Smooth sailing

Technology│Semiconductor
March 17, 2015
MALAYSIA
SEMICONDUCTOR
SECTOR NOTE
Notes from the Field
—————————————————————————————————————————
Mohd Shanaz Bin NOOR AZAM
T (60) 3 2261 9078
E shanaz.azam@cimb.com
Smooth sailing
We maintain an Overweight on the Malaysian semiconductor sector as
we see improving earnings visibility, driven by demand growth in the
automotive and communications segments and a structural shift in the
product mix. MPI is our top pick due to its attractive valuation and
better growth profile following its aggressive strategy for FY15.
Figure 1: Malaysian semiconductor sector P/E
P/E (x)
18.0
16.0
14.0
12.0
10.0
8.0
6.0
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Show Style "View Doc Map"
P/E
Contents
Mean
1+Std Dev
1-Std Dev
1+ 2 Std Dev
1- 2 Std Dev
SOURCES: CIMB, COMPANY REPORTS
BACKGROUND ...................................................................3
OUTLOOK ............................................................................5
RISKS .................................................................................10
FINANCIALS ...................................................................... 11
VALUATION AND RECOMMENDATION ...........................13
‘‘
After a record-setting
2014, the global semiconductor
industry is off to a promising start
to 2015, posting it’s highest-ever
January sales led by impressive
growth in the Americas market.
Sales in 2015 are expected to stay
strong across most regions and
product categories.”
John Neuffer, President & CEO of SIA
Highlighted Companies
MPI (Add, TP: RM7.50)
We expect MPI to continue its growth trajectory in
FY15, driven by an aggressive capex programme of
RM200m.
The
company’s
transition
into
higher-margin packages is progressing smoothly.
Unisem (Add, TP: RM2.50)
Unisem has demonstrated good earnings recovery,
with strong earnings delivery in the past three
quarters. Management expects 8% revenue growth
in FY15, driven by higher sales volume wafer
bumping, flip-chip and test services.
The sector trades at 12.ox CY16 P/E,
slightly below its 1-year historical
mean of 12.4x. It also trades at 1.4x
CY15 P/BV, about a 30% discount to
the
Taiwanese
outsourced
semiconductor assembly and test
(OSAT) players that trade at 2.0x. The
sector benefits from a shift in the
product
mix
to
higher-margin
packages, a strengthening US$ and
better operating efficiency, supported
by a three-year EPS CAGR of 23%.
Communication is still a key
driver
Resilient demand growth
Automotive to offer good
growth potential
We expect a positive outlook in FY15,
driven by sustainable industry
demand growth on the back of global
economic recovery. Most industry
research groups are projecting
average growth of 6-7% in FY15. The
Worldwide Semiconductor Trade
Statistic (WSTS) group expects the
automotive
and
communication
segments to grow faster than the
market, and the consumer and
computer segments to stay flat.
Communication devices, such as
smartphones, are still expected to
drive industry growth in the near term,
on the back of rising 4G adoption in
emerging markets. While smartphone
sales volume is expected to moderate,
MPI and Unisem should still benefit
from rising content growth that
requires more chips for these devices
to carry out computing processes.
IC Insights forecasts that automotive
could be the fastest market for IC
application, with a 2013-18 CAGR of
10.8%. We think this is due to higher
semiconductor content being installed
in all vehicles, as opposed to only
luxury
brands
previously.
For
example, higher vehicle safety
requirements are driving up demand
for tyre pressure monitoring sensors.
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT.
Designed by Eight, Powered by EFA
Semiconductor│Malaysia
March 17, 2015
Figure 2: Sector comparison
Company
Malaysian Pacific Industries
Unisem
Malaysia average
Advanced Semiconductor
Chipbond Technology
Powertech Technology
Siliconware Precision
Taiwan average
Bloomberg
Ticker
MPI MK
UNI MK
2311 TT
6147 TT
6239 TT
2325 TT
Recom.
Add
Add
Hold
Add
Reduce
Hold
Price Target Price
(local curr)
(local curr)
6.40
7.50
2.04
2.50
43.90
63.30
54.20
54.70
37.00
63.00
48.00
46.00
Market Cap
(US$ m)
344
371
10,906
1,299
1,335
5,387
Core P/E (x)
CY2015
CY2016
14.3
11.6
16.1
12.4
15.1
12.0
13.9
12.2
11.3
14.8
13.9
13.7
9.1
11.9
13.9
13.5
3-year EPS
CAGR (%)
20.2%
25.8%
22.9%
9.8%
13.5%
3.7%
8.9%
9.3%
P/BV (x)
Recurring ROE (%)
CY2015
CY2016
CY2015
CY2016
1.69
1.59
12.5%
14.1%
1.31
1.27
8.4%
10.4%
1.47
1.41
10.1%
12.0%
2.61
1.78
1.27
2.38
2.03
2.50
1.61
1.23
2.29
1.96
19.4%
15.2%
11.3%
16.5%
14.9%
18.7%
18.6%
10.3%
16.8%
14.8%
EV/EBITDA (x)
Dividend Yield (%)
CY2015
CY2016
CY2015
CY2016
4.1
3.4
3.8%
4.9%
5.1
4.3
4.4%
5.6%
4.5
3.8
4.1%
5.3%
6.4
5.7
3.0
5.7
4.8
6.2
4.3
2.6
5.1
4.3
4.5%
5.2%
5.3%
5.5%
5.5%
4.6%
6.9%
5.0%
5.8%
5.7%
SOURCE: CIMB RESEARCH, COMPANY
Calculations are performed using EFA™ Monthly Interpolated Annualisation and Aggregation algorithms to December year ends
2
Semiconductor│Malaysia
March 17, 2015
Smooth sailing
BACKGROUND
4Q14 review
The Malaysian semiconductor sector recorded 10.7% yoy revenue growth in
4Q14, driven by better sales volume from higher-margin packages and a
stronger US$. Following the stronger revenue growth, the sector’s core net
profit rose to RM51.6m vs. RM13.2m in 4Q13. This is attributable to a better
transition to higher-margin packages and better operating efficiency following
various cost-saving exercises carried out over the past few years. The sector’s
EBITDA margin expanded by 4.2% pts from 21.7% in 4Q13 to 25.9% in 4Q14.
