Spotlight on Semiconductor - DBS Research 2019-11-29: Clear Skies Ahead


Spotlight on Semiconductor - Clear Skies Ahead

  • New technologies and 5G driving demand, leading to a turnaround in the semiconductor industry.
  • Positive forecast on industry outlook in 2020, after an anticipated drop in 2019.
  • Shipment and inventory trends turning positive; historical data shows a strong recovery after every major crisis.
  • Stock picks: UMS Holdings, AEM Holdings, Frencken Group.

Turnaround in Semiconductor Sector

Semiconductor sector bottoming, aided by new growth drivers from new technologies.

  • The two-year boom in the semiconductor market led by the top three end markets - PCs, mobile phones and data centers - came to an abrupt stop last year, as geopolitical tensions weighed on end market demand. A slump in memory chip demand, among others, has plagued the semiconductor sector since then.
  • Prices for both DRAM memory, used in desktop computers and servers, and NAND, used in smartphones, have fallen sharply in the past 18 months. But these trends look like reversing, aided by major new growth drivers emerging from new technologies and 5G. This will have a profound impact on the semiconductor industry.

Semiconductor a leading indicator in entire technology value chain.

  • In most cases, the semiconductor sector is a leading indicator. The uptick in this industry should lead to an improvement in demand for other segments down the technology value chain. In this report, our focus is on the front end of the entire technology value chain, i.e. the upstream segment where the semiconductor plays are positioned. (please refer to diagram on page 9 in attached PDF report).
  • In the semiconductor space, we further split this into two portions –
    1. semiconductor front-end equipment manufacturing, and
    2. semiconductor back-end assembly and testing process.
  • Proxies to front-end plays include stocks like UMS HOLDINGS LIMITED (SGX:558) (BUY, Target Price: S$1.08), equipment manufacturer for Applied Materials. Back-end players are AEM HOLDINGS LTD (SGX:AWX) (Initiate BUY, Target Price: S$2.38), test handler provider for Intel; MICRO-MECHANICS HOLDINGS LTD (SGX:5DD) (return rating 2, fair value: S$2.13), a manufacturer of consumable parts and tools used in the fabricating, chip testing and assembling of semiconductors; and AVI-TECH ELECTRONICS LIMITED (SGX:BKY) (return rating 1, fair value S$0.47), which provides burn-in tests and burn-in boards, printed circuit board assembly services, and engineering services for semiconductor equipment. FRENCKEN GROUP LIMITED (SGX:E28) (BUY; Target Price: S$1.06) also has c.20% of its revenue exposed to the semiconductor industry.

Semiconductor Demand Driver

  • The semiconductor market is now larger and less volatile than before, due to growth and diversification of demand drivers, spanning consumer and enterprise end markets.
  • The nascent recovery in semiconductor is driven by:-
    1. Adoption of new technologies - in the form of Internet of Things (IoT), Big Data, and Artificial Intelligence (AI). Growing demand for specialty nodes that serve the IoT, communications, automotive, power, and image sensor markets is also driving robust investments in capacity and new technology.
    2. New products - including speech recognition devices, wearables and 3-D printing
    3. Product enhancement - for mobile phones, technology nodes (e.g. from 14 nanometer to 10 nanometer and lower)

Positive forecasts on industry trends in 2020

  • According to World Semiconductor Trade Statistics (WSTS) organisation, the worldwide semiconductor market is expected to return to growth in 2020. The worldwide semiconductor market was up 13.7% in 2018, an all-time high. The year 2019 is projected to be down by 13.3%. For 2020, all regions are forecast to grow with the overall market up 4.8%.
  • SEMI expects a recovery in the semiconductor industry in 2020. According to SEMI, global sales of semiconductor manufacturing equipment by original equipment manufacturers (OEMs) are projected to decline by 18.4% in 2019 from last year’s historical high. Growth in equipment sales is expected to resume in 2020, with an 11.6% y-o-y jump on the strength of memory spending and new projects in China, while equipment sales in Japan should surge 46.4%.
  • International Data Corporation (IDC) is expecting sensors, connectivity, and AI and computer vision to drive semiconductor demand. IDC estimates that the consumer semiconductor segment will grow at a CAGR of 6.4% for 2018-2023 on the back of consumer IoT devices and home automation gaining traction and scale. It is also forecasting worldwide shipments of AI-optimised processors for edge systems to reach 340.1 million units in 2019, an increase of 170.0% y-o-y, and surge to 1.5 billion units by 2023, achieving a five-year CAGR of 64.9%.

Shipment, billings and inventory trends turning positive

Semiconductor shipment recovering back to normalised long-term growth trend.

