Semiconductor players riding on smart gadget boom

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KUCHING: September 9 is said to be one of the dates some smartphone fans eagerly look forward to with great trepidation.

This date is slated to be the launch of the latest iPhone 6 by global gadget mogul Apple Inc.

Social media is abuzz with specifications and enhanced features of this upcoming models, with the public playing the guessing game on what’s new and exciting.

At about the same time, rival Samsung Electronics Co Ltd will also unveil its next flagship Android smartphone, Samsung Galaxy Note 4.

Many are keeping a watchful eye on new smartphones, as examplofied by the latest model of smartphone from China, Xiaomi, being sold out in less than half an hour upon selling online.

A local report observed that Malaysian buyers have logged onto Xiami Corporation’s website to grab a chance to get a unit of new Xiaomi’s smartphone, Mi3 but left disappointed as it was sold out within minutes.

Xiaomi, which is the biggest manufacturer of smartphone in China, had penetrated the Malaysian smartphone market in May and has since witnessed brisk sales of its gadgets.

The company which sprung to the IT market lately has reportedly overtook South Korea’s Samsung Electronics in China for the first time as the largest smartphone maker, having shipped a total of 15 million units in the second quarter of this year (2Q14) against Samsung’s 13.2 million units, according to market research firm Canalys.

The company utilises its online store portal to sell its smartphone and accessories, and  has from time to time release information on batch sales details on its Facebook page on how many units are available and the date and time it opens the sale.

This created a hit among young generation IT savvy buyers who seeks to purchase trendy smartphones at cheaper prices.

Likewise, Beijing-based Xiaomi which has just been in the market for four years is seeking to expand abroad.

The company has begun to branch out to other markets last year and has a presence in Hong Kong, Taiwan, Singapore, the Philippines, Malaysia and India.

Obviously, these technological developments bode well for semiconductor players as more chips and components are required to produce new smart devices.

Hence, semiconductors players could witness better times ahead with more orders coming on their way.

This is also expected to spur the recovery of the semiconductor industry after a gloomy outlook in the past three years.

The optimism is supported by the movement of the Technology Index on Bursa Malaysia which had breached a two-year high at 20.61 points on August 15 from a low of 11.35 points on May 3, 2013 and before that rose to hit 19.24 points on May 2, 2012.

Normally, the stock market is a leading indicator which symbolises the outlook of a particular sector and the economy of a country.

Spurring the recovery of the semiconductor industry

Since the start of the year, share prices of semiconductor players have been rising steadily with double and triple digits percentage gain year-to-date.

One of the rising stars, Malaysian Pacific Industries Bhd’s (MPI) share price jumped 104 per cent to RM6.45 as at August 15 from RM3.16 on January 2.

Others such as Inari Amertron Bhd (Inari), Unisem (M) Bhd (Unisem) and Globetronics Technology Bhd (Globetronics) share prices have also increased by 104, 77 and 58 per cent respectively over the same period.

MPI, a member of the Hong Leong Group and a company linked to Hong Leong Bank tycoon Tan Sri Quek Leng Chan has been one of the beneficiaries of this recovery.

For the nine months ended March 30, MPI’s revenue increased eight per cent year-on-year (y-o-y) to RM970 million while its net profit soared to RM36.41 million from RM173,000, represented a substantial increase y-o-y.

MPI in its notes accompanying the release of its nine months financial results said the higher revenue growth was contributed by all segments from its key markets namely Asia, the US and Europe which grew seven per cent, four per cent and 15 per cent respectively.

As a result, the semiconductor player’s profit before tax (PBT) was higher due to higher revenue generated from higher margin products and appreciation of the US dollar against the ringgit.

 

Stronger manufacturing growth

On a wider perspective, the latest export data for the month of June released on August 11 by the Statistics Department has pointed out that the manufacturing sector is still growing with higher output.