Figure 3: Malaysian semiconductor sector core net profit and EBITDA margin
(RM m)
60.0
30.0%
50.0
25.0%
40.0
20.0%
30.0
20.0
15.0%
10.0
10.0%
5.0%
(10.0)
(20.0)
0.0%
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
Net profit
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
EBITDA margin
SOURCES: CIMB, COMPANY REPORTS
Reversal from Unisem
The stronger earnings performance was partly due to a reversal in Unisem’s
performance, which recorded a stronger RM25.8m core net profit compared to a
RM3.1m core net loss in 4Q13 on the back of rising utilisation rates from its
wafer-level packaging (WLCSP), bumping and test services which command
higher margins.
Figure 4: MPI and Unisem core net profit and EBITDA margin trend
(RM m)
30.0
30.0%
25.0
25.0%
20.0
15.0
20.0%
10.0
15.0%
5.0
-
10.0%
(5.0)
5.0%
(10.0)
(15.0)
0.0%
1Q12
2Q12
3Q12
MPI net profit
4Q12
1Q13
Unisem net profit
2Q13
3Q13
4Q13
1Q14
MPI EBITDA margin
2Q14
3Q14
4Q14
Unisem EBITDA margin
SOURCES: CIMB, COMPANY REPORTS
3
Semiconductor│Malaysia
March 17, 2015
Communications still a key growth driver
The communication segment’s revenue grew by 22% yoy (11.8% qoq), driven by
higher shipment volume following resilient smartphone demand globally. Apart
from that, the sector is also benefiting from higher communication package
demand from rising 4G mobile adoption in China. While smartphone volume
growth is expected to moderate in the coming years, the outsourced
semiconductor assembly and test service providers like MPI and Unisem could
still benefit from an exponential increase in mobile applications that require
more chips for these devices to carry out computing processes.
Figure 5: Communications segment revenue gaining more sales
(RM m)
700
36%
35%
600
34%
500
33%
32%
400
31%
300
30%
29%
200
28%
100
27%
0
26%
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
Sector revenue
3Q13
4Q13
1Q14
2Q14
Communication revenue
3Q14
4Q14
ratio
SOURCES: CIMB, COMPANY REPORTS
Automotive is gradually gaining traction
The automotive segment’s revenue grew by 12.6% yoy (1% qoq), driven by
stronger demand for tyre pressure sensors and wheel speed sensors. This is
expected to grow further with rising infotainment and safety demand. We like
MPI and Unisem’s strategy to grow the automotive segment due to the
long-term nature of automotive packages. Moreover, this also helps to reduce
the impact of the cyclical nature of the communications segment.
Figure 6: Gradual increment from the automotive segment
(RM m)
700
22.0%
600
21.0%
500
20.0%
400
19.0%
300
18.0%
200
17.0%
100
16.0%
-
15.0%
1Q12
2Q12
3Q12
4Q12
1Q13
Sector revenue
2Q13
3Q13
4Q13
1Q14
Auto revenue
2Q14
3Q14
4Q14
ratio
SOURCES: CIMB, COMPANY REPORTS
4Q14 results were ahead of expectations
The 4Q14 results for Malaysian semiconductors were above expectations
following the recovery in industry demand and a better product mix. MPI and
Unisem also benefited from a stronger US$ and better operating efficiency.
4
Semiconductor│Malaysia
March 17, 2015
Figure 7: Malaysian semiconductor: 4Q14 results were above expectations
Semiconductor 4Q14 EPS vs CIMB
Key variance
MPI
Above expectations
Better product mix, lower material cost and stronger US$
Unisem
Above expectations
Higher utlisation, better product mix and stronger US$
SOURCES: CIMB, COMPANY REPORTS
OUTLOOK
Continuous growth in FY15
We expect the sector to maintain its positive outlook in FY15, driven by
sustainable industry demand growth on the back of global economic recovery.
Most industry research groups are projecting the global semiconductor industry
to grow by an average of 6-7% in FY15. The Worldwide Semiconductor Trade
Statistic (WSTS) group expects the automotive and communication segments to
grow faster than the market, and the consumer and computer segments to stay
flat.
