ASEAN Technology Sector - DBS Research 2021-03-19: Tailwinds Remain Strong


ASEAN Technology Sector - Tailwinds Remain Strong

  • Ample room for technology stocks to run as we are still in the early days of economic recovery.
  • Structural trends driving technology - 5G, telecommuting, EV, autonomous driving.
  • Still positive on semiconductor – AEM, UMS, Frencken; Inari Amerton for 5G play.
  • Pick Venture Corp and NanoFilm Technologies for differentiating technologies; Hana Microelectronics and KCE Electronics on rising demand for electronic components; and Humanica as the leader in Thai software arena.

Technology Sector underperformed year-to-date

  • The Technology sector has been one of the worst performing sectors year-to-date, a stark difference from last year, when it was the sole star. The divergence started at end February, in part triggered by rising yields and also the shift out of growth to value stocks.

Growth stocks down but not out.

  • However, value stocks’ outperformance over growth does not necessarily mean that investors are forsaking growth stocks but rather a broadening appetite for equities and diversification when fixed income yields are likely to stay low even as they rise modestly in a post-pandemic economic recovery.
  • Our interest rate strategist’s current view is for US 10-year yield to reach 1.75% in 2021 (year-to-date high 1.6%), while near-term yield is expected to be in the 1.3-1.5% range.

Impact of COVID-19 on demand for electronics

Strong demand for electronics as consumers spend more time at home.

  • As consumers work or school from home amidst the COVID-19 pandemic, purchases of electronic gadgets such as PCs, tablets, and monitors saw double-digit increases from 2Q20. Video game console sales also increased 17.4% y-o-y in 2020F. We believe these purchases were to make life at home more bearable and to facilitate the work/school from home environment.

Smartphone demand rebounds to pre-COVID-19 levels.

  • The COVID-19 pandemic has affected businesses and employees, and this resulted in a y-o-y decline in smartphone sales in 1H20. However, smartphone sales quickly rebounded to pre-COVID-19 levels in 2H20, signaling strong end-consumer demand for electronics.

Addressing concerns on rising yields

Inflation expectations and rising US 10-year treasury yields.

  • Inflation expectations have risen following the numerous fiscal and monetary policies implemented by the US government to mitigate the economic impact caused by the COVID-19 pandemic. The US government’s recent US$1.9tr fiscal package, combined with the path to economic recovery through vaccinations, has sparked reflation fears, resulting in a rapid rise in the US 10-year treasury yields.

Rapid rise in the US 10-year treasury yields sparks a sell-off in the technology sector.

  • Technology stocks typically perform well in a low interest rate environment and begin to stumble when interest rates rise. As many of the technology stocks are high-growth stocks with cash flows mostly weighted in the future, the higher interest rates result in a lower present value and valuation for these companies. We believe that these lower valuations caused the sell-off in the sector.

Where are we now in the recovery phase?

Room for technology stocks to run – we are still in early days of economic recovery.

  • The stock market cycle is forward looking and tends to lead the economic cycle. The most recent US GDP data print of -2.4% y-o-y in 4Q20 and 6.2% unemployment rate in 1Q21 suggest that we are still in the early stages of the economic recovery.
  • Technology stocks typically outperform in the early stages of the bull market due to the lower interest rate environment and we believe that inflation should be manageable given where we are in the economic cycle. We continue to believe that there is still room for the technology sector to run.
  • The technology industry trend remains strong, driven by COVID-19 and structural changes in the industry. Apart from COVID-19 increasing the demand for electronics, we believe that the incoming 5G cycle will enable new technological applications and drive a structural increase in demand for electronics and semiconductor chips.

Structural Trends Driving Technology

Telecommuting to continue to drive demand for data centre chips (structural change).

