PP 7767/09/2010(025354)

2 June 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
2 June 2010
MARKET DATELINE

Recom : Overweight
Semiconductor (Maintained)

Sustained Robust Chip Sales of +50.4% Yoy In April

Table 1 : Semiconductor Sector Valuations

EPS EPS growth PER P/NTA P/CF GDY
FYE Price FV (sen) (%) (x) (x) (x) (%) Rec
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
Unisem Dec 2.75 4.06 27.1 36.1 +>100 33.5 10.2 7.6 1.3 3.3 1.8 OP
MPI* Jun 6.35 8.46 45.1 67.6 +>100 49.8 14.1 9.4 1.4 3.5 3.1 OP
Notion Vtec Sep 2.69 4.68 34.7 46.8 35.3 35.1 7.8 5.7 2.0 5.7 2.4 OP
Sector Avg +>100 39.1 10.8 7.7

* FY11 & FY12

Chart 1. Semiconductor
♦ April chip sales up 50.4% yoy and 2.2% mom. The yoy sales growth Capital Equipment Trend

of 50.4% for April (vs. 58.6% yoy in March) was the sixth monthly gain
$2,500.0
on yoy basis – see chart 2. April 10 chip sales of US$23.6bn grew 2.2% $2,000.0

mom after a growth of +4.6% in April, mainly driven by the growing

US$mil
$1,500.0

demand for chips in wireless devices and improving sales from the $1,000.0

enterprise and the automotive sector. $500.0

$0.0

♦ Equipment bookings remain above parity. Apr 10 booking orders

0
-0

-0

-0

-0

-0

-0

-0

-0

-0

-1
ar

ar

ar

ar

ar

ar

ar

ar

ar

ar
M

M
surged 478.7% yoy (vs. 442.6% in Mar) to US$1.44bn mainly due to Bookings (3mma) Billings (3mma)

Source:Semi
higher investment in packaging, testing and fabrication equipment as well
as the low base factor in Apr 09. Furthermore, with a book-to-bill ratio of
1.13, Apr 10 was the tenth consecutive month of a book-to-bill ratio
above parity, suggesting resilient growth in capex trend since Jul 09.

♦ Top computer makers up revenue and profit, helped by corporate

spending. Dell and HP’s 1Q10 net profit jumped 52% and 28% yoy
respectively as revenue grew 21% and 13% yoy respectively on the back
of stronger-than-expected demand for computer related products as well
as improving spending by businesses. According to Dell, it performed
better as sales of servers, storage and services to businesses grew +38%
yoy driven by stronger sales in its business segments, mainly led by large
corporations (+25% yoy), governments (+22% yoy), and SMEs business
(+19% yoy). Similarly, HP expects stronger earnings growth ahead after
registering a stronger-than-expected growth in unit shipments of laptops
of 20% qoq in the 1Q on the heel of higher spending by businesses
replacing aging laptops.

♦ Risks. 1) Slower-than-expected economic recovery dampening demand

for equipment and consumer electronics; 2) Strengthening of RM against
US$; and 3) Higher raw material cost.

♦ Investment case. We are optimistic on the outlook for the

semiconductor sector, given an IT reorder cycle and strong demand for
Wong Chin Wai
key product segments such as digital cameras, mobile phones, and PCs as (603) 92802158
these will drive chips demand going forward. Hence, against the backdrop wong.chin.wai@rhb.com.my
of improved earnings visibility and stronger chip sales in 2010, we are
reiterating our Overweight stance on the sector. Our top pick for the Yap Huey Chiang
sector is Unisem (FV=RM4.06/share). (603) 92802166
yap.huey.chiang@rhb.com.my
Please read important disclosures at the end of this report.

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 2 June 2010

♦ April chip sales up 50.4% yoy and 2.2% mom. The yoy sales growth of 50.4% for April (vs. 58.6% yoy in
March) was the sixth monthly gain on yoy basis – see Chart 2. April 10 chip sales of US$23.6bn grew 2.2% mom
after a growth of +4.7% in April, mainly driven by the growing demand for chips in wireless devices and
improving sales from the enterprise and the automotive sector. Geographically, April 10 sales on a mom basis
from US, Europe, Japan, and Asia Pacific grew 3.1%, 0.5%, 2.3%, and 2.4% (vs. March 10: +5.6%, +7.1%,
+4.6%, and +3.8%) respectively.

Chart 2. Global Chip Sales vs. Book to Bill

1.4 70.0%

Global sales yoy (RHS), % 60.0%

1.2 book to bill (LHS), x
50.0%

1.0 40.0%

30.0%

0.8
20.0%
% yoy
Ratio

10.0%
0.6

0.0%

0.4 -10.0%

-20.0%
0.2
-30.0%

0.0 -40.0%
Jan-03
Mar-03
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Mar-10
♦ Taiwan and China collaboration. According to the Economist, Taiwanese and Chinese IT producers are
collaborating to leverage on each other’s advantages in efforts to boost capacity, encourage innovation, and
reduce costs. Note that Taiwan is the world’s largest makers of IT, producing more than 50% of all chips, nearly
70% of computer displays and more than 90% of all portable computers. We believe Taiwanese producers are
moving into cheaper countries such as China for cost advantage, and on the other hand, China will benefit from
the transferring of high-technological knowledge. Recently, the Chinese government hired Taiwanese firms to
improve on technical standards and at the same time, the Taiwanese government has repealed restrictions on
outbound investments, thus increase transfer of technology to China. For example, TSMC recently took an 8%
stake in China’s largest foundry, Semiconductor Manufacturing International Corporation (SMIC). Hence, we
believe these developments bode well for the semiconductor industry as these will reduce the risk of shortage of
supply of fabs and further facilitate expansion into new product markets such as solar panels and light-emitting
diodes.

