Technology - Cautiously optimistic

We reiterate our NEUTRAL view on the technology sector. The latest global semiconductor sales in December 2012 grew by 3.8% YoY (or -3.0% MoM) to USD24.7b, closing the year with total sales of $291.6b according to the Semiconductor Industry Association (“SIA”).  Although the 2012 sales number was the industry’s third highest yearly sales ever, it  was lower by 2.7% YoY, weighed down by the prevailing global economic uncertainties. On a separate measure, the book-to-bill ratio for North America-based semiconductor equipment manufacturers has improved to 0.92x in December from 0.79x in November. We are cautiously optimistic on the sector’s recovery amid the marginal improvement in both the indicators above. However, we believe the earnings  prospects for local tech companies will continue to remain cloudy in the medium term, with a potentially flat top line growth from still sluggish electronics demand coupled with a higher labour cost structure caused by the new minimum wage ruling. Although most of the tech stocks under our coverage are already trading at their respective floor valuations, we reckon that the uncertainties mentioned above will  likely cap any upsides for the stocks. There are no changes to all of our tech companies’ CY13-CY14 earnings estimates for now. We are reiterating our MARKET PERFORM calls as well as target prices on MPI (TP: RM2.59), JCY (TP: RM0.85), Unisem (TP: RM0.99), Notion (TP: RM0.78), and Kelington (TP: RM0.53). Meanwhile, we  are also maintaining our MARKET PERFORM rating on SAM Engineering (“SAM”) but with a lower target price of RM2.54 (from RM2.68 previously) after reviewing the group’s latest 9MFY13 result.

Global semiconductor sales in December 2012 improved further YoY but declined MoM amid a seasonally muted period. According to the Semiconductor Industry Association, global semiconductor sales in December 2012 continued to grow by 3.8% YoY, led by the strength in the Americas to record at USD24.7b, closing the year with total sales of $291.6b. Although the 2012 sales number was the industry’s third highest yearly sales ever, it was lower by 2.7% YoY, weighed down by the prevailing global economic uncertainties. In terms of the regional breakdown, America once again led as the highest sales region for semiconductors (+13.4% YoY) followed by Asia Pacific (+6.7% YoY). Meanwhile, sales in Europe and Japan were down by 5.5% and 11.2% YoY respectively. On a MoM basis, global sales in December 2012 were lower by 3.0%, dragged down by all the regions. 

SEMI’s book-to-bill ratio inched up to 0.92x in December.  According to Semiconductor Equipment and Materials International (SEMI), the book-to-bill ratio for North America-based semiconductor equipment manufacturers has improved to 0.92x in December from 0.79x in November. A ratio of 0.92x implies that USD92 worth of orders were received for every USD100 of products billed for the month. Although the ratio has improved to 0.92x from 0.79x, it is still below the 1.0x parity, which points to a still weak demand for semiconductor products. 

Headwinds to continue in 1H2013.  The order visibility of the local technology industry remains murky as industry players are still adopting a wait-and-see approach in light of the global economic uncertainties. Note that the Americas and Europe make up two-thirds of the global consumer electronics markets, and thus the prolonged economic headwinds in these countries could further

exacerbate the lacklustre demand for electronic devices in our view. Taking a cue on that, we believe that the top line numbers for technology companies will remain flattish in 2013.

Meanwhile, at the bottom line, we believe that the minimum wage ruling that commenced in January 2013 could erode the margin of tech companies in light of it contributing to a higher labour cost structure for them. Meanwhile, adverse currency fluctuation is another potential risk that could weighon the revenue and profitability of tech companies ahead. An appreciation of RM against USD beyond our assumed estimate of RM2.97 for CY13 could further hit the earnings of tech companies. All in all, these factors continue to pose a threat to the earnings growth of the sector in the medium term.

Review of tech companies’ results under our coverage. MPI’s 2QFY13/4QCY12 results came in below ours and the consensus estimates due to weaker sales from all regions, which saw its Asia, USA and Europe segments down by 6%, 9% and 7% QoQ respectively. If we take the latest MPI’s result as an indicator, that means that the other tech companies’ 4QCY12 results under our coverage could also come under pressure, thus supporting our cautious view on the sector. SAM, meanwhile, 9MFY13 results were came in within our expectation, thanks to the more resilient aerospace earnings which has provided some earnings cushion to the group during the current volatility market

Source: Kenanga