  • The increased work/school from home arrangements due to the COVID-19 pandemic has resulted in a surge in demand for unified communications and collaboration (UC&C) solution providers (Zoom, Webex, Microsoft Teams, and Skype) as individuals telecommute.
  • We continue to believe that there will be some conversion to flexible working as companies and employees are able to assess the feasibility and effectiveness of working from home. Benefits include cost savings (travelling and accommodation expenses) and less time wasted travelling to the workplace. This structural change will drive the longer-term demand for data centres and server processors.

5G’s superior connectivity will enable new technological applications.

  • 5G wireless technology is meant to deliver higher multi-Gbps peak data speeds, ultra-low latency, better reliability, massive network capacity, increased availability, and a more uniform user experience to more users. 5G is five times faster than 4G LTE and is used in enhanced mobile broadband, mission-critical communications, and IoT.

New generations of mobile networks drive smartphone sales and semiconductor shipments.

  • The 3G and 4G mobile networks introduced in the early 2000s and 2010s went on to drive smartphone sales and semiconductor shipments for the next few years. 5G was introduced in 2018 and while 5G smartphone transition has begun, it is still in the nascent stages of adoption. We are expecting 5G adoption to drive smartphone and semiconductor sales in the next few years.

5G smartphone penetration is projected to increase from 18% to over 35% in 2021.

  • TSMC expects global smartphone units to grow 10% y-o-y in 2021, and forecast the penetration rate for 5G smartphones to increase from 18% in 2020 to over 35% in 2021. Multi-year mega trend of 5G and high-performance computing (HPC)- related applications are expected to fuel strong demand.

Global IoT spending is projected to grow at a CAGR of 13.7% from 2020-2023F.

  • The faster transmission of data, larger network capacity and more stable and secure connection enabled by 5G will propel IoT. These are important features as they allow for real time data to be transmitted across many devices and on a stable and secure network. IDC is projecting global IoT spending to reach US$1.1bn by 2023, from US$749m in 2020.

Structural increase in semiconductor chips in vehicles.

  • Infotainment and navigation systems have in the past driven the value of semiconductor chips in vehicles. With advancements in technology, vehicles are now able to integrate technologically advanced features such as voice recognition into their infotainment and navigation systems. These advanced systems will require more semiconductor chips in vehicles.
  • In addition, the growing use of advanced driver assistance systems (ADAS), autonomous driving, and electric vehicles, will also drive the value of semiconductor chips in vehicles.

Electric vehicles and autonomous driving to massively drive semiconductor content in vehicles.

  • Jim Feldhan, president of Semico Research, estimates that the value of semiconductors used in an electric vehicle and autonomous vehicle could be as high as US$2,000 and US$15,000 respectively. A combination of the global rising concerns on environmental pollution, the inauguration of President Biden who is focused on addressing climate issues, and the large-scale deployment of 5G, have all contributed to the ramp-up of electric vehicle sales.
  • Electric vehicle sales (by units sold) accounted for 9.7% of the total vehicles sold in 3Q20 and 4Q20.

TSMC, the world’s largest foundry, guided for capex of US$25-28bn, blowing away past expectations.

  • To prepare for the higher demand for semiconductor chips, the world’s leading foundry, Taiwan Semiconductor Manufacturing Company (TSMC), has provided a capex guidance of US$25-28bn for FY21, blowing away analysts’ past expectations and is significantly higher than the usual ramped-up capex of US$15-17bn. The company believes that it is entering a period of high growth and is increasing its production capacity to capture the growth opportunities.

Semiconductor Chip Shortage

Global automotive sales rebounded strongly in 4Q20, causing a shortage of semiconductor chips in the industry.

  • Automotive sales declined by 25% y-o-y in 2Q20 and 3Q20 as COVID-19 impacted demand. When demand rebounded strongly in 4Q20 (near pre-COVID levels), automakers were caught by surprise and did not have enough semiconductor chips to manufacture their vehicles.

TSMC, the largest semiconductor foundry, cites chip shortage in mature nodes.

