We initiate coverage on the Asian semiconductor industry with a NEUTRAL. Despite challenging short-term conditions like weakening demand, the current inventory correction and intensifying competition, a lukewarm recovery should happen in 1H16. Plus, the long-term potential from IoT is huge. Hence, we initiate BUYs on select Taiwan winners and highlight potential Malaysian beneficiaries.
■ Challenging short term… The outlook for the entire technology supply chain has been dampened by ongoing inventory correction and weakening end demand as shipments of personal computers (PCs)/notebooks continue to fall while growth for mobile devices slows in 2015. Our view is for this situation to persist until 1Q16, with 1H16 seeing a lukewarm rebound. In addition, we note fierce competition from China posing a sizable threat to existing players from Taiwan.
■ …but Internet of Things (IoT) potential is promising, hence positive on select winners. In the long term, though, IoT is expected to drive semiconductor revenue – estimated to grow at a CAGR of 30% to ~USD20bn by 2017 (2014: USD9.1bn). There is huge potential from IoT, particularly in the sensors, automotive and industrial end product segments. Hence, we feel that, while the overall situation remains challenging, there should be select winners with enormous potential from the IoT trend.
■ Our Top Picks are MediaTek, Advanced Semiconductor Engineering (ASE) and King Yuan Electronics (KYEC).
Our Top Picks that are likely ride out the current challenges and to benefit from the IoT wave are:
i. Chip design leader MediaTek (2454 TT, BUY, TP: TWD332.00) with a net cash position, cheap multiples and ample IoT opportunities. With its leadership and core capabilities in a diverse offering of end products, we believe it can offer one-stop solutions and, eventually, an entire IoT ecosystem.
ii. Semiconductor assembly and testing services (SATS) leader ASE (2311 TT BUY, TP: TWD46.30), the “go-to” system-inpackage (SiP) provider of choice. We like its leadership position, SiP business and robust cash flow. It is already into IoT/wearables and is expanding into automotive/industrial.
iii. Testing leader KYEC (2449 TT, BUY, TP: TWD30.10). We like its diversified customer base, resilient revenue and margins. Exposure to IoT comes from related segments like automotive, and in-house micro-electromechanical systems (MEMS) and sensors testing.
■ Malaysian players to benefit from IoT too. With their sensors and radio frequency (RF) exposure respectively, Malaysian players Globetronics (GTB MK, BUY, TP MYR7.10) and Inari Amertron (Inari) (INRI MK, BUY, TP MYR4.55) are expected to benefit from IoT too. (Read Report)
Source : RHB Research