This article first appeared in The Edge Financial Daily on October 3, 2019

Semiconductor sector
Maintain underweight: The semiconductor sector remained in a downcycle with global semiconductor sales of US$34.2 billion (RM143.3 billion) (+2.5% month-on-month [m-o-m]; -15.9% year-on-year [y-o-y]) in August, marking the eighth consecutive month of decline on a y-o-y basis. Cumulatively, numbers are down 14.6% year-to-date (YTD) with weaker demand observed across all major product categories against the backdrop of the ongoing trade war as well as weaker memory demand and pricing. For 2019, the World Semiconductor Trade Statistics organisation forecasts global semiconductor sales to decline 12.1% before resuming growth in 2020 at 5.4%.

By geography, on a m-o-m basis, accelerated growth was recorded across all regions except for Europe where growth was still in negative territory. Notwithstanding, on a y-o-y basis, there continued to be a contraction in numbers across all regions, led by the Americas (-28.8%) and followed by China (-15.7%), Japan (-11.5%), the Asia-Pacific (all others; -9.2%) and Europe (-8.6%).

Billings in August declined 1.4% m-o-m and 10.5% y-o-y to US$2 billion. The y-o-y contraction represented the 10th consecutive month of decline on a y-o-y basis. YTD billings are down 20.7% at US$15.64 billion with a cutback in investments seen alongside weaker end-demand and a build-up in inventory levels following the aggressive investments made in 2018.

We reiterate our “underweight” recommendation on the semiconductor sector with a “buy” on Inari Amertron Bhd (target price [TP]: RM2.05) and “sell” on Malaysian Pacific Industries Bhd (TP: RM8.23), Unisem (M) Bhd (TP: RM1.88) and Elsoft Research Bhd (TP: 77 sen). Our bearish stance is premised on the lingering trade war between the US and China. That said, for exposure to the semiconductor sector, we advocate Inari as we expect its radio frequency and fibre optics businesses to benefit from greater commercialisation of fifth-generation (5G) technology. Key downside risks to the sector include a prolonged and heightened trade war as well as weakening of the US dollar. — TA Securities, Oct 2