  • In its 4Q20 earnings transcript, TSMC cited that most of the chip shortage was in its mature nodes (40-nm and 55-nm). This aligns with the chip shortage in the automotive industry as a mix of advanced and mature chips is used in the manufacturing of a new vehicle.

Re-allocation of chip production capacity to automakers and strong demand for electronics cause chip shortage to spread to other industries.

  • As a result of chip shortages, TSMC had to work with some of its automotive customers to move some of their mature nodes to more advanced nodes where TSMC has better capacity. At the same time, the surge in demand for electronics, as individuals work or school from home, has far outstripped planned supply and exacerbated the shortage in other industries.

Top global firms cite semiconductor chip shortages and call for increased investments.

  • Large firms in the electronics industry such as Apple, Qualcomm, AMD, and Sony have cited semiconductor chip shortages, and are seeing demand significantly outpacing supply. They have called for the need for foundries to increase investments to raise their production capacities.

Market sees chip shortage easing in 2H21 but we see this happening only in 1H22.

  • To address the shortage of chips, IDMs and foundries would have to
    1. ramp up their production, or
    2. in the event of already high utilisation levels, build more fabrication plants.
  • However, based on the current circumstances, we believe that IDMs and foundries are placed in a difficult position and can only address the shortage in 1H22.

No excess capacity to ramp up production volumes in 1H21.

  • The average lead time to manufacture a semiconductor chip is 4-6 months. IDMs and foundries would have to ramp up their production now for the shortage in 1H21 to ease in 2H21.
  • However, 2H is typically a seasonally stronger half mainly due to the holiday shopping season and new product launches. Despite 1H being a seasonally weaker half, TSMC cited extremely high levels of capacity utilisation in 4Q20. As such, we believe that there is no excess production capacity for IDMs and foundries to work with, to address the 1H21 shortage in 2H21.

Intel is expecting the demand for semiconductors in other industries to improve in 2H21.

  • In addition, given the high spending from cloud in 1H20, Intel is expecting cloud demand to improve in 2H21 as cloud digestion eases. It also expects COVID-impacted markets such as enterprises, data centres, and IoT to improve. All these point toward a strong demand for semiconductors in 2H21.

Earlier years’ capex indicates an insufficient rise in IDM/foundries’ production capacity in FY21F.

  • Based on our understanding, it takes close to two years to build a chip fabrication plant and to ramp up its production volumes. According to estimates by SEMI, investments made by IDMs and foundries in the earlier years only prepared for a 6% y-o-y rise in global chip fabrication capacity in 2021. We believe that this is insufficient to address the 1H21 shortage.

We believe that the 1H21 shortage can only be addressed earliest in 1H22.

  • Given the circumstances described, we believe that the 1H21 shortage would only be addressed when demand for electronics becomes seasonally weaker in 1H22 and with utilisation levels continuing to remain high in 2H21. This would allow some of the production in 2H21 to be allocated to the 1H21 shortage.

DBS View: The chip shortage should be seen as a positive, not negative.

  • The shortage re-emphasises the increasing importance of semiconductor chips and our vision of a secular uptrend. To prepare for the higher demand for semiconductor chips, the world’s leading foundry, TSMC, has provided a capex guidance of US$25-28bn for FY21, blowing away analysts’ past expectations and the usual ramped-up capex of US$15-17bn.
  • We believe the near-term shortage would cause a short squeeze in price upwards for these chipmakers. DRAM prices have risen by as much as 80% since the low in August last year. As supply catches up, we expect prices to ease only slightly as end-consumer demand remains strong.

Still Positive on Semiconductor Plays

  • Despite the current headwinds for technology stocks, we remain positive on the semiconductor plays, which are at the front end of the technology value chain. These include the semiconductor equipment manufacturers and also those involved in the assembly & testing process.
  • We are more selective on stocks in the mid-to-downstream plays that provide Electronic Manufacturing Services (EMS), including contract manufacturers like original equipment manufacturers (OEMs).

