Wednesday, 6 March 2013

Technology - Still cautiously optimistic


We reiterate our NEUTRAL view on the technology sector despite the mild improvement seen in the global semiconductor sales and the SEMI’s book-to-bill ratio given the continuing external economic headwinds and the minimum wage policy implementation. The latest global semiconductor sales in January 2013 grew by 3.8% YoY (or -2.8% MoM), marking the third consecutive month of improvement to record at USD24.1b. On a separate measure, the book-to-bill ratio for North America-based semiconductor equipment manufacturers has now improved to 1.14x in January from 0.92x in December. Although the ratio is now above the 1.0x parity for the first time since May 2012, which indicates a stronger demand, a YoY comparison basis still suggests that both orders and billings actually remain relatively soft, likely due to the pressure of a still weak global economy. We are only cautiously optimistic on the sector’s recovery as it could still be dragged down by its weaker sales in Europe and Japan. We believe hence that the earnings prospects for local tech companies will continue to remain cloudy in the medium term, with margins continuing to be eroded by a higher labour cost structure amid the new minimum wage policy implementation. Although most of the tech stocks under our coverage are trading at their respective floor valuations, we reckon that the uncertainties mentioned above will likely cap the upside for these stocks at this juncture.

Global semiconductor sales in January 2013 increased YoY but declined MoM amid a weak seasonal trend. According to SIA, global semiconductor sales in January 2013 grew by 3.8% YoY, marking an improvement for the third consecutive month, led by strengths in the Americas and Asia Pacific to record at USD24.1b. Notably, America (+10.5% YoY) once again led as the highest sales region for semiconductors followed by Asia Pacific (+7.8% YoY). Meanwhile, the weaker sales in Europe and Japan (-4.9% YoY and -12.3% YoY respectively) remained as a drag to the overall sales momentum. On a MoM basis, the global sales in January 2013 were lower by 2.8% as the marginal improvement in Europe (+0.4%) was offset by weaker sales in Americas (-3.5%), Japan (-5.5%) and Asia Pacific (-2.5%). While we are positive on the improvement, we believe that the recent US spending cuts could hurt its economy and may pressure the industry’s outlook.

SEMI’s book-to-bill ratio came in at 1.14x in January 2013. According to Semiconductor Equipment and Materials International (SEMI), the book-to-bill ratio for North America-based semiconductor equipment manufacturers has improved further to 1.14x in January from 0.92x in December. A ratio of 1.14x means that USD114 worth of orders were received for every USD100 of products billed for the month. Delving deeper, on a MoM basis, January’s bookings surged by 17% while billings declined by 5%. Meanwhile on the other hand, on a YoY basis, January’s bookings and billings both declined by 8% and 23% respectively. Although the ratio is now above the 1.0x parity for the first time since May 2012, which indicates a stronger demand, a YoY comparison basis suggests that both orders and billings still remain relatively soft and we understand that this could be due to the pressure of a still weak global economy.

Lights at the end of tunnel could only be seen in 2H2013. Post-4QCY12 results, although the overall industry performance was partly cushioned by a stronger US side, the weak market sentiment amid the prolonged economic uncertainties at the Euro side remains a drag on the industry. We share the same view with the industry players that any lights at the end of the tunnel could only be seen earliest in 2HCY13 given the ongoing economic headwinds. On the margin side, we reckon that a higher labour cost due to the minimum wage policy implementation could continue to erode the profit margin of the companies. Meanwhile, adverse currency fluctuation (an appreciation of RM against USD beyond our assumed estimate of RM2.97 for CY13) could be another potential risk that will suppress the profitability of tech companies.

Review of tech companies results under our coverage. Generally, the technology companies under our coverage reported subdued 4QCY12 results with four out of the six stocks under our coverage coming in below our expectations. These were mainly on the back of a weak revenue growth amid the global economic uncertainties as well as thinner margins as a result of higher operating costs. Major downgrades by us were on MPI, Unisem, Notion and JCY, which reported net losses in 4QCY12. We are maintaining our MARKET PERFORM calls on Unisem (TP: RM0.99), MPI (TP: RM2.59), Sam Engineering (TP: RM2.54), and Kelington, (TP: RM0.53) but have downgraded Notion VTec (TP: RM0.60) and JCY (TP: RM0.58) to UNDERPERFORM ratings due to the bleak outlook of the HDD segment.

Source: Kenanga

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