Semiconductor

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• Some glimmers of hope… Rays of hope are permeating the semiconductor
industry, which probably saw most of the bad news in 1QCY09. Global chip sales
improved slightly in Mar 09 with a 30.0% yoy decline compared with a 30.1% yoy
fall in Feb 09. The book-to-bill ratio has ticked up with preliminary Mar 09 numbers
hitting 0.61x, up from Feb 09’s abysmal 0.47x. Finally, utilisation rates have scraped
bottom as some production facilities have been shuttered and inventory control is
being exercised. The end-user markets appear to have troughed, with PC and
handset sales probably hitting the bottom. Furthermore, trade credit is now
normalising. That said, stabilisation does not equate to a recovery and we believe
that restocking activity as inventory runs low is the primary factor in the improving
outlook. We still expect 2009 to be a difficult year where the typical seasonal pick up
in 3Q may not materialise given the current re-stocking activities.
• …but no full-blown recovery until 2010. We argue that a true recovery will only
take root when the global economy begins to move upwards. A meaningful and
sustained recovery will only take place when consumer sentiment and spending
spring back to life and cause ASPs to start rising. We believe that a more
convincing uptrend will take hold only from 2H10 onwards.
• Global economies to start stabilising towards year-end. Our economists believe
that the world economy will feel the full impact of the global financial crisis this year.
Although the process of sorting out the financial system will take time and
resources, the cumulative effects of sizeable fiscal stimuli and aggressive monetary
easing globally will work to provide some stability. Recent global indicators are less
negative. Considering the extremely low base this year, global growth should pick
up in 2010 but will probably fall short of its long-run average growth rate of 3.7%.
• Upgrade sector to TRADING BUY. While the fundamentals for the sector remain
uncertain, we think that downside to share prices is limited as valuations are still
below trough levels. We upgrade the sector from Underperform to TRADING BUY.
Furthermore, in line with our market strategy, we think that investors’ risk appetite is
increasing and higher beta plays such as semicon should be in vogue. Investors
should start picking up semicon stocks ahead of the recovery of the sector as
historically, the share prices for both MPI and Unisem cratered 13-18 months before
the upturn of the sector. Sector catalysts include a) a sooner-than-expected revival
of end-user demand and b) a faster-than-expected economic recovery.
• Upgrade Unisem and MPI to Trading Buy. In tandem with the sector upgrade, we
upgrade MPI and Unisem from Underperform to Trading Buy. We raise our target
prices for both after cutting our discounts to their 5-year historical average by 30-
60% pts to 20-40% for Unisem and MPI respectively. We assign a lower discount to
Unisem, our top pick, as its higher liquidity and beta make it a better play on a
market rebound. Re-rating catalysts include a) qoq improvement in earnings, b)
revival of end demand and c) the higher betas on offer.

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Semiconductor

  1. 1. SECTOR UPDATE 7 May 2009 MALAYSIA CIMB Research Report Upgraded TRADING BUY Semiconductor Time to reboot? Terence Wong CFA +60(3) 20849689 - terence.wong@cimb.com • Some glimmers of hope… Rays of hope are permeating the semiconductor industry, which probably saw most of the bad news in 1QCY09. Global chip sales improved slightly in Mar 09 with a 30.0% yoy decline compared with a 30.1% yoy fall in Feb 09. The book-to-bill ratio has ticked up with preliminary Mar 09 numbers hitting 0.61x, up from Feb 09’s abysmal 0.47x. Finally, utilisation rates have scraped bottom as some production facilities have been shuttered and inventory control is being exercised. The end-user markets appear to have troughed, with PC and handset sales probably hitting the bottom. Furthermore, trade credit is now normalising. That said, stabilisation does not equate to a recovery and we believe that restocking activity as inventory runs low is the primary factor in the improving outlook. We still expect 2009 to be a difficult year where the typical seasonal pick up in 3Q may not materialise given the current re-stocking activities. • …but no full-blown recovery until 2010. We argue that a true recovery will only take root when the global economy begins to move upwards. A meaningful and sustained recovery will only take place when