We are downgrading our rating on the Technology sector to NEUTRAL
from OVERWEIGHT. All the tech companies under our coverage recorded results
that were below the street and our expectations. All the players are now wary
about the outlook for 2HCY12 due to the global economic uncertainties and the
slowdown in the consumer demand for electronic devices. In addition, we believe
that the highly possible strengthening of Ringgit Malaysia against US Dollar
over the next couple of months will have negative impacts on technology
companies’ earnings visibility. In conclusion, our top-down analysis points to
a negative outlook for the sector in 4Q12. Post-2QCY12 results, we had revised
down most of our earnings for the tech companies and downgraded their TPs
(target prices) as well. As this
juncture, we have OUTPERFORM calls on MPI (TP: RM3.10) and Notion (TP: RM1.50),
and MARKET PERFORM calls on Unisem (TP: RM1.32), SAM Engineering (TP: RM2.80), JCY
(TP: RM0.85) and Kelington (TP: RM0.53).
Visibility down due
to the global economic uncertainties. The tide in the industry has likely
turned negative as there has been a weakening of the industry fundamentals
brought about by the persistent uncertainties in the Eurozone, a slowdown in
the emerging markets (China and India) and the weak consumer sentiment in the
market. Should end-demand for smartphone,
tablet, PC, TV, and other consumer devices during holiday seasons fail to materialize
as we expect due to the macro impacts,
inventory correction could happen or worsen, hurting the semiconductor
companies (“SCM”) in 4Q12-1Q13.
The risk of Malaysian
Ringgit strengthening in 4Q12 a concern. Besides, the easing of monetary
policy, namely QE3 measures implemented by the US Federal Reserve could lead to
the Malaysian ringgit strengthening against the US dollar in 4Q12. Currency
risk could weight on top-line and erode profitability of the SCM companies
under our coverage, should RM appreciate against US$ with a swing beyond our
assumption range. This strengthening coupled with higher commodity prices
should have a negative impact on the
revenue and profitability performance of companies in the sector.
Structural challenges
have emerged. Riding on the mobile
computing trend, smartphones and tablet PCs have been the key demand drivers
for the SCM sector since 2011, and we expect both items to continuously shine
through 2012-13 to support SCM demand. As
such, we think that the PC industry growth deceleration is not just a temporary
phenomenon. The PC industry’s growth profile is facing many challenges and in
our view, the market here faces incremental risks beyond just a macroeconomic
slowdown. Consumers and enterprises remain distracted by alternative devices
such as smartphones and tablets, which continue to eat away the PC's share of
IT spending. These factors suggest that at a minimum, the current consensus
forecast for PC unit growth of 0.9% in CY12 is likely to face more downside
risks.
Our view is supported by HP and Dell whose managements are
now cautious about the growth of PCs in 2HCY12 given the uncertain economic
environment, a more competitive dynamics and also a softer consumer sentiment
worldwide. Meanwhile, the two big HDD players,
Western Digital (WD) and Seagate have said that they are wary about the soft
macroeconomic environment and the growing use of tablets and smart phones to
the detriment of PC usage. Consequently, WD is only expecting the unit growth
in HDD demand to be at just around 5%.
Supply has
normalised, but shipments are still down. After almost a year since the
Thai flood, productions have gone back to their normal rate as all the
manufacturers have ramped up their plants faster than expected. However, the
HDD shipment index is still far below the shipment rate before the Thai flood.
This we believe is likely due to the slower HDD demand as a result of the
flattish growth in the PC market and the shift of consumers’ spending into tablets
and smartphones. As such, JCY being a
leader in the local HDD sector is likely to feel the adverse impacts. In
conclusion, we are downgrading the sector rating to NEUTRAL from an OVERWEIGHT.
Source: Kenanga
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