KUALA LUMPUR: CIMB Equities Research has downgraded the semiconductor sector from Overweight to Neutral in view of the overall slowdown in industry demand and lack of new catalysts to drive sales growth.
“We project 10% EPS growth per annum for sector in 2016-17F; stronger growth for Inari. However, we expect tepid earnings growth by MPI and Unisem in 2016-17F due to slowdown in smartphone shipment volume growth and supply constraints,” it said on Thursday.
The research house expects the automotive segment to gradually emerge as a new sales driver, with rising electronics adoption, but this will take time to ramp up and offset earnings volatility.
It says Inari remains its sector top pick due to its robust earnings visibility (CY15-18F EPS compounded annual growth rate (CAGR) of 15%) and strong key client relationship with Broadcom.
To recap, CIMB Research expects the semiconductor industry to remain challenging in 2017 due to sluggish recovery in end-demand and concerns over excess inventory in supply chain dampening sales growth prospects.
The market research group, WSTS, projects on-year flat global semiconductor sales in 2016 due to demand weakness in developed markets (North America and Europe). According to WSTS, industry sales will expand by 3% in 2017F, driven by stronger global economic recovery (emerging markets and the US).
It also pointed out that independent market research group IDC projects that global smartphone shipment volumes will increase by a modest 5-year CAGR of 5% (2015-2020F), significantly lower than historical four-year CAGR of 28% (2011-2015).
“We expect global smartphone demand to experience minimal growth beyond 2016F,” it added.
As for radio-frequency (RF) components, CIMB Research anticipates demand to outpace smartphone demand due to smartphone requirements to cater for more frequency bands, especially with ongoing network modernisation.
It cited Technavio as projecting RF filter demand sales CAGR of 15% in 2016-2020F, driven by proliferation of smartphone and tablet applications that require high performance RF filters.
“This bodes well for Inari, MPI and Unisem as contract manufacturers for Broadcom, Qorvo and Skyworks (direct IP owners).
In spite of that, the research house expects automotive electronics market share to stay below 10% in next three years due to longer qualification period requirement.
Moreover, automotive is not likely to boost sector earnings in 2017 as much as the communications segment given the gradual pick-up in the sector demand.
“We believe the sector will benefit from the recent currency volatility, as majority of sales are denominated in US$. We estimate that on average, 95% of the sector’s sales are US$ based, while only 55% of total cost is in US$ (mainly, raw material and equipment costs).
“Unisem is the most sensitive to currency volatility, in our view, as it does not have a hedging policy. We project that every 1% depreciation in RM/US$ rate will translate into a 2.5-2.6% increase in the group’s FY17-18F net profit.
“Project sector (ex-Inari) net profit growth of 3-4% in 2016-17F. We forecast sector net profit growth of 7% in 2016 and 14% in 2017, driven by strong earnings growth by Inari.
“The company is on track to add new RF tester capacity and receive maiden contribution from new divisions in 2017. However, excluding Inari, we project that the sector will register modest net profit growth of 3-4% in 2016-17F, which is lower than our KLCI Index projection of 8% EPS growth in 2017.
“We downgrade the sector from Overweight to Neutral in view of the lacklustre earnings outlook and absence of key growth drivers in the next 12 months. The sector trades at 12.6 times CY17 P/E, slightly below its historical mean of 13 times. However, the sector still offers a decent 4.4% CY17 yield, supported by strong free cash flow generation.
“Inari remains our sector top pick due to its robust EPS CAGR of 15% in CY15-18F and strong relationship with its key customer, Broadcom. Key downside risks to our call are slowdown in RF demand and delayed contribution from new divisions,” CIMB Research said.
“We project 10% EPS growth per annum for sector in 2016-17F; stronger growth for Inari. However, we expect tepid earnings growth by MPI and Unisem in 2016-17F due to slowdown in smartphone shipment volume growth and supply constraints,” it said on Thursday.
The research house expects the automotive segment to gradually emerge as a new sales driver, with rising electronics adoption, but this will take time to ramp up and offset earnings volatility.
It says Inari remains its sector top pick due to its robust earnings visibility (CY15-18F EPS compounded annual growth rate (CAGR) of 15%) and strong key client relationship with Broadcom.
To recap, CIMB Research expects the semiconductor industry to remain challenging in 2017 due to sluggish recovery in end-demand and concerns over excess inventory in supply chain dampening sales growth prospects.
The market research group, WSTS, projects on-year flat global semiconductor sales in 2016 due to demand weakness in developed markets (North America and Europe). According to WSTS, industry sales will expand by 3% in 2017F, driven by stronger global economic recovery (emerging markets and the US).
It also pointed out that independent market research group IDC projects that global smartphone shipment volumes will increase by a modest 5-year CAGR of 5% (2015-2020F), significantly lower than historical four-year CAGR of 28% (2011-2015).
“We expect global smartphone demand to experience minimal growth beyond 2016F,” it added.
As for radio-frequency (RF) components, CIMB Research anticipates demand to outpace smartphone demand due to smartphone requirements to cater for more frequency bands, especially with ongoing network modernisation.
It cited Technavio as projecting RF filter demand sales CAGR of 15% in 2016-2020F, driven by proliferation of smartphone and tablet applications that require high performance RF filters.
“This bodes well for Inari, MPI and Unisem as contract manufacturers for Broadcom, Qorvo and Skyworks (direct IP owners).
“We see automotive as the next sales growth driver due to rising adoption of electronics in vehicles for infotainment and safety features,” it added.
It noted that IC Insights forecasts 4.9% sales CAGR in 2015-2020F for automotive electronics, with rising integrated circuit (IC) content in all new cars -- from luxury to base models.In spite of that, the research house expects automotive electronics market share to stay below 10% in next three years due to longer qualification period requirement.
Moreover, automotive is not likely to boost sector earnings in 2017 as much as the communications segment given the gradual pick-up in the sector demand.
“We believe the sector will benefit from the recent currency volatility, as majority of sales are denominated in US$. We estimate that on average, 95% of the sector’s sales are US$ based, while only 55% of total cost is in US$ (mainly, raw material and equipment costs).
“Unisem is the most sensitive to currency volatility, in our view, as it does not have a hedging policy. We project that every 1% depreciation in RM/US$ rate will translate into a 2.5-2.6% increase in the group’s FY17-18F net profit.
“Project sector (ex-Inari) net profit growth of 3-4% in 2016-17F. We forecast sector net profit growth of 7% in 2016 and 14% in 2017, driven by strong earnings growth by Inari.
“The company is on track to add new RF tester capacity and receive maiden contribution from new divisions in 2017. However, excluding Inari, we project that the sector will register modest net profit growth of 3-4% in 2016-17F, which is lower than our KLCI Index projection of 8% EPS growth in 2017.
“We downgrade the sector from Overweight to Neutral in view of the lacklustre earnings outlook and absence of key growth drivers in the next 12 months. The sector trades at 12.6 times CY17 P/E, slightly below its historical mean of 13 times. However, the sector still offers a decent 4.4% CY17 yield, supported by strong free cash flow generation.
“Inari remains our sector top pick due to its robust EPS CAGR of 15% in CY15-18F and strong relationship with its key customer, Broadcom. Key downside risks to our call are slowdown in RF demand and delayed contribution from new divisions,” CIMB Research said.
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