consumer sentiment and spending spring back to life and cause ASPs to start rising. We believe that a more convincing uptrend will take hold only from 2H10 onwards. • Global economies to start stabilising towards year-end. Our economists believe that the world economy will feel the full impact of the global financial crisis this year. Although the process of sorting out the financial system will take time and resources, the cumulative effects of sizeable fiscal stimuli and aggressive monetary easing globally will work to provide some stability. Recent global indicators are less negative. Considering the extremely low base this year, global growth should pick up in 2010 but will probably fall short of its long-run average growth rate of 3.7%. • Upgrade sector to TRADING BUY. While the fundamentals for the sector remain uncertain, we think that downside to share prices is limited as valuations are still below trough levels. We upgrade the sector from Underperform to TRADING BUY. Furthermore, in line with our market strategy, we think that investors’ risk appetite is increasing and higher beta plays such as semicon should be in vogue. Investors should start picking up semicon stocks ahead of the recovery of the sector as historically, the share prices for both MPI and Unisem cratered 13-18 months before the upturn of the sector. Sector catalysts include a) a sooner-than-expected revival of end-user demand and b) a faster-than-expected economic recovery. • Upgrade Unisem and MPI to Trading Buy. In tandem with the sector upgrade, we upgrade MPI and Unisem from Underperform to Trading Buy. We raise our target prices for both after cutting our discounts to their 5-year historical average by 30- 60% pts to 20-40% for Unisem and MPI respectively. We assign a lower discount to Unisem, our top pick, as its higher liquidity and beta make it a better play on a market rebound. Re-rating catalysts include a) qoq improvement in earnings, b) revival of end demand and c) the higher betas on offer. Sector comparisons Core ROE Target 3-yr EPS P/BV Div P/E (x) (x) yield (%) Bloomberg Price price Mkt cap CAGR (%) (Local) (Local) (US$ m) (%) ticker Recom. CY2009 CY2010 CY2009 CY2009 CY2009 Unisem UNI MK TB 1.20 1.70 160 80.1 23.3 (7.5) 0.7 0.8 2.8 7.40 MPI MPI MK TB 5.50 326 147.3 33.1 (31.2) 1.5 1.0 3.1 Chartered Semicon CSM SP U 0.21 0.14 1,311 nm nm 161.7 0.9 (17.4) 0.0 Simple average 111.9 27.7 41.0 1.0 (5.2) 2.0 O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy and TS = Trading Sell Source: Company, CIMB Research For further information, kindly contact Simeon Masuda Koh at 603-2084 9807 or simeon.koh@cimb.com Please read carefully the important disclosures at the end of this publication.
  2. 2. Some glimmers of hope… 2009 is shaping up to be an extremely difficult year for chipmakers as they have to fight their way through a tangled web of diminishing economic growth and weak end- user demand. Many market researchers are forecasting 2009 to be an exceedingly poor year: • In a somewhat dated projection made in Nov 08, Semiconductor Industry Association (SIA) forecast a 5.6% decline in 2009 global chip sales due to the current economic global turmoil. • Databeans, a market research outfit, is pessimistic about the outlook for this year, predicting that sales will fall by ~20% in 2009 to just over US$200bn (the market size nine years ago), exacerbated by temporary macroeconomic issues that have impacted consumer spending on devices that use integrated circuits (IC). • Gartner, on the other hand, expects semiconductor sales to tumble 24% from the 2008 level due to the impact of the financial crisis. • IDC, meanwhile, expects a revenue decline of 22% for 2009 due to macroeconomic uncertainty, double-digit declines in unit shipments, low utilisation rates and price erosion. • IC Insights projects a 16% decline in 2009 chip sales. Glimmers of hope? However, some glimmers of hope are beginning to break through. The following factors and the normalising of trade credit suggest that 1QCY09 may represent the bottom of the cycle: • Worldwide chip sales – Global chip sales showed a slight improvement in Mar 09 when sales fell 30.0% yoy vs. a 30.1% drop in Feb 09. 1Q sales dropped by 29.6% yoy but a lesser 27.3% on a qoq basis. Apart from Japan, sales in all geographic regions showed mom gains. According to the SIA, the modest sequential rebound in Mar sales suggests that demand has stabilised somewhat, albeit at substantially lower levels than last year. While all major product sectors showed mom growth, there is still limited visibility in end markets. Figure 1: Monthly sales (US$ bn) vs. yoy growth (%) US$ bn Monthly Sales % 25 y oy change (%) 60.0% 40.0% 20 20.0% 15 0.0% 10 -20.0% 5 -40.0% 0 -60.0% Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Source: SIA, Worldwide Semiconductor Trade Statistics, CIMB Research Figure 2: Chip sales by geography yoy comparison (%) Americas Europe Japan Asia Pac Total 60.0% 40.0% 20.0% 0.0% Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 -20.0% -40.0% -60.0% Source: SIA, WSTS, CIMB Research [2]
