Technology - Sticking To Our Bullish Stance
13 Mar 2015, 01:48 PM
We remain OVERWEIGHT on the technology sector as we expect the continued weakness in the MYR/USD rate to support sentiment in the near term. Over the medium term, we remain positive on the global sales of smart devices on cheaper price points and the introduction of new flagship models. Our Top Buys are Prestariang and Inari.
MYR weakness. The majority of the technology companies listed in Malaysia are export-oriented, with over 90% of their products typically shipped to foreign countries in USD terms. Hence, the recent weakness of the MYR against the USD could help to drive earnings growth for these players come their 1Q15 results release by April/May. To recap, USD/MYR averaged at MYR3.60 YTD vis-à-vis 4Q14’s MYR3.37 (+6.8% QoQ) and 1Q14’s MYR3.30 (+9.1% YoY). Our in-house 2015 USD/MYR forecast currently stands at an average of MYR3.60. That said, we do not discount the possibility of short-term volatility on the upside and estimate that every 1% depreciation of the MYR against the USD could translate into a potential earnings upgrade of 3-5% for the technology manufacturers under our coverage ceteris paribus.
Brisk sales of new flagship models. Gartner Research reported that global smartphones sales closed at a record high of 1.24bn (+28.4% YoY) units in 2014. We expect the positive momentum to sustain for 2015, albeit at a relatively more moderate 10-15% growth. This will be driven by the launch of new flagship models with improved hardware specifications in tandem with upgrades of operating systems. Notably in 4Q14, Apple (APPL US, NR) overtook Samsung (5930 KS, NR) to
become the largest smartphone maker, having sold over 74.8m devices compared with Samsung’s 73.0m. The consensus is now forecasting the group to sell 55m-65m iPhones in 1Q15 (vis-à-vis 44m units in 1Q14). Samsung, meanwhile, unveiled its latest flagship devices, ie the Galaxy S6 and curved Galaxy S6 Edge in early March. Since then, the Korean handset maker has broken its own pre-order record, clocking in 20m pre-orders so far, according to local media Korea Times. Xiaomi reiterates its target to sell 100m devices in 2015 (from 61.1m units in 2014). This, in our view, will be supported by its maiden high-end phablet offering, ie Mi Note and Mi Note Pro series, which were sold out in a record 3-minute session during its sales launch in January.
Watch out for other smart devices. We continue to believe the potential adoption of wearable electronic devices could help spur consumer spending on technology gadgets over the next 2-3 years. Ovum predicts that 400m wearable devices will be sold in 2020, up from 24m units in 2014. We see potential in the smartwatch space, although volume would likely be relatively insignificant to the smartphone industry for now, driven by cheaper price points as well as improvements in the smartwatch-focus application ecosystem. We believe the product will appeal to health-conscious consumers as it allows users to track fitness levels and to integrate data collected into a single account to provide useful insights.
1Q15 earnings could surprise on the upside
The majority of the technology companies listed in Malaysia are export-oriented, with over 90% of their products typically shipped to foreign countries quoted in USD terms. As such, the MYR’s recent weakness against the USD will likely help to propel earnings growth for these players come their 1Q15 results release by April/May. The USD/MYR has averaged at MYR3.60 YTD vis-à-vis 4Q14’s MYR3.37 (+6.8% QoQ) and 1Q14’s MYR3.30 (+9.1% YoY).
We expect the current downtrend to persist over the immediate term as the US Federal Reserve is widely anticipated to raise the country’s interest rate in due course and as investors, in our view, are pricing in the potential downgrade of Malaysia's sovereign ratings by Fitch Ratings come 2Q15. Our in-house 2015 USD/MYR forecast is at an average of MYR3.60. That said, we do not discount the possibility of short-term volatility on the upside and estimate that every 1% depreciation in MYR against USD could mean a potential earnings upgrade of 3-5% for the technology manufacturers under our coverage, ceteris paribus.
