Technology (NEUTRAL) - Cherry pick for 2H17

We have released our 2H17 strategy note on MY Technology and an update on Globetronics for today. Also, it’s AsiaMoney o’clock. Times are bad, keep us in our jobs :)

Technology (NEUTRAL) - Cherry pick for 2H17

·         Maintain NEUTRAL with selected BUYs. Malaysia technology names have reflected global optimism in the sector with equipment players leading YTD share price gains at +80%-229% while semiconductor players booked in +33%-82%. We expect the laggard semiconductor/EMS players to play catch-up in 2H17 in anticipation of strong momentum revenue/earnings growth. We have downgraded ViTrox to HOLD on 5 Jul 2017. Maintain BUY on on Inari (Top Pick) and VSI for their promising earnings outlook supported by valuations upside.   

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·         Super cycle rally led by the equipment players. 5M17 global semiconductor sales (GSS) jumped 18% YoY to USD155.2b, led by demand from China (+26% YoY) and America (+22% YoY); the last time annual GSS grew double digit was back in 2014 (+10% YoY) and 2010 (+34% YoY). Meanwhile, 5M17 technology equipment billing (tracked by SEMI) surged 54% YoY to USD10.3b (vs. +8% growth for the whole 2016); monthly billing for technology equipment has been growing MoM for 7 consecutive months since Nov 2016. Domestically, 1QCY17 earnings echoed what was seen in the global market in that most players, be it from equipment or semiconductor/EMS segments, recorded strong double-digit YoY growth in both revenue as well as earnings, led by the equipment players.

·         Strong growth to catch-up at semiconductor/EMS. Technology equipment has seen a steady pick-up in demand since early-4Q16, riding on capex plans by semiconductor/EMS players in anticipation of a super cycle for new application/component adoption in 2017’s smart devices. Into 2H17, we expect sequential growth in the equipment players to slow down while momentum at the semiconductor/ EMS players to pick up in order to meet demand of new major smart device launches ahead.

·         Game plan: Switch to semiconductor/EMS players. Significant share price gains in the overall sector have translated to peakish valuation for most, if not all tech companies, making them easy targets for profit-taking when the sentiment turns, especially the equipment players. Meanwhile, we also caution that gradual recovery in the MYR is unfavourable to most technology names which are net USD exporters. While we expect sentiment on technology players to remain lifted in 2H17, our preference are for the semiconductor/EMS players supported by anticipated strong growth in revenue/earnings.

Globetronics Technology (GTB MK; HOLD; TP: MYR6.40) - Ramping up for action in 2H17

·         All eyes on 3Q17 premium smartphone launches. Globetronics’ share price has rebounded 72% YTD (-46% YoY in 2016), driven by expectation of higher sensor volume demand of up to 27m/43m units p.m. in FY17/18 (from 9m units p.m. in FY16) from the likely adoption of light sensors in the upcoming premium smartphones, slated for launch in 3Q17. We lift our (i) FY17-19 earnings forecasts by 12%-21% and (ii) TP to MYR6.40 (+31%), having raised our PER peg to 18x (from 16.5x; average PER peg for our tech coverage). Maintain HOLD.