Asia’s tech sector appears set for headwinds in the first half of the new year, but that’s likely an opportunity to buy ahead of a second half recovery, Nomura said in a note last week.
“We think the current Asia tech sector downcycle, partly attributable to the U.S. Fed’s aggressive interest rate hikes and U.S.-China trade disputes in the second half of 2018, may see further downside through the first half of 2019 due to continued macro risks and inventory adjustments in the supply chains,” Nomura said.
But it noted that current valuations are falling near levels seen during the Global Financial Crisis in 2008 and it pointed to reasons to be optimistic about a recovery.
Firstly, it said there was a “high possibility” the U.S. Federal Reserve would slow the pace of its interest rate hikes and/or China would implement economic stimulus in the first half of this year.
A second factor was that component suppliers facing an oversupply situation have been adjusting their capex more proactively, while a replenishment demand surge from makers of smartphones, servers and other devices was likely after they adjusted inventory aggressively, Nomura said.
It also pointed to other trends, such as the introduction of 5G service in 2019, new platform launches by Intel and AMD in the first quarter for hyper-scale services, which are used in cloud computing and big data, and the “fourth industrial revolution,” which includes artificial intelligence, autonomous driving and the Internet of Things.
Playing on those themes, Nomura recommended buying shares in the memory and foundry segments, such as Samsung Electronics, SK Hynix, TSMC, Hua Hong and Vanguard, as well as players in new tech and other segments, such as 5G, time of flight (ToF), under-display fingerprint solutions (UD FS), multi-layer ceramic capacitors (MLCC), gaming PC and new IT services.
“Although we expect earnings of the companies in the memory sector to decline 40 percent in 2019, we believe the memory market should turn around from the trough in the first half of 2019, thanks to a proactive capex cut by memory companies along with demand recovery,” Nomura said. The downside for share prices in the sector was likely already limited as valuations were reflecting a severe downturn, it said.
Within the foundry business, Nomura said it expected TSMC would miss its long-term growth target this year amid expected sluggish sales growth, but it added that the foundry business is a major beneficiary of the fourth industrial revolution.
To invest in themes related to 5G, UD FS, ToF and foldable display, Nomura said it was positive on Luxshare and Zhen Ding for 5G antennas, Goodix for UD FS, and USI for ToF.
Nomura also said among products which aren’t new but have a strong outlook, it liked Samsung SDI among battery companies and OLED. It also said it liked Largan and LG Innoteck to play multi-cameras, Semco for MLCC and Chicony for gaming PC.