RM2.90 and
RM2.80 previously), our FY12 earnings forecasts for MPI, Unisem, SAM
Engineering (SAM) and Notion have been revised upwards by 9% for MPI and 5%
each for the remaining three companies. Similarly, our FY13 earnings forecasts
for the above-mentioned companies have risen by 20%, 16%, 5% and 16%
accordingly. Note that SAM will not see much of an impact to its earnings given
its substantial exposure to the aerospace’s engine casing business, which is
protected by back-to-back agreements on its raw materials. Our OUTPERFORM
rating on the overall Semiconductor sector remain unchanged. Due to our revised
higher earnings estimates above, we have raised our target prices for MPI, Unisem,
SAM and Notion to RM3.50, RM1.87, RM3.60 and RM1.85 respectively (from RM3.45,
RM1.86, RM3.50, RM1.60 previously). Note that we, however, are maintaining Kelington’s
earnings and target price (RM1.10) as forex rate changes have no major impact
on its earnings.
1QCY12 results
snapshot. While the results top lines were within ours as well as the
street estimates, they underperformed in their bottom lines due mainly to
higher material prices. Higher cost incurred led to margins compression in
those companies under our coverage. That said, none of the companies did exceptionally
well or very bad during the quarter. We also expect earnings growth rates to
rebound to the region of 20%-30% in 2012/2013 due to rising consumer demand in
electronics devices.
Stable ASP but higher
unit shipments in 2H. According to IHS iSuppli (IHS), a global leader in
market research, the ASP for the HDD market rose by 28% to $66/unit from
$52/unit in 4QCY11. It held steady at the same price in 1QCY12 and is expected
to be sustained throughout 2HCY12 due to the completion of the industry’s
consolidation. Meanwhile, unit shipments are expected to recover completely by
3QCY12 after the 29% YoY dropped in 4QCY11. To recap, unit shipments rose by
23% QoQ in 1Q followed by another 10% to 159m in 2QCY12. For the coming
quarter, IHS is expecting unit shipments to rise by another 10% QoQ in 3QCY12
to 176m mainly driven by increasing
storage capacity demand by consumers.
Consolidation of top
players to keep pricing stable.
Following the acquisition of Samsung by Seagate, and Hitachi GST by WD,
the top two suppliers now hold 85% of the HDD market share in 1QCY12 from just
62% in 3QCY11 (before the acquisitions). The acquisitions have resulted in the
top players now being more able to control pricing and thus able to keep the
ASPs at a relatively high level. In summary, we expect trends of rising volumes
and stable ASPs to emerge and boost the HDD market in 2HFY12.
Party continues but
may end in 1QCY13. Apart from using
the book-to-bill ratio to measure the semiconductor industry cycle, the YoY
growth of global semiconductor sales (“GSS”) published by SIA may be another
useful tool to measure the industry cycle (see Figure 5). GSS is a three-month moving average of the
semiconductor sales activity. Based on our observation, the industry cycle will
likely to reach a peak when GSS growth rises +45% YoY (+2SD from its mean) and conversely,
reaches bottom if it falls -28% YoY
(-2SD below its mean). The GSS YoY growth is currently at -2.7%, suggesting
ample room for the up-cycle to continue before reaching its average (at 8.7%)
and peak level.
Source: Kenanga
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