PP 7767/09/2010(025354)

5 October
RHB 2010
Research
Corporate Highlights

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

S e cto r Upd at e
5 October 2010
MARKET DATELINE
Recom : Neutral
Semiconductor (Maintained)

Aug Chip Sales Up 1.8% MoM But Slowing Down YoY

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
Unisem Dec 1.91 2.31 21.0 23.4 4.9 11.4 9.1 8.2 1.4 4.5 2.6 OP
JCY International Sep 0.97 1.32 13.2 14.2 9.9 7.6 7.3 6.8 1.9 5.3 6.7 OP
MPI* Jun 5.89 6.35 53.8 61.6 7.2 14.6 10.9 9.6 1.2 2.7 3.4 MP
Notion Vtec Sep 1.68 1.54 21.0 22.5 3.1 7.4 8.0 7.5 1.3 4.1 3.9 UP
Sector Avg 7.8 10.4 8.3 7.5
* Refers to FY11 & 12

♦ Chip sales higher mom. Chip sales continued with its tenth month of growth Chart 1. Semiconductor Capital
Equipment Trend
on yoy basis. However, its growth continued to narrow to 32.6% vs. 37.0% in
Jul and a high of 58.4% in Mar. Mom, Aug chip sales of US$25.7bn grew $2,500.0

1.8%, higher than Jul’s gain of 1.2%, but lower than the high of 5.2% in May. $2,000.0

Geographically, Aug sales grew on a mom basis for US (+2.0%), Europe

US$mil
$1,500.0

(+0.1%), Japan (+4.1%) and Asia (+1.4%).

$1,000.0

$500.0

♦ Stronger-than-expected mobile devices demand helped spur chip

$0.0

0
-0

-0

-0

-0

-0

-0

-0

-0

-0

-1
sales. Demand for mobile devices is expected to remain robust, on the back

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of increasing need for sophisticated technology, powerful application
Bookings (3mma) Billings (3mma)

processor, and multi-functions. Already, Apple had sold 1.7m of its iPhone 4’s
Source:Semi
within three days of its initial launch vs. 1.0m sold of its previous iPhone 3GS
model during the same period. PC vendors i.e. HP, Acer and Asus are also
entering the fray with the release of new smartphones to leverage on strong
market growth. Hence, we believe the strong demand for mobile device
segment augurs well for Unisem and MPI’s key chip products, i.e. QFN, WLCSP
and X3-MLP which cater to the communication and mobile segment.

♦ Equipment spending to soften in 2011. According to Gartner, capex

growth in 2011 is expected to moderate to 10% in 2011 (vs. 122.1% in
2010). Already, we understand Siliconware Precision Industries Co Ltd (SPIL)
and Advance Semiconductor Engineering Inc (ASE) are spending cautiously for
2011 and have pushed back several purchases of advance machinery. Closer
to home, we note that MPI and Unisem have each budgeted RM200-250m for
capex in CY11, but will spend in stages, according to the environment of the
industry. We view this positively, as it mitigates concerns of a capacity glut.

♦ 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. Going forward, despite the reduction in growth projections

by tech bellwethers, we believe strong demand in other key segments and
active innovative development will drive growth for the industry. However, in
the near term, we remain cautious on the sector and reiterate our Neutral call
due to risk arising from: 1) persistent weak demand for PCs; 2) Overcapacity
that will put downward pressure on average selling prices and ultimately Yap Huey Chiang
(603) 92802166
margins; and 3) weaker-than-expected consumer spending due to the
yap.huey.chiang@rhb.com.my
austerity measures in the Euro zone and uneven economic recovery in the
U.S.

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 5 October 2010

♦ Chip sales up higher mom. Chip sales continued with its tenth month of growth on yoy basis – see Chart 2.
However, its growth continued to narrow to 32.6% vs. 37.0% in Jul and a high of 58.4% in Mar. Mom, Aug chip
sales of US$25.7bn grew 1.8%, higher than Jul’s gain of 1.2%, but lower than the high of 5.2% in May.
Geographically, Aug sales grew on a mom basis for US (+2.0%), Europe (+0.1%), Japan (+4.1%) and Asia
(+1.4%).

Chart 2. Global Chip Sales vs. Book to Bill

1.4 70.0%

60.0%
Glo bal sales yo y (RHS), % bo o k to bill (LHS), x
1.2

50.0%

40.0%
1.0

30.0%

0.8
20.0%

10.0%
0.6

0.0%

0.4
-10.0%

-20.0%

0.2

-30.0%

0.0 -40.0%

Source: SIA

♦ Chip sales growth in 2011 to moderate. According to SIA, chip sales are likely to remain sustainable but
growth is expected to moderate to 6.3% in 2011 (vs. 28.4% in 2010), in line with the anticipation of slower
economic growth as well as the higher base effect – see Chart 3). Already, we understand Samsung has
indicated its key component business i.e. IC and memory chips are likely to peak this year but is adamant that
demand for electronics will remain resilient in 2011, buoyed by sales of tablets and smartphones. Similarly,
Taiwan Semiconductor Manufacturing Company (TSMC) expects record sales with 40% revenue growth in 2010,
but to slow down to 10% in 2011.