Although industry demand is projected to grow slower compared to FY14,
Gartner expects the industrial segment to outperform overall semiconductor
growth, with 9.1% revenue growth driven by LED lighting applications for
industrial, residential and smart city projects on the back of the rising
Internet-of-Things (IOT) adoption. Apart from that, wireless semiconductor
sales are expected to stay robust, driven by a shift in consumer demand from
mobile phones to smartphones and increasing 4G Long Term Evolution (LTE)
adoption worldwide.
One of the more aggressive forecasts in the industry was provided by an
independent research group, Semiconductor Intelligence, which projects
stronger growth of 11% in FY15 (vs. 10% in FY14), based on the assumption of a
stronger recovery in global economic growth this year. This reflects the latest
IMF data which expect the global economy to grow by 3.5% in FY15, driven by a
stronger recovery in the US and a boost from lower oil prices. Apart from that,
WSTS expects the Americas segment to overtake Asia Pacific as the growth
driver in the global semiconductor sector, with 5.3% growth projected compared
to 3.8% for Asia Pacific.
Figure 8: Global semiconductor sales forecast by region
US$ bn
Americas
Europe
Japan
Asia Pacific
Total
2012
54
33
41
163
292
2013
61
35
35
174
306
Years
2014
66
38
35
194
333
2015F
69
38
35
202
345
2016F
71
40
35
209
355
2012
-4.0%
-11.0%
-2.0%
-1.0%
-2.7%
2013
13.1%
5.2%
-15.2%
7.0%
4.8%
Growth
2014
6.9%
8.7%
1.3%
11.4%
9.0%
2015F
5.3%
1.5%
-0.3%
3.8%
3.4%
2016F
3.1%
3.2%
0.9%
3.5%
3.1%
SOURCES: CIMB, WSTS
Figure 9: 2015 global semiconductor sales forecast
Source
Gartner, Oct
WSTS, Dec
Mike Cowan, Dec
Semiconductor Intelligence, Dec
IC Insights
Simple average
2014
7.2
9.0
9.7
10.0
7.1
8.6
Figure 10: Global and regional GDP growth forecast
2015
5.4
3.4
4.2
11.0
7.5
6.3
GDP growth (%)
Global
Advanced Economies
United States
Euro Area
Japan
Emerging Market and Developing Economies
China
SOURCES: CIMB, VARIOUS
2012
3.1
1.4
2.8
–0.7
1.4
5.1
2013
3.3
1.3
2.2
-0.5
1.6
4.7
2014
3.3
1.8
2.4
0.8
0.1
4.4
7.7
7.8
7.4
2015F 2016F
3.5
3.7
2.4
2.4
3.6
3.3
1.2
1.4
0.6
0.8
4.3
4.7
6.8
6.3
SOURCES: CIMB, IMF
WSTS estimates IC sales to grow by 3.1% in FY15, led by analog and memory ICs.
Demand for medical/health electronics, LED lighting systems and green energy
management systems (lighting, temperature, security, etc.) for homes and
commercial buildings are expected to keep analog unit growth much more
robust than other IC product categories throughout the forecast period.
5
Semiconductor│Malaysia
March 17, 2015
Figure 11: WSTS forecast data
US$ bn
Discrete Semiconductors
Optoelectronics
Sensors
Integrated Circuits
- Analog
- Micro
- Logic
- Memory
Total
2012
19
26
8
238
39
60
82
57
292
2013
18
28
8
252
40
59
86
67
306
Years
Growth
2014 2015F 2016F 2012 2013 2014 2015F 2016F
20
21
22 -10.5% -4.9% 12.3% 4.4% 3.0%
29
31
32 13.4% 5.3% 7.0% 4.9% 3.3%
9
9
10 0.5% 0.3% 7.4% 6.1% 5.2%
275
283
292 -3.6% 5.7% 9.1% 3.1% 3.0%
44
47
49 -7.2% 2.1% 10.2% 7.3% 3.7%
62
63
64 -7.6% -2.6% 6.0% 1.5% 1.7%
90
91
94 3.7% 5.2% 4.2% 2.2% 2.7%
79
81
84 -6.2% 17.6% 17.3% 3.1% 4.1%
333
345
355 -2.7% 4.8% 9.0% 3.4% 3.1%
SOURCES: CIMB, WSTS
Moderate equipment spending
SEMI expects worldwide semiconductor capital spending to grow by 8% in FY15,
driven by new fab construction projects and the ramping up of new technology
nodes. Meanwhile, fab equipment spending is projected to grow stronger at 15%,
largely due to rising investments from foundries and memory companies
driving growth in FY15.
According to Gartner, worldwide semiconductor equipment capital spending is
expected to grow by 5.6% in FY15 from US$38.9bn to US$41.1bn as
manufacturers turn their focus to ramping up new capacity instead of building
new fab. In addition, we believe the demand for packaging and assembly
services from OSAT players should remain resilient as wafer-level packaging
and assembly equipment is expected to grow by 8.9% in FY15. The momentum
from strong 4Q14 sales has been carried forward through to Jan this year. SEMI
expects the equipment market to continue to grow this year given the positive
industry outlook.
Overall, the long-term outlook is for continued investments in leading-edge
logic as foundries and major integrated device manufacturers (IDMs) move into
the FinFET era. In memory, the outlook for NAND flash is especially strong as it
starts to become a major presence in data centres. The result could be steady
growth in spending for semiconductor equipment through to FY18, with only a
minor dip in FY16 due to cyclical weakness as DRAM spending responds to the
anticipated oversupply situation before returning to growth through to FY18.