  3. 3. • Book-to-bill ratio – After hitting near historical lows in Jan/Feb 09, the book-to-bill ratio ticked upwards with preliminary numbers for Mar 09 touching 0.61x. SEMI noted that the sharp declines in bookings have abated although the improvement in Mar is due to the easing of billings. It pointed out that semiconductor equipment bookings remain at levels below that needed to support a healthy supply chain. In fact, bookings have compressed at an alarmingly rapid clip, shedding some 76% since the beginning of 2008. • Utilisation rates have sat idle – As end-user demand dried up and as greater inventory control is exercised, utilisation rates began to fall precipitously, hitting 69.3% in 4Q, a level last seen during the dotcom bust. We think that downside to these rates is limited, especially once the semiconductor industry starts to witness a pick-up in production activity. Figure 3: Book-to-bill ratio (x) 1.60 1.40 1.20 1.00 0.80 0.60 Near historic low s 0.40 0.20 0.00 99 00 01 02 03 04 05 06 07 08 09 n- n- n- n- n- n- n- n- n- n- n- Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Source: SEMI Figure 4: Bookings vs. billings (US$ m) $3,500 Bookings Billings $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Source: SEMI Figure 5: Utilisation rates (%) 100.0 95.0 90.0 85.0 80.0 75.0 70.0 65.0 60.0 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 Source: SICAS • Foundries are seeing some rush orders – The Taiwan Semiconductor Manufacturing Company (TSMC) experienced its worst sequential decline ever with [3]
  4. 4. sales dropping 39% in 1Q. However, 2Q is seeing a strong rebound with projections of a 80-88% qoq surge aided in part by rush orders from the Chinese market which is seeing strong pickup and some re-stocking. Meanwhile, United Microelectronics Corp (UMC) is expecting a significant improvement in revenue in 2Q from the heavy 42% qoq decline in 1Q. It is seeing some rush orders from China. • End-user markets could have bottomed out – According to Gartner, worldwide PC shipments totalled 67.2m in 1Q09, declining 6.5% on a yoy basis. However, Gartner has been seeing some evidence of channel inventory restocking, particularly in the US. This should not be interpreted as a recovery in PC end user demand as it is unclear if the global PC market has hit the bottom. Intel, however, has issued a more bullish assessment calling for a bottom for PC sales in 1Q09 and that the industry is returning to normal seasonal patterns. On the mobile phone front, Nokia contends that while industry conditions will remain challenging, it appears that the vast majority of the channel inventory de-stocking appears to be behind it. While this will lead to lower industry volatility compared to the past two quarters, it is still too early to call a bottom in the market. That said, although the trajectory of the end- user market remains unclear, the end market is no longer falling in an uncontrolled manner. Meanwhile, Apple defied the macroeconomic environment, shipping total orders that exceeded the market’s expectations. • ASPs may start to rise – According to IC Insights, industry conditions are starting to suggest that ASPs will begin to improve dramatically in the coming months. This is due to low inventory levels. Any uptick in orders would conspire to drive prices upwards. 2009 will be a difficult year. The improving picture reflects more of an inventory re- stocking situation rather than a true fundamental return to demand. We think that the operating environment for 2009 will remain difficult where the typical seasonal pick up in 3Q may not materialise given the current re-stocking activities. But we caution that visibility is extremely poor at this stage with limited insights beyond 2Q. Many operators are still cautious on capex spending. In a recent interview, the MD of Unisem stated that demand in Mar had outpaced both Jan and Feb combined and that capacity utilisation rates had ticked up to 50% currently from 40% in Jan. While he is expecting a better 2Q than 1Q, he is still cautious. The outlook for 2009 is unclear as it is dependent on what happens in 2H09. Figure 6: Worldwide PC sales (m) Company 1Q09 1Q09 1Q08 1Q08 1Q09-1Q08 Shipments Market Share Shipments Market Share Growth (m) (%) (m) (%) (%) HP 13.3 19.8 13.0 18.1 2.5 Dell 8.8 13.1 10.6 14.7 -16.9 Acer 8.8 13.0 6.9 9.6 26.7 Lenov o 4.4 6.6 4.8 6.7 -7.7 Toshiba 3.7 5.5 3.1 4.3 18.4 Others 28.2 42.0 33.5 46.6 -15.6 Total 67.2 99.9 71.8 100.0 -6.5 Source: Gartner Figure 7: Worldwide handset sales (m) Company 4Q08 4Q08 4Q07 4Q07 2008-2007  Sales  Market Share  Sales Market Share Growth (%) (m ) (%) (m) (%) Nokia 118.8 37.7 133.2 40.4 -10.8 Samsung 57.5 18.3 44.4 13.4 29.7 LG 28.1 8.9 23.5 7.1 19.5 Sony Ericsson 23.6 7.5 29.8 9.0 -21.1 Motorola 21.7 6.9 39.3 11.9 -44.8 Others 65.0 20.7 59.8 18.1 8.7 Total 314.7 100 330.1 100 -4.7 Source: Gartner [4]
  5. 5. …but no great upturn likely until 2010 The key is demand revival and higher ASPs. End-user demand, which is key to the downcycle this time, remains extremely foggy with limited visibility beyond 2Q. At this juncture, consumer spending remains at relatively low levels, retail sales in the US are still weak and the inventory/shipment ratio of electronic and consumer goods is on the rise, although the worst is probably over. While private consumption in the US rebounded by 2.2% in 1Q09, our economics team thinks that growth of consumer spending will remain moderate as households repair their balance sheets and rebuild their savings. Therefore, we believe a real revival of the sector will probably unfold in 2H10 as the economy starts to improve gradually and consumer and corporate spending make a comeback. This will provide a boost to fairly low ASPs which will, in turn, spur capital investments, lift utilisation rates and lead to more output and outsourcing to the back- end test and packaging players. Finally, the various stimulus packages will take some time to work their way through the system and provide a fillip to consumer/corporate demand. A more pronounced recovery in 2010. Most market researchers are expecting a sharp V-shaped rebound in 2010, partly due to the exceedingly low base in 2009. • SIA has projected 2010 worldwide sales to push upwards by 7.4%. • Databeans is the most optimistic market research house, forecasting that 2010 worldwide sales will rebound sharply to exceed 2007’s levels. It expects a boomerang recovery in 2010, with worldwide sales increasing by 17%. It even went so far to predict that by 2011, sales will regain momentum and surpass the peak seen during 2007. • Gartner, on the other hand expects a fairly decent revitalisation trend in 2010, predicting growth of 7.5% then. • IC Insights expects a rather sharp acceleration in chip sales for 2010. Based on previous trends, chip sales have generally seen very strong growth in the order of 20% in the year after recession, followed by a 30-40% upturn in the subsequent year. If this holds true, then the industry is poised for strong growth in 2010-2011. • Finally, IDC does not expect yoy growth in revenues until 2Q10 although it expects a positive growth rate (quantum not disclosed) in 2010. Figure 8: Consumption spending declines at slower pace Figure 9: Improving consumer confidence Consumer Confidence Index Personal spending Retail sales Index % mom 100 3 2 80 1 60 0 -1 40 -2 20 -3 0 -4 Jan-07 Jun-07 Nov -07 Apr-08 Sep-08 Feb-09 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Source: Bloomberg [5]
  6. 6. Figure 10: US inventory to shipment ratio (x) of electronic products rising sharply – a bearish sign 2.20 2.00 1.80 1.60 1.40 1.20 1.00 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Source: CEIC, CIMB Research Global economy to stabilise by end 09 Stabilisation by end-09. Our economics team believes that the global economy will stabilise towards year-end although it will feel the full impact of the fallout from the global financial crisis this year, which will drive global growth into the deepest decline in decades. Major developed economies have suffered significant contractions despite attempts to limit the downturn through major fiscal stimulus packages, substantial interest rate cuts and, in the case of the US, UK and Japan, quantitative easing. In fact, the IMF recently revised its global economic outlook for the fourth time, noting the severe recession. It projects world output to decline 1.3% in 2009 in the deepest recession since the Great Depression. Growth is expected to recover gradually in 2010, increasing by 1.9% as a result of efforts to heal the financial sector as well as monetary and fiscal easing to support demand. But some abatement in bad news. Our economics team recently noted that the sharp decline in economic activity seems to