|Key Drivers of the Semiconductor Industry in 2018|
|Yesterday a Business Times exclusive highlighted Singapore’s Semiconductor Industry accounted for as much 72% of the electronics cluster’s manufacturing output in 2017, up significantly from 32% in 2000.
During 2017, the 10 largest capitalised Singapore stocks that operate in, or service the Semiconductor Industry averaged 129% total returns, with a median total return of 104%, nine gainers and one decliner. In the 2018 year through to 11 June, the same 10 semiconductor-related stocks have averaged a 4% decline, with a median decline of 12%, two gainers and eight decliners. This has brought their average 12 month return to 18.6%.
Supply & Demand Synopsis
Growing Demand for Memory Products
In its Annual Report released in April 2018 , Serial System highlighted that research firm Gartner expects the global semiconductor market to fare reasonably well this year after a strong 2017. The report added worldwide semiconductor revenue in 2018 is forecast to increase 7.5% from the previous year to US$451 billion, driven by strong demand for DRAM and NAND flash memory products. As noted in the aforementioned Business Times, this 7.5% increase, is down from last year’s 22.2 % surge. The UMS Holdings 2017 Annual Report detailed that the 22.2% surge saw semiconductor sales exceeded US$400 billion for the first time and semiconductor equipment sales shattered the historic high set in 2000.
Manufacturing Integration Technology Chairman and Managing Director, Kwong Kim Mone also maintained in April 2018 that memory chips, led by NAND, continue to grow as increasing storage capacities in everyday mobile devices spur demand.
Demand Driven by Electronics and New Digital Technologies
UMS Holdings Chairman & CEO Andy Luong highlighted that proliferating demand drivers that represent diverse applications in addition to ensuing increasing silicon (semiconductor) content in electronics is fuelling what many are calling a super cycle.
Serial System Executive Chairman & Group CEO Dato’ Seri Dr. Derek Goh Bak Heng also noted in March 2018 that firm demand for integrated circuits used for state-of-the-art smartphones and consumer electronics, smart-city initiatives autonomous vehicles, and other technology-reliant projects and applications is expected to be a driver of global semiconductor sales this year.
Dato’ Seri Dr. Goh also noted that growing interest in cryptocurrency mining – the process of creating digital currencies and recording all their transactions on a block chain or public ledger – is rapidly driving sales of high performance chips.
Dutech Holdings semiconductor segment is reported under its Business Solution segment along with four subsidiaries. Chairman and CEO Jonny Liu noted in the FY17 Annual Report that the advent of digital technologies is changing the way businesses operate in nearly every industry. Furthermore, Mr Liu stated the
dramatic growth in intelligent device adoption are driving many traditional hardware manufacturers to acquire
critical capabilities in designing and developing solutions to differentiate themselves from the competition and
to drive greater profitability.
Competition & Costs
The Ellipsiz Annual Report, released in October 2017, acknowledged that the semiconductor industry is highly cyclical due to the abrupt fluctuations in supply and demand of semiconductors. Ellipsiz added that the timing, length and severity of such fluctuations are becoming increasingly difficult to predict and the industry faces constant pricing pressure due to continued intense competition and cost cuts by the semiconductor manufacturers.
As UMS Holdings’ Mr Luong also noted, China is transitioning away from primarily being a consumer of chips towards developing a self-sufficient semiconductor supply chain. Micro-Mechanics Management noted in its 2017 Annual Report that with China continuing to develop into a major center for global chip manufacturing, it will remain focused on building an operation there capable of fast, effective and local support.
In its 2017 Annual Report, AEM Holdings Executive Chairman Loke Wai San reckoned that as semiconductors become more pervasive in our daily lives, their packages will certainly become more complex with the integration of microprocessors and components. Mr Loke expected that this will drive up the system-level testing needs of these complex semiconductors yet put pressure many of the world’s leading Integrated Circuits manufacturers to reduce the cost-of-test.
The high degree of cyclicality of the Industry is exemplified through the comparative volatility of the Philadelphia Stock Exchange Semiconductor Index (‘SOX’). The SOX currently maintains annualised 100 day historical volatility of 29%, compared to 18% for the S&P 500 and 14% for the Straits Times Index. Cyclicality and volatility has been a key motive for multiple stocks provide semiconductor products or services to diversify their businesses.
The performances of Singapore’s 10 largest capitalised stocks that operate in, or service the Semiconductor Industry are tabled below. To see more details on each stock, in SGX StockFacts click on the stock name.
Source: Bloomberg & SGX StockFacts (Data as of 11 June 2018). Note the 10 largest semiconductor stocks are selected on the basis of semiconductor-related operations reported in recent Annual Reports and is not an exclusive list of companies that service the Industry.
The majority of the 10 stocks listed above maintain a dividend yield and have recently posted net cash positive financials. For instance UMS Holdings continued to generate strong cash flow of $15.2 million in net cash from operating activities, and $12.0 million in free cash flow in 1QFY18.
Overall the 10 stocks have averaged a 18.6% total return over the past 12 months, which compares to a 27.4% total return for the SOX Index and a 12.3% gain for Bloomberg Asia Pacific Semiconductors Index. Much of the outperformance of the Semiconductor stocks as compared to the aforementioned indices occurred at the onset of the global re-rating of technology stocks in early 2017.
Key Drivers of the Semiconductor Industry in 2018