Tough times loom for technology sector, warns analyst

Technology Sector: Tough times ahead

3QCY11 results roundup. There have been few positives coming out of the tech sector during the recently concluded 3QCY11 earnings season. The four tech companies under our coverage which reported results for the quarter ended 30 Sep all performed below our expectations, highlighting the worse-than-expected impact caused by the uncertain macroeconomic environment. We have consequently pared our forecasts and fair value estimates across our tech sector coverage, with the exception of Karin Technology.

Macro concerns continue to weigh. During our conversations with management of the various companies, we noted a common trend of the cautious mood adopted by their customers, leading to pullback and/or delay in orders. The large YoY depreciation of the USD against the SGD also had an adverse impact, as it is typical for tech companies to have a significant proportion of their sales invoiced in USD. This situation might improve in 4Q though, given the recent strengthening of the USD against the SGD.

External shocks and cost pressures undermining growth potential. External shocks have plagued the sector this year, with the Japanese earthquake and tsunami in Mar followed by the flash floods in Thailand which have yet to fully subside. These have severely disrupted the supply chain. The HDD industry is expected to be one of the worst hit due to the floods, as ~25% of the global HDD output is produced in Thailand. Hence companies such as Broadway Industrial, Armstrong Industrial and Adampak are likely to be hampered by this event given their exposure to the industry. The supply chain disruption issues are further exacerbated by continued rising cost pressures stemming from higher wage and material costs, as well as rising interest rates in areas such as China.

Maintain NEUTRAL on the sector. Despite the weak economic landscape, sales of certain popular consumer electronics products such as smartphones and media tablets are likely to continue growing, together with investment on technology by companies, albeit at a slower pace than previously expected. We remain NEUTRAL on the tech sector, with a bias towards the downside.