Semiconductors spark Singapore economy's recovery
Crucial in electronic devices, the semiconductor represents 17% of S'pore's total manufacturing output
An electronic component has played an enormous role in the recovery of Singapore's economy in recent months.
It is the semiconductor, crucial in electronic devices and representing 17 per cent of Singapore's total manufacturing output.
Last week, the Ministry of Trade and Industry (MTI) announced that the economy grew a higher-than-expected 2.7 per cent in the first quarter on a year-to-year basis, largely due to the manufacturing sector, which grew by 8 per cent.
The encouraging manufacturing numbers was driven by the electronics and precision engineering clusters, which expanded because of robust global demand for semiconductors and semiconductor manufacturing equipment, said MTI.
Semiconductor companies listed on the Singapore Exchange (SGX) have shown solid results as well.
The 12 SGX-listed semiconductor stocks generated an average total return of 65.7 per cent in the year-to-date, bringing their one-year average total return to 115.6 per cent, according to a SGX report last week.
These firms have a combined market capitalisation of $1.2 billion.
Investors should also note that the three largest semiconductor stocks - UMS Holdings, Micro-Mechanics Holdings and AEM Holdings - are in net-cash positions, which ensures dividend payouts to their shareholders, said SGX.
The 12 SGX-listed semiconductor stocks generated an average total return of 65.7 per cent in the yearto- date, bringing their one-year average total return to 115.6 per cent, according to a SGX report last week.
These stocks are currently trading at a market-capitalisation weighted trailing price-to-earnings (P/E) ratio of 26.0, a jump from 9.5 at the beginning of the year.
The P/E is one way to indicate if a stock is overvalued or undervalued. Companies with a high P/E ratio are typically growth stocks.
"This is an indication that the sector's valuation has re-rated," said SGX.
The upturn in the industry is driven by strong demand for mobile and Internet of Things (IoT) devices.
For example, smartphones - specifically Chinese-made ones - are behind the burgeoning demand for semiconductors here, an MTI report noted last year.
The momentum in the semiconductor industry, which has been going strong for the past six months, is expected to last for a while longer.
Last week, MTI said growth in the electronics and precision engineering clusters "is expected to be sustained for the rest of the year".
Semiconductor companies here are dealing with overwhelming orders and ramping up production capacity.
For instance, UMS Holdings, in their first quarter earnings report, noted that its semiconductor business segment surged 108 per cent compared with the previous quarter.
Their revenue base and earnings will be boosted by their renewal with its key customers for three years, with the option for a further three years into 2023, the report said.
They will also be stepping up plans to expand production capacity, including a ramp-up in fabrication activities in the coming months.
"The group intends to invest a further RM80 million ($25.9 million) in Penang over the next few years, which includes building new clean rooms, taking advantage of a larger pool of talent and a more favourable tax status," UMS said in a press release on May 12.
The stellar performance of semiconductor stocks has boosted the information technology sector on the SGX as well.
Latest market statistics from SGX also showed that the IT sector was the best performing sector for three consecutive months this year.
The IT sector generated a 4.9 per cent capitalisation weighted total return in April, taking its year to date gains to 33.3 per cent.
This is higher than the Straits Times Index's total return of 14.3 per cent and the regional benchmark's (MSCI AC Asia ex-Japan IT Index) total return of 18.4 per cent (or +22.6 per cent in USD terms) over the same period, said SGX in a report last month.
And this momentum should continue.
According to data from Bloomberg, the 10 largest IT stocks on the SGX are expected to grow their earnings per share by a median of 19.9 per cent this year and another 11.7 per cent in 2018.
"The strong earnings outlook is likely one of the factors driving the IT Sector's return in the year-to-date," said SGX.
EMS providers shift focus to fight slowdown
Besides taking advantage of the "cyclical up cycle" of the semiconductor industry, investors can also consider the four electronic manufacturing service (EMS) providers listed on the SGX.
These firms, with a combined market capitalisation of $3.9 billion, have started to shift their focus to the faster growing emerging technologies to deal with the slowdown in traditional technology industries.
For instance, Venture, the largest IT stock with a market capital of $3.546 billion, has capabilities in areas such as 3D printing, genome medicine and optical component devices, among others.
Valuetronics Holdings is expected to tap on the megatrends of IoT and automotive electronics to help acquire new projects.
Half of CEI Limited's revenue comes from the medical technology and life science sector.
These three largest firms in terms of market capitalisation have returned 40.3 per cent in the year to date, showing that their new strategies are now "bearing fruit".
Post the STI rally, these three stocks were trading at an average trailing price-to-earnings (P/E) ratio of 13.3x.
Based on consensus data, the average forward P/E ratio for these four stocks is at 13.0x, noted SGX's report last week.
The forward P/E calculates the price-to-earnings ratio by using projected future earnings instead of current earnings.
According to data from Bloomberg, consensus expects these three companies to grow earnings per share by a median of 16.5 per cent this year and another 9.2 per cent in 2018.
"Amid the slowing growth in traditional technology industries, Singapore's EMS providers have shifted their focus to the faster growing emerging technologies/industries," noted SGX. - LINETTE HENG