We upgrade the technology sector to OVERWEIGHT following the recent selldown in the local equity market. This is underpinned by our view that global sales of smart devices would continue their positive momentum on cheaper price points. The introduction of more affordable wearable devices and the launch of Windows 10 could spark further re-rating into 2015. Our Top Buys are Inari and Datasonic.
Sturdy sales. Worldwide sales of semiconductors hit a new record of USD29.0bn (+2.0% MoM, +8.0% YoY) in Sep 2014, fuelled by strong inventory build-up for the upcoming holiday season in 4Q14. Cowan LRA and Gartner are forecasting for 2015 growth of 4.3% and 5.8% respectively. This in our view will be underpinned by resilient demand growth for smartphones and tablets given the proliferation of competitively-priced models. Xiaomi has recently set a new sales record on China’s Singles’ Day on 11 Nov as the company sold over 1.2m units of smartphones and generated over USD250m in revenue (+177.8% YoY from USD90m registered on 11 Nov 2013). By the same token, more affordable tablet models are being introduced, as the Chinese manufacturers are flooding the market with mass-market models. This should help achieve Gartner’s growth projections of 19.1% for tablets and 71.3% for ultra-mobiles for 2015.
Potential wild cards. We believe the introduction of more competitively-priced wearable electronic devices could help spur consumer spending on technology gadgets. Xiaomi has recently launched its fitness-focused smart wristband at USD13 per unit. On the premium segment, Apple is reportedly looking to launch its own smartwatch by end-1Q15 with a starting price of USD349 per unit. On a side note, media reports suggest that Microsoft is set to unveil the consumer version of Windows 10 operating system in Jan 2015. We expect an official launch to take place by 4Q15. Feedback has largely been positive and this could potentially help to revive the personal computers (PC) replacement cycle come 2016.
USD appreciation. The majority of the technology manufacturers listed in Malaysia are export-oriented, with over 90% of their products shipped to foreign countries. Lower oil prices would help to increase consumers’ spending power in oil-importing economies such as China, Japan, India, Europe and the US. On top of that, the recent MYR weakness against the USD will likely help to cushion the seasonally weaker 4QCY14 earnings. We are forecasting for 4QCY14 USD/MYR at MYR3.35, up 4.9% from 3Q14 average of MYR3.19. Our in-house 2015F USD/MYR forecast currently stands at an average of MYR3.30 vis-à-vis YTD average of MYR3.26
Buy On Weakness
2014 a record year in the making
The Semiconductor Industry Association (SIA) announced recently that worldwide sales of semiconductors hit a new record of USD29.0bn (+2.0% MoM, + 8.0% YoY) in Sep 2014, fuelled by strong inventory build-up for the upcoming holiday season in 4Q14. We are encouraged by the continued signs of improvement, as this marks the industry’s highest sales ever. 9M14 sales reached USD245.1bn (+10.1% YoY). We expect some softening in 4Q14 sales at USD82bn-85bn due to seasonality. On a full-year basis, we are forecasting for global semiconductor sales at USD327bn-333bn, up 7.8-8.7% YoY. This is largely consistent with estimates from major industry research houses, with Cowan LRA at 8.9%, Gartner at 7.2% and Semico Research at 7.4%. Moving into 2015, Cowan LRA and Gartner are forecasting for growth of 4.3% and 5.8% respectively. This in our view will be underpinned by: i) resilient demand growth for smartphones and tablets given the proliferation of competitively-priced models, ii) potential mass-market adoption of smart wearable devices, and iii) the launch of Windows 10 operating system by end-2015 to possibly kick-start the PC replacement cycle among corporates.
Growth underpinned by smart devices
Gartner maintains its bullish stance on the smart devices segment as lower price points (which would entice first-time smartphone purchases) as well as upgrades among existing owners to models with improved technical specifications would continue to drive smartphone sales momentum. This concurs with our views, taking into account that China-based smartphone brands like Xiaomi, Huawei and Lenovo (992 HK, NR) are all looking to expand their respective global presence. Of note, Xiaomi recently set a new sales record on China’s Singles’ Day (which fell on 11 Nov) as the company sold over 1.2m units of smartphones and generated over USD250m in revenue (+177.8% YoY from USD90m registered on 11 Nov 2013). The largest phone maker in China targets to boost phone shipments to 100m units in 2015 as the company diversifies into new markets such as India, Brazil and Russia after outselling Apple (AAPL US, NR) in its home market. Taking into account the emergence of affordable smartphone models from as low as MYR300-400 per unit, we are of the view that mass-market offerings from these fast-rising Chinese smartphone makers will accelerate the conversion to smartphone ownership. Gartner projects that sales of basic smartphones (including mid-range Android devices) will grow 52% YoY in 2014, while low-end smartphone units (including Chinese white box devices) may double come 2015.