Technology demand may not be so cyclical now.

  • The shift in demand that we are seeing now is mainly driven by a structural change, and may not be so cyclical anymore.
  • Digital adoption has taken a quantum leap, driven by the COVID-19 pandemic.

Semiconductor plays riding on higher chip demand.

  • Semiconductors are at the heart of the global economy. Demand for data centres and new PC products to support work from home, and also other gadgets such as PlayStations and mobile phones are driving demand for chips. The rollout of 5G technology that requires chips to build a new generation of phones, wireless infrastructure and other equipment is also helping to support demand.
  • Electric cars, which are gaining demand, use a wide range of chips for connectivity, power management, data processing and storage. All these would lead to higher demand for chips, especially the higher-end ones, and are hence positive for the semiconductor plays.

Semiconductor industry remains positive

  • Several industry data are pointing to more upside for the semiconductor industry. US semiconductor equipment billings passed its previous peak (May 2018) and momentum in the industry remains strong. The US 3-month semiconductor equipment billings increased 29.9% y-o-y in January to US$3.04bn, which also marked the 16th consecutive y-o-y monthly increase.
  • The World Semiconductor Trade Statistics (WSTS) and SEMI are projecting a stronger semiconductor industry in 2021. WSTS expects chip sales to accelerate, growing 8.4% to hit US$469bn in 2021. There have also been shortages due to the pandemic-fuelled demand. Global chip demand for automotive electronics has been gaining momentum since 4QFY20 and will continue to serve as a key growth driver as demand exceeds supply.
  • Similarly, SEMI forecasts the global sales of semiconductor manufacturing equipment to continue growing till 2022, hitting US$76.1bn. The adoption of technologies such as artificial intelligence (AI), IoT in fabrication and the constant use of advanced chipsets in automotive and consumer electronics will drive the demand for semiconductor manufacturing.


Stalled global economic recovery amid worsening of the COVID-19 pandemic.

  • Even with the positive developments for the COVID-19 vaccines, a spike in COVID-19 cases could disrupt the recovery of the global economies as it would take a longer time for vaccines to be available in mass.

Abandoning of growth stocks.

  • As many of the technology stocks are high-growth ones, the recent shift out of growth stocks into value plays amid rising yield has sparked a sell-off in the technology sector. Though we believe that value stocks’ outperformance over growth stocks does not necessarily reflect an abandonment of growth stocks but rather a broadening appetite for equities and diversification in a low interest rate environment, a prolonged negligence could further affect the technology stocks.

Weakening of the US$.

  • The technology companies under our coverage are exposed to US$ as the bulk of their sales are in US$ while costs are mainly in local currencies. While these companies do not hedge their currency exposures with forward contracts, the impact is mitigated by a partial ‘natural hedge’ through the matching of their financial assets with financial liabilities or procurement of their raw materials.
  • Hence, a weakening of the US$ vs local currencies could still result in forex loss as it is only partially hedged. Our currency strategists expect the US$ to strengthen against local currencies (including S$, MYR, CNY and THB) in 2Q21, and to gradually weaken in 2H21.

Valuation & Recommendation

Singapore tech cheapest in the region.

  • Compared to peers in the region, including Malaysia, Thailand and some of the HK-listed technology stocks, Singapore technology stocks are the cheapest in terms of P/E valuation.

Malaysia sector P/E hit 5-year high in February.

  • The Malaysia tech sector staged a strong recovery from the low in March last year to hit a 5-year high in February. The tech sector P/E, computed based on four stocks under our coverage – Inari Amerton, Globetronics, Unisem, and Malaysia Pacific Industries, shot past 30x in February. At the current P/E of 28.6x, though off the high of 32x, they are still trading at +1.5 standard deviation from their 5-year average.

High Thailand sector P/E partially skewed by Delta Electronics.

