We keep our OVERWEIGHT call on the technology sector going into 2QCY20 as pockets of opportunity have emerged after stocks took a beating in the wake of the novel coronavirus outbreak. While there is valid concern for disruption in both chip production and demand in China and neighbouring countries, we believe that the general trend for the technology sector is still pointing towards positive growth, albeit temporarily disrupted. We choose to take a positive view as valuations are trading at a steep discount from the peak while fundamentals remain intact. From the recent analyst briefings with tech companies, we are getting a general sense that orders are not being cancelled but back-loaded. This could translate into a late recovery in 2020, as seen in 2019. Hence, we believe that 1QCY20 earnings performance which is likely to be soft could provide an opportunity to re-position for recovery in 2HCY20. We like automotive-centric players as they offer more room for growth compared with smartphones. Our top picks are MPI (OP; RM13.30), KESM (OP; RM10.20) and D&O (OP; RM0.91).
“Chip” sale. We keep our OVERWEIGHT call on the technology sector going into 2QCY20 as pockets of opportunity have emerged after stocks took a beating in the wake of the COVID-19 outbreak. The Bursa Technology index is down 37% from its peak in mid-February. While there is valid concern for disruption in both chip production and demand in China and neighbouring countries, we believe that the general trend for the technology sector is still pointing towards a positive growth, albeit temporarily disrupted.
Opportunity to reposition. We are pricing in disappointing 1QCY20 earnings due to the extended Chinese New Year break in China and the movement control order (MCO) in Malaysia which led to longer than expected downtime in plant operations. Do note that the semiconductor sector is still permitted to operate during the MCO period with half the workforce. We choose to take a positive view as valuations are trading at a steep discount from the peak while fundamentals remain intact. From the recent analyst briefings with tech companies, we are getting a general sense that orders are not being cancelled but back-loaded. This could translate in to a late recovery in 2020, as seen in 2019. Hence, we believe that the disappointing 1QCY20 earnings could provide an opportunity to reposition for recovery in 2H20.
Launch of flagship 5G phones still intact. With the fact that Apple released a statement informing that its Worldwide Developer’s Conference (WWDC) event will take place as scheduled in June 2020, we have reason to believe that the timeline of Apple’s next flagship smartphone launch will still happen this year. In line with market trend, Apple is expected to adopt 5G in the upcoming flagship models. Such move is crucial for Apple to keep up with competition and retain market share given that its closest rivals, Samsung and Huawei, have already launched their flagship series (Galaxy S20 and P40 respectively) with support for 5G connectivity. We expect an increase in RF content per device in order to facilitate 5G connectivity, such as the addition of Sub-6Ghz and mmWave frequency bands. There is likelihood for 2 variant of configuration, a sub-6Ghz standalone and a Sub-6Ghz + mmWave model. Such configuration is in tandem with 5G developments roadmap where Asia and Europe regions are gravitating towards Sub-6Ghz, while the US are have started mmWave adoption. This bodes well for MPI (OP; FV: RM13.30) who is in the supply chain for Sub-6Ghz RF. Although Unisem (UP; FV: RM2.00) may also benefit by being in the RF supply chain, we are keeping an UNDERPERFORM rating at the moment as further cost incurred for the closure of its Batam plant may weigh on earnings.
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