The Statistics Department said the Industrial Production Index (IPI) which advanced seven per cent y-o-y in June was contributed by the manufacturing sector which grew 9.1 per cent followed by the electricity sector 6.5 per cent and mining sector 1.4 per cent.

It further observed the sub-sector which contributed to the increase in June were electrical and electronics (E&E) products (13.7 per cent), petroleum, chemical, rubber and plastic products (4.8 per cent), transport equipment and other manufactures (25.4 per cent).

Industry observer Maybank Investment Bank Bhd’s research wing (Maybank Research) in a report dated August 12 said industrial production picked up further in June.

“The growth in 2Q14 was 5.9 per cent y-o-y versus growth of 4.7 per cent y-o-y in 1Q14, the strongest since 2Q10, underpinned by faster growth in manufacturing.

“There was broad-based manufacturing sector expansion as all major clusters reported positive numbers leading to headline growth of 9.1 per cent y-o-y.

“The biggest driver was E&E which reported the seventh straight month of double-digit expansion.

“This was led by sub-clusters of printed circuit boards, diodes, transistors and other similar and communication equipment.

“The expansion in manufacturing output in June was driven mostly by export-oriented industries, which gained 8.1 per cent y-o-y after a sluggish growth of 2.1 per cent y-o-y a month earlier,” it observed.

The research arm of Affin Investment Bank Bhd (Affin Research) also concurred with Maybank Research).

Affin Research economist Alan Tan said,”The manufacturing sector which covers about 66 per cent share of the total IPI, rose strongly by 9.1 per cent in June from a revised eight per cent in May.

“This is the second month of consecutive higher increases, supported by production of E&E products, especially for computer, electronics and optical products. The output of E&E products trended higher in tandem with global semiconductor sales, which has remained resilient since its last drop in May 2013.

“According to the latest statistics by the Semiconductor Industry Association (SIA), the worldwide y-o-y sales of semiconductor rose further by 10.8 per cent to US$27.6 billion in June against US$26.9 billion in May,” he cited.

Semiconductor sales reach new high in June 

Earlier on August 4, SIA revealed that global sales of semiconductors which include sales of computer chips surged to the highest level at US$27.6 billion in June.

SIA president and chief executive officer (CEO) Brian Toohey had reportedly said, “The industry posted its highest-ever second quarter sales and outperformed the latest World Semiconductor Trade Statistics (WSTS) sales forecast.

“Looking forward, macroeconomic indicators – including solid US gross domestic product (GDP) growth – bode well for continued growth (of semiconductor industry) in the second half of 2014 and beyond,” he said.

At the same time, SIA is forecasting strong growth for the remainder of the year. The association noted that in the second quarter ended June, worldwide sales of semiconductors reached US$82.7 billion, up 5.4 per cent from the first quarter and 10.8 per cent y-o-y compared with 2Q13.

SIA noted year-to-date, sales during the first half of 2014 were 11.1 per cent higher than they were at the same period in 2013, which was a record year for semiconductor revenues.

The research division of MIDF Amanah Investment Bank Bhd (MIDF Research) said, “SIA posted a very optimistic sales figure for the month of June.

“It outperformed the previous peak of US$27.2 billion achieved in November 2013.

“At present, global semiconductor sales has stayed above the US$25 billion mark for one consecutive year.

“This signifies that the semiconductor industry has been enjoying its bull run since 2013,” the research firm said.

Looking ahead, MIDF said, “In the foreseeable term, adoption of smartphone remains one of the main catalysts to drive the sector.

“The transition of 2G to 3G and 4G will inevitably create stronger demand of low to mid-priced range smartphone, especially in emerging markets.

“On a longer note, the availability and acceptance of wearable devices are expected to extend the positive vibe in the industry. As such, we are reiterating our positive stance on the semiconductor industry,” MIDF Research said.

The research firm observed that sales in the US region continued to demonstrate bullish mode with expansion following 13 consecutive months of double-digit growth will all regions in particular Japan exhibited improved turnover.

