| Upside likely limited in short term |
| By OCBC Research |
Technology stocks have rallied in recent months mirroring an improvement in the general business conditions. Most major tech indices have recovered most or all of their losses over the past 52 weeks (Philadelphia Semicon Index: +1.5%; Nasdaq Composite: -5.7%, Dow Jones Industrial: -14.2%). However, we note that Singapore's FTSE ST Tech Index has stood out from the rest and significantly outperformed other indices with returns in excess of 30% for the same period (far exceeding the STI's returns of 4% as well). This reinforces our view in our August report that any further upside may be limited, at least in the short term. With stock valuations close to pre-crisis levels (thus already pricing in the impending economic recovery), we therefore maintain our Underweight rating on the technology sector.
World Semicon Revenue & Growth Forecast
Going forward, we believe 4Q09 and 1Q10 are likely to be crucial indicators for 2010 growth rate. While major economic stimulus packages (e.g. US$750b fiscal stimulus package in US; RMB4t in China) are likely to have a positive impact on demand, our conversations with companies under coverage revealed that the operating landscape has remained cautious due to limited or uncertain visibility. Should the sector slow (more than seasonal) in response to another round of inventory absorption or lower consumer spending due to rising unemployment, recovery may be muted/slower than what consensus expected.
Further, we also expect tech companies to continue to grapple with currency exchange fluctuations, price pressures and unwanted exposure from major customers, thereby increasing the costs of doing businesses.
Nevertheless, notwithstanding our downbeat view on the overall sector, we do see that selected markets (e.g. netbook, smartphone) are likely to fare better than others. Recent
strong growth in the semiconductor sector is also likely to flow through the value chain and benefit original equipment manufacturers (OEMs) and original design manufacturers (ODMs). As such, we continue to favour Karin Technology (BUY, FV S$0.28), which has recently won several sizeable orders from Chinese manufacturers in the netbook space, and Valuetronics (BUY, FV S$0.17), which is a diversified OEM/ODM solutions provider in the consumer electronics space. For investors seeking exposure to cash-rich companies with decent dividend yield, we have also identified Avi-Tech Electronics (HOLD, FV S$0.19) and Micro-Mechanics (HOLD, FV S$0.35) as suitable candidates.
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