As we approach the upcoming 3QCY12 results season, we examine some of the global technology industry’s key indicators and assess their potential impact on technology manufacturers under our coverage. We also see the gloom in the global PC market in 2H shrouding the HDD industry. That said, the global semiconductor market would also see sub-par numbers. Despite the bleakoutlook, we are retaining our NEUTRAL call on the sector in view of the inexpensive valuation of the stocks under our coverage.
Mediocre 2H PC sales seen. PC sales tend to be stronger in 2H but according to International Data Corporation (IDC), the 3QCY12 back-to-school season was a challenging period due to potential demand being deferred to 4Q. Meanwhile, we do not think that Windows 8 (W8), which we understand is poised to make a debut later this month, could dominate the market like Windows 7 (W7) did. Thus, we are reiterating our previous forecast that 2H PC shipments will grow by a low single-digit.
HDD makers brace for poor 3QCY12. Mirroring the global PC market, the worldwide HDD industry has been experiencing muted demand and inventory rebalancing. Seagate and Western Digital (WDC) have slashed their upcoming 3QCY12 revenue forecasts by 5%-7%. The two global giants have also revised lower their expected total addressable market (TAM) for the September quarter from 157m units to 140m units.
Worldwide semiconductor sales to remain flat in 2H. The worldwide semiconductor sales of USD24.3bn in August marked the second consecutive month of flat growth (+0.1% m-o-m). Meanwhile, the book-to-bill ratio of semiconductor equipment manufacturers has stayed below parity (at 0.84) for the third consecutive month. The global semiconductor industry’s outlook will remain challenging for the remainder of the year given the muted demand from technological products other than smartphones and tablets. We are reiterating our prior expectation of flat growth for 2012 given that the 8MCY12 global semiconductor sales are already down 4.7% y-o-y.
Maintain NEUTRAL. Given the headwinds faced by the global HDD market, we cut our earnings estimates by 13% for JCY and 9% for Notion for FY13. However, strictly based on valuation, we find both stocks inexpensive and thusupgrade JCY (FV: RM0.88) and Notion (FV: RM1.20) to TRADING BUYs. Meanwhile, our forecasts and FVs for local semiconductor packaging and testing companies are unchanged. MPI (FV: RM2.72) remains NEUTRAL although we are upgrading Unisem (FV: RM1.21) to TRADING BUY since the stock offers a potential upside of 21%. Despite the three TRADING BUYs versus one NEUTRAL call in our technology universe, we are retaining our NEUTRAL recommendation on the sector. We are keeping a close eye on all developments within the global PC, HDD and semiconductor space.
Mediocre 2H PC sales seen. PC sales tend to be stronger in 2H but according to International Data Corporation (IDC), the 3QCY12 back-to-school season was a challenging period due to potential demand being deferred to 4Q. Meanwhile, we do not think that Windows 8 (W8), which we understand is poised to make a debut later this month, could dominate the market like Windows 7 (W7) did. Thus, we are reiterating our previous forecast that 2H PC shipments will grow by a low single-digit.
HDD makers brace for poor 3QCY12. Mirroring the global PC market, the worldwide HDD industry has been experiencing muted demand and inventory rebalancing. Seagate and Western Digital (WDC) have slashed their upcoming 3QCY12 revenue forecasts by 5%-7%. The two global giants have also revised lower their expected total addressable market (TAM) for the September quarter from 157m units to 140m units.
Worldwide semiconductor sales to remain flat in 2H. The worldwide semiconductor sales of USD24.3bn in August marked the second consecutive month of flat growth (+0.1% m-o-m). Meanwhile, the book-to-bill ratio of semiconductor equipment manufacturers has stayed below parity (at 0.84) for the third consecutive month. The global semiconductor industry’s outlook will remain challenging for the remainder of the year given the muted demand from technological products other than smartphones and tablets. We are reiterating our prior expectation of flat growth for 2012 given that the 8MCY12 global semiconductor sales are already down 4.7% y-o-y.
Maintain NEUTRAL. Given the headwinds faced by the global HDD market, we cut our earnings estimates by 13% for JCY and 9% for Notion for FY13. However, strictly based on valuation, we find both stocks inexpensive and thusupgrade JCY (FV: RM0.88) and Notion (FV: RM1.20) to TRADING BUYs. Meanwhile, our forecasts and FVs for local semiconductor packaging and testing companies are unchanged. MPI (FV: RM2.72) remains NEUTRAL although we are upgrading Unisem (FV: RM1.21) to TRADING BUY since the stock offers a potential upside of 21%. Despite the three TRADING BUYs versus one NEUTRAL call in our technology universe, we are retaining our NEUTRAL recommendation on the sector. We are keeping a close eye on all developments within the global PC, HDD and semiconductor space.
