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PP 7767/09/2010(025354)

3 August 2010

Malaysia Corporate Highlights


RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
3 August 2010
MARKET DATELINE

Recom : Neutral
Semiconductor (Maintained)

Jun Chip Sales Growth Narrows Mom

Table 1 : Semiconductor Sector Valuations


EPS EPS growth PER P/NTA P/CF GDY
FYE Price FV (sen) (%) (x) (x) (x) (%) Rec
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
Notion Vtec Sep 2.35 2.07 26.8 29.0 4.8 7.9 9.2 21.1 1.8 2.3 2.2 UP
JCY International Sep 1.25 1.32 14.7 18.0 18.2 10.4 8.5 6.9 2.7 6.6 5.6 MP
Unisem Dec 2.97 2.31 22.5 21.0 +>100 -6.7 10.0 70.7 1.8 4.1 2.2 MP
MPI Jun 6.20 6.80 45.1 60.8 +>100 34.7 13.4 9.9 1.3 3.3 3.3 MP
Sector Avg 59.7 15.0 8.6 8.1

♦ Jun 2010 chip sales yoy and mom gains narrow. The yoy sales Chart 1. Semiconductor
Capital Equipment Trend
growth of 42.6% continued to narrow (vs. 48.6% in May and a high of
58.4% in Mar), even though it marked the ninth monthly growth on a yoy $2,500.0

basis. On a mom basis, chip sales grew by 0.5%, weaker than May’s gain $2,000.0

of 5.2%. Geographically, Jun sales on a mom basis from US and Japan

US$mil
$1,500.0

grew 4.3% and 1.1% (vs. May 10: +4.3% and +3.7%) respectively. On $1,000.0

$500.0
the other hand, Jun sales for Europe and Asia fell -1.2% and -0.5% (vs. $0.0

May 10: +3.2% and +13.5%) respectively.

0
-0

-0

-0

-0

-0

-0

-0

-0

-0

-1
ar

ar

ar

ar

ar

ar

ar

ar

ar

ar
M

M
♦ Samsung highlights potential earning weakness. Despite the
Bookings (3mma) Billings (3mma)

electronic giant achieving record quarterly earnings, the company has


Source:Semi
warned of weaker margins and earnings growth which in our view have
been affected by the uneven global economic recovery. The company
highlighted further concerns of lower chip demand especially for its
television sales and mobile phones, exacerbated by increasing
competition throughout the industry as well as China’s tightening policy
that may affect consumer spending.

♦ TSMC sees chip cycle peaking. TSMC, the largest contract chip maker
reported its best sales in its 2QFY10 results. However, this may suggest
that the chip market cycle may be approaching its peak. According to
reports, irregular double-ordering and lower-than-expected earnings by
several chip players indicate a potential sequential fall in 4Q2010.
Already, TSMC is guiding for a slower growth in its 3QFY10 revenue of 3-
5% qoq vs. 13.9% qoq in the 2QFY10.

♦ Risks. 1) Slower-than-expected economic recovery dampening demand


for equipment and consumer electronics; 2) Strengthening of RM against
US$; and 3) Higher raw material cost.

♦ Maintain Neutral. In our view, uninspiring U.S. consumer data and the
lingering Euro debt crisis have painted a cloudy picture going forward for
consumer electronics demand. In addition, a sharper-than-expected Yap Huey Chiang
economic slowdown in China may also impact consumer demand. In view (603) 92802166
of the risk of weakening global demand for electronics, we are yap.huey.chiang@rhb.com.my
maintaining our neutral stance on the sector

Please read important disclosures at the end of this report.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 1 of 4
available for download from www.rhbinvest.com
3 August 2010

♦ Jun 2010 chip sales yoy and mom gains narrow. The yoy sales growth of 42.6% continued to narrow (vs.
48.6% in May and a high of 58.4% in Mar), even though it marked the ninth monthly growth on a yoy basis –
see Chart 2. On a mom basis, chip sales grew by 0.5%, weaker than May’s gain of 5.2%. Geographically, Jun
sales on a mom basis from US and Japan grew 4.3% and 1.1% (vs. May 10: +4.3% and +3.7%) respectively.
On the other hand, Jun sales for Europe and Asia fell -1.2% and -0.5% (vs. May 10: +3.2% and +13.5%)
respectively.

