PP 7767/09/2010(025354)

6 April 2010

Malaysia Corporate Highlights

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

Sector Upda te
6 April 2010
MARKET DATELINE

Semiconductor Recom : Overweight

(Maintained)
Feb Sales Up Strongly By 56.2% Yoy

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 2.75 3.39 20.5 31.0 77.6 51.5 13.4 8.9 1.7 4.2 1.8 OP
MPI Jun 6.63 8.15 42.6 66.0 700.2 54.9 15.6 10.0 1.9 3.9 7.9 OP
Notion Vtec Sep 3.36 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
♦ Feb chip sales up strongly yoy. The stronger yoy sales growth of
56.2% for Feb (vs. 47% in Jan) was the fourth monthly gain on yoy basis. $2,500.0

$2,000.0
However, Feb chip sales of US$22.0bn declined 1.3% mom after a gain in

US$mil
$1,500.0
Jan. This is not unexpected and wafer foundries have cut back on $1,000.0

production in anticipation of seasonally weaker sales in Feb. $500.0

$0.0

♦ Emerging markets are the growth drivers in 2010-11 for computer

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makers. Major computer suppliers (i.e. Acer and HP) expect notebook Bookings (3mma) Billings (3mma)

and netbook sales from emerging economies (i.e. China and Brazil) to
register stronger growth in 2010-11 given the pent-up demand as Source:Semi
consumers and corporates delay purchases of computers during the
global economic crisis. In terms of 2010 revenue contribution, computer
makers expect Asian market (including China) to overtake the combined
markets of Europe, the Middle East and Africa, thus pushing the US
market into third place.

♦ Major chip makers moving away from home turf to focus on high-
growth markets. In the same vein, major chip makers such Renesas
Electronics (Renesas) are looking into high-growth markets, moving away
from stagnant markets (i.e. Japan and US). The company aims to
increase its overseas presence by teaming up with more Chinese chip-
design houses and seeking orders from Taiwanese electronic makers that
develop and manufacture appliances sold under the Japanese brands. We
believe this will set a precedent for more M&A and technological
partnership involving Chinese and Taiwanese companies going forward.

♦ 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.
Wong Chin Wai
Our top pick for the sector is Unisem (FV=RM3.39/share) given better (603) 92802158
earnings visibility mainly due to stronger contribution from Unisem wong.chin.wai@rhb.com.my
Chengdu on the back of higher capacity (i.e. rising QFN capacity) and
margin expansion.

Please read important disclosures at the end of this report.

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 6 April 2010

♦ Feb chip sales up strongly yoy. The stronger yoy sales growth of 56.2% for Feb (vs. 47% in Jan) was the
fourth monthly gain on yoy basis (see Chart 2). However, Feb chip sales of US$22.0bn declined 1.3% mom after
a gain in Jan. This is not unexpected and wafer foundries have cut back on production in anticipation of
seasonally weaker sales in Feb. Geographically, Feb 10 sales on a mom basis from US, Europe, Japan, and Asia
Pacific dipped 3.7%, 1.8%, 1.1%, and 0.4% (vs. Jan: -1.9%, -0.3%, -2.6%, and 2.0%) respectively.

Chart 2. Global Chip Sales vs Book To Bill

1.4 70.0%

Global sales yoy (RHS), % 60.0%

1.2 book to bill (LHS), x
50.0%

1.0 40.0%

30.0%

0.8
20.0%

% 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

♦ Equipment orders remain above parity. Equipment bookings in Feb 10 were up a whopping 377% yoy (vs.
325% in Jan 10) to US$1.23bn mainly due to higher investment in test capacity and wafer fabrication equipment
as well as the low base factor in Feb 09. Despite a shorter working month in Feb 10, bookings were up 4.5%
(vs. +29.1% mom in Jan 10) pointing towards stronger capex spending ahead. Furthermore, with a book-to-bill
ratio of 1.20, Feb 10 was the eighth consecutive month with a book-to-bill ratio of above one suggesting
resilient growth in capex trend beginning Jul-09. We believe further capex spending would be driven by: 1)
conversion from gold to copper wire-bonding (Recall that Unisem plans to spend around 20-30% of capex to
boost its copper wire bonding capacity); and 2) resumption of DRAM & NAND process migration investments
(spurred by the growing interest of the tablet device, i.e. Apple’s Ipad and Amazon’s Kindle. Note that Unisem
has raised its capex guidance to US$60-70m (vs. US$50m previously); MPI and Notion are undergoing capacity
expansion plans in anticipation of accelerated demand for electronics expected to kick-start in 2Q10.