♦ Equipment bookings remain above parity. Apr 10 booking orders surged 478.7% yoy (vs. 442.6% in Mar)
to US$1.44bn mainly due to higher investment in packaging, testing and fabrication equipment as well as the
low base factor in Apr 09. Furthermore, with a book-to-bill ratio of 1.13, Apr 10 was the tenth consecutive
month of a book-to-bill ratio above parity, suggesting resilient growth in capex trend since Jul 09. We believe
further capex spending would be driven by: 1) copper wire bonding capacity; and 2) investment in 200mm and
300mm wafer fabs. Note that MPI, Unisem, and Notion are in capacity expansion mode in anticipation of
stronger demand for consumer electronics in 2H2010. While Apr book-to-bill ratio of 1.13 eased marginally from
Mar 10 of 1.21, we believe this mitigates concerns of excessive expansion.

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 2 June 2010

♦ Heavy spending on signs of improving outlook. Similarly, electronic giants such as Samsung, Toshiba, and
LG are expected to double 2010 capex to US$16bn, US$14bn, and US$17bn respectively, mainly to meet the
stronger-than-expected demand for chips related electronics. Spending is expected to focus on manufacturing
miniaturisation packages in tandem with expectations of a growing demand for smaller form of devices i.e. 3G
handsets, tablets, and notebooks.

♦ Top computer makers up revenue and profit, helped by corporate spending. Dell and HP’s 1Q10 net
profit jumped 52% and 28% yoy respectively as revenue grew 21% and 13% yoy respectively on the back of
stronger-than-expected demand for computer related products as well as improving spending by businesses.
According to Dell, it performed better as sales of servers, storage and services to businesses grew +38% yoy
driven by stronger sales in its business segments, mainly led by large corporations (+25% yoy), governments
(+22% yoy), and SMEs business (+19% yoy). Similarly, HP expects stronger earnings growth ahead after
registering a stronger-than-expected growth in unit shipments of laptops of 20% qoq in the 1Q on the heel of
higher spending by businesses to replace aging laptops.

♦ Silicon wafer shipments up in 1Q, chip houses see a strong 3Q10. According to Semi, 1Q worldwide
silicon wafer shipments increased 5% to 2,214m sq inches, the highest since 3Q08. It was the fourth
consecutive quarter of growth in silicon shipments suggesting a robust demand for chip packaging and testing
houses, which are expecting a sequential growth through the 3Q10. According to industry sources, demand for
wafer testing is expected to be stronger in 2Q-3Q as capacity expansion by foundries is set to complete around
mid-2010.

♦ LED panel shipments to grow 135%. According to iSuppli, shipments of large-size panels with LED backlights
are expected to reach 276.7m units (see Chart 3) in 2010 (+135% yoy) on the back of strong demand for TVs,
notebooks and desktop as well as stronger-than-expected usage in other products. For example, LED backlights
are increasingly being incorporated in electronic signage, industrial and medical applications. LED is said to be
more popular due to its superior advantage to the older CCFL technology, as well as being slimmer in design,
lighter, lower power consumption, and environmentally friendly (non-mercury). Note that iSuppli has forecast
LED backlight units in panel TV, notebooks, and PC monitors to grow by 18.4%, 88.0% and 20.8% respectively
in FY10.

Chart 3: Global shipments of LED-backlit large-size Panels

900
800
700
m units

600
500
400
300
200
100
0
2009 2010f 2011f 2012f 2013f 2014f

Source: iSuppli

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 2 June 2010

Valuations and Recommendation

♦ Unisem: Capacity expansion in Chengdu. Management had indicated that capex in FY10 will mainly be used
for capacity expansion in Chengdu by acquiring additional copper wire-bonders. Unisem expects its QFN capacity
in Chengdu to increase to 7m/day by 2Q and 9m/day by 4Q10 (vs. 6m/day in 1Q10). Note that Unisem had
spent 75% of the capex in 1Q10 (vs. 49% in 4Q09). Management expects FY10 revenue contribution from
Chengdu to be driven mainly by: 1) stronger-than-expected chips demand from the emerging economies; 2) still
resilient demand for wireless and networking chips driven by China’s stimulus package; and 3) higher capacity
utilisation. We reiterate our fair value of RM4.06/share which is based on unchanged 15x FY10 PER.

♦ MPI: Capacity expansion and roll-out of new packages in Suzhou. We believe MPI’s medium-term
earnings visibility remains bright given still-resilient chips demand from China. Further-out, we highlight that
earnings growth would be driven by stronger chips demand from US and Europe as well as margin expansion
stemming from higher contribution of high-density packages and module packages. We maintain our fair value
of RM8.46/share which is based on unchanged 15x CY10 PER.

♦ Notion Vtec: Riding on the electronic industry. We believe Notion’s earnings will be driven mainly by: 1)
stronger demand in the 2.5’’ HDD segment particularly the robust orders from Samsung; and 2) stronger
contribution from its camera division given volume loading from Nikon. We maintain fair value of RM4.68/share
which is based on unchanged 10x FY11 PER.

♦ Reiterate Overweight. We are optimistic for the outlook for the semiconductor sector, given an IT reorder
cycle and strong demand for key product segments such as digital cameras, mobile phones, and PCs as these
will drive chips demand going forward. Hence, against the backdrop of improved earnings visibility and stronger
chip sales in 2010, we are reiterating our Overweight stance on the sector. Our top pick for the sector is
Unisem.

IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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