By Kevin Tan
Thu, 8 Jul 2010, 08:54:44 SGT

In line with our expectation that the worldwide semiconductor sales growth is likely to accelerate in May, statistics as published by Semiconductor Industry Association (SIA) on Tuesday showed that the global sales indeed posted a 4.5% MoM growth in May, up from 2.2% MoM growth in April. This set of strong monthly results further support our view that the semiconductor industry is likely to see a sustainable recovery in 2010, driven by a brighter economic outlook, and higher consumer and corporate spending. According to SIA, the global chip sales also remain on track to reach its forecast of 28.4% growth in 2010. As such, we remain positive on the industry’s growth prospects in the coming quarters as well. We continue to favour semiconductor companies like Avi-Tech Electronics (BUY, S$0.24 fair value) and Micro-Mechanics (BUY, S$0.57 fair value) for their growth potential, proven track record, strong financial position and sturdy operating cashflows. Both companies also offer attractive FY11F dividend yields of 6-9%. We reiterate our OVERWEIGHT view on the semiconductor industry.

Semiconductor sales growth accelerated in May as expected. In line with our expectation that the worldwide semiconductor sales growth is likely to accelerate in May, statistics as published by Semiconductor Industry Association (SIA) on Tuesday showed that the global sales indeed posted a 4.5% MoM growth (+47.6% YoY) in May, up from 2.2% MoM (+50.4% YoY) rise in April. In addition, the growth was again ahead of market’s expectation and also set another record high for the third month running. This set of strong monthly results further support our view that the semiconductor industry is likely to see a sustainable recovery in 2010, driven by a brighter economic outlook, and higher consumer and corporate spending.

On pace to reach SIA’s forecast of 28.4% growth. We also note that the growth of semiconductor sales in May was the strongest in the Americas and Asia Pacific regions, increasing by 8.2% MoM and 5.0% MoM respectively. As June is typically a strong month, we believe sales for the upcoming month is likely to sustain at May level or show further improvement. This may in turn translate to better quarterly sales and earnings among the semiconductor companies under our coverage, considering the significant exposure and robust growth they face in these regions. According to SIA, the global chip sales also remain on track to reach its forecast of 28.4% growth in 2010. As such, we remain positive on the industry’s growth prospects in the coming quarters as well.

Semiconductor inventory remains lean; components’ demand outstrips supply. Against concerns of moderating demand after the end of restocking cycle in the semiconductor industry (which started since 4Q09), we also note that market watcher iSuppli had recently announced that the chip inventory levels among semiconductor suppliers remain at ‘extremely low levels’ and that Days of Inventory (DOI) appear to be significantly less that what were reported in companies’ financial reports. We see this as a positive indicator as it suggests continued strong demand in the downstream and lower risks of oversupply situation in market.

Maintain OVERWEIGHT. We continue to favour semiconductor companies like Avi-Tech Electronics (BUY, S$0.24 fair value) and Micro-Mechanics (BUY, S$0.57 fair value) for their growth potential, proven track record, strong financial position and sturdy operating cashflows. Both companies also offer attractive FY11F dividend yields of 6-9%. We reiterate our OVERWEIGHT view on the semiconductor industry.