  • For Thailand, the sector P/E based on the stocks under our coverage - Delta Electronics, Hana Microelectronics, KCE Electronics and SVI Public Company, is at 42.2x, slightly above the +2 standard deviation level. This is mainly skewed by Delta as it accounts for 77% of the total market capitalisation of electronics stocks under our coverage. Excluding Delta Electronics, the average P/E is still higher than Singapore stocks.

Strong Balance Sheet to Drive Growth

Opportunistic acquisitions.

  • A healthy cash position can also help to propel growth via opportunistic acquisitions. A case in point is AEM’s recent acquisition of CEI Limited (SGX:AVV). CEI is able to offer synergies to the group, including cross-selling of products and services and sharing of know-how to improve operational efficiencies.

Dividend payout.

  • All the tech stocks under our coverage have been paying dividends. Their dividend payout ratios ranged from 17-93% of their latest earnings and we expect a similar trend going forward.

Technology Stock Picks

Semiconductor plays – AEM, UMS, Frencken.

Mid-to-downstream plays – Venture Corp, Inari Amerton, KCE Electronics, Hana Microelectronics, Nanofilm Technologies.

  • We are more selective on the mid-to-downstream plays which include EMS, OEM and other tech service providers.
  • Our picks in these areas include Venture Corp, which has exposure to a wide range of industries including Life Science Technologies, Medical Devices/Equipment and Lifestyle and Wellness Consumer Products. We like Venture Corp for its differentiating capabilities to attract key leaders in the respective domains that it has a presence in, and to offer end-to-end solutions from R&D right through product commercialisation.

NanoFilm Technologies, on which we recently initiated coverage, is another of our picks.

  • We expect strong growth in earnings of 45%/31% for NanoFilm Technologies in FY21F/FY22F. The stocks boasts multiple avenues to capture high-growth opportunities, both from existing products and industries (computer, smartphone, consumer electronics, printing and imaging, precision engineering), and penetration of new markets (FMCG personal grooming, automotive, optical lens, optical sensors and new energy), leveraging on its proprietary differentiated technology-based solutions, which is superior to conventional technology.
  • We are optimistic that Inari Amerton’s key RF segment will recover strongly in FY21-22 (20-52% y-o-y), driven by increased RF content in 5G smartphones, as well as rising penetration of 5G smartphones over time. Inari Amerton also has order visibility till 2023.
  • Among Thai Stocks under our coverage, Delta Electronics is the direct beneficiary of COVID-19, thanks to its exposure to the data centre business. Delta Electronics’s EV power supply sales are also boosted by the government’s stimulus measures to promote clean energy adoption. Delta Electronics’s share price significantly outperformed peers in electronics and the overall market in FY20. However, the current valuation is rather demanding and fragile to the potential change in SET50 index calculation criteria due to Delta Electronics’s low liquidity nature.
  • Our top picks for the sector right now are KCE Electronics and Hana Microelectronics. KCE Electronics should benefit from the recovery in automotive sector and the mass-market adoption of new enhanced safety features. KCE Electronics is also planning to build a whole new plant which could increase overall production volume by almost 60%. Hana Microelectronics, which is also one of our top picks, is expected to benefit from the global semiconductor upcycle trends, thanks to 5G smartphone adoption and the prolonged inventory restocking cycle.
  • Apart from the Electronics sector, we also like Humanica as the leader of Thai software companies. Humanica has high potential to capture growth in HR outsourcing services and monetisation from the users on its HR software platform, from multiple JV initiatives like Flexi-benefit, learning modules, and potential P2P lending in the future.

Refer to the attached 18-page report for complete analysis.

Lee Keng LING DBS Group Research | Wei Le CHUNG DBS Research | Woo Kim TOH DBS Research | https://www.dbsvickers.com/ 2021-03-19
SGX Stock Analyst Report BUY MAINTAIN BUY 24.300 SAME 24.300