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PP 7767/09/2010(025354)

7 July 2010

Malaysia Corporate Highlights


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

Sector Upda te
7 July 2010
MARKET DATELINE

Recom : Neutral
Semiconductor (Maintained)

Easing Chip Sales Ahead?

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 2.98 4.68 34.7 46.8 35.3 35.1 8.6 6.4 2.2 6.3 2.2 OP
JCY International Sep 1.49 2.16 14.7 18.0 45.5 22.2 10.1 8.3 3.2 7.8 4.7 OP
Unisem Dec 2.97 3.26 27.1 29.6 +>100 9.3 11.0 10.0 1.4 3.5 1.7 MP
MPI Jun 6.20 6.80 45.1 60.8 +>100 34.7 13.7 10.2 1.3 3.4 3.2 MP
Sector Avg +>100 22.2 11.2 9.2

♦ May chip sales yoy gain narrows. The yoy sales growth of 47.6% for Chart 1. Semiconductor
May (vs. 50.4% in Apr and a high of 58.4% in Mar) was the seventh Capital Equipment Trend
monthly gain on yoy basis. May chip sales of US$24.7bn grew by 4.5%
mom (vs. +2.2% in Apr) suggesting resilient demand for key electronic
$2,500.0

$2,000.0
devices i.e. smartphones and PCs. Geographically, May sales on a mom

US$mil
$1,500.0

basis from US, Europe, Japan and Asia Pacific grew 4.3%, 3.2%, 3.7% $1,000.0

and 13.5% (vs. April 10: +3.1%, +0.5%, +2.3% and +2.4%) $500.0

respectively. $0.0

0
-0

-0

-0

-0

-0

-0

-0

-0

-0

-1
ar

ar

ar

ar

ar

ar

ar

ar

ar

ar

M

M
Higher chip sales forecast. On the 10th of June, SIA raised its global Bookings (3mma) Billings (3mma)

chip sales forecasts for FY10-11 to 28.4% and 6.3% respectively (vs.
10.2% and 8.4% previously) on the back of a brighter outlook for the Source:Semi
industry. We believe chip sales will be mainly driven by the robust
demand for consumer electronics in emerging markets. Nonetheless, we
believe that chip sales will unlikely continue to register sharp yoy growth
going into 2H2010 as demand for electronics begins to normalise.
Already, regional and global chip sales growth appears to have begun to
flatten out – see Chart 3).

♦ Sector de-rated on normalising growth. In the 2H2010 strategy


report on 31 Jun, we had highlighted the risk of a sharper-than-expected
global economic slowdown and we had downgraded our view on the
semiconductor sector. Therefore, going forward, we believe earnings
growth for semiconductor players will likely begin to moderate given the
rapid growth in the first five months of this year. Therefore, we have
downgraded our target PER for semiconductor stocks under our coverage
from 15x to 11x CY11 PER to reflect a more modest growth in the coming
quarters and in line with the weighted average PER for regional peers.

♦ 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. We believe the prolonged Euro debt crisis may be


detrimental to consumer sentiment in the region. Note that Europe
accounts for an estimated 19% of the global market share for consumer
electronics. Moreover, a sharper-than-expected economic slowdown in
China may also impact consumer demand. Hence, in view of the risk of
potentially weaker demand for chips, we are maintaining our neutral Yap Huey Chiang
stance on the sector (downgraded from overweight in our strategy report (603) 92802166
yap.huey.chiang@rhb.com.my
dated 30 June).

Please read important disclosures at the end of this report.


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♦ May chip sales yoy gain narrows. The yoy sales growth of 47.6% for May (vs. 50.4% in Apr and a high of
58.4% in Mar) was the seventh monthly gain on yoy basis – see Chart 2. May chip sales of US$24.7bn grew by
4.5% mom (vs. +2.2% in Apr) suggesting resilient demand for key electronic devices i.e. smartphones and PCs.
Geographically, May sales on a mom basis from US, Europe, Japan and Asia Pacific grew 4.3%, 3.2%, 3.7% and
13.5% (vs. April 10: +3.1%, +0.5%, +2.3% and +2.4%) 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

♦ Higher chip sales forecast. On the 10th of June, SIA raised its global chip sales forecasts for FY10-11 to
28.4% and 6.3% respectively (vs. 10.2% and 8.4% previously) on the back of a brighter outlook for the
industry. We believe chip sales will be mainly driven by the robust demand for consumer electronics in emerging
markets. Nonetheless, we believe that chip sales will unlikely continue to register sharp yoy growth going into
2H2010 as demand for electronics begins to normalise. Already, regional and global chip sales growth appears to
have begun to flatten out – see Chart 3).