Figure 12: Worldwide semiconductor equipment spending 2013-18 forecast
Item (US$ bn)
Semiconductor capital spending
Growth
Capital equipment
Growth
Wafer fab equipment
Growth
Wafer-level manufacturing equipment
Growth
Wafer-level packaging and assembly equipmet
Growth
Die level packaging and assembly equipment
Growth
Automated test equipment
Growth
2013
58
-12%
33
-16%
27
-19%
29
-8%
1
0%
3
-3%
2
-3%
2014
65
13%
39
16%
32
16%
33
16.1%
2
19%
3
14%
2
24%
2015
66
1%
41
6%
34
7%
36
7%
2
9%
3
-4%
2
2%
2016
66
0%
40
-2%
34
0%
36
0%
2
-1%
3
-16%
2
-12%
2017
70
7%
45
11%
37
10%
39
11%
2
23%
3
12%
2
18%
2018
75
7%
47
6%
39
6%
42
6%
3
14%
3
5%
3
5%
SOURCES: CIMB, GARTNER
Mobile devices and applications are still major drivers
Mobile computing devices, such as smartphones and tablets (S&T), should still
be the key growth drivers for the sector due to the increasing demand from
emerging markets and higher content growth from the continuous development
of mobile device applications. Gartner forecasts worldwide device shipments to
rise by 3.8% yoy from 2.38bn units in FY14 to 2.47bn units in FY15. Overall
growth should be driven by mobile phone and tablet shipments, which are
expected to expand by 4.3% and 4.2% in FY15 and FY16 (vs. 3.8% in FY14),
respectively. Despite the moderate forecast in mobile phone shipments, IDC
expects smartphone sales volume to grow by 12.2%, reaching 1.4bn units in
FY15.
6
Semiconductor│Malaysia
March 17, 2015
Figure 13: Worldwide device shipments volume by segment
Worldwide shipment (mil)
Device Type
PC (Desktop & Notebook)
Ultrabook
Tablet
Mobile Phone
Total
2013
299
17
180
1804
2300
Sales
2014
2015F
279
259
39
62
216
233
1844
1915
2378
2469
2016F
248
85
259
1980
2572
Growth (%)
2013
2014 2015F
-12.3
-6.8
-7.2
84.0
126.8
59.0
50.2
20.3
7.9
3.3
2.2
3.9
3.8
3.4
3.8
2016F
-4.2
37.1
11.2
3.4
4.2
3-year
CAGR
-6.1
70.3
13.0
3.1
3.8
SOURCES: CIMB, GARTNER
While S&T shipment volume growth is expected to slow down due to a higher
base and saturation in developed markets. We still see decent growth prospects,
led by improving smartphone penetration in the emerging markets, which is
expected to drive demand over the next five years. IDC is projecting a 9.8%
2014-18 CAGR for smartphone shipments, driven by higher volumes for mid- to
low-end smartphone models.
The Asia Pacific region should be an important region for the smartphone
market as its market share is expected to grow from 14% in FY13 to 24% in FY18.
Nevertheless, we understand that the decent growth volume may come with
lower average selling prices (ASP) due to intense competition. On a worldwide
basis, IDC expects the ASP for smartphones to fall by about 5% annually, from
US$297 in FY14 to reach US$241 by FY18.
Figure 14: Smartphone shipments by operating system
Figure 15: Smartphone market share forecast for 2013-2018
90%
80%
Title:
Source:
40.0%
80%
78%
35.0%
Please fill in the values above to have them entered in your report
70%
30.0%
60%
25.0%
50%
20.0%
40%
15.0%
30%
10.0%
15% 14%
20%
10%
4%
5.0%
6%
1% 0%
1% 2%
Blackberry
Others
0.0%
0%
Android
iOS
Windows Phone
2014
Asia Pacific (exJapan & China)
2018
2013
China
2014F
2015F
USA
Western Europe Rest of the world
2016F
2017F
SOURCES: CIMB, IDC
2018F
SOURCES: CIMB, IDC
Overall, we are not overly concerned about the potential slowdown in
smartphone shipment growth given the higher penetration rate in developed
markets and higher user base. However, we believe components manufacturers
still have decent growth opportunities from higher content growth within S&T
given the ongoing development of mobile device applications.
Qualcomm has highlighted that, each year, more and more sensors are
integrated into smartphones in order to enable various tasks for enhancing user
experience. For example, the first Samsung GALAXY S1, which was launched in
FY10, had only three sensors compared to 12 sensors in the GALAXY S5.
Therefore, we think that smartphones could remain a key driver for the sector
given the higher content growth opportunity apart from increasing demand for
higher mobile computing power in emerging markets.
Automotive to emerge as a new industry driver
While the communications segment should remain a key growth driver for the
sector, we are seeing the automotive segment playing a bigger role in driving
industry growth following IC Insights’ projection that automotive will be the
fastest market for IC application with a 2013-18 CAGR of 10.8%.
7
Semiconductor│Malaysia
March 17, 2015
We think this is partly due to higher semiconductor content in all vehicles that
was previously only associated with luxury vehicles. For example, since Nov
2014, the European Union has mandated that new cars are equipped with
tyre-pressure sensors. This should help to drive up semiconductor demand
growth in automotive.
