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Thursday, May 7, 2009

Semiconductor

• Some glimmers of hope… Rays of hope are permeating the semiconductor
industry, which probably saw most of the bad news in 1QCY09. Global chip sales
improved slightly in Mar 09 with a 30.0% yoy decline compared with a 30.1% yoy
fall in Feb 09. The book-to-bill ratio has ticked up with preliminary Mar 09 numbers
hitting 0.61x, up from Feb 09’s abysmal 0.47x. Finally, utilisation rates have scraped
bottom as some production facilities have been shuttered and inventory control is
being exercised. The end-user markets appear to have troughed, with PC and
handset sales probably hitting the bottom. Furthermore, trade credit is now
normalising. That said, stabilisation does not equate to a recovery and we believe
that restocking activity as inventory runs low is the primary factor in the improving
outlook. We still expect 2009 to be a difficult year where the typical seasonal pick up
in 3Q may not materialise given the current re-stocking activities.
• …but no full-blown recovery until 2010. We argue that a true recovery will only
take root when the global economy begins to move upwards. A meaningful and
sustained recovery will only take place when consumer sentiment and spending
spring back to life and cause ASPs to start rising. We believe that a more
convincing uptrend will take hold only from 2H10 onwards.
• Global economies to start stabilising towards year-end. Our economists believe
that the world economy will feel the full impact of the global financial crisis this year.
Although the process of sorting out the financial system will take time and
resources, the cumulative effects of sizeable fiscal stimuli and aggressive monetary
easing globally will work to provide some stability. Recent global indicators are less
negative. Considering the extremely low base this year, global growth should pick
up in 2010 but will probably fall short of its long-run average growth rate of 3.7%.
• Upgrade sector to TRADING BUY. While the fundamentals for the sector remain
uncertain, we think that downside to share prices is limited as valuations are still
below trough levels. We upgrade the sector from Underperform to TRADING BUY.
Furthermore, in line with our market strategy, we think that investors’ risk appetite is
increasing and higher beta plays such as semicon should be in vogue. Investors
should start picking up semicon stocks ahead of the recovery of the sector as
historically, the share prices for both MPI and Unisem cratered 13-18 months before
the upturn of the sector. Sector catalysts include a) a sooner-than-expected revival
of end-user demand and b) a faster-than-expected economic recovery.
• Upgrade Unisem and MPI to Trading Buy. In tandem with the sector upgrade, we
upgrade MPI and Unisem from Underperform to Trading Buy. We raise our target
prices for both after cutting our discounts to their 5-year historical average by 30-
60% pts to 20-40% for Unisem and MPI respectively. We assign a lower discount to
Unisem, our top pick, as its higher liquidity and beta make it a better play on a
market rebound. Re-rating catalysts include a) qoq improvement in earnings, b)
revival of end demand and c) the higher betas on offer.

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