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This article first appeared in The Edge Financial Daily, on March 16, 2017.

 

Semiconductor sector
Maintain neutral:
Malaysian semiconductor sector revenue rose 8% quarter-on-quarter (q-o-q) and 1.4% year-on-year (y-o-y) in 4Q16, ahead of expectation due to higher utilisation on the back of demand recovery and favourable currency movements. This was broadly in line with global semiconductor sales which rose 5.4% q-o-q, driven by recovery in industry demand following inventory adjustments in the first half of 2016. Key global semiconductor players are projecting 8% q-o-q sales drop in the first quarter of 2017 (1Q17), in line with seasonal demand weakness and a shorter operating period in the quarter.

Most independent industry research groups see stronger global semiconductor demand growth of 6% in 2017 (versus 1.1% in 2016), driven by inventory replenishment from 2Q17, better average selling prices and higher content application on the back of global economic recovery. 

Market research group World Semiconductor Trade Statistics expects North America to grow fastest at 4.7%, followed by Asia Pacific at 3.3% on the back strong demand for memory. Independent industry research firm Gartner projects a minimal 2.9% y-o-y capital spending growth in 2017.

We expect radio frequency (RF) components demand to outgrow smartphone demand due to growing requirements for more frequency bands, especially with ongoing network modernisation. This bodes well for Inari, Malaysian Pacific Industries Bhd (MPI) and Unisem — as contract manufacturers for Broadcom, Qorvo and Skyworks (direct IP owners), they benefit from the surge in RF chip demand. However, we are wary of excess capacity from the slowdown in inventory replenishment given the spike in smartphone makers’ inventory days since 2Q16.

We see automotive as the next sales growth driver due to rising adoption of electronics in vehicles for infotainment, safety features and connectivity. IC Insights forecasts 4.9% sales compound annual growth rate in 2015 to 2020 for automotive electronics, with rising integrated circuit content in new cars, from luxury to base models. We see MPI as an exciting proxy for automotive growth given its long experience and leading position in the segment.

We forecast sector net profit growth of 15% in 2017 (versus 9% in 2016), driven by strong earnings growth by Inari and MPI. Inari is on track to add new RF tester capacity and receive maiden contributions from its new divisions in 2017. 

Meanwhile, we expect MPI to benefit from the ramping up of its new automotive sensor line from 2Q17 onwards. We think the sector’s strong earnings growth outlook is fairly valued given that it now trades at 16 times 2017 price/earnings, one standard deviation above historical mean of 13 times. — CIMB Research, March 14

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