Meanwhile, the independent market research group, IHS iSuppli, indicated that
the automotive semiconductor market recorded 10% revenue growth in FY14
due to higher chip content and robust vehicle production following new vehicle
emission regulations and higher vehicle safety requirements. iSuppli expects the
automotive semiconductor market to grow by 7.5% in FY15, driven by strong
growth from hybrid electric vehicles, telematics and advanced driver assistance
systems (ADAS).
In addition, another market research group, Strategy Analytics, expects the
trend in rising electronic content in cars to continue, both in terms of dollar
value and content volume. It is important to highlight that IC automotive
application is not limited to safety as IC Insights also highlighted the rising
demand for vehicle infotainment system, driver-assistance systems and
connectivity in driving future semiconductor demand in automotive.
Figure 16: 2014 IC market by end use application
($US bn)
120
107.4
103.7
100
80
60
35.3
40
21.7
17.0
20
2.0
0
Communication
Computer
Consumer
Automotive
Industrial
Military
SOURCES: CIMB, IC Insights
Figure 17: Automotive is projected to lead the IC growth rate
Computer
3.3%
Consumer
4.1%
Military
4.1%
Total Ics
5.5%
Industrial
5.7%
Communication
6.8%
Automotive
10.8%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
2013-18 CAGR
SOURCES: CIMB, IC Insights
8
Semiconductor│Malaysia
March 17, 2015
IOT is a long-term driver
The Internet of Things concept is the latest buzzword in today’s technology
industry given its vast potential to impact billions of lives globally. The concept
is gaining better traction given that it no longer stems from the consumer end of
the market, but is also being driven by the business world.
Cisco predicts that the number of connected devices could far exceed the global
population by 2020, with 50bn connected objects by that year. These connected
devices could possess one or more sensors that would monitor specific locations,
vibration, motion and temperature. Through IOT, these sensors would connect
to a system that can understand and analyse the data to provide new
information to an organisation’s system and to individuals.
IC Insights projected total industry sales by IoT communication and sensor
subsystems to grow from US$48.3bn in FY14 to US$103.6bn in FY18, or a
four-year CAGR of 27%. In terms of market segments, connected cities, which
include “smart” electric grids, roads and streetlights and other public
infrastructure applications, are expected to remain the largest semiconductor
segment with IOT exposure at a 2013-18 CAGR of 15%. However, the industrial
internet segment is expected to catch up to the connection cities segment due to
high growth in factories, logistics and healthcare application.
Figure 18: IOT revenue projection by internet communication and sensor systems
($US bn)
120
103.6
100
79.8
80
70.0
57.7
60
48.3
39.8
40
33.1
20
0
2012
2013
2014E
2015F
2016F
2017F
2018F
SOURCES: CIMB, IC Insights
Figure 19: IOT semiconductor sales by segment 2014E
(US$3.9bn)
Connected homes
7%
Figure 20 IOT semiconductor sales by segment 2018F
(US$11.5bn)
Wearable systems
3%
Connected homes
10%
Wearable systems
4%
Connected
vehicles
8%
Connected cities
37%
Connected
vehicles
13%
Industrial internet
29%
Connected cities
53%
Industrial internet
36%
SOURCE: CIMB, IC Insights
SOURCE: CIMB, IC Insights
9
Semiconductor│Malaysia
March 17, 2015
Hence, this is where we see the long-term value for domestic semiconductor
players, which are beginning to delve into manufacturing these sensor
components. We see this as a very positive long-term driver for the sector given
that it opens new end markets for semiconductor components. We also agree
with IC Insights which highlighted that the next big thing in the industry could
be many products serving many markets instead of one or two huge growth
drivers.
RISKS
Decline in consumer spending
Another potential risk for the sector is a decline in consumer spending. Despite
the improving labour market condition and lower energy price, US consumer
spending has been lacklustre due to a mix of bad weather conditions and
cautious outlook by consumers. Based on data from the US Bureau of Economic
Analysis, US consumer spending fell below 4% between Dec 2014 to Feb 2015.
Meanwhile, the University of Michigan’s consumer confidence data for Mar
2015 recorded 91.2, which is lower than 98.1 in Jan 2015. Nevertheless, in the
long-term, consumer confidence has steadily grown from a low of 73.2 in Oct
2013. Overall, we expect the depressed global crude oil price and positive trend
in US consumer spending to continue to support the recovery in semiconductor
industry demand.
Figure 21: US consumer spending growth (% yoy)
Figure 22: University of Michigan US consumer confidence
%
8
120
6
100
4
80
2
60
0
40
-2
20
-4
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
0
Jan-04
Jan-14
US Consumer spending
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Consumer confidence
SOURCE: BLOOMBERG, CIMB
SOURCE: BLOOMBERG, CIMB
10
Semiconductor│Malaysia
March 17, 2015
FINANCIALS
Stronger free cashflow generation
The strength of earnings recovery in the sector is illustrated by the higher free
cashflow (FCF) generation. Both MPI and Unisem have been conserving cash
and staying cautious about their capex spending over the past two years given
the slowdown in industry demand aside from the communications segment.
