Semiconductor (POSITIVE) - Opportunities favour the ready

Semiconductor (POSITIVE) - Opportunities favour the ready

• The clouds are clearing. Semiconductor players should have seen a pick-up in demand in 2QCY16 in preparation of major smartphone launches in 2H16. Furthermore, 2QCY16 earnings will likely to be boosted by reversal in forex losses incurred in 1QCY16 due to the stronger USD at quarter end, post the Brexit event. Yet, YTD share prices remain in negative territory for most technology players, offering a decent entry point especially for those who are net USD exporters with good demand visibility.
• 1QCY16 semiconductor earnings were hit by a double-whammy: (i) weak demand due to channel inventory rationalization by a major smartphone player and (ii) unrealized forex losses from mark-to-market of cash and receivables at USD1/MYR3.90 as at end-1Q16.
• 2H16: The tide has turned. We expect sentiment on semiconductor & equipment players to improve in 2H16 with demand picking up from May/June 2016 onwards in anticipation of major smartphone launches in Aug/Sep 2016. Furthermore, with USD/MYR forex reversing to the 4.03-level at end-June from 3.90 at end-Mar, we expect some reversal of the unrealized forex losses in 2QCY16 earnings; semiconductor players took a hit in the quarter ended-Mar 2016. Notwithstanding further OPR cuts potential going forward, volatility in MYR should provide trading opportunities for the export-orientated semiconductor stocks.
• Go for players with better earnings visibility. We remain POSITIVE on the sector; our Top Pick is now ViTrox for its near-term earnings prospects. Over the longer term, its business model is changing for the better with a wider customer base, and an enlarged addressable market from its new forays which should smoothen its business volatility and improve earnings visibility going forward.

We also like Inari for its earnings visibility, riding on (i) increasing RF content in smart devices (from higher adoption of 3G/LTE globally) and (ii) Broadcom’s continuous outsourcing of its manufacturing processes. Both Inari and ViTrox are (i) beneficiaries of a weaker MYR against USD, (ii) in good net cash position and (iii) Shariah-compliant. Globetronics remains a HOLD for uncertainty in orders for its sensor division.

Automotive (NEGATIVE) – Perodua unveils its first sedan model, Bezza

• A game changer? Perodua has officially opened bookings for its first sedan model, the EEV-certified Bezza (95% local content, MYR300m to develop), over the weekend with prices ranged from MYR37.3k for its 1.0L standard G (MT) to MYR50.8k for its 1.3L Advanced variant (AT); 5 variants in total to compete against Proton Saga 1.3L (40k-45k units sold in 2015) which is priced between MYR34-38k. Perodua expects the Bezza to be one of their best volume sellers with a sales target of 7.6k/month for this year; conservative in our view. We have previously imputed 15k/30k units of Bezza in our 2016/17 forecasts; this model could potentially boost TIV for the remaining of 2016. Our forecasts are unchanged for now; maintain BUY on Pecca, HOLD on MBM and SELL on UMWH.

In terms of exposure to Perodua, we believe that MBM is the prime beneficiary with: (i) Perodua being a 22.6%-owned associate which accounts for 80-85% of MBM’s bottomline, we estimate, (ii) ~10-11% of Perodua cars sold in Malaysia via DMM Sales (DMMS) and (iii) auto parts supplies (i.e. seatbelts, airbags and wheels) via Hirotako and OMI.