26 April 2012
Semiconductor Sector Update: Chip demand is on track for a stronger growth in the second half of 2012, underpinned by the resilient recovery in the US economy - RHB Research
We note that more positive industry data have emerged with the latest equipment orders marking the second consecutive book-to-bill ratio above parity and the positive trend of new orders of electronics and computers from the United States.
More importantly, major IC manufacturers recently have provided positive revenue guidance for the coming quarter.
China is expected to remain resilient and the pick-up in the United States will offset EU's decline. While there may be concerns on the sector's outlook due to the European Union s (EU) descent into a recession and China's economic slowdown, we believe that the growth momentum of the semiconductor market is sustainable.
In our view, the EU's decline will be offset by the recovery in the United States while chip demand from China should remain resilient, driven by tech hungry consumers and the proliferation of the IT market.
We note that new orders of computers and electronic products in February declined by just 0.9%, from a decline of 12.4% year-on-year (y-o-y) and 18.7% y-o-y in January and December, respectively. The second consecutive month of y-o-y positive trend points to a better outlook for the end-demand segments for PCs and consumer electronic products.
According to Gartner, the semiconductor assembly and test services (SATS) market is expected to pick up strongly in 2012 by 4.1%, underpinned by: (1) normalisation of inventory levels; (2) rising demand for packaging, driven by pick up in consumer demand; and (3) demand for lower cost and advanced processes.
Risk to our view is weaker-than-expected recovery in the global chip sales in the second half of 2012.
We believe recent industry data and indication by the major tech players support our view that the sector has reached a trough and is on the path to recovery. Thus, to reflect the beginning of the industry growth cycle, we have raised our benchmark forward price per book value (P/BV) to 1.2 times (from 1 time previously), which is one standard deviation above Unisem's five-year historical average forward P/BV.
Our fair value estimates for Unisem and MPI are raised to RM1.84/share and RM4.08/share (from RM1.53 and RM3.40) respectively. Thus, we are upgrading Unisem and MPI to outperform (from market perform previously).
We reiterate our view that chip demand is on track for a stronger growth in the second half of 2012, underpinned by the resilient recovery in the US economy as well as improving consumer and business sentiment as these will drive chip sales going forward.
Thus, in anticipation of the pick-up in chip demand in the medium term, we upgrade our call on the sector to overweight from neutral.