28 March 2005
Electronics stocks listed on the Singapore exchange have been weak for the past year or so, far underperforming the overall market. There are some signs that the business outlook for certain segments of the electronics sector may be improving, but whether electronics stocks can take advantage of this improvement is questionable.
The SGX Electronics Index closed at 136.77 last week. So far in 2005, it is down 16 percent. This follows a decline of 7 percent over 2004.
Contrast this with the overall market. The Straits Times Index is up 4 percent so far in 2005, after a rise of 17 percent in 2004.
Clearly, electronics stocks have badly underperformed the overall market. The recent performance of the sector in the real economy probably justifies this underperformance.
In February, Singapore's non-oil domestic exports (NODX) increased 7.9 percent on a month-on-month seasonally-adjusted basis, reversing a 0.6 percent contraction in January. However, overall NODX was pulled up by non-electronic products, especially petrochemicals.
Domestic electronic exports, on the other hand, fell 3.6 percent compared to a year earlier. This follows a 5.9 percent year-on-year growth in January. The decline in electronic exports was mainly due to weakness in exports of disk drives, telecommunications equipment and other peripherals.
Non-oil retained imports of intermediate goods, a short term leading indicator of overall manufacturing activities, posted a 3.9 per cent contraction on a month-on-month seasonally-adjusted basis in February, reversing a 9.0 percent expansion in January. This is not a favourable sign, although it should be pointed out that the indicator is somewhat volatile.
Manufacturing output in February tells a similar story, with overall output falling 9.8 percent from January on a seasonally-adjusted basis, having already fallen 6.9 percent in January. On a year-to-year basis, overall manufacturing output fell 10.2 percent while electronics output fell 2.4 percent.
A recent decision by disk drive maker Maxtor to close one of its two plants in Singapore will exacerbate the weakness in disk drive production. The company has decided to relocate its low-end production to China, following similar moves by rivals such as Seagate and Western Digital.
Companies in Singapore, however, may not be unduly hurt by the decline in the disk drive industry in Singapore. In a recent report on the disk drive industry, The Edge Singapore cited a March 7 note by OCBC Securities analyst Bryan Yeong in saying that some suppliers to disk drive makers have themselves set up plants in China. Therefore, this retrenchment exercise by Maxtor is expected to be "a non-event for the share prices of its suppliers".
The report in general struck an optimistic note for the disk drive-related companies in Singapore. It said that inventories and selling prices have improved and demand looks set to grow. High metal prices, however, could "throw a spanner in the works" for some of the companies.
Standard & Poor's also has an optimistic view of the industry. In addition to citing the improving trend in inventory level and selling prices, its analyst Richard Stice recently wrote that revenue growth will be underpinned by the expanded use of disk-drive products, with demand in high-end systems being supplemented by new avenues of growth in the consumer-device market.
Elsewhere in the electronics sector, the chip industry remains in the doldrums, although there may be light at the end of the tunnel.
Analysts generally expect 2005 to see essentially flat growth in semiconductor sales. For example, Merrill Lynch recently cut its earnings forecast for Micron Technology and Infineon Technologies and cut its ratings for Hynix and Powerchip Semiconductor from "buy" to "neutral" in the fact of weak demand and falling chip prices.
As a result, chip companies are holding back on investment. The Semiconductor Equipment Association of Japan recently reported that Japanese-based manufacturers of semiconductor equipment posted a book-to-bill ratio of 0.83 in February, down from 0.94 in January, while VLSI Research reported that the worldwide semiconductor equipment industry slid to 0.84 in February from 0.88 in January.
North American-based manufacturers of semiconductor equipment posted a book-to-bill ratio of 0.78 in February, according to the Semiconductor Equipment and Materials International (SEMI) trade group. What may be noteworthy, though, is that this is unchanged from the revised figure in January, suggesting a possible bottom for the industry.
Indeed, although orders for North American-based semiconductor equipment makers in February fell 22 percent over the same month last year, it actually improved four percent over January. In particular, backend bookings were up six percent in February over January.
"Keep in mind that the back-end typically leads the industry recovery," Avinash Kant, an analyst with Adams Harkness, was quoted in EETimes as saying. "While we expect the book-to-bill to stay at these levels (or even decline slightly) for another month or two, we do expect the book-to-bill to start to move up after that."
In another encouraging news recently reported by Bloomberg, ISuppli Corp said that it expected global stockpiles of chips to be "completely cleared out" early in the April-to-June period.
Demand for personal computers, however, is expected to decelerate. Last month, market research firm Gartner reported that it thought that business and home PC replacement activity is likely to decelerate over 2005. More recently, IDC reported that it was lowering its projected PC growth rate to 9.7 percent from 10.1 percent earlier, citing delayed economic recovery in Japan and a cautious outlook in the United States.
While the economic outlook is an important consideration for investors, they also need to be aware of another fact regarding electronics stocks: Many of them are quite expensively valued. Despite falling for the past year or so, electronics manufacturers listed in Singapore are trading at average P/E ratios of about 26, whereas the market as a whole is only trading at a P/E ratio of around 12.
This indicates that even where the outlook for electronics companies may be improving, the outlook for their stock prices may be a different matter. Investors apparently never quite gave up on the sector, looking forward to the eventual turnaround. When it comes, stock prices may not react correspondingly.
A strong bull run for the overall stock market over the next few months would probably pull electronics stocks along as well. Investors who do not see such a prospect for the stock market should probably remain wary of investing in the electronics sector.
Disclaimer: The commentaries posted here represent the opinions of the author at the time of posting and should not be taken as investment advice. Readers who wish to take any investment action based on information obtained from this site should seek appropriate advice from a qualified financial adviser.