SINGAPORE (May 24): The tech manufacturing services sector could take a hit if a US-China trade war breaks out, especially when there are signs of a slowdown in the semiconductor industry.
CGS-CIMB Securities therefore advises investors to aim for range-bound trading opportunities instead of chasing tech share prices.
The International Monetary Fund (IMF) expects global economic growth of 3.9% in 2018 and 2019, however it is worried about the erosion of support for global economic integration given the inward-looking shift in policies.
In addition, the US government may start scrutinising partnerships between American and Chinese companies in the field of artificial intelligence (AI) which could extend into the field of semiconductors and autonomous vehicles.
And although the long-term outlook for the semiconductor industry remains positive, CGS-CIMB says the sector is facing a slowdown after the strong showing in 2017.
Already, tech companies like Micro-Mechanics are watching for further signs of tapering demand and CGS-CIMB’s channel checks with other industry participants also suggest that they are similarly cautious.
Nevertheless, CGS-CIMB is maintaining its “overweight” on the tech sector which is based on bottom-up amalgamation of “add” calls.
“Sunningdale is our top pick as it is a value stock once more after poor 1Q18 results,” says William Tng in a recent report.
Among the tech stocks under CGS-CIMB’s coverage is AEM Holdings whose 1Q18 core net profit at 18% of CGS-CIMB’s full-year forecast came in below expectations but in line with the company’s own guidance.
“If we apply a 25% and 50% haircut to our earnings forecast for FY19 and maintain our target P/E of 10x, the revised down target prices will be $0.905 and $1.36, respectively. Our current scenario is a target price of $1.78, based on 10x FY19 earnings,” says Tng.
As for Sunningdale, its 1Q18 core net profit came in below expectations due to the decline in the consumer/IT segment.
“A de-rating back to the 10-year historical average P/BV will result in a target price of $1.12 or 11.8% downside from the current price. Our base-case valuation for Sunningdale is $2.50, based on a target FY18F P/BV of 1.23x,” says Tng.
Venture’s share price suffered a massive de-rating due to concerns over the weak 1.5% y-o-y revenue growth and customer concentration risk.
“We value Venture at 15.4x 11-year average FY19 earnings as concerns over a trade war caused a multiple de-rating. During the GFC, Venture traded at a historical average forward P/E of 14.7x,” says Tng.
As at 12.03pm, shares in AEM, Sunningdale and Venture are trading at $1.46 (down 7%), $1.33 (up 3.9%) and $21.03 (up 2.3%) respectively.
