This article first appeared in The Edge Financial Daily on August 7, 2019

Semiconductor sector
Maintain underweight: Global semiconductor sales in June declined 0.9% month-on-month (m-o-m) and 16.8% year-on-year (y-o-y) to US$32.7 billion (RM137.01 billion), also marking the 6th consecutive month of contraction on a y-o-y basis. Cumulatively, first half of 2019’s (1H19) sales fell 14.5% to US$195.9 billion with lower demand observed across all major semiconductor categories.

Apart from weak memory demand and pricing, the ongoing trade war has also seen increased cautiousness and tighter controls on inventory levels. On a quarterly basis, second quarter of 2019’s (2Q19) numbers improved marginally 0.4% quarter-on-quarter but declined 16.8% y-o-y to US$98.2 billion.

For 2019, the World Semiconductor Trade Statistics organisation forecasts global semiconductor sales in 2019 to decline 12.1%, off record highs in 2018 (+13.7%). While this implies a moderated pace of decline in 2H19 versus 1H19, we opine there could be downside to the forecast alongside an escalation in the trade war.

Recall that the US had recently upped the ante as it will begin to impose 10% tariffs on the remaining US$300 billion worth of Chinese goods effective Sept 1. The upcoming round of tariffs is expected to hit consumers’ goods including laptops and smartphones.

By geography, all regions declined on a y-o-y basis. This was led by the Americas (-29.5%) and followed by China (-13.9%), Asia-Pacific (all others) (-13.7%), Japan (-12.8%), and Europe (-10.9%). Meanwhile, on an m-o-m basis, all regions except for Japan posted low single-digit contraction.

Billings in June declined 2.5% m-o-m and 19.0% y-o-y to US$2,012.7 million. Of note, billings growth on a y-o-y basis has been in negative territory for eight consecutive months. 1H19’s billings declined 23.2% to US$11,589.6 million mainly due to weaker end-demand as well as the cutback in investments on the back of a build-up in inventory levels.

In all, we reiterate our “underweight” recommendation on the semiconductor sector with recommendations of “buy” on Inari Amertron Bhd and “sell” on Malaysian Pacific Industries, Unisem (M) Bhd and Elsoft Research Bhd.

We expect the heightening and lingering trade war between the US and China to remain a key dampener in the near term. Key downside risks for the sector include: i) a prolonged trade war; ii) an escalation in trade tensions; and iii) a weakening of the US dollar. — TA Securities, Aug 6