Malaysia Semiconductor (Overweight): Silicon Valley of the East

Good morning, a light piece on Penang semiconductor history and development for your weekend reading.

Malaysia Semiconductor (Overweight): Silicon Valley of the East

• Penang, Silicon Valley of the East, is home to more than 60 multinational and homegrown technology/semiconductor names and it leads in Malaysia’s E&E export, which accounts for 24% of 2014 GDP. Penang now contributes about 8% of back-end semiconductor output globally while Malaysia as a whole contributes 12%.

In terms of approved FDIs, Penang recorded a 110% YoY jump in investments in 2014 to MYR8.2b. Recent FDIs into Penang especially in the new Batu Kawan mainland area includes a total of MYR2.8b investment/expansion by SanDisk Corp, Seagate Technology and Keysight Technologies.

·         Findings from a recent conference. We recently attended the Semicon SEA conference, organized in Penang for the first time. Key takeaways from the conference are:

Ø  Worldwide semiconductor sales is expected to reach USD354b in 2015 (+4% YoY), driven by higher demand for end products such as smart devices (i.e. smartphones and tablets). This will benefit Penang semiconductor companies (i.e. Inari Amertron, Globetronics Technologies) with exposure in this segment

Ø  Meanwhile, the capital equipment market is expected to grow 12% YoY in 2015 to USD42b and this could benefit local test and inspection equipment players such as ViTrox Corp, Elsoft Research, MMS Ventures and Pentamaster.

Ø  Internet of things (IoT) and big data to provide visibility in the sector as a whole. IDC expects the installed base for IoT units to grow to 28.1b units in 2020 from just 9.1b units in 2013, taking IoT market revenue to USD7.1t in 2020 from USD1.9t in 2013. This will be driven by increasing adoption of electronic devices with networking capabilities (i.e. wearables, automotive, homes, commercial equipment). [Source: IDC, http://www.idc.com/downloads/idc_market_in_a_minute_iot_infographic.pdf]

Ø  On a broader perspective, down cycles in the overall sector is expected to be shorter as overcapacity issues are now better controlled by fewer players as a result of increasing consolidation in the past 15 years (i.e. Micron acquired Elpida, Avago acquiring LSI, mergers of NXP and Freescale and etc).

·         Our picks in the sector:

Ø  Inari Amertron (BUY, TP: MYR4.05)  - Proxy to Avago Technologies (AVGO US, Not-Rated) in the radio frequency (RF) and fibre-optics related products as a key EMS player with the largest testing facility in SEA. Our TP pegs the stock at 16x CY16 PER, for a 2-year 22% prospective earnings CAGR.

Ø  ViTrox Corporation (BUY, TP: MYR4.05)  - A leading customised automated inspection equipment supplier to global semiconductor & EMS players, riding on a strong replacement cycle for automated X-ray inspection (AXI) equipment for the next 2-3 years. Our TP pegs the stock at 13.5x CY16 PER, for a 2-year 20% prospective earnings CAGR.