Semiconductors: 7% growth in CY2011:: Macquarie Research,

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Semiconductors: 7% growth in CY2011
Event
 World 3-month moving average semiconductor sales decreased 0.5% YoY in
June 2011, based on WSTS data released on 1 August. We believe this is the
growth trough, and semiconductor sales growth looks set to reaccelerate from
CY3Q. We expect the inventory cycle to similarly trough by CY4Q.
 With CY1H having come in softer than we had initially forecast due to factors
such as a softer macro backdrop and earthquake disruptions, we are lowering
our semiconductor industry growth estimate for CY2011 to 7% from 10% in
tandem with our US team led by Shawn Webster. This follows the direction of
recent adjustments to our company-level forecasts.
Impact
 We highlight that a bottoming of the semiconductor sales YoY growth cycle
(occurring now), and a recent peaking of the inventory growth cycle (between
CY1Q and 2Q) has historically been associated with a period of
outperformance for semiconductor share prices (Figure 1).
 Share prices began recovering in late CY2010, but this was temporarily
suspended in CY2Q-3Q due to macro concerns that are now driving a midcycle
correction. Contrary to the negative tone of the market consensus, we
believe the outlook for the shares will improve as the chip inventory cycle hits a
CY4Q trough. We believe the outlook for shares should be broadly favourable
until the industry approaches the next inventory cycle peak in CY2012.
 We agree with TSMC’s view of a benign cycle correction. As highlighted by
Macquarie analyst Michael Liu, TSMC’s Morris Chang indicates that the
current inventory adjustment should be moderate and mostly completed by
CY3Q, and that TSMC’s utilisation rate should pick up by CY4Q. We note that
this outlook ties in with our observation that key foundry customers like Altera,
Xilinx and Broadcom have posted good results and guidance.
 An assumption for our forecast is that the world economy does not suffer a
systemic shock that sharply constricts demand, drives down production of end
products and accentuates chip destocking – as was seen in CY2008-09. We
assume that the long-term chip industry sales growth rate of 6% still holds.
Indications like Apple’s strong results, solid indications from Intel and IBM on
corporate IT demand reassure us that end demand is not dropping off.
 Recent downward adjustments in chip sector capex plans should help
alleviate oversupply concerns and underpin expectations of a cyclical
recovery for the chip sector. SPE orders have been declining and we expect
these to bottom in CY3Q just ahead of the bottoming of the inventory cycle.
Outlook
 We are positive on the chip sector. We believe the cycle is bottoming now,
and despite near-term volatility, we believe attractive entry points for many
stocks are appearing. Regionally, we highlight Michael Liu’s reiteration of his
Outperform rating on TSMC as well as Damian Thong’s reiteration of an
Outperform on Toshiba. We do not expect all companies to benefit evenly
from the cyclical recovery, and investors may prefer to be positioned in
companies with structurally stronger growth prospects.