We expect the sector’s FCF to trend higher given the minimal capex
requirements in the near- to medium-term as the sector still has excess
structural capacity to meet the rising industry demand. Moreover, the sector’s
FCF level is expected to exceed the FY13 high of RM300m from FY14 onwards.
Furthermore, we believe the stronger FCF generation could provide more
flexibility for companies to increase dividend payouts.
Figure 23: Strength in earnings recovery is reflected in rising FCF trend
RM m
500
400
300
200
100
0
-100
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 2015F 2016F
Sector Free Cash Flow
SOURCES: CIMB, COMPANY REPORTS
Figure 24: MPI FCF trend gradual pick-up in 2015 due to
RM200m capex programme
Figure 25: Steady growth in FCF with limited capex
RM m
RM m
250
250
200
200
150
150
100
50
100
0
50
-50
-100
0
2009
2010
2011
2012
2013
2014
2015F
2010
2016F
2011
2012
2013
2014
2015F
2016F
Unisem Free Cash Flow
MPI Free Cash Flow
SOURCE: CIMB, COMPANY REPORTS
SOURCE: CIMB COMPANY REPORTS
11
Semiconductor│Malaysia
March 17, 2015
Positive impact from a strengthening US$
We expect the sector to benefit from robust US economy and strengthening in
US$ against the ringgit which appreciates by 5.6% ytd. We understand that
nearly 100% of the sales by Malaysian semiconductor companies are
denominated in US$, compared to about 70-75% of cost that are mainly related
to raw materials. Based on our estimates, every 1% appreciation in US$ would
translates to 3-4% increase in MPI and Unisem FY15 core net profit. Overall, the
stronger US$ is positive for the domestic semiconductor players.
Healthy balance sheet position
We also like the sector due to its healthy balance sheet position as its overall
gearing level has been trending down since FY09, except during the slowdown
in 2011-12. In FY14, the sector recorded a 10.4% gearing ratio, which is below its
historical mean of 20.8%. We expect the sector’s gearing to decline and become
net cash by the end of this year as the sector continues to reduce its borrowings
while staying cautious about new capital spending, instead focusing on ramping
up new capacity for advanced packages.
Figure 26: Sector gearing is trending down
50%
40%
30%
20%
10%
0%
-10%
-20%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 2015F 2016F
Sector Gearing
SOURCES: CIMB, COMPANY REPORTS
Figure 27: MPI is in net cash position as at Dec 2014
Figure 28: Unisem gearing stands at 19% as at Dec 2014
60.0%
80.0%
60.0%
40.0%
40.0%
20.0%
20.0%
0.0%
0.0%
-20.0%
-20.0%
-40.0%
-60.0%
-40.0%
2001
2003
2005
2007
2009
2011
2013
2001
2015F
2003
2005
2007
2009
2011
2013
2015F
Unisem Gearing
MPI Gearing
SOURCE: CIMB, COMPANY REPORTS
SOURCE: CIMB, COMPANY REPORTS
12
Semiconductor│Malaysia
March 17, 2015
VALUATION AND RECOMMENDATION
Maintain Overweight
Figure 29: Malaysian semiconductor sector earnings forecasts
Core net profit (RM m)
2010
2011
2012
2013
2014
2015F
2016F
2017F
MPI
82.6
19.6
(6.0)
34.5
73.1
94.2
115.4
127.0
Unisem
181.9
19.7
(4.6)
(17.1)
62.8
85.5
110.9
125.2
Sector
264.5
39.3
(10.6)
17.4
135.9
179.8
226.3
252.2
2014-17 EPS CAGR
22.9%
Core net profit growth (%)
2011
2012
2013
2014
2015F
2016F
2017F
MPI
(76)
(131)
672
112
29
22
10
Unisem
(89)
(123)
(270)
468
36
30
13
Sector
(85)
(127)
264
680
32
26
11
SOURCES: CIMB, COMPANY REPORTS
Following the strong earnings recovery in FY14, we expect Malaysian
semiconductor sector to continue growing and benefiting from demand shift
towards mobile computing and connectivity. We believe that both MPI and
Unisem have taken the right strategy in shifting their portfolio mixes, albeit
gradually, towards higher-margin segments, such as communications and
automotive. Moreover, we saw these companies recovering over the past year as
sector profitability improved on the back of expansions in EBITDA margin. We
now expect the sector’s earnings to record a 2014-17 CAGR of 23%, mainly
driven by higher sales from new packages and better operating efficiency.
In our coverage, we prefer the companies leveraged to S&T products given the
strong demand forecasts for the segment. Our sector top pick is MPI. We prefer
MPI to Unisem because of its attractive valuation and aggressive growth
strategy. MPI has a higher exposure to the communications segment at 36% of
revenue, while Unisem has about 29% revenue contribution from the segment.
MPI and Unisem trade at 14.3x and 16.1x CY15 P/Es, respectively. The current
valuation level is still below the sector historical mean of 19x during the
recovery cycle in 2005-2010. We currently have Add ratings on both stocks.
