Navigating Singapore 2019 ~ Tech/Manufacturing Sector - CGS-CIMB Research 2018-11-29: NEUTRAL

Navigating Singapore 2019 ~ Tech/Manufacturing Sector - CGS-CIMB Research | SGinvestors.io SILVERLAKE AXIS LTD (SGX:5CP) VENTURE CORPORATION LIMITED (SGX:V03) VALUETRONICS HOLDINGS LIMITED (SGX:BN2) RIVERSTONE HOLDINGS LIMITED (SGX:AP4) UMS HOLDINGS LIMITED (SGX:558)

Navigating Singapore 2019 ~ Tech/Manufacturing Sector - NEUTRAL


Positive Trends

  • Long-term growth drivers remain intact. The basic premise of tech manufacturing is innovation. As long as companies continue to innovate with new and better products, there will be demand for manufacturing. Current long-term growth drivers include Internet-of-Things, industrial automation for factories, artificial intelligence, life sciences, new applications for drones and autonomous vehicles, to name a few.
  • The relocation of selected manufacturing activities out from China has gained pace. We believe ASEAN as a whole could be a beneficiary. Vietnam could be a big beneficiary given its proximity to China as factories in China could complete the final product assembly there to mitigate the tariff impact. Malaysia, for example, has successfully developed an electronics manufacturing hub in Penang.


Negative Trends

  • Investors are now focusing on the poor earnings visibility for tech manufacturing stocks given the cautiousness of customers in response to the trade tensions.
  • Other recurring risks include volatile exchange rates, higher oil prices and progress of the ongoing US-China trade war discussions and margin pressure induced by trade tensions.


Looking To 2019


Higher earnings risk in 2019.

  • As a broad barometer for the industry, we expect global semiconductor sales to possibly see a y-o-y decline in 2019 after another record year in 2018. While the general trend for the tech manufacturing service industry is one of a stronger second half, we think the trend for 2018 has been distorted by the trade war and investors should focus instead on the impact on individual stocks.
  • Of the seven small-cap tech manufacturing stocks we cover, two reported results in line with our expectations, two reported better-than-expected results, while the remaining three reported earnings below our expectations.

Singapore as a catchment area.

  • Given that Singapore’s tech manufacturing services companies have excess capacity, incremental demand from the relocation of plants from China could help to improve their financial performance via a higher factory utilisation rate.
  • Rental demand for industrial properties could also increase as factories seek capacity outside of China. Given the uncertainties, companies could mitigate risks via renting factories rather than spending capex to build new ones.

M&A interest is likely to continue

  • M&A interest is likely to continue, especially in the semiconductor space where China needs to accelerate the development of its chip industry to reduce its dependence on imports.
  • In Singapore, both ASTI HOLDINGS LIMITED (SGX:575) and MANUFACTURING INTEGRATION TECHNOLOGY LTD (SGX:M11) have received buyout offers from Chinese parties for their semiconductor equipment business.
  • In Malaysia, Unisem (UNI MK) has also received a buyout offer from Chinese parties in conjunction with its existing major shareholders.


Outlook Statement



Stock Preference

  • Given the noises from trade tension, we pick a technology name as our preferred stock in this sector - SILVERLAKE AXIS LTD (SGX:5CP).
  • Silverlake Axis It is the leading software firm that specialises in customised software solutions mainly for the banking industry, and saw strong 76% y-o-y growth in 1QFY6/19 core net profit, resulting from the early stages of the delivery of core banking contracts.
  • Further mid-and large-sized contract wins could potentially be in the pipeline as we anticipate further digital enhancements and core banking system upgrades ahead in Silverlake Axis’s key operating markets – Malaysia, Thailand, Singapore, and possibly Indonesia as well. With an order backlog of RM320m as at end-Sep 18, this should support our expectation of 11-50% y-o-y EPS growth in FY19-20F.





William TNG CFA CGS-CIMB Research | Colin TAN CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-29
SGX Stock Analyst Report ADD MAINTAIN ADD 0.560 SAME 0.560
ADD MAINTAIN ADD 17.440 SAME 17.440
ADD MAINTAIN ADD 0.930 SAME 0.930
ADD MAINTAIN ADD 1.300 SAME 1.300
HOLD MAINTAIN HOLD 0.750 SAME 0.750





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