Semiconductor update – Burrowing down in the year of the rabbit (CIMB)

The factors that led to underperformance of the semicon sector in 2010, i.e. economic uncertainty and weak PC sales, refuse to go away. These factors, plus other headwinds such as moderating chip sales growth for 2011, near-term earnings pressure from seasonality, a strengthening ringgit and elevated raw material costs, trigger our downgrade of the sector from Overweight to NEUTRAL. We believe that conditions will remain weak over the next six months and we view 2H11 as a better time to re-enter the sector as seasonality patterns play out. Keeping in step with our sector downgrade, we cut Unisem and MPI from Outperform to Neutral as we scale back our target prices for wider discounts to their historical P/BV.