Strategy Update
- We note that chip players remain cautious on building
inventories or expanding capacity despite the strong surge in chips
demand since 2Q09. As chips suppliers continue to adopt just-in-time
production given limited visibility post festive sales in 1Q 2010, we
expect tech companies to ramp up capacity and build inventory in the
event of stronger demand from US and Europe in 2Q-3Q 2010.
- Although Oct orders were flattish mom, we note that
equipment orders have been registering six months of mom gain since
Mar 09, driven mainly by investments in logic capacity as well as
stronger-than-expected capex spending by major foundries. Going into
2010, capex momentum would hinge on: 1) conversion from gold to copper
wire-bonding; 2) resumption of DRAM & NAND process migration
investments; and 3) resilient wafer foundry capex spending.
- We believe investors should already be looking at better
earnings growth for the semiconductor players in 2010-11. We note that
global peers are currently trading at an average FY10 PER of 13.8x,
which compares to 10.8x for the semiconductor stocks under our
coverage. Hence, we have revised up our FY10 target PER to 12x (from
11x previously) to reflect: 1) improved sector earnings visibility on
the heels of strong chips demand from China and gradual pick-up in US
demand for consumer electronics. Accordingly, our fair values for
Unisem and MPI have been raised to RM2.29 and RM6.52 respectively
(from RM2.09 and RM5.29 previously).
- Hence, against the backdrop of improved earnings visibility
and stronger chip sales in 2010, we have upgraded the sector to
Overweight (from Neutral previously). Our top pick for the sector is
Unisem.
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