Technology Sector - OCBC Investment 2015-12-11: NEUTRAL amidst moderate global growth

VENTURE CORPORATION LIMITED V03.SI MEMTECH INTERNATIONAL LTD M26.SI CSE GLOBAL LTD 544.SI

Technology Sector: NEUTRAL amidst moderate global growth

 Uneven world economic growth
 Downside risks remain
 VMS our top pick for 2016

The technology (tech) sector is cyclical in nature, and its performance has a strong positive correlation with the global macroeconomic trends and outlook.
As we look ahead to CY16, global economic growth is expected to outpace CY15, according to International Monetary Fund (IMF). More specifically, most major economies except for China are expected to record faster growth in CY16 compared to CY15. That said, we note that IMF had consecutively cut its forecasts for global growth, once in Jul 15 and more recently in its Oct 15 update report.

According to Bloomberg consensus, sales of major EMS/ODM players are expected to see only decent average growth of ~3.0% in CY16, while semiconductor market is forecasted by World Semiconductor Trade Statistics (WSTS) to record flat CY15 and moderate 1.4% growth in CY16.
Downside risks remain as a result of declining commodity prices, which leads to reduced capital flows to emerging markets and put pressures on their currencies.
With uneven global economic growth across different regions, we think business and consumer sentiment may be affected, leading to cloudy earnings visibility for the major tech players and suppliers.

Given the mixed macroeconomic outlook, we maintain our NEUTRAL rating on the tech sector. As the world continues to digitalized and be connected via network ("internet of things"), and with the increasing adoption rate of smart devices, we are still positive on the sector over the longer-term.
According to market watcher, Gartner, consumers in mature markets will use and own three to four devices by CY18, forecasting that the installed base of devices will total 7.8b units in CY16 (including wearables, phones, tablets and PCs) and reaching 8.3b in CY18. Therefore, while near-term outlook remains unexciting, we expect tech spending to increase and recover robustly when global economy recovers on a firmer footing.

For the reasons above, we recommend investors to be selective in their exposure to the tech sector stock universe in Singapore.
Our top pick in the sector is Venture Corporation (VMS) [BUY; FV: S$9.00] given its diverse customer base, stable growth outlook, strong balance sheet, and attractive FY15F dividend yield of 6.0%. We also note that VMS’ large revenue exposure to USD will further boost its revenue growth, as Bloomberg consensus forecasts for USD strengthen further against SGD in CY16.
Just last month, we also initiated coverage on Memtech International (Memtech) [BUY; FV: S$0.158], noting upsides from:
1. revenue growth driven by incoming new orders from its automotive customers;
2. increasing gross margins on change in product mix; and
3. attractive FY16F dividend yield of 5.7%.
Lastly, having seen a decline of 5.2% in its share price after OPEC’s meeting on 4 Dec, we still like CSE Global (CSE) [BUY; FV: S$0.54] supported by largely resilient earnings and believe the decline is overdone.

Eugene Chua OCBC Investment | Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2015-12-11

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 9.00 Same 9.00

BUY Maintain BUY 0.158 Same 0.158

BUY Maintain BUY 0.54 Same 0.54