Worry over semiconductor sector

Industry’s outlook comes into focus after market beating

PETALING JAYA: Local technology stocks have taken quite a beating on the stock market lately, raising concerns among investors on the outlook for these companies – and the sector.

Analysing their performance on a year-todate basis, KESM Industries Bhd, which hit an all-time high of RM22 on Jan 18, has seen its share price drop 8%.

Year-to-date, Inari Amertron Bhd’s shares have also declined 8%; Malaysian Pacific Industries Bhd (MPI) has plunged 30%; Globetronics Technology Bhd has fallen 16% and Unisem (M) Bhd has tumbled more than 25%.

Their performance lately does not come as much of a surprise, said one analyst, given the fact that the sector hit a record high in early January.

“Following a stellar performance last year, it would seem like the super-cycle has run out of steam and the growth is no longer sustainable,” he said. He has a “neutral” call on the outlook of the local tech sector for this year.

In 2017, Malaysian semiconductor companies saw between a 53% and 105% increase in their share price. Globally, tech stocks have been outperforming for nearly four years.

TA Securities said in a report earlier this week that global semiconductor sales in January 2018 remained robust at US$37.6bil (RM147.15bil). This represented a 22.7% yearon-year growth and 1% month-on-month drop - marking eighteen consecutive months of growth on a year-on-year basis.

“The marginal decline in sales on a monthon-month basis was due to seasonality. We believe sales continued to be driven by memory, the largest and fastest growing semiconductor category which contributed to 2017’s record high sales of US$412.2bil (RM1.6 trillion).

“That said, the World Semiconductor Trade Statistics (WSTS) has forecast industry’s sales in 2018 to moderate to single-digit levels of 7% with broad-based growth across product categories,” the research house noted.

Despite the WSTS’ projection, MIDF Research expects demand for semiconductor products to remain robust, driven by new smartphone line-up; expected recovery in the tablet market and stable demand from the automotive industry.

“Capital spending will continue to growth, albeit slower pace. We view that this could negatively impact the dividend payout ratio.

“Given the impressive share price performance in 2017, we view that most of the semiconductor companies under our coverage does not trade at attractive valuation at this juncture. All factors considered, we are maintaining our ‘neutral’ recommendation on the sector.”

TA Securities has also maintained a neutral’ outlook for the local tech sector.

“With prevailing concerns on downside risk from the ringgit’s strengthening and rising commodity prices, we are maintaining our neutral stance on the sector. That said, we have upgraded Inari and MPI to ‘buy’ as the recent market weakness have presented added upside potential.

“Elsoft is our top pick. We like the stock for its strong order book, rich margins, lower susceptibility to foreign exchange (forex) fluctuations and research and development capabilities. Sell Unisem.”

Meanwhile, Kenanga Research has more optimism for KESM.

“Post earnings release, we keep our forward estimates and target price unchanged.

“We continue to like KESM given its unique position in the high growth automotive semiconductor business and believe that the com- pany will benefit from two salient trends, namely rising car production by global automakers and increased chip content within vehicles.”

CIMB Research has revised down its earnings forecast for local tech companies to account for forex fluctuations.

It said the appreciation in the ringgit against the US dollar will be negative for the domestic semiconductor sector as it will reduce the sector’s profitability. “For companies under our coverage, Unisem will be the most affected by forex volatility as it does not have a hedging policy and has one of the highest proportions of localised content among its peers,” the research house said.

“We estimate for every 1% strengthening of the ringgit against the dollar, Unisem’s 2018 earnings per share could fall by 2.6%.”

The research house says automotive and industrial segments are expected to be the new growth drivers for the tech sector.

McKinsey & Co projects automotive semiconductor demand to post 2015 to 2020 compounded annual growth rate (CAGR) of 6%, higher than the overall industry CAGR of 3% to 4%. It expects the growth to be driven by higher vehicle sales and rising electronic content in vehicles.