Technology (NEUTRAL) - New is always better

Technology (NEUTRAL) - New is always better

·         Maintain Neutral. 2017 will be an interesting year especially for the smartphone supply chain, with Apple’s next iPhone launch in Sep 2017 potentially packing a punch for its 10th year anniversary. Alongside growth in infrastructure spending (i.e. data centers) to support tomorrow’s advancement in technology applications, these will translate to demand/visibility for the semiconductor segment. Also, persistent strength in USD beyond our base assumption of USD1/MYR4.15 should also boost net exporters’ earnings. Nonetheless, we remain NEUTRAL on the sector as valuation is fair at 15x 2017 PER for expected earnings growth of 30%. Inari is our only BUY pick.

·         A forex boost in 4QCY16 earnings? Despite the seasonal sequential slowdown in 4QCY16 in terms of revenue due to the year-end holidays for most players, we expect technology hardware names who are net USD exporter to see an earnings boost from (i) stronger ASPs and (ii) mark-to-market of cash and net receivables as the USD/MYR closed 8% higher QoQ at 4.49, as at end-Dec 2016 (vs 4.14 in end-Sep 2016). Most of the tech hardware names has already seen share price gains in expectations of strong headline profits, boosted by forex gains due to a stronger USD/MYR. Volatility in the USDMYR forex should provide trading opportunities for the export-orientated technology stocks.

·         Stock picks. We expect Malaysian technology names like Inari and Globetronics which involved in the aforementioned segments to resume their double-digit earnings growth in 2017. For now, we prefer Inari for its (i) consistent job wins from Broadcom and (ii) new forays which could boost near-term earnings. While we are currently neutral on ViTrox, its transition to the new Campus 2.0 in 2H17 could be a re-rating catalyst as constraints on capacity are lifted. As for Globetronics, while we believe that earnings recovery would likely happen in 2H17, the stock remains a SELL on pricey valuations (20x CY17 PER) despite a 116% YoY jump in 2017E earnings.