PP 7767/09/2010(025354)

14 April 2010

Malaysia Corporate Highlights

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

Sector Upda te
14 April 2010
MARKET DATELINE

Recom : Overweight
Semiconductor (Maintained)

Intel 1Q Earning Boosted By Stronger-Than-Expected

PC Sales

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 3.00 3.74 20.5 31.0 77.6 51.5 13.4 8.9 1.7 4.2 1.8 OP
MPI* Jun 7.02 8.46 42.6 66.0 700.2 54.9 15.6 10.0 1.9 3.9 7.9 OP
Notion Vtec Sep 3.32 4.59 33.4 45.9 30.4 37.5 10.1 7.3 2.5 7.1 2.0 OP
Sector Avg 65.8 50.1 13.3 8.8

* FY11 & FY12 Chart 1. Semiconductor

Capital Equipment Trend
♦ Intel sees stronger recovery for PC in 2010. Intel reported 1QFY10
revenue of US$10.3bn (+44% yoy, -3% qoq) and earnings of US$2.4bn $2,500.0

$2,000.0
(+288% yoy, +7% qoq) on the back of stronger-than-expected demand

US$mil
$1,500.0
for microprocessor arising from notebook sales and network servers. We $1,000.0

believe Intel’s 2Q-3QFY10 earnings would remain strong driven by $500.0

notebook/netbook sales from emerging markets i.e. China and India, $0.0

9
underpinned by the rising consumer spending as well as resilient

-0

-0

-0

-0

-0

-0

-0

-0

-0
ar

ar

ar

ar

ar

ar

ar

ar

ar
M

M
corporate IT capex. Bookings (3mma) Billings (3mma)

♦ LCD TV makers boost output as demand rises. In addition, major Source:Semi

Japanese LCD TV producers (i.e. Sharp and Panasonic) are expected to
ramp up output significantly in 2010, given the sharp recovery in flat- Chart 2. Global Chip sales vs. Book to
Bill
screen TV demand as well as the launch of 3-D TV in a major way. We 1.4 60.0%

understand that panel producers are targeting more mature markets such
Global sales yoy (RHS), % 50.0%
1.2
book to bill (LHS), x
40.0%

as the US, Europe and Japan for the higher-end 3-D TV as discount 1.0
30.0%

20.0%

brands continue to eat away market share for the normal panels, where
0.8
Ratio

10.0%

0.6

profits have been sapped by price declines.

0.0%

0.4 -10.0%

-20.0%

♦
0.2

ASP supported by resilient chips demand. In our view, average 0.0

-30.0%

-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
selling prices (ASP) for chips would remain resilient given still tight chips
supply amidst slower-than-expected ramp-up in SATS (subcontracting, Source: SIA

assembly, testing and services) capacity as well as tight inventory

management by chip suppliers. While 1Q10 ASP for DRAM was lower
marginally (mainly due to seasonal factor), but we highlight that DRAM
prices were up by a stronger 16-21% qoq in 3Q-4Q09 respectively driven
mainly by the foundries’ tight capacity and stronger-than-expected
demand from the PC segment.

♦ 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. Medium term,
we believe Unisem and MPI share prices would likely be driven by
stronger-than-expected earnings from technology giants such as IBM,
Apple and Cisco. Hence, against the backdrop of improved earnings Wong Chin Wai
visibility and stronger chip sales in 2010, we are reiterating our (603) 92802158
wong.chin.wai@rhb.com.my
Overweight stance on the sector. Our top pick for the sector is Unisem
(FV=RM3.74/share).

Please read important disclosures at the end of this report.

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 14 April 2010

♦ Intel sees stronger recovery for PC in 2010. Intel reported 1QFY10 revenue of US$10.3bn (+44% yoy, -3%
qoq) and earnings of US$2.4bn (+288% yoy, +7% qoq) on the back of stronger-than-expected demand for
microprocessor arising from notebook sales and network servers. We believe Intel’s 2Q-3QFY10 earnings would
remain strong driven by notebook/netbook sales from emerging markets i.e. China and India, underpinned by
the rising consumer spending as well as resilient corporate IT capex. Hence, with PC segment contributing to 20-
30% of global chip sales, we expect stronger chip sales growth in 2010. Accordingly, Gartner has projected
worldwide PC shipments to grow 20% in 2010 driven mainly by strong demand in mobile computers and the new
slate tablets.

♦ Foundry giants reported strong 1Q10, guiding stronger growth ahead. In the same vein, TSMC (world’s
largest foundry) and UMC, reported stronger-than-expected results, with 1Q10 revenue grew a whopping
133.4% and 146.5% yoy respectively. We understand the increase in sales in the first quarter was due to strong
demand in the panel sector i.e. laptops and smartphones from China as well as the low base factor in 1Q09.
Going forward, TSMC and UMC are expecting 2Q10 revenue to grow 10-20% sequentially as it is seeing visible
sales order stemming from strong demand for consumer gadgets.