Additionally, it noted North America-based manufacturers of semiconductor equipment posted a book-to-bill (BTB) ratio of 1.09 times, the highest ratio recorded in the first half of 2014 (1H14).

A BTB ratio of more than one indicates growth while a ratio of less than one signalled falling demand or less orders received compared with production.

Moreover, MIDF Research observed that the BTB figure posted in June was also above the average ratio of 1.06 times in 2013.

For 1H14, the research firm highlighted both bookings and billings have surpassed the records achieved in 1H13.

Therefore, with higher orders from technology companies to manufacture new model of smartphones and other smart devices in the near future, semiconductor players such as MPI, Globetronics, Inari and Unisem are poised to benefit from continued growth in 2014.

 Semiconductor players prospects

As one of the most established semiconductor companies in Malaysia, MPI is looking to grow faster than the industry average and expects the financial performance of the group to improve further in financial year 2014 (FY14).

MPI group managing director Peter Nigel Yates in the company’s latest Annual Report said, “We have continued actively to target the growing smartphone and tablet market.

“Over one third of our output is shipping into these two key applications.

“We have a well-established position in the top two industry leading brands and more recently, we have also started shipping into the rapidly growing China smartphone market.

“The group has a very strong presence in the accelerometer and advanced display driver businesses.

“This growth has been sufficient to offset both a small decline in leadframe sales in the region as well as continuing weakness in the personal computer and cosumer business,” he said.

He observed that the group at present has a leading position in radio frequency (RF) front-end modules, with important design wins in several key industry players.

He believed that more demand for RF-enabled devices which are increasingly adopted in homes in the form of routers, smart televisions (TVs) and other devices connected through the Internet to drive demand for its products.

Globetronics on the other hand is tapping the huge opportunities arising from wearable devices through its multinational corporation customers.

Globetronics chief executive officer Heng Huck Lee said some of the new products that the company is working on are near commercial readiness and the adoption of those new devices in the market is expected to be significant contributors to growth and profitability starting in 2H14.

Besides that, the IT company is reportedly eyeing merger or acquisition opportunities in electronic medical manufacturing companies in the Southeast Asia region to widen its revenue base.

“The electronic medical device manufacturing sector is a recession-proof business, which generates sustainable margins.

“We will be exploring to provide original equipment manufacturing (OEM) services and developing our own medical device brandname.

“The group will be able to leverage on its electronic manufacturing expertise to expand in the electronic medical device business.

“This is also within the group’s business direction to develop sensors for bio and health wearable smart devices for US customers,” Heng said.

In the meantime, he noted that the group is adding a new production line for the manufacturing of light-emitting diode (LED) which will start producing next month for one of the top LED lighting manufacturer in the world.

Over the longer term, Heng believed that the growth for the company will be derived from its core competencies mainly from products and components that it manufactured which support smartphones, medical electronics, automotive tablets, wireless networks and wearable wireless products.

Inari, an electronics manufacturing services (EMS) provider is gradually expanding its production capacity to meet the rising demand from its clients.

The company which had just completed its transfer to the Main Market from ACE Market in early June is planning to drive growth further through the development and rolling out of a wider range of service offerings to enhance its earnings streams.

Through innovation and research and development (R&D), Inari is expected to deliver another set of strong financial performance for FY14.

Inari CEO Lau Kean Cheong said, “The group is committed to meeting increased orders from our existing clientele.

“This will be supported continued process improvements, technology upgrades and capacity expansion.

“The group is also looking to aggressively grow our fibre-optics business, bolstered by the investment into Inari South Key Sdn Bhd (ISK) and integration of Amerton’s expertise in the sector.

“To achieve this, the group has started intensive R&D jointly with our existing clients, in order to accelerate the production and delivery of our fibre-optics products and services in the year ahead.

“Given the continued growth in demand for more and faster digital data, the global fibre-optics segment will require faster connectivity products in Fibre-To-The-Home (FTTH), data centres and cloud computing.

