|Lim & Tan Research recently posted: "Overweight tech sector". Which semiconductor stocks?" Below are excerpts from DBS' 8-page report on the upside potential of tech/semiconductor stocks.
Excerpts from DBS report
Analysts: Lee Keng LING & Woo Kim TOH
• Players with diversified geographical footprint will benefit from supply chain shift led by trade war and COVID-19
• COVID-19 accelerating digital transformation pace – benefits those with exposure to servers, storage, chips
• Semiconductor plays still in favour – AEM, UMS, Frencken; DELTA for exposure to data center
The best performing sector despite recent consolidation. Despite recent consolidation, the FTSE Technology Index (FSTTG Index) was the best performer and the only index to register a positive return YTD; the FSTTG Index outperformed the STI by 26.7%.
The adoption of new technologies - Internet of Things, Big Data, Artificial Intelligence and 5G - is driving new demand.
"Our preference is still on stocks in the semiconductor, medical and server/data space. This includes the two pure semiconductor plays, AEM, which we have upgraded to BUY after close to two months of consolidation, and UMS. Both AEM and UMS derive >90% of their revenue from their semiconductor customers. We also like Frencken, which has an 18% exposure to the semiconductor sector, based on FY19 revenue. All three stocks have already recovered beyond the pre-COVID level."
-- DBS report
Players with diversified geographical footprint will benefit from shift in supply chain. The onset of the US-China trade war, and now COVID-19 pandemic, is accelerating the shift of supply chains out of China.
Companies with manufacturing facilities outside China would benefit from this shift. All the stocks in our coverage list have manufacturing facilities outside China. (refer to page 5 on manufacturing footprints)
COVID-19 stepping up pace of digital transformation. The pandemic has structurally increased the need for digital transformation.
Demand for servers, storage, and network related products surged. Semiconductor plays, which are at the front end of the technology value chain, are key beneficiaries, while INRI is a direct exposure to the 5G theme.
We also like DELTA for its exposure to data center business.
|Continue to prefer semiconductor plays. SEMI expects global fab equipment spending to jump 24% y-o-y in 2021, 10ppts higher than its previous forecast made in 1Q 2020. The May semiconductor equipment billing data is up 14% y-o-y.
We continue to expect semiconductor stocks to outperform, with or without COVID-19.
AEM was upgraded to BUY from Hold with a higher TP of S$3.53; Frencken’s TP is raised to S$1.02. UMS remains a BUY, S$1.04 TP.
Exposure to medical and medical-related segments is also an added advantage for Venture, Frencken, Fu Yu, MPI (Malaysian Pacific Industries) during this pandemic.
Key risks: Escalation of US-China tensions, USD decline
Full report here.