Brisk sales of new flagship models
According to statistics from Gartner Research, global smartphones sales closed at a record high of 1.24bn (+28.4% YoY) units in 2014. We expect this positive momentum to sustain for 2015, though at a relatively more moderate 10-15% growth. This will be driven by the launch of new flagship models with improved hardware specifications, in tandem with upgrades of operating systems.
Notably in 4Q14, Apple overtook Samsung to become the top smartphone maker, selling over 74.8m devices compared with Samsung’s 73.0m. The consensus currently forecasts that the group would sell 55m-65m iPhones in 1Q15 (vis-à-vis 44m units in 1Q14).
To counter its market share decline, Samsung unveiled its latest flagship devices, ie the Galaxy S6 and curved Galaxy S6 Edge in early March. Since then, the Korean handset maker has broken its own pre-order record, clocking in 20m pre-orders so far, according to Korea Times. HTC (2498 TT, NR), too, announced its 2015 flagship model, ie the HTC One M9, which is reportedly set to be launched by end-March. Within the mass market segment, meanwhile, Xiaomi has reiterated its target to sell 100m devices in 2015 (from 61.1m units in 2014). This, in our view, will be supported by its maiden high-end phablet offering, ie Mi Note and Mi Note Pro series, which were sold out in a record 3-minute session during the sales launch in January.
Tablets to see revamped product line-up
On the flip side, however, global tablet sales showed some signs of weakness as 4Q14 shipments registered their first YoY decline of 3.2% to close at 76.1m, based on International Data Corporation’s (IDC) compilation. We attribute the weakness to
the cannibalisation impact from the introduction of bigger-screen phablets and a lack of innovation in products launched over the past six months.
That said, we believe some of these weaknesses will likely be addressed in the upcoming launches come 2H15. Of note, Apple is reportedly looking to launch a larger 12.9 inch-screen iPad in September after witnessing an 18.0% YoY drop in its 4Q14 iPad sales. Local media reports suggest that the company is looking to incorporate USB ports into its next-generation iPads to help facilitate transfers of data as the group attempts to penetrate into business users under the enterprise market. Within the Android camp, we expect demand for tablets to be driven by the introduction of productivity-focused applications and technology innovations such as smart gesture interface.
Watch out for smart wearables
We continue to believe the potential adoption of wearable electronic devices could help spur consumer spending on technology gadgets over the next 2-3 years. Ovum predicts that 400m wearable devices will be sold in 2020, up from 24m units in 2014. We see potential in the smartwatch space, although volume would likely be relatively insignificant to the smartphone industry for now, driven by cheaper price points as well as improvements in the smartwatch-focus application ecosystem. We believe the product will appeal to health-conscious consumers as it enables users to keep track of their fitness levels and integrate data collected into a single account, which would provide them with useful insights.
On the premium segment, Apple has finally confirmed that its own smartwatch series, known as Apple Watch, will be available for sale come 24 April. Prices range from an affordable level of USD349 to as high as USD17,000 per unit. Although reviews have thus far been mixed due to lack of new applications, we expect interest to pick up over time upon the introduction of third-party applications to help improve the functionality of the watch.
With Apple coming into the picture, we expect existing non-Apple smartwatch manufacturers to improve on their offerings by revamping their respective user interfaces, designs and user-friendliness and potentially revisit their price points. The recently-concluded Mobile World Congress 2015 in Barcelona, Spain witnessed major smartphone brands such as Huawei, ZTE (763 HK, NR), and LG (66570 KS, NR) all unveiling their respective smartwatch product line-ups. Pebble, a smartwatch brand that was born from crowd-funding also announced its follow-up act in the form of Pebble Time in late February.