By the same token, more affordable tablet models are being introduced as the Chinese smartphone makers are flooding the market with mass-market tablet as well as tablet-cum-phone (known as phablet) models. This, in our view, would help to achieve Gartner’s growth projections of 19.1% for tablets and 71.3% for ultra-mobiles for 2015. All in, Gartner estimates that overall worldwide combined shipments of devices will reach 2.41bn units in 2014, a 3.2% increase from 2013, and to break the 2.5bn threshold come 2015.
Wearable devices to potentially propel demand
In addition, we believe the potential adoption of wearable electronic devices could help spur consumer spending on technology gadgets. Worldwide smartwatch market is currently relatively small, having generated an estimated USD700m sales in 2013. Gartner is forecasting for the shipment volume of such devices – mainly to cater for fitness purposes – to drop in 2014 and 2015 due to an overlap in functionality between smart wristbands, wearable fitness monitors and smartwatches, and to only rebound in 2016 on lower price points as well as improvements in designs. The transition phase during 2014-2015, however, could potentially come in shorter than expected in our view as we note that: i) The price points of these devices have already started trending down. Of note, Xiaomi has recently launched its fitness-focused smart wristband at USD13 per unit. Known as the Mi Band, the device works as a fitness tracker with a 30-day battery life; ii) On the premium segment, Apple is reportedly looking to launch its own smartwatch known as Apple Watch by end-1Q15 with a starting price of USD349 per unit. Early previews by technology websites such as www.techradar.com, www.macworld.co.uk, and www.ablogtowatch.com have thus far been positive; and iii) With Apple coming into the picture, we expect existing non-Apple smartwatch manufacturers to improve on their offerings by revamping their respective user interfaces, designs and user-friendliness and to potentially revisit their price points. From our brief channel checks, smartwatches are currently priced at USD100-250 per unit for Android-supported smartphones. Ultimately, we see the adoption of wearable smart devices as a potential wild card to help propel growth in semiconductor sales over the medium to longer term. We believe the product will appeal to health-conscious consumers as it allows the user to track his/her fitness level and to integrate data collected into a single account to provide useful insights to the user.
Internet of Things a medium- to long-term catalyst
We foresee the Internet of Things (IoT) to play a more prominent role in our daily lives over the next 2-3 years, as industries spanning consumer, industrial, medical, automotive and others start to adopt more technological innovations. Essentially, IoT would help to promote automation and hence propel usage of semiconductor components in the long run. Gartner estimates that the processing, sensing and communications device portion of the IoT segment will grow 36.2% in 2015. This will likely spur demand for semiconductor components such as microcontrollers, embedded processors, optical and non-optical sensors. Major car makers are now exploring the possibility of installing sensors in engine components to prompt predictive maintenance. The LED lighting industry too is gradually adopting sensors for energy-saving purposes.
Preview of Windows 10 in Jan 2015
Gartner expects the traditional PC market to continue its downtrend to a contraction of 6.6% in 2014 and 5.6% in 2015. 3Q14 shipments remained paltry at 79.4m units (-1.1% YoY). We attribute this to the subpar user experience feedback on its touch-based Windows 8 platform. Based on our checks, Microsoft (MSFT US, NR) has officially stopped selling retail copies of Home Basic, Home Premium and Ultimate versions of Windows 7 as well as Windows 8 from 31 Oct. The move in our view is to pave the way for the launch of its next-generation operating system known as Windows 10 in 2H15. Media reports suggest that Microsoft is set to unveil the consumer version of Windows 10 in Jan 2015. The software developer is currently holding a preview session for tech developers to download and try their hands on the system. We expect an official launch to take place latest by 4Q15. Initial feedback has largely been positive and this could potentially help to revive the PC replacement cycle come 2016.
