Small Mid Cap Strategy - DBS Research 2017-05-23: Ride On The Tech Bull

Small Mid Cap Strategy - DBS Vickers 2017-05-23: Ride On The Tech Bull Singapore Small Mid Cap Stocks Top Picks 2017 VALUETRONICS HOLDINGS LIMITED BN2.SI AEM HOLDINGS LTD AWX.SI UMS HOLDINGS LIMITED 558.SI HI-P INTERNATIONAL LIMITED H17.SI

Small Mid Cap Strategy - Ride On The Tech Bull

  • Information Technology shines on global macro tailwinds, but there are still gems to be mined.
  • For tech, prefer companies with strong earnings momentum/turnaround, potential M&A targets, strong cash positions – Hi-P, UMS, AEM, Valuetronics.



Technology sector – more room to grow; go for companies with strong earnings momentum, potential M&A targets, net cash or turnaround plays with lower execution risk 


Information Technology sector shines but there’s more room to grow 

  • The Information Technology has been the best performing sector, both on a 3-month and 1-year basis, after trading at depressed valuations over the last one to two years. On a 1- month basis, it was second only to Financials, which includes the Banks. 
  • The drivers to Technology’s stellar outperformance include a more favourable global macro outlook, improved market sentiment fueled by positive manufacturing data and also the hunt for more takeover/privatisation candidates that has re-rated the sector.
  • With the sector outlook still positive and key sub-segments such as semiconductor, smartphone and Internet of Things (IoT) expected to thrive, we still see room for further share price appreciation for selected stocks.


Further upside for semiconductor, smartphone, Internet of Things (IoT) 

  • Among the sub-segments, the semiconductor segment is expected to do well. SEMI (the global industry association serving the manufacturing supply chain for the micro- and nano-electronics industries) predicts that fab equipment spending will reach unprecedented levels in the coming years, reaching a record high of over US$46bn in 2017, before nearing the US$50bn mark in 2018.
  • Several closely-watched indicators are also positive – recent global book-to-bill numbers remained above 1, while worldwide billings of North-American based equipment manufacturers continue to climb. 
  • Similarly, the World Semiconductor Trade Statistics (WSTS) also revised its 2017 sales growth forecast in February to 6.5%, from 3% previously. WSTS expects the largest growth to come from sensors, analog, and memory products.
  • The worldwide smartphone market, according to the independent research firm International Data Corporation (IDC), will see a total of 1.53 billion units shipped in 2017, up 4.2% from the 1.47 billion units shipped in 2016. Thereafter, shipments will reach 1.77 billion units in 2021, which translates to a compound annual growth rate (CAGR) of 3.7%. The report also highlights that shipments will increase in 2017 and 2018 due to the plethora of new phone releases from major brands during this period.
  • For the Internet of Things (IoT) segment, according to IDC, global IoT spending will experience 15.6% CAGR over the 2015-2020 forecast period, reaching US$1.29 trillion in 2020.
  • Back home, Singapore industrial production data has been rising steadily since August last year. Industrial output for March expanded by 10.2% y-o-y, another strong showing following a revised 10.2% gain in the previous month. Electronics continued to be the key driver.  
  • Production output was up by 37.7% y-o-y as indicators on global electronics cycle are reflecting an upswing in electronics demand.

Technology companies with good report cards 

  • A handful of Technology stocks turned in a strong set of results in the results reporting season just ended. The improvement in results was mainly attributable to strong demand and better margins due to better product mix and / or operational efficiency. Please see the table - Technology companies with market capitalisation of > S$100m that recently released results .




Inexpensive sector valuations but be selective; Companies with strong earnings momentum, turnaround plays with lower execution risk or potential M&A targets preferred (net cash a bonus).

  • Given the sector’s recent stellar price performance, we would prefer to be selective on Technology names, particularly focusing on those with strong fundamentals and earnings pipeline to support further re-rating. A strong balance sheet with healthy cash position would be an added advantage to support capacity expansion plans to fulfills strong demand, and also to develop or source for new products and services.
  • Turnaround companies with lower downside risk / further legs to grow, or new business / key products could also be interesting.
  • As Technology sector valuations remain inexpensive, stronger interest could also be revived if takeover/privatisation activity picks up.
  • With earnings momentum set to further strengthen, coupled with net cash positions and M&A potential, Hi-P and UMS check the most boxes.


