PP 7767/09/2010(025354)

2 March 2010

Malaysia Corporate Highlights

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

Sector Upda te
2 March 2010
MARKET DATELINE

Recom : Overweight
Semiconductor (Maintained)

Jan 10 Bucks The Normal Seasonal Trend

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 2.28 3.07 20.5 31.0 77.6 51.5 11.1 7.3 1.4 4.2 2.2 OP
MPI* Jun 6.31 8.15 42.6 66.0 700.2 54.9 14.8 9.6 1.8 3.9 8.3 OP
Sector Avg 80.1 45.5 12.5 8.6

* FY11 & FY12 Chart 1. Semiconductor

Capital Equipment Trend
♦ Jan chip sales bucked the normal seasonal trend. Jan 10 chip sales
of US$22.5bn (+0.3% mom) bucked the normal seasonally weaker sales $2,500.0

$2,000.0
in January mainly due to stronger-than-expected chip sales ahead of the

US$mil
$1,500.0
festive Chinese New Year sales. Moreover, the stronger yoy sales growth $1,000.0

of 47.2 % for Jan, the third monthly gain on yoy basis after 13 months of $500.0

yoy decline since Oct 08, was due to the low base factor in Jan 09. $0.0

9
-0

-0

-0

-0

-0

-0

-0

-0

-0
ar

ar

ar

ar

ar

ar

ar

ar

ar
♦

M
Stronger demand outlook for equipment in 2010. Jan 10 equipment Bookings (3mma) Billings (3mma)

orders were up a stronger 24.1% mom to US$1,132.4m (vs. +9.0% in

Dec 09), driven mainly by investments in test capacity as well as Source:Semi
stronger-than-expected capex spending by major foundries. Note that Jan
10 bookings were 3.5x higher than the 12-year low of US$247m in Mar
09. With a book-to-bill ratio of 1.20, Jan 10 was the seventh consecutive
month with a book-to-bill ratio of above one suggesting resilient growth in
capex trend beginning Jul-09. SEMI expects chip suppliers to increase
their capex spending by 45-60% yoy in 2010, spurred by higher IC
demand and capacity constraint in major chip segments (i.e. memory and
logic).

♦ Qoq gain bucked the normal seasonal trend. While the 1Q is

seasonally the weakest quarter (i.e. post festive sales), majority of chip
suppliers (i.e. Texas Instruments, Altera, Analog Devices and ON
Semiconductor) are guiding for a sequential increase in IC sales on the
back of: 1) stronger-than-expected demand for consumer electronics
from China ahead of the Chinese New Year (CNY festival); 2) pick-up in
demand for automotive chips stemming from the strong auto sales in
China (with passenger car unit sales growth of 52% yoy in 2009); and 3)
investment in 3G infrastructure on the back of China’s US$585bn stimulus
package.

♦ 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 believe the semiconductor sector is poised for a

stronger recovery in 2010 given stronger demand outlook. 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 (FV=RM3.07/share) given better
Wong Chin Wai
earnings visibility mainly due to stronger contribution from Unisem
(603) 92802158
Chengdu on the back of higher capacity (i.e. rising QFN capacity) and wong.chin.wai@rhb.com.my
margin expansion.

Please read important disclosures at the end of this report. Page 1 of 4

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 2 March 2010

♦ Jan chip sales bucks the normal seasonal trend. Jan 10 chip sales of US$22.5bn (+0.3% mom) bucked the
normal seasonally weaker sales in January mainly due to stronger-than-expected chip sales ahead of the festive
Chinese New Year sales. Moreover, the stronger yoy sales growth of 47.2 % for Jan, the third monthly gain on
yoy basis after 13 months of yoy decline since Oct 08, was due to the low base factor in Jan 09– see Chart 2.
Geographically, Jan 10 sales on a mom basis from US, Europe, Japan dipped 1.9%, 0.3% and 2.6% (vs. Dec 09:
1.4%, 2.5% and 6.0%) respectively. Jan 10 sales from Asia Pacific gained 2.0%% yoy (vs. +0.6% in Dec 09).