have abated somewhat compared to previous months. This stems from several indicators including i) reduced risk aversion, ii) some tentative signs of stabilisation in the US, iii) China’s fiscal stimulus hitting home, and iv) regional exports bottoming out. Figure 11: Global GDP growth estimate 2007 1Q08 2Q08 3Q08 4Q08 2008 2009F 2010F US 2.0 0.9 2.8 -0.5 -6.3 -6.1 -2.0 to -3.0 1.0 EU 2.6 2.1 1.4 0.6 -1.3 0.8 -3.0 0.5 Japan 2.4 1.5 0.7 -0.2 -4.3 -0.6 -3.0 0.8 UK 3.0 2.6 1.8 0.4 -2.0 0.7 -2.8 0.2 Source: Bloomberg, CEIC What will turn the global situation around? Global policy continues to fire on all cylinders, with the public sector balance sheet (the federal government and central banks) being used to cushion the private sector’s deleveraging process. The Fed’s latest bold actions of adopting quantitative easing and removing toxic assets from banks’ balance sheets should over time help to restore the health of the banking sector and ensure the resumption of credit flows to the private sector. The significantly lower interest rates and fiscal stimulus which will take 6-9 months to work its way through the system will undoubtedly help to stabilise economic activity later this year. Global growth should be stronger in 2010 than in 2009, aided by the extremely low base. Nevertheless, the growth trajectory will probably fall short of its long-run average of 3.7%. We think major developed economies will not return to above-trend growth for another 2-3 years. [6]
  7. 7. Figure 12: The global economy will take several years before it grows above trend again % Global grow th Forecast Long-term trendline 8 6 L-T av g 4 3.7% 2 0 -2 2009E 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010F Source: International Monetary Fund (IMF), CIMB/CIMB-GK Research Figure 13: Major economies roll out large fiscal packages China 13.3 5.6 US Japan 2.0 EU-27 1.5 UK 1.4 % of GDP 0 2 4 6 8 10 12 14 Source: National sources, OECD, CIMB/CIMB-GK Research Figure 14: Major central banks have slashed interest rates to historical lows As at 9 Apr 09 As at end-Sep 08 % p.a. 6 -450bp since Sep 08 5 -300bp since Sep 08 4 3 -175bp since Sep 08 2 -40bp since Sep 08 1 0.25 0.10 1.25 0.50 0 US Fed fund rate Japan target rate ECB benchmark rate BoE bank rate Source: National sources, CIMB/CIMB-GK Research Valuation and recommendation Upgrade to TRADING BUY. While the fundamental outlook remains rather ugly with little improvement expected throughout 2009, we believe that the downside risk to share prices is limited. Valuation-wise, both Unisem and MPI are still trading below their trough valuations (Figures 18 and 19) during the dotcom bust and the past five years. In line with our upgrade of the broader market and a shift to higher-beta cyclical plays in this cycle, we are upgrading the sector to TRADING BUY from Underperform. Re-rating catalysts for the sector include a) faster-than-expected revival of end- demand and b) a quicker-than-expected economic recovery. In fact, tech stocks in the US and Taiwan have rallied in recent weeks as many believe that the worst has passed and that a recovery could be on the cards. Near the bottom? Following the weak share price performance, both MPI and Unisem are now trading below even the trough P/BVs seen during the 2001 dotcom [7]
  8. 8. bust. We think that much of the bad news has already been priced in. In fact, using the broader KL Technology Index as a gauge, we see that it has been on a downward momentum, losing 39% since the beginning of 2008 and an even more astounding 77% since the last peak back in Oct 2003. Share prices react before the recovery. As noted in our previous report in Oct 08, both Unisem and MPI saw their share prices cratering some 13-18 months prior to the recovery in the sector. Share prices then rebounded, hitting their peak five months prior to the end of the dot-com crash, implying an 8-10 month window for profit-taking. While we earlier advocated a re-entry sometime in June 2009, we have turned slightly more bullish in line with our market strategy. We now think that an earlier timeframe would be more appropriate. Figure 15: KL Technology Index 150 125 100 75 50 25 0 May -00 May -01 May -02 May -03 May -04 May -05 May -06 May -07 May -08 Source: Bloomberg Figure 16: Unisem’s price performance during dotcom crash RM 15 Dot-com crash 13 Peak after price 11 cratered 9 Low during crash 7 5 3 1 Jan-00 May -00 Sep-00 Jan-01 May -01 Sep-01 Jan-02 May -02 Sep-02 Source: Bloomberg, CIMB Research Figure 17: MPI’s price performance during dotcom crash RM 55 Dot-com crash Peak after 48 price cratered 41 Low during crash 34 27 20 13 6 Jan-00 May -00 Sep-00 Jan-01 May -01 Sep-01 Jan-02 May -02 Sep-02 Source: Bloomberg, CIMB Research Upgrade both Unisem and MPI. We are upgrading both Unisem and MPI from Underperform to Trading Buy as we think that the downside to share prices is limited as both are trading below trough valuations. For Unisem, business conditions appear to be improving with stronger demand and higher utilisation rates seen. Also, its MD expects a better 2Q than 1Q. However, we should not read too much into this for the [8]