Chart 2. Global Chip Sales vs. Book to Bill

1.4 70.0%

Global sales yoy (RHS), %


60.0%
1.2 book to bill (LHS), x
50.0%

1.0 40.0%

30.0%

0.8
20.0%
% yoy
Ratio

10.0%
0.6

0.0%

0.4 -10.0%

-20.0%
0.2
-30.0%

0.0 -40.0%
Jan-03
Mar-03
May-03
Jul-03
Sep-03
Nov-03
Jan-04
Mar-04
May-04
Jul-04
Sep-04
Nov-04
Jan-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Source: SIA

♦ Jun book-to-bill of 1.19. Jun equipment booking orders of US$1.68bn grew 379.0% yoy (vs. 415.3% in May)
mainly due to stronger-than-expected capex in packaging, testing and fabrication equipment. Furthermore,
book-to-bill of 1.19 was the highest recorded since Aug 06, as well as the eleventh consecutive month of a
book-to-bill ratio above parity, suggesting still resilient capex trend since Jul 09. Going forward, capex spending
momentum will be mainly driven by: 1) conversion from gold to copper wire bonding process; 2) investment in
fine-pitch immersion machines; and 3) investment in logic capacity. However, we note that chip players are still
facing capacity constraints as well as shortages in labour and raw materials.

♦ Samsung highlights potential earnings weakness. Despite the electronic giant achieving record quarterly
earnings, the company has warned of weaker margins and earnings growth which in our view have been
affected by the uneven global economic recovery. The company highlighted further concerns of lower chip
demand especially for its television sales and mobile phones, exacerbated by increasing competition throughout
the industry as well as China’s tightening policy that may affect consumer spending.

♦ TSMC sees chip cycle peaking. Similarly, TSMC, the largest contract chip maker reported its best sales in its
2QFY10. However, this may suggest that the chip market cycle may be approaching its peak. According to
reports, irregular double-ordering and several lower-than-expected earnings by several chip players indicate a
potential sequential fall in 4Q2010. Already, TSMC is guiding for a slower growth in its 3QFY10 revenue of 3-5%
qoq vs. 13.9% qoq in the 2QFY10.

♦ Lower outlook for hard disk drives. WD’s reported lower-than-expected 4Q10 earnings suggesting slower
demand for the HDD. We note that ASP of HDDs are under pressure as there are indications of an oversupply
within the industry and competition is heating up as Samsung and Toshiba aggressively seek market share.
Similarly, Seagate highlighted that its lower-than-expected quarterly earnings were due to weakening demand
as Euro sovereign debt crisis as well slower consumer spending take effects.

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3 August 2010

Valuations and Recommendation

♦ Unisem: Moving Upstream. Unisem plans to increase capacity for its higher-end packages i.e. system-in-
packages (SIPs), wafer-level chip-scale packages (WLCSPs) as well as for its low-margin legacy packages i.e.
PDIP 8L and SOIC 8L. Unisem’s earnings would be mainly driven by: 1) chips demand for its higher-margin QFN
packages; 2) lower operating expenses due to cost-cutting measures; and 3) higher contribution from Chengdu
and Ipoh. In a separate note today, we had increased our FY10 revenue growth forecast to 47% (vs. 40%
previously) to reflect stronger-than-expected demand for chips as near-term visibility remains positive.
However, we are less optimistic about longer-term earnings given the recent spate of negative guidance which
industry players and in a separate note today, we have lowered our FY11-12 EPS forecasts by -1.9% and -
11.5% respectively. Accordingly, our fair value has been trimmed to RM2.31/share from RM2.36) but we
maintain our Market Perform call on the stock.

♦ MPI: Rolling out new chips. We believe that MPI’s earnings would be mainly driven by: 1) higher margins
from high-density matrix leadframe as well as the migration from gold to copper wirebonding process; and 2)
higher contribution from module packages. We maintain Market Perform and our fair value of RM6.80/share
based on an unchanged 11x FY11 EPS.

♦ JCY: Downgraded to Market Perform. Given Western Digital and Seagate’s lower-than-expected reported
earnings recently, we believe the view on the hard disk drives (HDD) industry has become less optimistic going
forward. The two HDD giants highlighted concerns on weakening demand in the next few quarters stemming
from the Euro sovereign debt issues, the still uninspiring U.S. consumer demand as well as capacity oversupply
in the industry. Hence, we have trimmed our FY10-12 revenue growth forecast by 40-45%. Consequently, our
FY09/10-12 EPS forecasts have been lowered by -0.2%, -0.3%, and -0.3% respectively. We have also reduced
our FY11 target PER to 10x from 12x. Accordingly, we have lowered our fair value to RM1.32/share (from
RM2.16) and we are downgrading JCY to Market Perform (from outperform previously).

♦ Notion Vtec: Negative outlook. While Notion’s earnings may be supported by its camera segment, we are
concerned on the outlook for PC sales and the HDDs. Given the negative view, we have cut our FY09/10-12 EPS
forecasts by 21.1%, 36.2%, and 47.4% respectively. Hence, we have downgraded the stock to Underperform
(from outperform) with a fair value of RM2.07/share. The changes are highlighted in a separate report today.

♦ Maintain Neutral. The still uninspiring U.S. consumer data and lingering Euro debt crisis have painted a cloudy
picture going forward for the demand for consumer electronics. In addition, a sharper-than-expected economic
slowdown in China due to the tightening policy may also impact consumer demand. In view of the risk of
weakening global demand, we are maintaining our neutral stance on the sector.

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available for download from www.rhbinvest.com
3 August 2010

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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