♦ Stronger-than-expected mobile devices demand helped spur chip sales. While lower guidance by PC
makers in the short term suggests potential weakness in chip sales, we are more positive on the demand for
smartphones. We believe smartphones will likely be the frontrunner and key indicator for chip sales in the
future. Demand for mobile devices are expected to remain robust, on the back of increasing need for
sophisticated technology, powerful application processor, and multi-functions. Apple had sold 1.7m of its iPhone
4’s within three days of its initial launch in US, UK, France, Germany and Japan vs. 1.0m sold for its previous
iPhone 3GS model during the same period. After a month, 3.0m of iPhone 4 was sold and has already been
launched in parts of Asia. PC vendors i.e. HP, Acer and Asus are also entering the fray with the release of new
smartphones to leverage on strong market growth. Hence, we believe the strong demand for mobile device
segment augurs well for Unisem and MPI’s key chip products, i.e. QFN, WLCSP and X3-MLP which cater to the
communication and mobile segment.

♦ Intel’s new chips to drive notebook demand? Intel and AMD partly blamed the emergence of tablets for the
slowdown in demand for notebooks. Not to be outdone, Intel is releasing its new microprocessor architecture,
called the “Sandy Bridge” that combines the processor core and graphics into the one die which will be far
superior vis-à-vis its predecessors. Hence, Intel expects the new chip to drive PC demand as the performance
will be higher than other competing devices. Already, computer suppliers such as Quanta Computer and Compal
Electronics are expected to ship 60m notebooks in 2011, putting in a more positive outlook for notebooks. Note
that MPI had previously cited the case where one of its customers had stopped buying power supply chips in
1QFY06/11 given the worry of a potential weakness in notebook sales.

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 5 October 2010
Chart 3: Global Chip Sales, 2006-2012

350 35.0%

30.0%
300
25.0%

250 20.0%

15.0%
200
10.0%
150
5.0%

100 0.0%

-5.0%
50
-10.0%

0 -15.0%
2006 2007 2008 2009 2010f 2011f 2012f
C hip s ales Yo Y

Source: SIA

♦ Equipment bookings dropped mom but book-to-bill remains above parity. While Aug equipment orders
fell marginally by 1.1% mom to US$1.82bn, booking orders grew 195.5% yoy (vs. 221.2% yoy in Jul) driven by
strong investment in foundries, logic capacity and fine-pitch immersion machines. In addition, Aug book-to-bill
ratio of 1.17 was the fourteenth consecutive month of a book-to-bill ratio above one, suggesting resilient growth
in capex trend since Jul 09.

♦ … but to soften in 2011. Due to the stronger-than-expected rebound in chip sales witnessed early this year,
capacity constraints prompted chip players to spend heavily on equipment and machinery. However, in tandem
with the chip sales forecast, capex growth in 2011 is expected to moderate to 10% in 2011 (vs. 122.1% in
2010), according to Gartner. Already, we understand Siliconware Precision Industries Co Ltd (SPIL) and Advance
Semiconductor Engineering Inc (ASE) are spending cautiously for 2011 and have pushed back several purchases
of advance machinery i.e. copper wire bonders in anticipation of moderating sales. Closer to home, we note that
MPI and Unisem have each budgeted RM200-250m for capex in CY11, but will spend in stages, according to the
environment of the industry. We view this positively, as it mitigates concerns of a capacity glut.

Valuations and Recommendation

♦ Unisem: Leveraging on Chengdu’s growth. 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. Unisem’s 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. While we are neutral on the sector, we believe the selldown for Unisem has
been overdone. Hence, we upgraded the stock to Outperform from market perform in our 4Q2010 strategy
report date in 1 Oct with a fair value of RM2.31/share based on an unchanged 11x FY11 FD EPS.

♦ MPI: Focusing on high-density packages. MPI’s earnings would be mainly 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 its high margin X3-MLP. We maintain Market Perform and our fair value of RM6.35/share
based on an unchanged 11x CY11 EPS.

♦ JCY: Long-term target of 90% market share. Given its reliance on Western Digital and Seagate, the
company is looking to expand its customer base as well as increase its margins. Going forward, 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 for demand for desktops
and gaming consoles; and 3) improving corporate and consumer IT spending. We upgraded the stock to
Outperform from market perform in our 4Q2010 strategy report dated 1 Oct. Our fair value of RM1.32/share is
based on an unchanged 10x FY11 EPS.

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 5 October 2010

♦ Notion Vtec: Cost overruns will dampen earnings. Notion’s earnings will be mainly driven by: 1) stronger
demand from its camera segment given volume loading for its new lens mounting components; and 2) stronger
contribution from its automotive segment for the electronic braking system (EBS). However, we are concerned
on the outlook for its HDDs segment which may continue to erode margins as higher costs and lower utilisation
rate continue to persist. We maintain our Underperform call with a fair value of RM1.54/share based on
unchanged 8x FY11 FD EPS.

♦ Maintain Neutral. Going forward, despite the reduction in growth projections by tech bellwethers such as Intel,
AMD and Texas Instrument, we believe strong demand in other key segments and active innovative
development will drive growth for the industry. However, in the near term, we remain cautious on the sector and
reiterate our Neutral call due to risk arising from: 1) persistent weak demand for PCs; 2) Overcapacity that will
put downward pressure on average selling prices and ultimately margins; and 3) weaker-than-expected
consumer spending due to the austerity measures in the Euro zone and uneven economic recovery in the U.S.

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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
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