  9. 9. full year as it is coming from a low base effect and visibility remains poor. We have, therefore, reduced our discount to its 5-year historical P/BV average from 80% to 20%. This lifts our target price from RM0.53 to RM1.70. The upside catalysts for Unisem include a) a qoq improvement in earnings, b) revival of end-demand and c) its higher beta. We attach a lower discount to Unisem vs MPI as its higher liquidity and beta make it a better play on a market rebound. Similarly, we think that MPI will report poor 1Q results but expect conditions to stabilise after. We raise our price objective for MPI from RM3.30 to RM7.40 after scaling back our discount to its 5-year adjusted historical P/BV from 70% to 40%. The re-rating catalysts for MPI include a) a qoq improvement in earnings, b) revival of end- demand and c) increasing risk tolerance. Our preference lies with Unisem over MPI primarily for its higher beta. Figure 18: Unisem’s historical P/BV (x) 12 10 8 6 4 2 0 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Source: Bloomberg, CIMB Research Figure 19: MPI’s unadjusted historical P/BV (x) 15 12 9 6 3 0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Source: Bloomberg, CIMB Research [9]
  10. 10. COMPANY BRIEFS… [ 10 ]
  11. 11. QUICK TAKES 7 May 2009 MALAYSIA CIMB Research Report Syariah-compliant stock TRADING BUY Upgraded Unisem (M) Berhad RM1.20 Target: RM1.70 Time to reboot? Mkt.Cap: RM566m/US$160m Semiconductor UNI MK / UNSM.KL Terence Wong CFA +60(3) 20849689 – terence.wong@cimb.com Some glimmers of hope Some glimmers of hope…Rays of hope are permeating the semiconductor industry, which probably saw most of the bad news in 1QCY09. Global chip sales improved slightly in Mar 09 with a 29.9% yoy decline compared with a 30.4% yoy fall in Feb 09. The book-to-bill ratio has ticked up with preliminary Mar 09 numbers hitting 0.61x, up from Feb 09’s abysmal 0.47x. Finally, utilisation rates have scraped bottom as some production facilities have been shuttered and inventory control is being exercised. The end-user markets appear to have troughed, with PC and handset sales probably hitting the bottom. Furthermore, trade credit is now normalising. That said, stabilisation does not equate to a recovery and we believe that restocking activity as inventory runs low is the primary factor in the improving outlook We still expect 2009 to be a difficult year where the typical seasonal pick up in 3Q may not materialise given the current re-stocking activities. …but no full-blown recovery until 2010. We argue that a true recovery will only take root when the global economy begins to move upwards. A meaningful and sustained recovery will only take place when consumer sentiment and spending spring back to life and ASPs start rising. We believe that a more convincing uptrend will take hold only from 2H10 onwards. Upgrade sector to TRADING BUY. While the fundamentals for the sector remain uncertain, we think that downside to share prices is limited as valuations are still below trough levels. We upgrade the sector from Underperform to TRADING BUY. Furthermore, in line with our market strategy, we think that investors’ risk appetite is increasing and higher beta plays such as semicon should be in vogue. Investors should start picking up semicon stocks ahead of the recovery of the sector as historically, the share prices for both MPI and Unisem cratered 13-18 months before the upturn of the sector. Sector catalysts include a) a sooner-than-expected revival of end-user demand and b) a faster-than-expected economic recovery. Valuation and recommendation Upgrade to TRADING BUY with higher target price. We retain our earnings forecasts but upgrade Unisem to TRADING BUY from Neutral as we believe that the downside to its share price is limited given that the stock is trading below trough valuations. Business conditions appear to be improving, with stronger demand and higher utilisation rates in evidence. Also, Unisem’s MD expects a better 2Q than 1Q. However, we should not read too much into this for the full year as it is coming from a low base and visibility remains poor. We have, therefore, reduced our discount to its 5- year historical P/BV average from 80% to 20%. This lifts our target price from RM0.53 to RM1.70. We assign a lower discount to Unisem vs MPI as its higher liquidity and beta make it a better play on a market rebound. The re-rating catalysts for Unisem include a) a qoq improvement in earnings, b) revival of end-demand and c) its high beta of 1.3x. For further information, kindly contact Simeon Masuda Koh at 603-2084 9807 or simeon.koh@cimb.com [ 11 ]
