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Saturday, February 27, 2016

Testing times for test equipment makers

Slowing demand for smart devices affect Penang-based manufacturers

THE semiconductor test equipment and smart sensor manufacturers in Penang are experiencing a soft first quarter following two consecutive good first quarters in 2014 and 2015.

The slowdown started in the fourth quarter of 2015 due to the weakening of Asian currencies, delay in the release of smart devices with fresh features, and a challenging economic environment.

Globetronics Technology Bhd expects a softer first quarter for 2016 due to the slowing down in the demand for smart devices.

Group chief executive officer Datuk Heng Huck Lee tells StarBizWeek this is due to the restrained replacement rate of smart phones in Asia and the slow growth of gross domestic product in the region.

“The factors responsible for the slower replacement rate of smart phones include weakened Asian currencies and the lack of new breakthrough features in premium smartphones.

“As a result, there is a 20% decline in the demand for premium smartphones, which has impacted the semiconductor component and equipment segments, which include sensor and test equipment manufacturers, in the region,” says Heng.

Heng: ‘The factors responsible for the slower replacement rate of smartphones include weakened Asian currencies.’

The trend may extend to the second quarter, according to Heng.

“We anticipate the release of smart phones in the mid-range and premium categories with fresh features in the late second quarter or early third quarter of 2016,” he says.

Heng says after two consecutive good first quarters in 2014 and 2015, the industry had expected the first quarter this year to perform.

“The signs of slowing down came as a surprise in the late fourth quarter 2015, portending a weak first quarter in 2016.

“The group’s first quarter will be softer than the previous year corresponding period and the fourth quarter of 2015,” he says.

According to Heng, the group is allocating about RM35mil as capital expenditure for 2016 to release new products and sensors in the second and third quarters.

“One of the new products will commence commercial production in the second quarter, while the other three would in the third and fourth quarter.

“We expect the group’s orders for sensors to recover and surge in the second half 2016.

“For the fiscal year 2015, we expect another record year for the group,” he says.

China factor

Moving ahead, Heng says a serious challenge to semiconductor component manufacturers will come from manufacturers in China .

“Currently China produces only about 10% of the semiconductor components used in smart devices, telecommunication, and computing products, and imports the remaining 90%.

“However, starting in 2015, the Chinese government will provide financial incentives of about US$20bil to US$50bil to ramp the production of locally produced semiconductor components.

Chuah: ‘The deliveries for the first half 2016 are mostly from the backlogged orders from the fourth quarter.’

“This will reduce China’s imports of semiconductor components and raise exports of semiconductor components from China to compete in the market,” Heng says.

MMS Ventures Bhd anticipates a slowdown in the first quarter 2016 as the signs were already present in the fourth quarter 2015. Group managing director TK Sia says there was already a slowdown in orders for the group’s semiconductor test equipment used for checking light-emitting diode (LED) products used in the automotive, general lighting, and smart device segments.

“For the first quarter 2016, orders are projected to decline by 10% to 15% compared with the previous year corresponding period.

“So far, we have received about RM15mil worth of orders to be delivered in the first and second quarters of 2016.

“We expect business to pick up in the second and third quarters, based on customers’ feed back and order projections for the second half of 2016,” he says.

Due to the slowdown in the final quarter of 2015, MMS Ventures expects revenue for its 2015 fiscal year ended December 2015 to contract by about 15% compared to 2014.

According to Sia, the 2016 year would be flat against 2015.

“We quote about 70% of our sales in US dollars, which more than offset the 20% of imported raw materials quoted in US dollars,” he says.

MMS test-equipment are priced between US$50,000 to US$100,000 per unit, depending on features and models.

“Korean and Japanese made test-equipment are priced about 30% higher,” he says.

Pentamaster Corp Bhd executive chairman CB Chuah says the slowdown in the fourth quarter led to deferred delivery of semiconductor test equipment to customers.

“The deliveries for the first half 2016 are mostly from the backlogged orders from the fourth quarter. We expect pick-up in sales in the third quarter of 2016,” Chuah adds.

According to a report in Research and Markets, the global smart sensors market is expected to reach at US$9.22bil in 2018, growing at a compounded annual growth rate of 11.53% from the period 2014-2020.

“The growth of the market is fuelled by increasing adoption in automobile sector.

“It has emerged as one of the top contributors in the overall market size due to increase in the number of vehicles by emerging economies.

“Some of the benefits associated with these sensors are scalability, reliability and cost effectiveness.

“These are widely used in industries like aerospace and defence, automotive, consumer electronics and others.

“Sports segment is recognised as one of the emerging sectors for smart sensors market,” the report says.

According to a Gartner research house report released in January 2016, the worldwide semiconductor capital spending is expected to decline 4.7% in 2016 to US$59.4bil.

This is down from the 3.3% growth predicted in Gartner’s previous quarter’s forecast.

“The 2016 outlook for the semiconductor manufacturing equipment market reflects a bleaker outlook for end-user electronics demand and the world economic environment,” says David Christensen, senior research analyst at Gartner.

“Capital investment policies of leading semiconductor vendors have remained cautious against the background of sluggish electronics demand. However, the long-term outlook shows a return to growth, although the wafer-level manufacturing equipment market is expected to enter a gentle down cycle in 2016 due to the loss of the supply and demand balance in the DRAM market,” he says.

The bearish market sentiment and the continued upward trajectory of the greenback followed by the devaluation of the China’s renmimbi in August last year have left shares of semiconductor and technology stocks tumbling.

Among the major stocks that declined on the local stock exchange include Malaysian Pacific Industries Bhd, followed by Inari Amertron Bhd, Unisem Bhd and KESM Industries Bhd.

Since January, shares of MPI tumbled the most at 26.98%, followed by Inari Amertron 13.16%, KESM 13.08% and Unisem 7.41%.

Fortress Capital CEO Thomas Yong says semiconductor stocks performed relatively well in 2015, with stock price gain ranging from 30% to over 100% and this was supported by strong earnings growth.

Apart from higher global demand driven by higher smartphone shipments, Yong says the main factor that has contributed to the robust earnings growth for semiconductor firms is the weakening of the ringgit that softened by about 22% in 2015.

But, the stock prices may stay soft after seeing a strong performance last year, according to Yong.

That said, factors like the currency fluctuations will likely drive the direction of the stock prices, he says.

Going forward, with the increasing applications of semiconductors into telecommunication devices, automative, medical and consumer devices as well as Internet of Things, he says semiconductor sales are less volatile compared to the past where sales rely profoundly on the market for PCs and smartphones.

“As such, semiconductor sales are likely to be closely correlated with the economic growth, which is likely to slow down in the near term,” he notes.

Meanwhile, Areca Capital CEO Danny Wong Teck Meng says the downward trend in semiconductor stocks are related to demand for smartphones that is seen to be tapering off, apart from the US dollar showing a reversal effect.

“This may not favour firms with exports in US dollar.”

JP Apex Research says industrial production index (IPI) would continue to grow at a moderate pace of 2.6% y-o-y amid weaker manufacturing data posted by China in January 2015.

“Electrical and electronics products sustained their uptrend despite negative performance in semiconductor sales, while a continued downtrend was observed in mining, dragged by negative expansion in the subsectors,” it says, adding that higher growth in electrical and electronics products will continue to support IPI expansion.

The IPI continued to show improvement on a quarterly basis after its fourth-quarter 2015 performance increased by 2.9% y-o-y, backed by positive growth in manufacturing and the electricity index.

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