Chart 3: Regional and Global Chip Sales (% yoy, May 2008-May 2010)

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

-20.0%

-40.0%

-60.0%

A mericas Euro pe Japan A sia P acific Wo rldwide

Source: SIA

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♦ Equipment bookings remain above parity. May equipment booking orders surged 415.3% yoy (vs. 479.3%
in Apr) to US$1.48bn mainly due to higher investments in packaging, testing and fabrication equipment as well
as the low base factor in May 09. Furthermore, with a book-to-bill ratio of 1.12, May 2010 was the eleventh
consecutive month of a book-to-bill ratio above parity, suggesting resilient growth in capex trend since July
2009. Further out, capex spending momentum will be mainly driven by: 1) conversion from gold to copper wire
bonding process; and 2) investment in fabs for fine-pitch immersion machines (which are mainly used in the
45nm wafer technology) as well for the 200nm and 300nm wafers. However, we understand chip players are
facing difficulties coping with the surge in demand due to capacity constraints as well as shortages of labour and
raw materials (i.e. mould compound, lead frames and gold wire). Note that MPI, Unisem, Notion and JCY are
expanding capacity in anticipation of stronger-than-expected demand for consumer electronics in 2H2010.

♦ Smartphone shipments in 1Q10 were better than expected. The marginal drop (-1.7% qoq) in shipments
in the 1Q surprised handset players as it did not drop sharply as expected. This suggests a resilient growth in
the smartphone market as more users are drawn into the usage of smartphones for applications such as social
networking and wireless internet connectivity. We are positive on these developments which will benefit the
semiconductor stocks i.e. Unisem and MPI as they are ramping up its X-MLP and QFN packages used in wireless
and communication devices.

♦ Inventory levels still below norm. According to iSuppli, chip inventory levels remain at low levels despite
marginal increase in the 1Q. Statistics show that inventory in the 2Q is significantly lower than expected despite
capacity ramp up by tech companies – see Chart 4. This indicates that stockpiles were not replenished in the 1Q
and device manufacturers continue to operate on just-in-time production. We believe the low levels of inventory
may cause lead times to extend through the supply chain which in turn causes shortages for components.

Chart 4: Global Inventory For Semiconductor Suppliers 2Q08-2Q10 (US$ bn)

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0
2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Source: iSuppli

♦ TWSESCI has underperformed the TWSE beginning Jan. We note that the semiconductor sector (led by
large cap stocks such as TSMC and ASE) has underperformed Taiwan’s TAIEX Index by -2.4% since early-Jan on
the back of concerns on the Euro debt crisis. More recently, the concern has shifted to fears of a sharper-than-
expected slowdown as the global economy begins to normalise. Therefore, we highlight potential price weakness
ahead for Unisem and MPI as their share price performance usually lags Taiwanese peers.

♦ Sector de-rated on normalising growth. Going forward, we believe earnings growth for semiconductor
players will likely begin to moderate given the rapid growth in the first five months of this year. Therefore, we
have downgraded our target PER for semiconductor stocks under our coverage from 15x to 11x CY11 PER (see
on strategy report dated 30 June) to reflect a more modest growth in the coming quarters and in line with the
weighted average PER for regional peers – see Table 2).