  • The surge in shipments in 2017 was driven by strong demand in end markets for PCs, mobile phones, and data centers. As semiconductor companies ramped up production, end market companies accelerated their orders in the face of an escalating trade war, providing an additional leg to semiconductor shipments in 2018. As geopolitical tensions weighed on end market demand, semiconductor shipments began to drop in 4Q18.
  • Semiconductor shipments bottomed out in April 2019 as new technology started to usher in demand for more advanced chips and equipment. At current level, the shipments seemed to have stabilised at slightly above the US$30bn level. This level coincides with the normalised long-term growth trend (represented by the black dotted line in the chart) of global semiconductor shipments.

Strong recovery after every major crisis.

  • In terms of y-o-y change, historical semiconductor shipment data has shown a steep rebound after each major crisis, including Asian Financial Crisis in 1997/1998, the dot.com crisis in 2000/2001, Global Financial Crisis in 2008/2009 and now the trade war. The 15.9% y-o-y drop in August 2019 was one of the steepest since 1992. A normalisation of the shipment trend should lead to an improvement in y-o-y growth.
  • Based on the latest data in September 2019, shipment data is showing signs of turning up. If the sales momentum can continue, this should lead to a sustainable recovery for the sector.

Billing turning positive.

  • In terms of billings data, the y-o-y change for the manufacturers’ billing for North America started to turn positive in October, after 11 consecutive months of decline, according to preliminary data from SEMI.
  • For the key semiconductor sub segments including Fab Facilities Equipment, Test Equipment and Assembly and Packaging Equipment, the billing data started to trend up in July 2019. However, if the prolonged US-China trade war is unable ink a ‘phase one’ deal and the global economy continues to show tepid growth, the risk is that we may only see a more decisive turn when there is better visibility on the trade front and a healthier economy.

Inventory de-stocking.

  • Inventory levels, which are a function of both projected demand as well as current demand, are trending down. Semiconductor companies usually build on their inventories in anticipation of a surge in demand from new technology.
  • Other factors such as a possible escalation of US-China tariffs and weakening demand due to the geopolitical issues would also contribute to the inventory buildup. However, in the most recent quarter, we are beginning to see a drawdown in inventory levels for both the semiconductor manufacturers (BI Semi Manufacturers Index Inventory) and the chip makers (BI Semi Index Inventory).

Bottoming out in Singapore manufacturing

Worst could be over for manufacturing sector.

  • In Singapore, our economist is of the view that the manufacturing sector could be bottoming out. On the surface, the manufacturing sector reported a headline contraction of 3.5% y-o-y for 3Q19. However, this was partly caused by the high base in the same period last year. Sequentially, the sector has recovered to register a marginal decline of 0.4% q-o-q saar, a marked improvement from -4.2% previously.
  • The decline in NODX is easing while the electronics export is showing a y-o-y improvement. The worst of the manufacturing cycle could be over, but growth in this sector could remain lacklustre amid weak global demand and uncertainties around the ongoing trade talks between the US and China.

Continued investment in semiconductor.

  • In terms of semiconductor investments, JTC Corporation is building a new semiconductor facility in Tampines as Singapore continues to back its large electronics sector despite a global slowdown. The first phase is scheduled to be completed by 2021.Global semiconductor company Micron Technology launched a new wafer fabrication facility here in August. ST Microelectronics expanded its Ang Mo Kio wafer fab facility in September, more than doubling its capacity.

Looking up to global players for guidance

Positive outlook guidance.

  • Bigger players in the semiconductor space like Applied Materials, Micron Technology, Intel and TSMC are guiding for better outlook ahead.
  • The positive guidance is mainly on the back of growing demand in the new technology space from 5G, IoT and data analytics, coupled with inventory destocking. Ongoing inventory correction in DRAM and NAND are near term tailwinds. More customers are upgrading their equipment ahead of the 5G rollout in key markets.
  • On the supply side, capex cuts and delays in commencement of operations of wafer plants across the industry are leading to supply reductions. Overall, the overstocking situation in 1H19 is improving as demand has been picking up in 2H19. The industry demand-supply environment is projected to be much healthier in 2020.
  • In terms of valuations, the global plays are trading at about 40% to 50% premium to the SGX-listed plays.

Applied Materials (AMAT)

  • Uptick in demand, expect 9.2% EPS growth next quarter. AMAT’s 4Q FY Oct 2019 results reflect a healthy uptick in demand for semiconductor equipment, driven by strong investments by foundry logic customers and acceleration of the 5G roadmap, after a downturn that lasted for four quarters. AMAT provided strong guidance for 1Q FY2020, projecting adjusted EPS of 87-95UScts, after reporting 81UScts in 4Q19.
  • AMAT remains optimistic about the price elasticity of NAND, which is expected to bolster NAND customer spending in the near term. The demand for foundry logic is improving, thanks to rising demand for specialty nodes in automotive, power, IoT, communications, and image sensor markets.