Figure 30: Stronger earnings recovery forecast driven by portfolio shift
(RM m)
300.0
16.0
14.0
250.0
12.0
200.0
10.0
150.0
8.0
100.0
6.0
4.0
50.0
2.0
-
-
(50.0)
(2.0)
2010
2011
2012
2013
Sector core net profit (RMm)
2014
2015F
2016F
2017F
Sector ROE (%)
SOURCES: CIMB, COMPANY REPORTS
In terms of the sector as a whole, it trades at a 12.0x CY16 P/E, slightly below its
1-year historical mean of 12.4x and 13% discount to its Taiwanese peers. In
addition, the sector also trades near to a 30% discount to its Taiwanese OSAT
peers, at 1.4x CY15 P/BV, which is still below its historical mean of 1.5x.
13
Semiconductor│Malaysia
March 17, 2015
Therefore, we think the sector’s valuation is still compelling as it benefits from a
transition to higher-margin packages, strengthening in the US dollar and better
operating efficiency, that is supported by a three-year EPS CAGR of 23%, which
is higher than Taiwanese OSAT peers’ 9%.
Hence, we maintain an Overweight rating on the Malaysian semiconductor
sector as we see improving earnings visibility for the companies in the sector,
led by rising automotive content and mobile computing demand in emerging
markets and increasing connectivity and communication between objects based
on the Internet of Things concept.
Figure 31: 1-yr forward sector P/E (x)
P/E (x)
18.0
16.0
14.0
12.0
10.0
8.0
6.0
Jan-14
Apr-14
P/E
Mean
Jul-14
1+Std Dev
Oct-14
1-Std Dev
Jan-15
1+ 2 Std Dev
1- 2 Std Dev
SOURCE: CIMB, COMPANY REPORTS
Figure 32: 1-yr forward sector P/BV (x)
P/BV (x)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Mar-04
Mar-05
Mar-06
Mar-07
Sector P/BV
Mar-08
Mar-09
Mean
Mar-10
Mar-11
1+Std Dev
Mar-12
Mar-13
Mar-14
Mar-15
1-Std Dev
SOURCES: CIMB, COMPANY REPORTS
14
Semiconductor│Malaysia
March 17, 2015
Figure 33: MPI’s 1-yr forward P/E (x)
Figure 34: Unisem’s 1-yr forward P/E (x)
P/E (x)
P/E (x)
18.0
20
16.0
18
14.0
16
14
12.0
12
10.0
10
8.0
8
6.0
6
4.0
4
2.0
2
0
Sep-13
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Dec-13
Mar-14
Jun-14
Dec-14
P/E
Mean
1+Std Dev
P/E
Mean
1+Std Dev
1-Std Dev
1+2 Std Dev
1-2 Std Dev
1-STD Dev
1+2 Std Dev
1-2 Std Dev
SOURCE: CIMB, COMPANY REPORTS
Mar-15
SOURCE: CIMB, COMPANY REPORTS
Figure 35: MPI’s 1-yr forward P/BV (x)
Figure 36: Unisem’s 1-yr forward P/BV (x)
P/BV (x)
P/BV (x)
5.0
1.8
4.5
1.6
4.0
1.4
3.5
1.2
3.0
1.0
2.5
0.8
2.0
0.6
1.5
0.4
1.0
0.2
0.5
Jan-05
Sep-14
0.0
Jan-05
Jan-07
P/BV
Jan-09
Mean
Jan-11
1 + Std Dev
Jan-13
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-15
1 - Std Dev
SOURCE: CIMB, COMPANY REPORTS
P/BV
Mean
1 - Std Dev
1 + 2 Std Dev
1 + Std Dev
1 - 2 Std Dev
SOURCE: CIMB, COMPANY REPORTS
15
Semiconductor│Malaysia
March 17, 2015
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16
Semiconductor│Malaysia
March 17, 2015
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Semiconductor│Malaysia
March 17, 2015
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of the following securities. Investors should carefully read and study the details of the derivative warrants in the prospectus before making
investment decisions.
AAV, ADVANC, AIT, AMATA, ANAN, AOT, AP, ASP, BANPU, BAY, BBL, BCH, BCP, BEC, BECL, BGH, BH, BIGC, BJC, BJCHI, BLAND, BMCL,
BTS, CENTEL, CK, CPALL, CPF, CPN, DELTA, DEMCO, DTAC, EARTH, EGCO, ERW, GFPT, GLOBAL, GLOW, GUNKUL, HANA, HEMRAJ,
HMPRO, ICHI, IFEC, INTUCH, IRPC, ITD, IVL, JAS, KBANK, KCE, KKP, KTB, KTC, KTIS, LH, LOXLEY, LPN, M, MAJOR, MC, MEGA, MINT,
NOK, PS, PSL, PTG, PTT, PTTEP, PTTGC, QH, RATCH, RML, ROBINS, SAMART, SAWAD, SCB, SCC, SCCC, SF, SGP, SIM, SIRI, SPALI,
SPCG, SRICHA, STA, STEC, STPI, SVI, TCAP, THAI, THCOM, THREL, TICON, TISCO, TMB, TOP, TPIPL, TTA, TTCL, TTW, TUF, UV, VGI,
TRUE.
Corporate Governance Report:
The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the
policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the
Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public
investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.
The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may
be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.
Score Range:
Description:
90 - 100
Excellent
80 - 89
Very Good
70 - 79
Good
Below 70 or
N/A
No Survey Result
United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing
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authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by,
deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report
is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than
the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to
lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory
of the United Arab Emirates.
