Technology Sector - RHB Invest 2019-03-19: Awaiting Conclusion On Trade Deal

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VENTURE CORPORATION LIMITED (SGX:V03) SILVERLAKE AXIS LTD (SGX:5CP) FU YU CORPORATION LTD (SGX:F13) FRENCKEN GROUP LIMITED (SGX:E28) MEMTECH INTERNATIONAL LTD (SGX:BOL)

Technology Sector - Awaiting Conclusion On Trade Deal

• Our approach has remained unchanged, focusing on key selection of stocks in this space which have sound fundamentals and balance sheet as well as good growth despite the ongoing trade war issues.
• Our Top Picks – Venture Corporation, Fu Yu Corporation and Silverlake Axis – reported positive results and their share prices have also rallied since the start of the year.
• While we explore new names which we consider laggards like Memtech International and Frencken Group, maintain NEUTRAL on the sector.

Positive news on trade deal lighting up the technology sector.

• Since US President Donald Trump initiated the possibility of a trade war against China and its other key deficit trading partners in Mar 2018, Singapore stocks, especially those in the manufacturing sector, have taken a significant hit.
• However, since end-Jan 2019, there has been positive news on this front coming out from both parties as they have met and held talks during 1Q19 – Mr Trump has agreed to extend the 1 Mar trade deal truce deadline, citing positive progress in trade talks. Both parties have also expressed optimism towards a trade deal in front of the media, which improved market sentiment generally, mostly tech stocks, as the market seems to be positioning for a trade deal by end Mar 2019.

Still sticking to bottom up approach.

• While we do note that sentiment has improved generally among most technology stocks, we still prefer to stick to the bottom up approach for stock selection in this space. We focus on companies with sound fundamentals and decent growth, as we feel these stocks will continue to rerate as they deliver their results.
• We do note that not all technology share prices have rallied (see SGX Technology Stocks Share Price Performance) – some have even derailed due to negative earnings, or a slowdown due to loss of projects, or cut in orders by their customers, like Sunningdale Tech (SGX:BHQ) and Valuetronics (SGX:BN2) (downgraded after its recent results, see report: Valuetronics - Likely Overhang From Smart Lighting; Now NEUTRAL).
• The semi-conductor sector remains weak across the whole supply chain, with orders still recovering at a slow pace. As such, our Top 3 picks remain unchanged, namely Venture Corporation (SGX:V03), Fu Yu Corporation (SGX:F13) and Silverlake Axis (SGX:5CP), as we continue to see potential positive earnings growth momentum into 1Q19.
• On the sector, we maintain NEUTRAL, as there is no certainty that a trade deal can be met, which would be detrimental to sentiment among stocks in this space, if otherwise.

Looking into laggards with sound fundamentals

• We continue to explore the sector and try to identify stocks which have not yet been rerated or rerated less than its peers in the tech space, ie laggards. We believe these stocks might rerate as they deliver earnings growth going forward, coupled with further positive news on the US-China trade deal. These include Frencken Group (SGX:E28) and Memtech International (SGX:BOL) which we do not have coverage at the moment.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2019-03-19

SGX Stock Analyst Report BUY MAINTAIN BUY 19.000 SAME 19.000

BUY MAINTAIN BUY 0.650 SAME 0.650

BUY MAINTAIN BUY 0.240 SAME 0.240

NOT RATED MAINTAIN NOT RATED 99998 SAME 99998

NOT RATED MAINTAIN NOT RATED 99998 SAME 99998