Headwinds in global PC market. PC shipments have been sluggish for the past seven quarters, posting flat to single-digit growths, despite the recent introduction of the ultrabook. Typically, PC sales tend to be stronger in 2H but according to IDC, 3QCY12’s back-to-school season was a challenging period. We understand that W8 is poised for a debut later this month and a small group of consumers may be waiting for the new batch of PCs to be pre-installed with the new OS, thereby potentially backloading demand. However, giant PC makers from the US, Hewlett Packard and Dell, think otherwise and have warned of slower demand for the remaining of the year. We also noticed a shift in consumer preferences towards smartphones and tablets, which served another blow to the mature PC market.
Gloomy prospects for Windows 8. For the past three years, Microsoft has sold over 630m Windows 7 (W7) licences and now commands a market share of >40%. Since then, the operating system (OS) has become the all-time fastest-selling version of Windows. As seen in Figure 2, W7 dominated the OS market swiftly whereas its predecessor Windows Vista had failed to do so. As for the soon-to-be released W8, we do not think it will become a market mover given that the early adopters of W7 are only three years old. Other reasons for a potentially slower W8 update include: i) the advent of the touch user interface, which is prompting existing users to unnecessarily replace their PC hardware, ii) a strong resistance to change, especially for those who recently switched over to W7, iii) it requires major retraining for Windows users, iv) it is not suitable for business environments and v) there is a lack of application compatibility.
Microsoft Surface a growth avenue. Later this month, Microsoft will introduce its own line of tablets, Surface, to tap the fast-growing market. This signals a paradigm shift in which Microsoft ventures into the hardware space to indirectly compete with its customers – the PC makers. The move poses a significant threat to the symbiotic relationship between Microsoft and its PC partners. It also implies that Microsoft is anticipating greater growth prospects for Surface compared to its legacy OS products which cater toward the PC market.
2H to see slower PC shipment growth. All in all, we are reiterating our previous expectation of 2H PC shipments registering low single-digit growth. Recall that couple of months back, Gartner had cut its 2012 global shipment forecast for the second time this year from 4.4% to 2.7%. Meanwhile, IDC expects worldwide PC shipments to grow at a four-year CAGR of 7.1%, down from the previous 2012-2016 forecast of 8.4%.
Seagate and WDC fall short. Mirroring the global PC market, the worldwide HDD industry was dragged down by muted demand and inventory rebalancing. Seagate and Western Digital (WDC) both slashed their upcoming 3QCY12 revenue forecasts by 5%-7%. Furthermore, they also revised their total TAM target from 157m units to 140m units for the September quarter. However, they were silent on ASP trends but we think that it should decline at a quicker pace but still stay above pre-Thai flood levels; the current triopolistic HDD market provides better price control than before due to less intense competition.
Thai floods not as bad as last year. We gathered that the recent floods in Thailand were less severe compared to last year’s. Nonetheless, we remain vigilant on the situation. Until now, both Seagate and WDC have not commented or released any statements with regards to their Thai operations. The former has plants located in Samut Prakan and Nakhon Ratchasima while the latter has facilities in the Pathum Thani and Ayutthaya provinces. Of these, only Ayutthaya is currently flooded (see Figure 5). Recall that last year, WDC was badly affected by the catastrophe while Seagate was unscathed. We will obtain a clearer picture when both companies hold their 1QFY13 results conference call later this month. Nonetheless, based on our channel checks with JCY and Notion’s management, we understand the flood situation in Thailand is not as dire as last year’s and their operations are still intact. JCY and Notion have a presence in the Sraburi and Ayutthaya
provinces respectively.
provinces respectively.
Second straight month of flat semiconductor sales. According to the Semiconductor Industry Association (SIA), the August worldwide semiconductor sales of USD24.3bn marked the second consecutive month of flat growth (+0.1% m-o-m). Stagnant regions include the Americas (+1.0% m-o-m), Japan (+1.0% m-o-m) and Asia (+0.0% m-o-m), whereas Europe was the only continent that shrank (-1.9% m-o-m). Sales were also down y-o-y and YTD across all regions. The outlook for the global semiconductor industry continues to be challenging for the remainder of the year given the muted demand from technological products other than smartphones and tablets.