  12. 12. Financial summary FYE Dec 2007 2008 2009F 2010F 2011F Revenue (RM m) 972.5 1,233.4 825.4 954.1 1,025.9 EBITDA (RM m) 227.2 235.7 151.0 193.3 218.5 EBITDA margins (%) 23.4% 19.1% 18.3% 20.3% 21.3% Pretax profit (RM m) 117.7 24.0 8.3 29.1 51.1 Net profit (RM m) 119.1 19.8 7.1 24.3 42.9 EPS (sen) 25.3 4.2 1.5 5.2 9.1 EPS growth (%) 44.2% (83.4%) (64.3%) 243.8% 76.7% P/E (x) 4.8 28.6 80.1 23.3 13.2 Core EPS (sen) 14.1 11.5 1.5 5.2 9.1 Core EPS growth (%) (19.8%) (18.2%) (87.0%) 243.8% 76.7% Core P/E (x) 8.5 10.4 80.1 23.3 13.2 Gross DPS (sen) 13.7 3.4 3.4 3.9 4.5 Price chart Dividend yield (%) 11.4% 2.8% 2.8% 3.2% 3.8% 1.6 P/BV (x) 0.7 0.7 0.7 0.7 0.7 9.00 8.00 1.4 ROE (%) 16.3% 2.4% 0.8% 2.9% 5.1% 7.00 1.2 6.00 Net gearing (%) 56.5% 54.9% 43.2% 38.1% 30.0% 5.00 1.0 4.00 P/FCFE (x) (17.0) (112.2) 12.6 9.7 6.7 0.8 3.00 2.00 EV/EBITDA (x) 4.6 4.4 6.2 4.7 3.8 0.6 1.00 % change in EPS estimates - - - 0.00 0.4 May-08 Oct-08 Mar-09 CIMB/Consensus (x) (14.99) 0.68 1.00 Volume 1m (R.H.Scale) Unisem (M) Berhad Source: Bloomberg Source: Company, CIMB Research, Bloomberg [ 12 ]
  13. 13. QUICK TAKES 7 May 2009 MALAYSIA CIMB Research Report Syariah-compliant stock TRADING BUY Upgraded Malaysian Pacific Industries Bhd RM1.20 Target: RM1.70 Time to reboot? Mkt.Cap: RM566m/US$160m Semiconductor UNI MK / UNSM.KL Terence Wong CFA +60(3) 20849689 – terence.wong@cimb.com Some glimmers of hope Some glimmers of hope…Rays of hope are permeating the semiconductor industry, which probably saw most of the bad news in 1QCY09. Global chip sales improved slightly in Mar 09 with a 29.9% yoy decline compared with a 30.4% yoy fall in Feb 09. The book-to-bill ratio has ticked up with preliminary Mar 09 numbers hitting 0.61x, up from Feb 09’s abysmal 0.47x. Finally, utilisation rates have scraped bottom as some production facilities have been shuttered and inventory control is being exercised. The end-user markets appear to have troughed, with PC and handset sales probably hitting the bottom. Furthermore, trade credit is now normalising. That said, stabilisation does not equate to a recovery and we believe that restocking activity as inventory runs low is the primary factor in the improving outlook. We still expect 2009 to be a difficult year where the typical seasonal pick up in 3Q may not materialise given the current re-stocking activities. …but no full-blown recovery until 2010. We argue that a true recovery will only take root when the global economy begins to move upwards. A meaningful and sustained recovery will only take place when consumer sentiment and spending spring back to life and ASPs start rising. We believe that a more convincing uptrend will take hold only from 2H10 onwards. Upgrade sector to TRADING BUY. While the fundamentals for the sector remain uncertain, we think that downside to share prices is limited as valuations are still below trough levels. We upgrade the sector from Underperform to TRADING BUY. Furthermore, in line with our market strategy, we think that investors’ risk appetite is increasing and higher beta plays such as semicon should be in vogue. Investors should start picking up semicon stocks ahead of the recovery of the sector as historically, the share prices for both MPI and Unisem cratered 13-18 months before the upturn of the sector. Sector catalysts include a) a sooner-than-expected revival of end-user demand and b) a faster-than-expected economic recovery. Valuation and recommendation Upgrade to TRADING BUY with higher target price. We are upgrading MPI from Underperform to TRADING BUY as we think that the downside to its share price is limited given that it is trading below trough valuations. We expect MPI to report poor 1Q results, after which conditions should stabilise. We retain our earnings forecasts but raise our price objective from RM3.30 to RM7.40 after scaling back our discount to its 5-year adjusted historical P/BV from 70% to 40%. The re-rating catalysts for MPI include a) a qoq improvement in earnings, b) revival in end-demand and c) increasing risk tolerance. However, we prefer Unisem to MPI, primarily for its higher beta. For further information, kindly contact Simeon Masuda Koh at 603-2084 9807 or simeon.koh@cimb.com [ 13 ]
