Technology sector lacks catalysts for rerating

by **Cals** Thu 17 Oct 2013, 10:06

Business & Markets 2013

Written by RHB Research

Thursday, 17 October 2013 09:48

Technology sector
Maintain neutral: The mature personal computer (PC) market remains lacklustre while the smartphone and tablet (S&T) industry continues to flourish. The strong demand for S&T is fuelled by affordability and consumer preference for smaller-screen devices.

Although S&T is primarily used for content consumption, it is fast gaining popularity in document-laden and work environments. Hence, the PC market may face further headwinds moving into the future.

The lacklustre PC industry has in turn dragged down hard disk drive (HDD) sales. Going forward, this phenomenon should continue to pressure the HDD market given that approximately 65% to 70% of HDD shipments are for PCs.

Like conventional digital cameras, we think the cameras with interchangeable lens (CIL) and interchangeable lens (IL) segments have given way to new smartphone models with sophisticated built-in cameras. Consumers are now turning away from dedicated photographic devices, while the popularity of CIL is waning.

Recent industry data for semiconductors has been encouraging. That said, it is still too early to regard this as the beginning of a structural recovery for the sector. Overall, we are still cautious on the medium to longer term outlook, and think that the bottom line growth of
semiconductor companies will depend largely on their product mix and strategies, going forward.

Overall, we are still “neutral” on the technology sector. In the semiconductor space, we are downgrading Malaysian Pacific Industries Bhd to “neutral” from a “trading buy”, given its recent share price run-up, but our fair value (FV) is unchanged at RM2.76. Similarly, Unisem (M) Bhd (FV: 95 sen) stays as a “neutral”.

In the local HDD component space, we still advocate a “sell”on JCY International Bhd (FV: 45 sen) given that its business depends solely on the HDD market while its high operating expenditure is eroding profitability.

In the meantime, while we are cautious on Notion VTec Bhd’s recent investment in an unrelated silver production company, we think it is fairly priced for now. Hence, we remain “neutral” on the stock, with its FV at 74 sen. — RHB Research, Oct 16

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This article first appeared in The Edge Financial Daily, on October 17, 2013.