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Table 2. Global Peer Comparisons


Average FY11
Market cap
Company Bloomberg ticker PER
(US$m)
(x)
TSMC 2330 TT 48,411.2 10.7
ASE 2311 TT 4,483.4 8.6
Amkor AMKR US 966.4 5.0
Silicon Precision Ware SPIL US 3,534.0 9.7
UMC UMC US 7,506.9 13.2
Market cap weighted average 11.0
Source: Bloomberg, RHBRI

Valuations and Recommendation

♦ Unisem: Expanding higher-end packaging in Chengdu. 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. We believe Unisem’s near-term 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. Note that we estimate 30% and 8% of revenue
contribution is derive from China and Europe respectively. Hence, given the potential slowdown in chip sales as
economic growth normalises, we have cut our FY11-12 revenue growth to 10% p.a. (from 13.8-13.4%). In
addition, we have rolled forward our valuation base year to FY11 (from FY10) and lowered our target PER.
Hence, our fair value has been cut to RM3.26 (from RM4.06/share previously) based on 11x FY11 EPS. We have
downgraded Unisem to Market Perform in our strategy report dated 30 June (from outperform previously).

♦ MPI: Rolling out new chips. We are positive on MPI’s near-term earnings outlook given still-resilient chips
demand from China as well as its move to roll out the higher-margin X3-MLP (approximately 50% of current MLP
footprint). We highlight that MPI’s earnings would be 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. Further out, however, we believe the focus will be on sustainability of growth and the risk that
the European debt crisis may begin to affect demand. Note that 31% of its revenue contribution is derived from
Europe. Hence, given the potential slowdown in chip sales in the region, we have trimmed our FY11 revenue
growth to 9%. Similarly, we have trimmed our EBITDA margins to 28.5% (from 29.3%) to reflect lower sales of
its higher-margin packages i.e. X-MLP. We have rolled forward our valuation base year to FY11 (from FY10) and
reduced our target PER from 15x to 11x. Hence, we have lowered our fair value to RM6.80 (from RM8.46) and
have downgraded MPI to Market Perform in our strategy report dated 30 June (from outperform previously).

♦ Riding on the electronic industry. We believe Notion’s earnings will be driven mainly by: 1) stronger demand
in the 2.5’’ HDD segment particularly the robust orders from Samsung; and 2) stronger contribution from its
camera division given volume loading from Nikon. We maintain our Outperform call with a fair value of
RM4.68/share which is based on unchanged 10x FY11 PER.

♦ Banking on data storage. JCY’s earnings will be mainly driven by: 1) strong demand for the 2.5’’ HDD fuelled
by stronger-than-expected demand for mobile PCs and consumer electronics; 2) resilient demand for the 3.5’’
HDD stemming from resilient demand for desktops and gaming consoles; and 3) improving corporate and
consumer IT spending. We maintain our fair value of RM2.16 which is based on an unchanged 12x FY11 PER
with an Outperform call.

♦ Maintain Neutral. We believe the prolonged Euro debt crisis may be detrimental to consumer sentiment in the
region. Note that Europe accounts for an estimated 19% of the global market share for consumer electronics.
Moreover, a sharper-than-expected economic slowdown in China may also impact consumer demand. Hence, in
view of the risk of potentially weaker demand for chips, we are maintaining our neutral stance on the sector
(downgraded from overweight in our strategy report dated 30 June).

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Chart 5: Unisem Technical View Point


♦ Unisem’s upward momentum accelerated when it
bounced up from the UTL near the RM1.55 region
in late Dec 2009. The upward momentum pushed it
to a high of RM2.60 in Jan 2010.

♦ Following a decent pullback to below the RM2.10


level in Feb, it resumed its rally again and hit a
multi-year high of RM3.53 in May.

♦ However, as it failed to defend the RM3.42


significant level, it turned in for another round of
consolidation.

♦ But, near a resistance-turn-support level at


RM2.60, the stock staged a rebound in Jun.

♦ This round, it only managed to reach RM3.25,


before succumbing to profit-taking pressure.

♦ At the close yesterday, it was trading at RM2.97,


below the key level of RM3.00.

♦ Although the short-term technical readings suggest


yet another potential recovery leg ahead, the
weakening 10-day and 40-day SMAs indicates a
retreating trend likely.

♦ If it continues to stay below RM3.00 and the recent


high of RM3.25, it will confirm the breaking of the
steep uptrend and head towards the RM2.40 –
RM2.60 support region, near the longer-term
uptrend UTL in the near term.

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 (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law.
The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may
differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not
to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein
in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated
persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
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any liability for any loss or damage arising out of the use of all or any part of this report.

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Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
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services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

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.

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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.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

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the actions of third parties in this respect.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for
the actions of third parties in this respect.

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