Chart 2. Global Chip Sales vs Book To Bill

1.4 60.0%

Global sales yoy (RHS), % 50.0%

1.2
book to bill (LHS), x
40.0%

1.0
30.0%

20.0%
0.8

% 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

May-03

Jul-03
Sep-03

Nov-03

Jan-04

Mar-04
May-04

Jul-04
Sep-04

Nov-04
Jan-05

Mar-05

May-05

Jul-05
Sep-05

Nov-05

Jan-06

Mar-06
May-06
Jul-06

Sep-06
Nov-06

Jan-07

Mar-07

May-07
Jul-07

Sep-07

Nov-07

Jan-08
Mar-08
May-08

Jul-08

Sep-08
Nov-08

Jan-09

Mar-09

May-09
Jul-09

Sep-09

Nov-09
Jan-10
Source: SIA, RHBRI

♦ Stronger demand outlook for equipment in 2010. Jan 10 equipment orders were up a stronger 24.1% mom
to US$1,132.4m (vs. +9.0% in Dec 09), driven mainly by investments in test capacity as well as stronger-than-
expected capex spending by major foundries. Note that Jan 10 bookings were 3.5x higher than the 12-year low
of US$247m in Mar 09. With a book-to-bill ratio of 1.20, Jan 10 was the seventh consecutive month with a book-
to-bill ratio of above one suggesting resilient growth in capex trend beginning Jul-09. SEMI expects chip
suppliers to increase their capex spending by 45-60% yoy in 2010, spurred by higher IC demand and capacity
constraint in major chip segments (i.e. memory and logic). We highlight that key drivers for a stronger capex
spending in 2010 would be:
1) Conversion from gold to copper wire-bonding. We understand that about 40% of the leading
semiconductor companies worldwide are currently using copper wire technology in their products, with the
balance planning to switch to copper wire in 1-2 years’ time. Recall that Unisem plans to spend around 20-
30% of its FY10 capex to boost its copper wire bonding capacity (via purchase of 120 wirebonders with
copper wire bonding capability). Furthermore, ASE, SPIL and Amkor have collectively announced plans to
grow capex from US$650m in 2009 to US$1bn in 2010, mainly driven by copper wire-bonding conversion
proces).
2) Resumption of DRAM & NAND process migration investments. According to industry sources, Samsung
(the largest memory producer) would be spending around US$6.5-7.3bn in 2010 to boost its memory fab
capacity in Korea.
3) Resilient wafer foundry capex spending. Given the stronger demand outlook for Apple’s A4 processor
(i.e. IPad microprocessor), Samsung Electronic is planning to spend around US$1bn to increase its 300-mm
foundry capacity in Austin and Korea. In addition, note that TSMC and UMC have raised 2010 capex guidance
to US$4.8bn and US$1.2-1.5bn (from US$2.7bn and US$1bn previously) against the backdrop of stronger
chips demand and technological advancement (i.e. migration to node <65nm).

Page 2 of 4

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available for download from www.rhbinvest.com
 2 March 2010

♦ Qoq gain bucked the normal seasonal trend. While the 1Q is seasonally the weakest quarter (i.e. post
festive sales), majority of chip suppliers (i.e. Texas Instruments, Altera, Analog Devices and ON Semiconductor)
are guiding for a sequential increase in IC sales on the back of: 1) stronger-than-expected demand for consumer
electronics from China ahead of the Chinese New Year (CNY festival); 2) pick-up in demand for automotive chips
stemming from the strong auto sales in China (with passenger car unit sales growth of 52% yoy in 2009); and
3) investment in 3G infrastructure on the back of China’s US$585bn stimulus package. Accordingly, Unisem
expects 1QFY12/10 revenue to increase 3-5% qoq (vs. -32.4% qoq in 1QFY12/09) driven by strong demand of
QFN and leadframe packages (PDIPW 8L and SOIC 8L). Nevertheless, on a qoq basis, Unisem expects revenue
to revert to a stronger growth beginning 2QFY12/10. Similarly, MPI guided for a stronger qoq growth in
3QFY06/10 revenue (vs. +11% qoq in 2QFY06/10) driven mainly by still resilient chips demand from China.

♦ Excess inventory to remain lean in 2010. In our view, global excess inventories are expected to remain lean
in 2010 given still tight chips supply amidst slower-than-expected ramp-up in SATS (subcontracting, assembly,
testing and services) capacity as well as tight inventory management by chip suppliers. In addition, iSuppli
expects 1Q10 global excess inventory level to decline to US$24.3m (-0.4% qoq, -4.0% yoy), which is 6.9%
below the excess inventory equilibrium level of US$26m.

Chart 3: Excess Inventory

36 4

2
34
0
32
-2
Inventory(US$m)

30
-4

QoQ(%)
28 -6

-8
26
-10
24
-12
22
-14

20 e) -16
7

9
0

0(
1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1
1Q

Inventory (US$m) QoQ

Source: iSuppli

Valuations And Recommendation

♦ Unisem riding on Chengdu’s growth. Management expects FY10 revenue contribution from Unisem Chengdu
to increase to 35% before rising to >50% in FY11 (from 20% in FY09), driven mainly by: 1) stronger-than-
expected chips demand arising from festive season sales (i.e. CNY) from China; and 2) still resilient demand for
wireless and networking chips driven by China’s stimulus package. The company expects Chengdu’s FY10
earnings to double on the back of higher capacity (i.e. rising QFN capacity) and margin expansion (due to
stronger contribution from higher ASP packages). Hence, against the backdrop of improved earnings visibility
and stronger-than-expected chip sales in 1Q10 and extending into 2Q10, we are reiterating our Outperform call
on the stock with an unchanged fair value of RM3.07/share.

♦ 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. Hence, we maintain our Outperform
call with fair value of RM8.15/share which is based on unchanged 15x CY10 PER.

♦ Reiterate Overweight. We believe the semiconductor sector is poised for a stronger recovery in 2010 given
stronger outlook for key product segments (i.e. PCs, mobile phones and LCD panels) as well as new electronic
gadgets/applications, 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.

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IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law.
The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may
differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not
to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein
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persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
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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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