The earnings of the semiconductor sector may still be weak but that has not stopped some analysts from feeling that the time to start buying into the sector is now.
CIMB Research head Terence Wong believes that while share prices of semiconductor stocks have factored in the negatives and downside is limited, there may be price weakness when the first-quarter results are released. Hence, Wong may use this as a buying opportunity.
Data wise, manufacturers of semiconductor equipment received US$1.33bil (RM3.99bil) worth of orders in February 2012, which lifted the SEMI book-to-bill ratio above parity to 1.01 times for the first time since September 2010.
The SEMI book-to-bill is a ratio of three-month moving averages of worldwide bookings and billings for North American-based semiconductor equipment manufacturers
“This is a clear sign that demand recovery is under way. This is good news for share prices of semiconductor manufacturers as they also tend to track the book-to-bill ratio, which is usually used as a lead indicator. Even though the first quarter is expected to be weak, we think that the industry is about to take a turn for the better and real demand will return in the second half of 2012,” said Wong.
Another indicator pointed out by CIMB was that utilisation rates had been coming off since the second quarter of 2010 and were now close to seasonal lows. Inventory levels have fallen below consumption levels and orders have been gaining momentum since January 2012.
For the local semiconductor manufacturers, utilisation rates have fallen much closer to the seasonal lows, at about 60%.
“We expect rates to start picking up gradually in the second quarter of 2012. Although the all-time lows are below 50%, we do not foresee this happening unless the global economy slumps, which is unlikely as recent macro-economic data show that the economies are slowly turning positive,” said Wong.
Not all are convinced that the time for feeling more positive on semiconductor stocks is now.
Kenanga Research, however, feels that with the SEMI book-to-bill ratio below the unitary value for 16 straight months, this indicates the electrical and electronics subsector is still sluggish.
“Global semiconductor shipments will probably continue to post declines for the rest of the first half of 2012 until demand in major consumer markets improve,” it said.
“Although US consumer spending will pick up on an improving labour market outlook, the same cannot be said for eurozone, as the unemployment rate is considered to be very sticky downwards against the backdrop of the debt crisis.”
On the downside, semiconductor inventories in the first quarter of 2011 were at their highest level since 2001,
Despite hitting an 11-year high in the fourth quarter, average semiconductor days or inventory held by chip suppliers is expected to decline by 0.5% in the first quarter of 2012, providing some hope that market conditions are improving.
“Nonetheless, should semiconductor demand rise more than projected, companies holding excess inventory could turn that to their advantage because they will be in a better position than those that have become too lean,” said Wong.
For the first quarter, Unisem (M) Bhd is guiding for an 8% quarter-on-quarter drop in topline as conditions remained soft in January and February due to the inventory correction, fewer working days due to festive and public holidays and a sluggish PC market.
For Malaysian Pacific Industries Bhd, it has guided for flat topline and potentially an improvement in bottomline from cost savings arising from its high density production line and operational adjustments.
Both companies have announced that they expected demand to start picking up in the second quarter of 2012 and in a bigger way in the second half of the year.
So far, Wong said that the outlook from customers for the first quarter of 2012 had been mixed.
For example, Texas Instruments Inc and Maxim Intergrated Products are guiding for a 4% to 12% and 1% to 6% drop in first quarter sales respectively as they expect inventory management to carry over from the fourth quarter of 2011.
Meanwhile, Analog Devices has projected a 1% to 4% growth as inventories are currently below consumption rates and order rates increased significantly during the first six weeks of the first quarter of 2012.