♦ Emerging markets are the growth drivers in 2010-11 for computer makers. Major computer suppliers
(i.e. Acer and HP) expect notebook and netbook sales from emerging economies (i.e. China and Brazil) to
register stronger growth in 2010-11 given the pent-up demand as consumer and corporates delay purchases of
computers during the global economic crisis. In terms of 2010 revenue contribution, computer makers expect
Asian market (including China) to overtake the combined markets of Europe, the Middle East and Africa, thus
pushing the US market into third place. While falling computer prices have underpinned sales during the global
economic downturn, we believe longer-term growth would be driven by consumers moving up the value chain
(i.e. focus on PC performance and features such as high-end graphics) as well as shorter replacement cycle of 2-
3 years (vs. 3-5 years in the past).

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 6 April 2010

♦ Major chip makers moving away from home turf to focus on high-growth markets. In the same vein,
major chip makers such Renesas Electronics (Renesas) are looking into high-growth markets, moving away from
stagnant markets (i.e. Japan and US). Renesas, for instance, aims to increase its overseas presence by teaming
up with more Chinese chip-design houses and seeking orders from Taiwanese electronic makers that develop
and manufacture appliances sold under the Japanese brands. We believe this will set a precedent for more M&A
and technological partnership involving Chinese and Taiwanese companies going forward. We believe these JVs
would likely boost Unisem and MPI’s market share as they are currently supplying chips to the major design
houses in China and Taiwan.

♦ Electronic manufacturers in restructuring mode. We understand that electronic manufacturers are

undergoing restructuring plans which include: 1) streamlining its production to reduce costs; 2) supply chains
management to better manage the inventory level; and 3) focus on R&D to develop higher-margin products.
Already, Sony and Toshiba have announced plans to sell factories producing low-margin small LCD (liquid crystal
display) panels to rival companies and subcontracting out low-margin products to contract manufacturers. We
believe large electronic manufacturers are moving towards ‘asset-light’ strategy to decrease their manufacturing
footprint and improve profitability. By the same token, Samsung had initiated a restructuring exercise which
would allow the company to concentrate its resources on two main businesses i.e. memory chips and consumer
products. These developments are likely to be positive for Unisem, MPI, and Notion margins as they move up
the value chain supported by its production of higher-margin components, i.e. higher density packages, X3-MLP
chips, and spindle motor hubs respectively.

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 RM3.39/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.

♦ 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. Given the strong demand outlook for all the business segments, 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) 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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 6 April 2010

Chart 3: Unisem Technical View Point

♦ Unisem launched a significant rally in late Dec
2009, after congesting at around the RM1.40 –
RM1.80 region for more than 5 months.

♦ The rally led the stock to a high of RM2.60 in mid-

Jan 2010, but triggered a steep correction, which
dragged the stock to RM1.86 low in Feb, just near
to the 40-day SMA of RM1.90s.

♦ Thereafter, the stock struggled to reclaim the tough

resistance of RM2.60. It only succeeded in late Mar
2010.

♦ The stock traded comfortably at above RM2.60 and

the 10-day SMA of RM2.70 in the recent trading.

♦ In our view, with a removal of RM2.60, the stock

has staged a successful chart breakout.

♦ Going forward, it could retest the higher RM3.00 –

RM3.42 resistance zone if it sustains at above
RM2.60 in the near term.

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
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persons may from time to time have an interest in the securities mentioned by this report.

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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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