Asia Technology Strategy: all pointing towards more upside

Asia Technology Strategy: all pointing towards more upside

● AxJ tech has been up 13% YTD, powered by a 16% move in
Taiwan tech and a 22% move in hardware. Semis have lagged,
reversing a part of 2H11 performance.
● In our view, while a meaningful part of the up-move has been
captured (tech has outperformed the region by 7% since end-June
2011 and is the second best performing sector), we believe that
into 1Q results, tech should continue to do well.
● Valuation history suggests that after a bounce from the bottom,
valuations rarely turn south from the levels currently seen.
Monthly revenue momentum in Taiwan is quite supportive too for
down-stream, and the inventory correction process for upstream
seems to be well advanced.
● The later two should support a turn in the earnings cycle—one of
the two key factors behind our constructive stance. Our buy list
has not changed—Quanta/ Wistron, SPIL/ASE, Asustek/ Lenovo,
Spreadtrum, ZTE, Catcher. Samsung Elec we like, but it would
probably continue to move sideways in 1Q12.

Since the 2000 tech bubble burst, AxJ tech valuations have always
gone down to about 1.8x and have then bounced (except during the
GFC). Interestingly, the bounce of the lows has always resulted in a
visit to above average levels within a six-to-nine months period (the
only exception being the SARS induced double-dip in valuations in 1Q
2003). While the pace of the recent rally may warrant some cooling-off
and another global macro accident may yet pull back markets, our
bias is that valuations are again going to get back into above-average
territory, implying another 10-15% upside at the index level.

Fundamentals are supportive too. The likely turn in the earnings
momentum was one of our key arguments behind our constructive
view in 3Q11 and now evidence is starting to support that (Fig 2).
Monthly sales momentum for Taiwan tech has picked up since 4Q11
(Fig 3), driven by a pick-up in downstream revenues (Fig 4), which in
turn is a result of some major new product launches (iPhone 4S,
Amazon’s Kindle Fire). While the early CNY distorted January
numbers somewhat, we believe that the YoY momentum should
continue. At the upstream, level, latest data suggest that semis
inventory is normalising (Fig 5) and, in our view, the process should
be completed by 1Q12, in line with our long held belief. Positive
revenue momentum for downstream and bottoming inventory level for
upstream should both help earnings direction.