  14. 14. Financial summary FYE Dec 2007 2008 2009F 2010F 2011F Revenue (RM m) 972.5 1,233.4 825.4 954.1 1,025.9 EBITDA (RM m) 227.2 235.7 151.0 193.3 218.5 EBITDA margins (%) 23.4% 19.1% 18.3% 20.3% 21.3% Pretax profit (RM m) 117.7 24.0 8.3 29.1 51.1 Net profit (RM m) 119.1 19.8 7.1 24.3 42.9 EPS (sen) 25.3 4.2 1.5 5.2 9.1 EPS growth (%) 44.2% (83.4%) (64.3%) 243.8% 76.7% P/E (x) 4.8 28.6 80.1 23.3 13.2 Core EPS (sen) 14.1 11.5 1.5 5.2 9.1 Core EPS growth (%) (19.8%) (18.2%) (87.0%) 243.8% 76.7% Core P/E (x) 8.5 10.4 80.1 23.3 13.2 Gross DPS (sen) 13.7 3.4 3.4 3.9 4.5 Price chart Dividend yield (%) 11.4% 2.8% 2.8% 3.2% 3.8% 1.6 P/BV (x) 0.7 0.7 0.7 0.7 0.7 9.00 8.00 1.4 ROE (%) 16.3% 2.4% 0.8% 2.9% 5.1% 7.00 1.2 6.00 Net gearing (%) 56.5% 54.9% 43.2% 38.1% 30.0% 5.00 1.0 4.00 P/FCFE (x) (17.0) (112.2) 12.6 9.7 6.7 0.8 3.00 2.00 EV/EBITDA (x) 4.6 4.4 6.2 4.7 3.8 0.6 1.00 % change in EPS estimates - - - 0.00 0.4 May-08 Oct-08 Mar-09 CIMB/Consensus (x) (14.99) 0.68 1.00 Volume 1m (R.H.Scale) Unisem (M) Berhad Source: Bloomberg Source: Company, CIMB Research, Bloomberg [ 14 ]
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RECOMMENDATION FRAMEWORK #1* STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS OUTPERFORM: The stock's total return is expected to exceed a relevant OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 12 months. expected to outperform the relevant primary market index over the next 12 months. NEUTRAL: The stock's total return is expected to be within +/-5% of a relevant NEUTRAL: The industry, as defined by the analyst's coverage universe, is benchmark's total return. expected to perform in line with the relevant primary market index over the next 12 months. UNDERPERFORM: The stock's total return is expected to be below a relevant UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, benchmark's total return by 5% or more over the next 12 months. is expected to underperform the relevant primary market index over the next 12 months. TRADING BUY: The stock's total return is expected to exceed a relevant TRADING BUY: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 3 months. expected to outperform the relevant primary market index over the next 3 months. TRADING SELL: The stock's total return is expected to be below a relevant TRADING SELL: The industry, as defined by the analyst's coverage universe, benchmark's total return by 5% or more over the next 3 months. is expected to underperform the relevant primary market index over the next 3 months. * This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand and Jakarta Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. CIMB-GK Research Pte Ltd (Co. Reg. No. 198701620M) [ 16 ]
  17. 17. RECOMMENDATION FRAMEWORK #2 ** STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS OUTPERFORM: Expected positive total returns of 15% or more over the next OVERWEIGHT: The industry, as defined by the analyst's coverage universe, 12 months. has a high number of stocks that are expected to have total returns of +15% or better over the next 12 months. NEUTRAL: Expected total returns of between -15% and +15% over the next NEUTRAL: The industry, as defined by the analyst's coverage universe, has 12 months. either (i) an equal number of stocks that are expected to have total returns of +15% (or better) or -15% (or worse), or (ii) stocks that are predominantly expected to have total returns that will range from +15% to -15%; both over the next 12 months. UNDERPERFORM: Expected negative total returns of 15% or more over the UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, next 12 months. has a high number of stocks that are expected to have total returns of -15% or worse over the next 12 months. TRADING BUY: Expected positive total returns of 15% or more over the next 3 TRADING BUY: The industry, as defined by the analyst's coverage universe, months. has a high number of stocks that are expected to have total returns of +15% or better over the next 3 months. TRADING SELL: Expected negative total returns of 15% or more over the next TRADING SELL: The industry, as defined by the analyst's coverage universe, 3 months. has a high number of stocks that are expected to have total returns of -15% or worse over the next 3 months. ** This framework only applies to stocks listed on the Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. For further information, kindly contact Simeon Masuda Koh at 603-2084 9807 or simeon.koh@cimb.com [ 17 ]

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