Hi-P and UMS – strong earnings momentum, potential M&A targets, net cash; AEM – strong earnings, net cash 

  • Current semiconductor equipping trends augur well for semiconductor equipment manufacturers AEM (Non-Rated, Fair Value S$3.35) and UMS (Rating: BUY, Target Price S$1.33), which are poised to deliver above-industry growth as they leverage on their entrenched relationships with their respective key clients and capacity expansions to fulfill strong demand. Current valuations are also inexpensive, especially on an ex-cash basis.
  • Additionally, the fragmented shareholding structure for UMS - with only one large shareholder with a 20% stake, makes it an attractive takeover target.
  • Aided by a combination of new product ramps, capacity expansion and cost optimisation strategies, contract manufacturer Hi-P (Rating: BUY, Target Price: S$1.07) is set to register strong, sustainable earnings growth ahead. We expect utilisation rate to reach 60-70% in the next 1-2 years, from below the current 40%. 
  • To date, there is still no concrete succession plan announced by Executive Chairman & Chief Executive Officer, Mr Yao Hsiao Tung.


Riverstone – indirect beneficiary of current semiconductor upcycle 

  • While headwinds in the healthcare glove industry remain, Riverstone’s (Rating: BUY, Target Price S$1.07) niche cleanroom glove business sets it apart from the bigger boys and see the company as an indirect beneficiary of the current semiconductor upcycle as demand for its higher-margin cleanroom gloves (+20% y-o-y in 1Q17) continue to gain traction among leading semiconductor and electronics manufacturers.


Valuetronics – strong cash position with zero debt; decent yield 

  • Supported by proven track record and robust financials, Valuetronics (Non-Rated, Fair Value S$0.95) should benefit as outsourcing for electronic manufacturing services continue to gain favour. 
  • While valuation of 11x CY18F PE seems fair, a substantial 35% of Valuetronics’ current market cap is backed by net cash. Trading at just 7.3x ex-cash PE, Valuetronics appears attractive vs peers’ average of 9.2x. A dividend yield of about 4.3% is also on offer.


Sunningdale, Fu Yu – potential M&A plays 

  • We also like Sunningdale (Non-Rated) for its strong business fundamentals and commitment to growing its portfolio of value-added products. Apart from its advanced manufacturing capabilities, global manufacturing footprint and scale, the group also stands out for its diversified MNC customer base. 
  • A majority of its customers each contribute 3-5% to group sales, which greatly reduces customer concentration risk commonly seen among small-mid cap peers. Historically, Sunningdale has undergone several rounds of M&As to grow.
  • While near-term outlook for close peer, Fu Yu (Non-Rated) remains under pressure, the counter could be interesting as a dividend play, offering potential yield of 7.5%, and is also an M&A target.


Addvalue - game changing product on the way; potential M&A target 

  • Provider of one-stop mobile satellite broadband communication terminals and solutions, Addvalue, is expected to turnaround from losses recorded in the last few years, with the launch of new products targeting a niche market. 
  • The addition of a new business, the world’s first Inter-Satellite Data Relay System (IDRS), would be a game changer and big boost to Addvalue when commercialisation starts, likely in the next two to three years.
  • Near term, securing contracts from government agencies or industrial players would be a catalyst for the stock. 
  • Addvalue could also be a potential takeover target, especially with the near commercialisation of the IDRS terminal. It has already been approached by a few parties.






Lee Keng LING DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-05-23
DBS Vickers SGX Stock Analyst Report NOT RATED Maintain NOT RATED 0.950 Same 0.950
NOT RATED Maintain NOT RATED 3.350 Same 3.350
BUY Maintain BUY 1.330 Same 1.330
BUY Maintain BUY 1.070 Same 1.070



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