In this briefing:
- Time-Out Not Time up for Trade War
- Semiconductor WFE Outlook. Things Just Got Really Ugly
- Thailand: The Sandbox
- Small Cap Diary: MEGA, Eastwater
- UTP (UTP TB): Continued Gain from Tight Global Paper Supply
1. Time-Out Not Time up for Trade War
- Xi and Trump walk away from Buenos Aires with something to sell at home
- But trade negotiations will be dominated by fraught disagreements
- After 90-day negotiations, further delays to tariff escalation are likely
2. Semiconductor WFE Outlook. Things Just Got Really Ugly
SEMI, the global industry association serving the manufacturing supply chain for the electronics industry, published three different forecasts for wafer fab equipment (WFE) sales in the past week. While the forecasts differ in approach and detail, they all agree on one thing, WFE revenues are continuing to fall and the outlook for 2019 is sharply down on previous estimates.
Specifically, Q4 2018 WFE revenues are set to decline 20.8% or $3.3 billion QoQ and the forecast which had just six months ago predicted 7% growth in 2019 is now calling for an 8% decline next year.
These latest forecasts cast a dark shadow over the predictions of the leading WFE manufacturers that H1 2019 would be stronger than H2 2018 and we anticipate a strong downward revision of forward guidance in the upcoming earnings season.
There may be a glimmer of hope on the horizon however as SEMI forecasts a strong rebound in the second half of 2019 leading to a return to growth of ~20% in 2020. Let’s see.
3. Thailand: The Sandbox
4. Small Cap Diary: MEGA, Eastwater
Small caps have an easier time scaling up in good times, but can get hit much harder by liquidity in the bear markets. Anyway, it’s still good to check how some of the better-know small cap names like MEGA and Eastwater even if they are not doing particularly well.
Here’s some highlights:
- MEGA hasn’t done quite as well. Their earnings growth has slowed to under 10% this year despite an average of 19% between 2014 and 2017. It doesn’t seem like there’s anything wrong with the business model or even execution, just Law of Large Numbers and running out of near-term opportunities.
- Interestingly, the company’s biggest market outside ASEAN is Africa (eg. Nigeria, Ethiopia), which accounts for 12% of their branded product revenues, and that’s declined 4.2%, hence dragging down the company’s performance.
- East Water realized healthy and stable gross margin of 50% and ROE of 10.9% while maintaining a strong credit rating of A+, allowing them to finance aggressive capex cheaply.
- The company generates over half of its revenues from raw water, which is more profitable than tap and industrial, and has had a recent change in strategic shareholder from EGCO to Manila Water.
5. UTP (UTP TB): Continued Gain from Tight Global Paper Supply
- Strong long-term sales growth, share price is less volatile, and solid short-term earnings momentum relative to its sector
- Sales growth for UTP’s cardboard paper and packaging used for corrugated boxes should be supported by an ongoing 20% ramp-up in production to 20,000 tons/month on tight global supply conditions
- Strong demand and efficiency improvements on older cardboard paper-making equipment has expanded margins, operating margin expanded by 12 ppts in 9M18 YoY
- UTP has shown solid improvements in asset turnover while also improving its net margin
- Risk: Chinese moves to ramp up paper supply again
* Consensus Estimates
