Semiconductor a bright spot on Bursa Malaysia

by **Cals** Mon 14 Sep 2015, 15:35

Semiconductor a bright spot on Bursa Malaysia

By Gho Chee Yuan / digitaledge Daily | September 14, 2015 : 10:05 AM MYT

KUALA LUMPUR: Flagging economic growth in China, where smartphone sales exceed 400 million units each year, is posing concerns that the global semiconductor industry may face a slowdown as a consumption boom of the world’s second-largest economy is punctured.

But according to investment analysts, this may not necessarily be doomsday for semiconductor players in Malaysia, because they have a well-diversified product portfolio. Furthermore, the weakening ringgit is a boon to them.

The latest statistics by [size=16]Gartner Inc, a US-based information technology research outfit, show that China posted its first decline in smartphone sales of 4% in the second quarter of this year since 2013, suggesting the smartphone market there is nearing saturation.

Adding to the gloomy outlook, global semiconductor sales in July registered a decline, after posting year-on-year growth for 26 consecutive months. In July, worldwide semiconductor sales were US$27.9 billion (RM120.25 billion), dipping 0.9% from US$28.1 billion in July 2014. In fact, growth in global semiconductor sales has been decelerating since early last year — not a positive sign moving forward.

Despite the global headwinds, investment analysts see the semiconductor sector as one of the few bright spots on Bursa Malaysia for the fact that they are export-oriented firms earning strong US dollars. Also, nowadays, there are many “tech-conscious” consumers with new gadgets as the priority on their shopping lists.

“Demand for communication devices will continue to be supported by low- to middle-class consumers seeking to stay connected and to be at the forefront of the latest cutting-edge technological product offerings,” said MIDF Researchanalyst Martin Foo Chuan Loong in a research report dated Sept 7.

“Semiconductor companies that position themselves in the right production value chain will in turn benefit from high volume orders,” he said.

He expects the new smartphone line-up towards year end to boost demand in the semiconductor industry.

“Given the high correlation between the semiconductor industry and the global economy, we are expecting uninterrupted growth in the semiconductor industry for as long as the global economy continues to grow,” he added.

However, Kenanga Investment Bank Research (Kenanga IB) analyst Desmond Chong does not discount a flat growth in semiconductor sales next year, based on data released thus far.

Although the macroeconomic condition seems to be deteriorating, he said the tech players are benefiting from the weakening ringgit, given their export-oriented earnings profiles.

“Local semiconductor players are mostly outsourced semiconductor assembly and test players. Hence, the slowdown should only be reflected on their earnings in at least three to six months’ time, based on [the] historical trend.

“While I foresee that sales could be generally flattish in US dollar terms, their earnings in ringgit terms will continue to benefit from the favourable foreign exchange,” he added.

AllianceDBS Research analyst Toh Woo Kim noted that local players such as Inari Amertron Bhd ([You must be registered and logged in to see this image.] Valuation: 2.10, Fundamental: 3.00) and Globetronics Technology Bhd ( Valuation: 1.70, Fundamental: 3.00) are serving their niche market in the semiconductor industry.

“Both of them are radio-frequency (RF) components manufacturers and demand for RF products is still very high. Hence, they are continuously expanding their capacity.

“Aside from that, they are also embarking on research and development to come out with new products and new designs,” Toh added.

Another analyst who declined to be named said some local players had also expanded their reach into the automotive segment by producing microchips to be used in electronic cars or smart cars (self-driving cars).

“Autonomous vehicles or self-driving cars are expected to hit the market within the next decade. Some of the local players have been actively developing or designing microchips used in these vehicles,” the analyst said.

With this, he is of the opinion that the long-term earnings visibility of local semiconductor players remains intact. “The better product mix and portfolio should continue to support their income,” he added.

On Bursa Malaysia, semiconductor stocks are also among the outperformers in the current weak market. Year to date, the share price of Malaysian Pacific Industries Bhd (MPI) ([You must be registered and logged in to see this image.] Valuation: 2.00, Fundamental: 2.10) has gained RM2.15 or 47.5%, followed by Globetronics’ RM1.74 or 41% rise, while Inari has strengthened 90.9 sen or 38%. Unisem (M) Bhd ( Valuation: 1.20, Fundamental: 1.80) has gained 11 sen or 6.2%.

It is not hard to fathom why the impressive share price performance when looking at the latest quarterly earnings figures. The semiconductor firms’ fat profits with strong balance sheets were a rather big contrast to many companies which posted sharply lower profits, and some sank into deeper losses.

Leading the pack was MPI, whose net profit leaped to RM34.3 million, or 18.07 sen per share, for the quarter ended June 30, from RM8.73 million or 4.62 sen per share. Meanwhile, Inari’s net profit jumped 40% to RM40.3 million, or 5.57 sen per share. Unisem’s net profit tripled to RM31.4 million, or 4.59 sen per share, from RM10.8 million or 1.61 sen per share.

Kenanga IB recommended investors to opt for semiconductor stocks that have higher exposure to the more resilient smartphone and automotive industries. Its top pick is MPI, given its relatively cheap valuation of 10 times forward price-earnings ratio compared to peers.

MIDF reiterated its positive stance on the semiconductor sector with a “buy” call on Unisem and Globetronics, with target prices of RM2.74 and RM7.05 respectively.

Meanwhile, AllianceDBS continued to like Inari, Globetronics and MPI, given their better positioning in the market, with target prices of RM4.25, RM7.50 and RM7.55 respectively.

This article first appeared in digitaledge Daily, on September 14, 2015.
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