United Kingdom and Europe: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK)
Limited (“CIMB UK”). CIMB UK is authorised and regulated by the Financial Conduct Authority and its registered office is at 27 Knightsbridge,
London, SW1X 7YB. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are
persons that are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in matters relating to investments
falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”); (c) are
persons falling within Article 49 (2) (a) to (d) (“high net worth companies, unincorporated associations etc”) of the Order; (d) are outside the
United Kingdom; or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the
Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be
communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This report is directed only
at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to
which this report relates is available only to relevant persons and will be engaged in only with relevant persons.
Only where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does
not constitute independent "investment research" under the applicable rules of the Financial Conduct Authority in the UK. Consequently, any
such non-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of
investment research and will not subject to any prohibition on dealing ahead of the dissemination of investment research.
United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S.-registered broker-dealer
and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand)
Co. Ltd, CIMB Securities Limited, CIMB Securities (Australia) Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons
who qualify as "U.S. Institutional Investors" as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only
for Institutional Investors whose ordinary business activities involve investing in shares, bonds and associated securities and/or derivative
securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional
Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a
recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB
Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order
in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc.
CIMB Securities (USA) Inc does not make a market on the securities mentioned in the report.
Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to
professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
Distribution of stock ratings and investment banking clients for quarter ended on 31 December 2014
1586 companies under coverage for quarter ended on 31 December 2014
Rating Distribution (%)
Investment Banking clients (%)
Add
58.4%
6.0%
Hold
29.4%
4.3%
Reduce
12.2%
1.0%
Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2014.
AAV – Very Good, ADVANC – Very Good, AEONTS – not available, AMATA - Good, ANAN – Very Good, AOT – Very Good, AP - Good, ASK – Very Good,
ASP – Very Good, BANPU – Very Good , BAY – Very Good , BBL – Very Good, BCH – not available, BCP - Excellent, BEAUTY – Good, BEC - Good, BECL –
Very Good, BGH - not available, BH - Good, BIGC - Very Good, BJC – Good, BLA – Very Good, BMCL - Very Good, BTS - Excellent, CCET – Good,
CENTEL – Very Good, CHG – not available, CK – Very Good, CPALL – not available, CPF – Very Good, CPN - Excellent, DELTA - Very Good, DEMCO – Good,
DTAC – Very Good, EA - Good, ECL – not available, EGCO - Excellent, GFPT - Very Good, GLOBAL - Good, GLOW - Good, GRAMMY - Excellent, HANA Excellent, HEMRAJ – Very Good, HMPRO - Very Good, ICHI - not available, INTUCH - Excellent, ITD – Good, IVL - Excellent, JAS – not available, JUBILE –
not available, KAMART – not available, KBANK - Excellent, KCE - Very Good, KGI – Good, KKP – Excellent, KTB - Excellent, KTC – Good, LH - Very Good,
LPN – Very Good, M - not available, MAJOR - Good, MAKRO – Good, MBKET – Good, MC – Very Good, MCOT – Very Good, MEGA – Good, MINT Excellent, OFM – Very Good, OISHI – Good, PS – Very Good, PSL - Excellent, PTT - Excellent, PTTEP - Excellent, PTTGC - Excellent, QH – Very Good,
RATCH – Very Good, ROBINS – Very Good, RS – Very Good, SAMART - Excellent, SAPPE - not available, SAT – Excellent, SAWAD – not available, SC –
Excellent, SCB - Excellent, SCBLIF – Good, SCC – Very Good, SCCC - Good, SIM - Excellent, SIRI - Good, SPALI - Excellent, STA – Very Good, STEC - Good,
SVI – Very Good, TASCO – Good, TCAP – Very Good, THAI – Very Good, THANI – Very Good, THCOM – Very Good, THRE – not available, THREL – Good,
TICON – Good, TISCO - Excellent, TK – Very Good, TMB - Excellent, TOP - Excellent, TRUE – Very Good, TTW – Very Good, TUF - Good, VGI – Very Good,
WORK – not available.
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CIMB Recommendation Framework
Stock Ratings
Definition:
Add
The stock’s total return is expected to exceed 10% over the next 12 months.
Hold
The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.
Reduce
The stock’s total return is expected to fall below 0% or more over the next 12 months.
The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward
net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.
Sector Ratings
Overweight
Neutral
Underweight
Definition:
An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.
A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.
An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.
Country Ratings
Overweight
Neutral
Underweight
Definition:
An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.
A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.
An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.
*Prior to December 2013 CIMB recommendation framework for stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand,
Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange were
based on a stock’s total return relative to the relevant benchmarks total return. Outperform: expected to exceed by 5% or more over the next 12 months.
Neutral: expected to be within +/-5% over the next 12 months. Underperform: expected to be below by 5% or more over the next 12 months. Trading Buy:
expected to exceed by 3% or more over the next 3 months. Trading Sell: expected to be below by 3% or more over the next 3 months. For stocks listed on
Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Outperform: Expected positive total returns of 10% or
more over the next 12 months. Neutral: Expected total returns of between -10% and +10% over the next 12 months. Underperform: Expected negative total
returns of 10% or more over the next 12 months. Trading Buy: Expected positive total returns of 10% or more over the next 3 months. Trading Sell: Expected
negative total returns of 10% or more over the next 3 months.
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