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Monday, February 19, 2018

CIMB Research neutral on semicon sector, replaces Inari with KESM

Monday, 19 Feb 20188:34 AM MYT

KUALA LUMPUR: CIMB Equities Research is maintaining its Neutral rating on the semiconductor sector as it thinks the sector's strong earnings growth outlook is priced in.

It said on Monday the sector is trading at 15.8 times CY18F price-to-earnings (P/E), which is one standar deviation above its historical mean of 14 times.

“We downgrade Inari to Hold in view of the strong share price performance in the past 12 months and earnings pressure from forex volatility. We replace Inari with KESM as our top pick due to its attractive growth prospects in automotive and minimal forex exposure,” it said.

To recap, it said Malaysian semiconductor sector revenue rose 28% on-year in 9M17, driven by higher utilisation on the back of new capacity expansion and robust industry demand across key segments, such communications and automotive and industrial.

Overall, the semiconductor sector recorded 47% on-year growth in 9M17 core net profit partly due to favourable currency movements as the average rate for RM/US$1 fell by 6% yoy.

CIMB Research pointed out that for 2018, most independent industry research groups expect lower global semiconductor sales growth (mean of 9% vs. 21% in 2017), partly due to a higher base in 2017 and stabilising supply-demand dynamics for memory components.

Market research group Worldwide Semiconductor Trade Statistics (WSTS) expects North America demand to grow the fastest at 10.3%, followed by Asia Pacific at 6.6%. IC Insights, meanwhile, expects the total integrated circuits (ICs) sales to grow by 8% in 2018F.

“We expect the demand for radio-frequency (RF) components to continue to outgrow the demand for smartphones due to higher RF filter requirements to support additional frequency bands,” it said.

Yole Development projects RF front-end module sales CAGR of 14% in 2016-2022F, driven by rising demand for mobile connectivity and ongoing network modernisation. This bodes well for Inari, MPI and Unisem as they are contract manufacturers for direct IP owners like Broadcom, Qorvo and Skyworks.

CIMB Research also pointed out that McKinsey & Co projects automotive semiconductor demand to post 2015-2020F compounded annual growth rate (CAGR) of 6%, higher than the overall industry CAGR of 3-4%. It expects the growth to be driven by higher vehicle sales and rising electronic content in vehicles.

IHS Markit forecasts electronic content value to rise from US$312 per car in 2013 to US$460 in 2022F due to increasing safety, comfort and connectivity requirements.

“We see KESM and MPI as exciting proxies for automotive semiconductors given their experience in the segment. The appreciation in RM vs. US$ is negative for the domestic semiconductor sector as it will reduce the sector’s profitability.

“For companies under our coverage, Unisem will be the most affected by forex volatility as it does not have a hedging policy and has one of the highest proportions of localised content among its peers. We estimate for every 1% strengthening of the ringgit vs. US$, Unisem’s FY18F EPS could fall by 2.6%,” it said.


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