“We believe our investments in this segment will be a strategic growth catalyst for the group,” he said.  At the same time, he observed that the group’s wireless packaging and RF testing segment is expected to register strong growth as sales of smartphones and tablets remained key growth factors in the global semiconductor industry.

Apart from that, Unisem believed the worst could be over as industry trend has pointed towards higher demand for semiconductor products. Its chairman and group managing director John Chia noted that its financial performance in the last few quarters were pulled down by its operations in Wales, UK and Batam in Indonesia. The group which has several manufacturing plants had to restructure some of its overseas operations which incurred higher costs to improve its financial performance. Going forward, Chia was reportedly said, “Our main challenges is to maintain a consistent high utilisation rate at our facilities and therefore reduce cyclical earnings. “Our new business strategies should help reduce the volatility generally associated with the business. “We are targeting more Tier-1 players and mid-size companies as our customers rather than support start-up companies as part of our future business strategies,” he noted. He believed growing demand for semiconductor components arising from the manufacturing of smart devices will provide more businesses to the company. Hence, Chia is optimistic that the company’s earnings momentum for the upcoming quarters of 2014 will be sustained.

Analysts’ view on semiconductor industry and company prospects

With all rosy picture ahead, can the growth and the earnings of the semiconductor players be sustained?

CIMB Research, the research arm of CIMB Investment Bank Bhd, in a report dated August 11 said the semiconductor industry is riding on the ‘Internet of Things’.

Dubbed as a long term key growth driver for the industry and has vast potential for growth, the ‘Internet of Things’ refers to a network of connecting wired or wireless devices is characterised by an autonomous positioning, management and monitoring system that communicates without human interaction through local or global connectivity.

In other words, it means connecting smart devices especially mobile devices such as smartphones and tablets to a network through the Internet and allows those devices to operate or to be controlled using technology to enhance the lifestyle of the people.

Thus, increasing connectivity and interaction is expected to spur more demand and usage for semiconductor parts and components in the future.

US-based International Data Corporation (IDC) forecasted the global demand for ‘Internet of Things’ to reach US$7.1 trillion by 2020 from US$1.9 trillion in 2013 as global population increase.

Furthermore, Cisco Systems Incorporation predicted that the number of connected devices will far exceed the global population.

Moving on, CIMB Research analyst Mohd Shanaz Noor Azam in a report said, “We believe the outlook for the sector remains attractive, fuelled by encouraging demand in 2014 on the back of an improving global economy.

“There are still interesting growth opportunities for domestic semiconductor players in the communication segment, specifically in the mid-to-low-end smartphone market due to rising mobile connectivity demand from emerging markets.

“We expect the sector to return to growth following a challenging period during the past two years, driven by an improving portfolio mix, better operating efficiency and stronger industry demand on the back of an improving global economic environment.

“Most industry research groups (also) raised their 2014 industry sales forecast in the second quarter of this year to an average of 8.6 per cent.

“One of the more aggressive forecasts in the industry was provided by an independent research group, Semiconductor Intelligence, which projects 10 per cent sales growth in 2014 based on the assumption of stronger recovery in global economic growth this year.

“Despite the stronger growth in demand expected from the developed economies, Asia is likely to remain the key source of growth for the sector as it accounts for 59 per cent of the global semiconductor market,” he said.

Mohd Shanaz said based on CIMB Research estimate, revenue from communications is the biggest contributor, making up about 28 to 29 per cent of the Malaysian semiconductor sector’s revenue.

He noted that between the domestic semiconductor players, MPI and Unisem, MPI has a higher exposure to the communications segment which accounted for 36 per cent of the company’s turnover, while the communication segment contributed about 29 per cent to Unisem’s revenue.

Hence, CIMB Research maintained its ‘overweight’ call on the Malaysian semiconductor sector as the research firm foresees improving earnings visibility for MPI and Unisem.

The research firm also expects companies to benefit from rising demand for mobile devices, powered by the ‘Internet of Things’ and stronger global economic recovery.