The technology sector has been driving the market’s year-to-date rally. The consensus outlook seems to favour the electronics cluster for its resilience, although there have been some concerns raised about its sustainability.

Have tech stock prices already reflected all the positives, or is there still room to run for the local-listed tech manufacturing stocks?

2H17 Industry outlook for tech industry

Semiconductor

Semiconductor2

 

CIMB Research believes the semiconductor industry is poised to recover from its poor showing in the past quarters.

According to industry forecaster Gartner Inc, the outlook for the semiconductor industry for 2017 has turned positive on the back of inventory replenishment and increasing average selling prices (particularly in commodity memory and application-specific standard products).

Moving forward, CIMB Research expects the emergence of Internet of Things (IoT) category to become the long-term growth driver of the semiconductor industry.

Automotive

Another area that CIMB Research believes will become a sales growth driver for the semiconductor industry is the automotive industry. The adoption of electronics in vehicles for infotainment and safety features are the main reasons for their forecast.

CIMB Research cited that the world’s leading automotive semiconductor player NXP Semiconductor expects global automotive semiconductor sales to deliver 5.0% CAGR over 2015-2020F due to increasing electronics content per vehicle.

Semiconductor Industry

Mobile devices

Demand for smartphones and mobile devices remain muted due to longer replacement cycle and mature market situations.

Smart Home

Demand for smartphones in developed markets will likely be driven by innovations, such as artificial intelligence, smart home functionality, mobile payments and mobile health.

Independent market researcher Gfk opines that there are still pockets of growth opportunities in developing regions, such as the Middle East, Africa and emerging Asia, to drive demand growth in 2017F.

Investors’ takeaway: Watch out for these 3 drivers

1. Short term driver: M&As

Tech manufacturing stocks have been sitting on a net cash position since the end of 1Q17. The net cash position puts the tech manufacturing stocks as both a prime target for acquisition or in a prime position to acquire other companies.

CIMB Research believes that the share prices of tech manufacturing stocks could move higher in both situations, be it making an earnings accretive M&A or become a target of acquisition.

In particular, CIMB Research sees potential in an M&A between Sunningdale and Memtech to create a strong synergy between themselves.

2. Short term driver: Special dividends

CIMB Research foresees the special as another share price catalyst. Based on CIMB Research’s analysis, a few tech manufacturing companies are in a good position to beat consensus dividend per share estimates for FY17F.

UMS, which CIMB Research forecasts to make record net profit in FY17F, has a track record of paying special dividends whenever they report strong earnings.

Memtech, which has US$5.7 million proceeds from selling its assets, could also be paying special dividends in FY17F.

3. Long term driver: Earnings growth

Historically, earnings growth has been a key share price driver of tech manufacturing stocks. CIMB Research opines that tech manufacturing stocks like AEM and Memtech often trade at consistent PE ratios.

The better than expected earnings growth has been driving the share price higher in past years to meet the PE valuation of tech manufacturing stocks. On the other hand, stocks like UMS and Sunningdale have been showing a historical trend of direct correlation between return on equity (ROE) and share price.

Hence, CIMB Research believes that stronger than expected earnings in the upcoming quarters will lead to outperformance in tech manufacturing stocks.

In the next article, we will highlight five tech stocks recommended by CIMB Research that has the potential to spring a positive surprise.