Investment Highlights

• We maintain our NEUTRAL recommendation on the technology sector as we believe that multi-year growth riding on positive prospects has been fairly priced in. The sector’s positive prospects arise from increased demand for semiconductors relating to the following trends: (i) adoption of 5G smartphones and increased investment in expanding 5G infrastructure globally; (ii) electric vehicles (EVs) and autonomous driving with more interest on new technologies using materials such as silicon carbide (SiC) and galium nitrite (GaN) as well as growth in smart sensors; (iii) adoption of Industry 4.0 technologies such as big data, automation and the internet of things (IoT) to build a more resilient supply chain.

• Our NEUTRAL stance is based on the stocks under our coverage (Exhibit 6). We have two BUY calls, one on Inari Amertron (fair value RM3.31) and another is Globetronics Technology (FV RM2.84). We have HOLDs on Malaysia Pacific Industries (FV RM36.05) and Pentamaster Corp (RM4.99), and one SELL call on ViTrox Corporation (RM13.24). The sector has an overall 3-star environmental, social and governance (ESG) rating as appraised by us in our ESG report on 23 March 2021.

• Near-term headwinds: With the imposition of the movement control order (MCO) 3.0 from 12 May 2021, which has since been extended until 28 June 2021, the electrical and electronics sector is operating at a 60% workforce capacity with the approval of Malaysia’s Ministry of International Trade and Industry (MITI). The impact of MCO 3.0 on production depends on the duration of lockdown implemented by the local government. Other near-term uncertainties include: (i) higher raw material costs due to the global semiconductor shortage; (ii) higher overall costs related to Covid-19 restrictions such as logistics, distribution and sanitation costs; and (iii) travel restrictions impacting discussions with potential customers.

• Capacity expansions to cater for demand upsurge following the global chip shortage: All the companies under our coverage are expanding. Inari intends to continue its capacity expansion for its radio frequency business in line with the growing demand for 5G while Globetronics is expanding its factory space in Penang by 30% (30K sqft). MPI, which is undergoing the 2nd phase of level 2 expansion at Carsem Suzhou by 50K sqft, is also seeking a new site in China by end CY22 for its silicon carbide related-products while adding a 121K sqft building near its M-Site in Ipoh. Meanwhile, Pentamaster is setting aside RM25mil to expand the production space of its Batu Kawan and Bayan Lepas factories in 2021 and is on the lookout for its 3rd plant in Batu Kawan for its factory automated solutions (FAS). ViTrox is working on the development of its Campus 3.0 which is set to start in 2HCY21 and aims to be completed by 2023.
• Worldwide semiconductor market to grow by 19.7% in 2021: The World Semiconductor Trade Statistics (WSTS) released its spring forecast on 8 June 2021, projecting a 19.7% growth in 2021 at US$527bil followed by an 8.8% growth in 2022 at US$573bil. The 2021 forecast was revised upwards from its earlier forecast of US$469bil in its autumn 2020 forecast. In 2021, Asia Pacific, including China, is forecasted to show the strongest growth rate at 23.5%, followed by Europe, Japan and the Americas. The largest growth contributors are memory ICs, followed by sensors and analog ICs that are projected to expand 31.7%, 22.4% and 21.7% respectively. All other categories are expected to show double-digit growth, except for optoelectronics and logic ICs (Exhibit 1). Meanwhile, the Semiconductor Industry Association (SIA) recorded US$41.9bil sales in April 2021 (+2% MoM, +22% YoY) as global demand remained high and sales rose across a range of chip products throughout the world’s major regional markets (Exhibit 2).
• In 1QCY21, global smartphone sales grew 26% YoY to 378mil units, according to Gartner, due to the improvement in consumer outlook, sustained learning and work from home requirements, as well as due to pent-up demand from 2020 which saw a steep decline and thus a lower base for comparison. Samsung’s launch of its mid-priced smartphones and early shipping of its flagship 5G smartphones boosted its unit sales. Apple’s launch of its first 5G iPhone led to continued demand in 2021 and 5G is expected to continue to be the major growth driver for 2021 fuelled by device upgrades. All top 5 vendors registered strong YoY growth, which indicates market consolidation among them. Meanwhile, Chinese vendors Xiaomi, Oppo and Vivo saw growing demand for 5G phones capitalizing on the weakening sales of Huawei and LG for the quarter. Although the global chip shortage has not impacted the smartphone industry, this may change in the coming quarters and could result in higher ASPs for smartphones (Exhibits 3 & 4).

• Global auto sales to grow by 8–10% in 2021: In May 2021, S&P Global updated its forecast that global auto sales will expand by 8–10% to 83–85mil units in 2021 (vs. an earlier projection of 7–9% growth) as it expects a quicker global rebound after 2020 sales exceeded its expectations due to pent-up demand and measures to stimulate demand in 2HCY20. China will lead the recovery, followed by North America with Europe likely lagging behind (Exhibit 5). Meanwhile, EVs including plug-in hybrids are set to increase its global share of the market to 6–8% in 2021, after having a 4.4% and 2.5% share in 2020 and 2019 respectively, with the European market is expected to drive growth in EVs.

• We have a NEUTRAL recommendation on the sector. However, we may upgrade our recommendation to OVERWEIGHT if: (i) companies under our coverage secure significant jobs and/or major customers; (ii) strengthening USD outlook; (iii) faster-than-expected adoption of technological trends such as 5G, spurring high demand for end products; and (iv) improvement in US-China trade relations which will help to reduce market uncertainty. We may downgrade our stance to UNDERWEIGHT if: (i) weak economic conditions and supply chain impacts caused by the delay in containing Covid-19 cases globally which leads to prolonged restrictions and higher costs; (ii) margin erosion in the face of a weakening USD; (iii) worsening trade war ties between the US and China, specifically relating to technology and intellectual property, and (iv) worsening Covid-19 cases locally causing disruptions in production.

• Our top pick is Globetronics Technology (BUY, RM2.84) as we believe the stock is undervalued at its current share price and that investors should take advantage of the recent price correction to accumulate the stock. The group’s positive prospects arise from: (i) its strength in smart sensors (~60% of total group revenue) with new generation sensor demand expected to drive growth ahead; (ii) ramp-up in laser automotive headlamps to boost its LED/SSL segment; and (iii) potential opportunities from the US-China trade war that could lead to customer diversification and revenue enhancement.

Source: AmInvest Research - 22 Jun 2021