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The Edge

By Sangeetha Amarthalingam
Despite a year-on-year increase of 12.3 per cent in global semiconductor sales last December, which brought the total for 2016 to a record US$338.9 billion (RM1.5 trillion), most analysts in Malaysia are neutral on the local-related players due to challenges from a slower global economy, rising trade protectionism and the weaker ringgit.
Global semiconductor sales for 2016 was just 1.1 per cent more than 2015, according to the European Semiconductor Industry Association.
JF Apex Securities Sdn Bhd research head Lee Chung Cheng said he expects Malaysian electrical and electronic (E&E), and technology-device manufacturers that depend highly on exports, to be negatively impacted.
“We see effects such as foreign direct investment and a certain degree of relocation of production return to the US. Should [the] US impose a higher import duty or tariff, it could affect international trade.
“Being highly dependent on exports, Malaysian manufacturers like E&E and technology sectors will be negatively impacted,” he told The Edge Financial Daily.
MIDF Amanah Investment Bank Bhd analyst Martin Foo noted the general anxiety over US President Donald Trump’s aim to seek the return of production to the US to create more jobs for Americans.
“Nevertheless, there is no immediate risk [of] relocation of plants, or services such as research and development (R&D), sales and after sales, and branding that have high profit margins.
“Malaysian companies are mostly involved in outsourced assembly and test, so it makes sense to earn back that higher margin segment (through sales and after sales services),” he told The Edge Financial Daily via telephone.
Foo said the World Semiconductor Trade Statistics (WSTS) 2017 sales growth projection of 3.3 per cent is mainly driven by expectations of better sales growth from the sensor and memory product categories.
“We view that high sensor sales are in tandem with the uptake in IoTs (Internet of Things) while higher memory sales forecasts could be driven by [a] shortage of NAND flash memory and [the] new 3D NAND ramp-up coming on-stream,” he pointed out in a Dec 7 note to clients.
According to WSTS’ autumn projections, sales of optoelectronics such as light-emitting diode and solar cells are expected to reach US$33 billion or up 2.9 per cent after dipping in 2016.
Sensor sales are forecasted at US$11.7 billion from US$10.8 billion and integrated circuits might rise to US$281.4 billion, up 3.2 per cent in 2017, from an expected 0.7 per cent slide in 2016.
Meanwhile, Foo believes the segment would be affected by Apple Inc’s anticipated scale down in production of iPhone 7 and iPhone 7 Plus, resulting from lower demand as end-users wait for the new iPhone in conjunction with its 10th anniversary.
He expects a slight impact on manufacturers for the smartphone in the first quarter next year but the effect should fade by the second half of 2017 as iPhone 8 is expected to be revealed later this year.
Maybank IB Research in its 2017 strategy note said the year will be interesting with the iPhone 8 expected to “pack a punch in specifications”.
“Alongside growth in infrastructure spending (i.e. LTE/LTE-A networks, data centres) to support tomorrow’s advancement in technology applications (i.e. cloud computing, UHD streaming, industry 4.0), these will translate to demand visibility for the semiconductor industry. Persistent strength in the US dollar beyond our base assumption of US$1/RM4.15 should also boost net exporters’ earnings.
“Nonetheless, we remain ‘neutral’ on the sector as valuation is fair at market weighted 14.2 times 2017 price-earnings ratio for expected earnings growth of 30 per cent. Inari Amerton Bhd is our only ‘buy’ pick with exposure to the aforementioned segments,” it said.
It added that it likes Inari Amerton for its consistent job wins from semiconductor giant Broadcom, and new forays that could boost near-term earning.
In a research note on December 15, CIMB Investment Bank Bhd, which downgraded its outlook for the sector to ‘neutral’ from ‘overweight’, said it anticipates demand for radio-frequency (RF) components to outpace smartphone demand in 2017.
“This is due to smartphone requirements in catering to more frequency bands, especially with ongoing network modernisation,” it said.
Global tech researcher Technavio projects RF filter demand sales compound aggregate growth rate of 15 per cent in 2016 to 2020, driven by a proliferation of smartphone and tablet applications that require high performance RF filters.
“This bodes well for Inari Amertron, Malaysian Pacific Industries Bhd and Unisem (M) Bhd as contract manufacturers for Broadcom Ltd, Qorvo Inc and Skyworks Solution Inc (direct Internet protocol owners),” CIMB said.
Meanwhile, Foo viewed the Bank Negara Malaysia (BNM) foreign exchange policy to support the ringgit could result in foreign currency translation loss for semiconductor companies, and if inflexibly implemented could translate to additional cost of doing business.
“Recall that generally, revenue of semiconductor companies is usually received in [US] dollars while only 50 per cent of the costs are denominated in ringgit. This would mean that they would need to convert the [US] dollar-denominated income to ringgit and subsequently reconvert it to [US] dollars.
“Our channel checks indicate that some companies are in the midst of applying for a waiver from this measure. On this score, it is notable that the announced measures allow exporters to hold higher foreign currency balances, with approval from BNM, to meet their obligations in foreign currency,” he said.
Analysts neutral on tech-related stocks in 2017


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Investors monitor share prices from electronic display boards of the Kuala Lumpur Stock Exchange at the RHB trading floor in Kuala Lumpur. Photo: Jimin LAI/AF

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Analysts note anxiety over US President Donald Trump’s aim to seek the return of production to the US to create more jobs for Americans