Watch out for potential contract flows for non-manufacturing players On the non-manufacturing technology stocks under our coverage, we like Prestariang (PRES MK, BUY, TP: MYR3.03) as we are adamant that the group will register its all-time high earnings in FY15, leveraging on its recently-secured Microsoft contract as the sole supplier of Microsoft solutions to the public sector. Besides that, we expect its share price to further re-rate over the near term due to a stream of positive news flow on potential orderbook replenishment over the next 1-6 months. The group is looking to secure renewals for its previously expired contracts like IC Citizen and Program Pentauliahan Profesional in 2Q15. This will help to address its underperformance in 2014 and ease concerns on a further earnings drag. The proposed partnership with Majlis Amanah Rakyat, which the group is expecting to finalise by end-March, will help its university to finally break even this year – with positive earnings accretion come FY16. In addition, Prestariang is looking to conclude its proposed training course for the Program for International Student Assessment (PISA) by 2H this year. We believe the contract will likely have a tenure of 6-8 years and could potentially end up as its single-largest contract at total value of >MYR500m. If it materialises, we see room for an earnings re-rating, as we have yet to factor in any contribution from PISA.
We also like Datasonic (DSON MK, BUY, TP: MYR1.66) as its outstanding orderbook of 7.5m MyKad copies plus 5.5m national passports’ polycarbonate data pages as of Dec 2014 would continue to drive its earnings momentum for 2015. In addition, our channel checks indicate that the group could be eyeing the contract to provide smart chips for Malaysian passports by 3Q15. Under the current arrangement, smart chips are embedded in the back cover of Malaysian passports. Our sources gathered that it is currently proposing to integrate the contactless chip into the polycarbonate data page, in order to enhance security. Given Datasonic’s existing position as the sole supplier of the polycarbonate data page, we like its chances of securing this job as we anticipate potential cost synergies.
Reiterate OVERWEIGHT stance
We reiterate our OVERWEIGHT stance on the technology sector as we expect near-term sentiment to be supported by continued weakness in MYR against USD. Over the medium term, we remain positive on the global sales of smart devices on cheaper price points as well as the introduction of new flagship models. Our Top Buys are Prestariang and Inari Amertron (INRI MK, BUY, TP: MYR3.74). We continue to advise investors to seize the opportunity to increase their exposure to the technology sector given that:
i) Lower oil prices would help to increase consumers’ spending power in oil-importing economies such as China, Japan, India, Europe and the US. Ultimately, this would help to boost domestic consumption and potentially lift demand for technology products in the immediate term.
ii) Recent weakness of the MYR against the USD will likely help to propel earnings growth for these players come their 1Q15 results release. To recap, USD/MYR averaged at MYR3.60 YTD vis-à-vis 4Q14’s MYR3.37 and 1Q14’s MYR3.30. Our in-house 2015 USD/MYR forecast currently stands at an average of MYR3.60.
iii) Continued strength in the demand for semiconductor components, which is underpinned by resilient demand growth of smartphones amid the proliferation of competitively-priced models. On top of that, the potential mass-market adoption of smart wearable devices could come in as a wild card to further re-rate the demand for technology devices.
Within the smart device-centric semiconductor assembly and test services sector, we prefer Inari Amertron over Globetronics Technology (GTB MK, NEUTRAL, TP: MYR4.95), as: i) the former offers relatively more exciting growth prospects at a
CAGR of 28% for FY15F-17F, underpinned by growth in demand for its major customer Avago Technologies’ (AVGO US, NR) radio frequency-related products, and ii) diversification into new businesses such as fibre optics and electronics test
and measurement segment to boost its recurring earnings base over the long term. Amongst the semiconductor players in general, we prefer Malaysian Pacific Industries (MPI MK, BUY, TP: MYR7.69) over Unisem (UNI MK, NEUTRAL, TP: MYR2.30) given the former’s relatively more attractive current valuations and potential dilution impact on the latter upon the conversion of its outstanding warrants. On a side note, we ceased coverage on Notion VTec (NVB MK, NR) during the quarter due to its subpar earnings visibility, as we foresee further weakness in its camera segment on the proliferation of smartphones with improved cameras, and believe earnings accretion from its smartphone venture is unlikely to be significant for now.
Source: RHB
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