♦ LCD TV makers boost output as demand rises. In addition, major Japanese LCD TV producers (i.e. Sharp
and Panasonic) are expected to ramp up output significantly in 2010, given the sharp recovery in flat-screen TV
demand as well as the launch of 3-D TV in a major way. We understand that panel producers are targeting
more mature markets such as the US, Europe and Japan for the higher-end 3-D TV as discount brands continue
to eat away market share for the normal panels, where profits have been sapped by price declines. Thus, we
believe medium-term chips demand from the TV segment would likely be driven by the stronger roll-out of 3-D
TV as well as resilient panel demand from the emerging market (i.e. China)

♦ ASP supported by resilient chips demand. In our view, average selling prices (ASP) for chips would remain
resilient 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. While 1Q10 ASP for
DRAM was lower marginally (mainly due to seasonal factor), but we highlight that DRAM prices were up by a
stronger 16-21% qoq in 3Q-4Q09 respectively driven mainly by the foundries’ tight capacity and stronger-than-
expected demand from the PC segment. Hence, we believe medium term chips ASP would remain supported
given still-tight chips supply and growing strength in the end-market (i.e. PC, LCD TV and handheld devices)
demand.

♦ Higher-than-expected utilisation rates. According to Semiconductor International Capacity Statistics

(SICAS), worldwide utilisation rates remained high at 80-85% in 1Q10 (vs. 85-88% in 4Q09) despite the
seasonal weaker quarter, suggesting resilient chips demand going forward. Closer at home, note that 1Q10
capacity utilisation for Unisem and MPI were at its all-time high of around 90% mainly due to stronger-than-
expected chips demand from China. Looking forward, SEMI expects 2010 overall utilisation rates to exceed 95%
(vs. 77% in 2009), mainly due to slower-than-expected ramp up in SATS and wafer foundries.

Chart 3: IC Industry Capacity

2500 120

100
K W afers/W eek

2000
80
1500
60
1000
40
500 20

0 0
2Q 7
3Q 7
4Q 7
1Q 7
2Q 8
08

4Q 8
1Q 8
2Q 9
3Q 9
4Q 9
1Q 09
2Q 0f
3Q 0f
4Q 0f
f
10
0
0
0
0
0

0
0
0
0
0

1
1
1
1Q

3Q

Unutilised Capacity Utilised Capacity Percent Utilisation

Source: SICAS

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 14 April 2010

♦ Equipment order books remain positive. SEMI expects March equipment order to register stronger mom
growth amidst the strong capex spending by major foundries and SATS players. Already, ASML (the world
largest chips equipment producer) expects strong sequential growth driven mainly by strong demand from
foundries for its fine-pitch immersion machines (which are mainly used in the 45nm wafer technology). In
addition, we understand that equipment (i.e. packaging and chip testing machines) suppliers are currently
having difficulty coping with the surge in demand from SATS players such as Unisem and ASE.

Valuations And Recommendation

♦ Capacity expansion in Chengdu. Management has guided a higher capex in FY10 of US$60-$70m (vs. US$50
previously) with 75% of the capex to be spent in Chengdu’s capacity expansion. Note that Unisem expects its
QFN capacity in Chengdu to increase to 10m/day by 4Q10 (from 5m/day 4Q). Management expects FY10
revenue contribution from Chengdu to be driven mainly by: 1) stronger-than-expected chips demand from the
emerging economy; 2) still resilient demand for wireless and networking chips driven by China’s stimulus
package; and 3) higher capacity utilisation. Hence, given the stronger-than-expected medium-term chips
demand, we have tweaked upwards our FY10-12 earnings projections by 10.2%, 0.5%, and 0.12% respectively.
Accordingly, we have raised our fair value to RM3.74/share from RM3.39/share, which is based on unchanged
15x FY10 PER.

♦ 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. Thus, we have raised our FY10-12
earnings projections by 5.8%, 2.9%, and 0.91% respectively after factoring in stronger-than-expected medium-
term chips demand from China. Accordingly, our fair value has been raised to RM8.46/share from RM8.15/share
which is based on unchanged 15x CY10 PER.

♦ Riding on the electronic industry. We believe Notion’s earnings will be driven mainly by: 1) stronger demand
in the 2.5’’ HDD segment particularly the robust orders from Samsung; and 2) stronger contribution from its
camera division given volume loading from Nikon. We expect margins to remain stable supported by 1) stronger
contribution of higher-margin camera segment; 2) continuous stable HDD ASP; and 3) cost-cutting measures via
efficient in-house tooling capability. For now, we maintain our Outperform call with fair value of RM4.59/share
which is based on unchanged 10x FY11 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). Medium term, we believe
Unisem and MPI share price would likely be driven by stronger-than-expected earnings from technology giants
such as IBM, Apple and Cisco. Nevertheless, we highlight that we are still looking at FY11 EPS growth of 51.5%
and 54.9% for Unisem and MPI respectively, which implies stronger upside potential to our new fair value
estimates 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.

IMPORTANT DISCLOSURES

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information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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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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