Book-to-bill ratio stays below 1. The billings of semiconductor equipment manufacturers continue to outpace bookings in August, with the former declining at a slower rate m-o-m compared to the latter (-7.4% vs -9.2%). Hence, the book-to-bill ratio stayed below parity (at 0.84) for the third consecutive month. Also, on the back of reduced demand, Semiconductor Equipment and Materials International (SEMI) expect 2H to show a similar trend due to persistent weakness in overall industry capex spending cycle.
Flat worldwide semiconductor sales in 2H. We are reiterating our prior expectation of flat growth for 2012 given that 8MCY12 global semiconductor sales had already declined by 4.7%. Recently, Intel, the world’s largest PC chipmaker, cut its 3QCY12 sales forecast by 6%-9%, citing a sluggish enterprise PC market and waning PC demand from emerging markets. Recall that World Semiconductor Trade Statistics (WSTS) had projected global semiconductor sales growth of only 0.4% y-o-y from 2011 and anticipates the industry to grow 4%-7% for the next two years.
VALUATION & RECOMMENDATION
JCY (TRADING BUY; FV: RM0.88) undervalued. Having reported weak numbers in its last quarter and given the worsening outlook for the global PC and HDD industries, we are cutting JCY’s FY13 earnings by 13.1%. We are also lowering our valuation multiple from 6.4x to 4.5x FY13 PE to derive a new FV of RM0.88 (previous FV: RM1.44). The revision is justified, based on the average forward PE of Seagate and WDC (shown in Table 3). At the current market price, JCY offers a 12% price upside as well as an attractive dividend yield of 10%. Despite the macro headwinds, the stock is undervalued. This prompts us to upgrade JCY from NEUTRAL to TRADING BUY.
JCY (TRADING BUY; FV: RM0.88) undervalued. Having reported weak numbers in its last quarter and given the worsening outlook for the global PC and HDD industries, we are cutting JCY’s FY13 earnings by 13.1%. We are also lowering our valuation multiple from 6.4x to 4.5x FY13 PE to derive a new FV of RM0.88 (previous FV: RM1.44). The revision is justified, based on the average forward PE of Seagate and WDC (shown in Table 3). At the current market price, JCY offers a 12% price upside as well as an attractive dividend yield of 10%. Despite the macro headwinds, the stock is undervalued. This prompts us to upgrade JCY from NEUTRAL to TRADING BUY.
Notion (TRADING BUY; FV: RM1.20) lifted by its camera segment. Notion’s last quarterly results were similarly dragged down by its HDD segment but we saw encouraging numbers from its camera business. However, recent industry statistics from Camera & Imaging Products Association (CIPA) indicated that shipments for cameras with interchangeable lens (CIL) contracted in July (-0.2% m-o-m) and August (-4.8% m-o-m). We are not perturbed, as shipments usually peak in September and October. Moreover, 2H is typically the strongest shipment period for CILs. That said, we are still revising lower Notion’s FY13 earnings by 8.8% to incorporate the challenges facing the HDD segment and to err on the conservative. Nevertheless, we are maintaining our valuation multiple of 6.4x FY13 PE given its diversified product base. Notion’s 3QFY12 revenue contribution from its HDD:Camera:Auto segments stand at 38%:49%:13% respectively. Our new FV of RM1.20 (previous FV: RM1.30) offers an upside of 14% and hence, we upgrade the stock from NEUTRAL to TRADING BUY.
Feb-March 2013 the best time to bottom-fish for MPI and Unisem. Status quo on MPI and Unisem given that we are maintaining our prior outlook on the global semiconductor industry. MPI has a FV of RM2.72 while Unisem’s FV is RM1.21. The former remains a NEUTRAL but we are upgrading the latter to TRADING BUY since it has a sizeable upside of 21%. Recall that we had pegged both stocks to 0.8x CY13 P/NTA (40% discount to the historical five-year sector average of 1.4x). That said, we think Feb-March 2013 is the best time to accumulate either stock as we expect to see a rerating for the sector. Figure 9 indicates that the y-o-y changes of the monthly global semiconductor sales are strongly correlated to the forward P/NTA valuation of both MPI and Unisem. Thus, with the expectation that worldwide semiconductor sales will be flat in 2H plus the typical weak 1Q for next year, Feb-March 2013 is the best time to bottom-fish and ride on the uptrend for 2QCY13.
Source: OSK
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