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This article first appeared in The Edge Financial Daily on May 3, 2018

Technology sector
Maintain neutral:
Worldwide sales of semiconductor products advanced by 20% year-over-year (y-o-y) to USS37 billion (RM145.41 billion). This represents the 20th consecutive month of y-o-y sales improvement since August 2016. Higher sales were recorded across all major regional markets and all semiconductor product categories, especially for the memory product segment. Meanwhile, on a monthly sequential basis, global semiconductor sales only grew marginally by 0.7% y-o-y. This is in line with the typical seasonal market trends. Premised on this, we expect monthly sales to pick up, on a sequential basis, towards the end of the second quarter (2Q) of 2018 in preparation of various flagship smartphone launches in 3Q18.  

Billings of semiconductor equipment totalled up to US$2,426.9 million for the month of March 2018. This represents a monthly sequential increase of 0.4% month-on-month. On a y-o-y basis, the billings grew at a slower pace of 16.7% y-o-y, mainly attributable to the high base effect. To recall, on March 2017, billings increased by 73.7% y-o-y. Nonetheless, Semi is “seeing sustained strength in the global semiconductor equipment market”. Semi is expecting the capital spending for full year 2018 to grow by approximately 9% y-o-y. This indicates that the monthly growth rate should taper off towards the second half of 2018.  

According to newswire, China’s state-backed semiconductor fund, known as the National Integrated Circuitry Investment Fund, is near to closing a 120 billion yuan (RM74.79 billion) investment round for a second fund to boost the local chip production and technologies. This is subsequent to the emergence of US-China trade tension and US sanctions on ZTE Corp. At present, China is still heavily reliant on imported chips. It manufactures only 16% of the semiconductors it uses domestically. The fund is expected to increase the local supply to make up at least 40% of China’s semiconductor needs by the middle of the next decade. We expect the move will support the growth in semiconductor equipment spending and ultimately spur the sale of semiconductor products in the long run.

Taiwan Semiconductor Manufacturing Co Ltd has revised its full-year revenue target lower partially due to the soft demand for premium phones. Apple is believed to be the primary reason for this decline in the revenue forecast. On the contrary, Qualcomm Inc issued an optimistic forecast for the current quarter indicating that China’s smartphone market is pointing toward a recovery in demand. Qualcomm will stand to benefit because its supplying manufacturers in China are growing by taking market share from Apple. Recall that smartphones shipments in China fell by 21.0% y-o-y.

The growth rate of monthly worldwide sales of semiconductor has trended lower mainly due to the high base effect. Moving forward, the annual growth rate is expected to taper off to single digit in 2018 according to World Semiconductor Trade Statistics. Nonetheless, we expect demand for semiconductor products to remain robust, driven by the new smartphone line-up, expected recovery in the tablet market, and stable demand from the automotive industry. Capital spending will continue to growth, albeit at a slower pace.

On another note, the trade tension between the US and China is causing uneasiness among investors. Should the trade tension intensified, it could negatively impact the earnings prospect of semiconductors companies under our coverage. Nonetheless, our channel checks indicate that there is no change to volume order at this juncture. Nevertheless, we do not discount the possibility that future earnings outlook of these companies could be affected. Pending further development on the trade tension, we are maintaining our “neutral” recommendation on the sector. — MIDF Research, May 2

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