By the same token, 3QCY14 hard disk drive (HDD) shipments for the notebook and desktop segment too shed 1.3% YoY. Overall HDD industry sales, however, inched higher by 3.4% YoY to 64.7m units as the negative impact from subpar PC sales was more than offset by demand growth of HDD (+23.7% YoY) in the consumer electronics segment. We attribute this to the launch of gaming consoles ie Sony’s (6758 JP, NR) Playstation 4 and Microsoft’s Xbox One at end-2013, but we expect the impact to normalise come 2015. Western Digital is guiding for a potential sequential decline in 4QCY14 revenue, with a likely moderation in consumer electronics to be offset by continued strength in capacity enterprise.
Cameras remain lacklustre
On a side note, we believe camera manufacturers would continue to face headwinds due to the cannibalisation impact from the introduction of smartphones equipped with relatively sophisticated camera specifications. Notably, Camera & Imaging Products Association (CIPA) reported a 26.9% YoY decline in global camera shipments as of YTD Oct 2014. Shipments of cameras with interchangeable lens (CIL) too declined by 18.4% YoY.
Upgrade to OVERWEIGHT following recent market selldown Following the recent market selldown on fears over further weakness in crude oil prices, we now have four BUY calls and three NEUTRAL calls under our technology sector coverage. As such, we are upgrading our sector recommendation to OVERWEIGHT (from Neutral). Although the recent weakness in crude oil prices exerted some selling pressure on local equity market, we advise investors to seize the opportunity to increase their exposure to the technology sector given that:
i) The majority of the technology manufacturers listed in Malaysia are export-oriented with over 90% of their products shipped to foreign countries. Lower oil prices would help to increase consumers’ spending power in oil-importing economies such as China, Japan, India, Europe and the US. Ultimately, this would help to boost domestic consumption and hence could potentially lift demand for technology products in the immediate term.
ii) Recent weakness in MYR against USD will likely help to cushion the seasonally weaker 4QCY14 earnings. We are forecasting for 4QCY14 USD/MYR at MYR3.35, up 4.9% from 3Q14 average of MYR3.19. Our in-house 2015 USD/MYR forecast currently stands at an average of MYR3.30vis-à-vis YTD average of MYR3.26.
iii) Continued strength in demand for semiconductor components, which is underpinned by resilient demand growth of smartphones and tablets amid the proliferation of competitively-priced models from Chinese manufacturers. On top of that, the potential mass-market adoption of smart wearable devices and the potential revival of the PC replacement cycle should the Windows 10 launch prove to be successful would be wild cards to further re-rate demand for technology devices. Within the smart device-centric semiconductor assembly and test services sector, we prefer Inari Amertron (Inari) (INRI MK, BUY, TP: MYR3.82) over Globetronics Technology (GTB MK, NEUTRAL, TP: MYR4.75), as: i) the former offers relatively more exciting growth prospects at a CAGR of 23%, underpinned by growth in demand for its major customer Avago Technologies’ (AVGO US, NR) radio frequency-related products, and ii) diversification into new businesses such as fibre optics and electronics test and measurement segment to boost its recurring earnings base over the long term. Amongst the semiconductor players in general, we like both Unisem (UNI MK, BUY, TP: MYR2.16) and Malaysian Pacific Industries (MPI MK, BUY, TP: MYR6.34) following their recent share price retracement and as we expect their earnings momentum to sustain on improving utilisation rates moving into 2015. In the local HDD and camera component space, we continue to foresee earnings headwinds for Notion VTec (NVB MK, NEUTRAL, TP: MYR0.45) as sector fundamentals remain weak. On the non-manufacturing technology stocks, we continue to advocate investors to accumulate on Datasonic Group (Datasonic) (DSON MK, BUY, TP: MYR2.10).
Although the Government has decided to set the retail price of RON95 and diesel using the managed floating system come 1 Dec, Domestic Trade, Cooperatives and Consumerism Minister Datuk Seri Hasan Malek has confirmed that the Government is currently evaluating 28 different proposals on the proposed fuel subsidy rationalisation scheme. This is expected to be implemented upon a recovery in global oil prices. We continue to like Datosonic’s chances of securing the job via its 30%-owned associate Fuelsubs House SB by using the MyKad as the core operating platform. Our cautious stance on Prestariang (PRES MK, NEUTRAL, TP: MYR1.57), meanwhile, remains for now as we believe that the slower-than-expected contract flows in 1H14 could potentially trigger further earnings disappointment come 4Q14-1H15.
Source: RHB