  • Raised capex guidance by c.40%. 3Q19 results were driven by new product launches both in premium smartphones and high-performance computing applications using TSMC’s industry-leading 7 nanometer technology. TSMC expects c.9% sequential improvement in revenue for 4Q19, and has raised capex by c.40% for 2019, and expects 2020 capex to be similar. The higher capex is mainly due to the higher than expected 5G ramp-up as compared to 4G.
  • TSMC is also expanding its customer and product portfolio. Inventory had been gradually digested throughout 3Q19, driven by smartphone and high-performance computing-related applications.

Micron Technology

  • Expect improvement in DRAM and NAND. Micron expects improvement in the demand for the DRAM and NAND industries, primarily driven by a normalisation of inventories, and secular growth trends in various end markets.
  • The projected demand growth in the DRAM industry remains unchanged in the mid-teens for 2019, with supply exceeding demand. Micron expects demand growth in the DRAM industry to see a pick up to the high teens-to-20% in 2020, above supply growth in the mid-teens, which should help normalise supplier inventories and enable a healthy industry environment. Micron expects long-term DRAM demand growth CAGR to be in the mid-to high teens.
  • The demand elasticity and supply reductions in the NAND industry will lead to improving market conditions and declining industry inventory. Micron now expects demand growth in the low to mid-40% range for 2019, which will exceed industry bit supply growth of approximately 30%. For 2020, it estimates industry bit demand growth of high 20s-to-low 30% range, with supply growing slightly below demand. Micron also expects improvement in margins, and long-term NAND bit demand growth CAGR to be in the low 30% range.


  • Well-positioned for 5G deployment; expects increase in market share. Intel has raised capex guidance by US$0.5 bn to US$16 bn as a result of increased 10-nanometer and 7-nanometer investments. Intel is well positioned for 5G deployments in 2020 and expects to grow its market segment share in wireless base stations to 40% by 2022.
  • Intel is well-positioned for the next market inflection as 5G has opened up significant new IoT opportunities in equipment to smart connected endpoints.

Stock Picks

Room for further upside?

  • The share prices of pure semiconductor plays listed on SGX have surged c. 50% over the last two months, on the back of the strong results and guidance from some of the big global players in the technology space, and partly due to the avoidance of a technical recession in Singapore.
  • Market sentiment has also improved during this period, with the ST Index registering c.5% gain.
  • Therefore, is there any more upside for the semiconductor stocks after a strong run? We believe so, judging from
    • the uptick in the global semiconductor shipments;
    • positive guidance from global players and positive forecasts on industry trend, and
    • more room for valuation re-rating towards the PE valuation reached during the previous peak cycle.
  • The pure semiconductor plays like AEM Holdings, UMS Holdings, Avi-Tech Electronics and Micro-Mechanics are currently trading at > 30% below peak cycle valuations, except for Frencken Group, which has a c.20% exposure to the semiconductor industry.

AEM Holdings (SGX:AWX; Initiate with BUY; Target Price: S$2.38)

UMS Holdings (SGX:558; BUY; Target Price: S$1.08)

  • Riding on increasing demand on semiconductor equipment driven by new technologies and 5G. We upgraded UMS Holdings to BUY from Fully Valued back in October, premised on resumption of the growth in global semiconductor equipment sales in 2020. See report: UMS Holdings - Charging Higher.
  • At the company level, our channel checks also showed that UMS Holdings is beginning to see a pick-up in semiconductor sales. The recent 3Q19 results further reinforced our view. UMS Holdings is now witnessing signs of an upturn in the overall semiconductor industry as demand is picking up with chip inventories easing and new technological disruptors driving the growth of new products and capabilities. The successful renewal of its integrated system business contract with key customer, AMAT, for another three years helps to strengthen earnings visibility. We remain positive on the turnaround in the semiconductor segment and expect sales momentum to continue.
  • See UMS Holdings Share Price; UMS Holdings Target Price; UMS Holdings Analyst Reports; UMS Holdings Dividend History; UMS Holdings Announcements; UMS Holdings Latest News.

Frencken Group (SGX:E28; BUY; Target Price: S$1.06)

Avi-Technology Electronics (SGX:BKY; Return rating 1; Fair value S$0.47)

Micro-Mechanics (SGX:5DD; Return rating 2; Fair value S$2.13)

See attached 59-page PDF report for complete analysis.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-11-29
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 2.130 SAME 2.130