By Kevin Tan
Thu, 4 Mar 2010, 08:51:04 SGT

Recent quarterly results by semiconductor companies under coverage showed that chip and related segmental sales had improved in 4Q09, in line with our expectations. However, both companies’ capital equipment segmental performances disappointed in the quarter due to still weak business conditions in the capital equipment market. Going forward, however, we are keeping our view that chip companies are likely to expand their capacity in 2010 amid rising utilization rates and an improving market outlook, hence spurring the sales of chip manufacturing equipment. Jan Book-to-Bill ratio of 1.20 (up from 1.03 in Dec and 0.47 in Jan 2009) provided by industry watcher SEMI appears to reinforce our point for higher capex spending plans by these companies. We also note that iSuppli and Gartner, amongst other firms, had recently upped their 2010 worldwide semiconductor revenue growth forecasts to 20-22% (from 13-15% range in late 2009), in view of healthy sales momentum and improvements in economic conditions. We believe this is an indication of better growth prospects for semiconductor companies. As such, we are upgrading the semiconductor sector to OVERWEIGHT from NEUTRAL.

Improvement in chip and related segmental sales. Recent quarterly results by semiconductor companies under coverage showed that chip and related segmental sales had improved in 4Q09, in line with our expectations. For Micro-Mechanics (MMH), its Semiconductor Tooling segment booked in a 25.0% YoY growth as it continued to benefit from a steady pick-up in customer orders. As for Avi-Tech Electronics, its Burn-In services and Board Manufacturing also registered an estimated 14.9% YoY increase in revenue collectively, driven by its initiatives in the US market and wider product offerings.

Capital equipment market remains soft. However, both companies’ capital equipment segmental performances disappointed in the quarter due to still weak business conditions in the capital equipment market. While MMH reported a 10.9% QoQ improvement in sales for its Custom Machining and Assembly (CMA) segment, it was down by 31.2% YoY. In the case of Avi-Tech, its Engineering Services revenue was down 73.7% YoY and 40.0% QoQ. We believe that this was due to conservative management of capacity by chip companies, resulting in a delay of orders for capital equipment.

Market recovery seems imminent. Going forward, however, we are keeping our view that chip companies are likely to hasten their capacity expansion in 2010 amid rising utilization rates in last three quarters and an improving market outlook, hence spurring the sales of chip manufacturing equipment. Jan Book-to-Bill ratio of 1.20 (up sharply from 1.03 in Dec and 0.47 in Jan 2009) provided by industry watcher SEMI suggests that these chip companies may have embarked on their higher capex spending plans. In fact, we note that the Jan bookings were at the highest level since Apr 2008 (+24.1% MoM, +308.5% YoY) and that many market research firms are expecting the overall capital equipment market to show an explosive 45-55% surge this year.

Double-digit growth in 2010. We also observe that iSuppli and Gartner, amongst other firms, had recently upped their 2010 worldwide semiconductor revenue growth forecasts to 20-22% (from 13-15% range in late 2009), in view of healthy sales momentum and improvements in economic conditions. We believe this is an indication of better growth prospects for semicon companies. As such, we are upgrading the semiconductor sector to OVERWEIGHT from NEUTRAL. Under our coverage, Avi-Tech is our preferred stock due to its attractive upside potential and strong financial position (net cash forming 78.1% of share price).