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Wednesday, January 9, 2019

Semiconductors Vs Gloves – Which Is Better?

Author: kltrader | Publish date: Wed, 9 Jan 2019, 09:32 AM

Macquarie Equities Research (MQ Research) wrote an analysis on semiconductors and gloves based on which stocks can sustain more yields in the long run. With semiconductors appearing oversold, MQ Research concluded in its report (8 Jan) that valuations look attractive, and recommend swapping out of gloves into semiconductors.

MQ Research’s thesis: swap gloves for semiconductors Comparing semiconductors and gloves may be akin to apples and oranges, but both are still fruits in the context of export-manufacturers. The similarities are more pronounced when comparing outsourced semiconductors assembly and test (like Inari), which at their core are contract manufacturers like the glove-makers. MQ Research reiterates its strategic preference for quality
high-beta stocks that can sustain yields and recommend swapping out of gloves into semiconductors.

Gloves: Risk of oversupply MQ Research is Neutral on gloves with a negative bias due to stretched valuations and over capacity risk in 2019. Valuations look rich with a sector average of 29x price-to-earnings ratio (PER) vs 3-yr compound annual growth rate (CAGR) of only 14%. MQ Research sees long-term structural headwinds weighing on sector margins and growth due to the nature of the business: low value-add, low barrier-to-entry, and low customer stickiness. MQ Research prefers Top Glove to Hartalega.

Semiconductors: Oversold The tech sell-down appears overdone. Apple’s guidance implies a 15% year-on-year (YoY) decline in iPhone revenues (MQ: -10.6% units YoY) while MQ Research forecast -5% YoY FY19 global smartphone shipments. In contrast, Inari has underperformed the benchmark index by -35% since the beginning of 2017. MQ Research believes short-term risks are adequately priced in. ViTro remains MQ Research’s top pick for the sector with minimal exposure to consumer electronics. MQ Research continues to like long-term fundamentals for both stocks despite its bearish 2019 outlook for the sector.

Source: Macquarie Research - 9 Jan 2019

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