ETRON SECTOR - Speculative buying amid interest rate cuts, weaker baht needed for long-term investment

Strong growth in smartphone and PC shipments in 2Q24

The global smartphone market rose by 12% y-y in 2Q24, driven by AI technology features and improved demand in the mass market due to easing inflation. Samsung held the largest market share in the global smartphone market. Meanwhile, the PC market showed a 3.4% y-y growth in shipments, buoyed by the adoption of AI technology in Windows 11 software.

Advanced chips boost industry

Global semiconductor sales in Jul grew by 18.7% y-y and 2.7% m-m, marking the fourth consecutive month of increase. This highlights a strong outlook for the industry, with sales growing by 40.1% y-y and 4.3% m-m in the US market and an increase of 19.5% y-y and 0.9% m-m in the Chinese market. On the other hand, sales in the European market tumbled by 12% y-y and 0.5% m-m. Based on Taiwanese chipmaker TSMC’s sales revenue for 2Q24, it increased due to higher demand for advanced chip technology, particularly the High-Performance Computing (HPC), which is more advanced than the key products supplied by HANA or KCE, so these two listed firms have not yet benefited from the stronger demand for advanced chips.

Higher investment in AI servers

A CIO survey shows that this year’s percentage of those who want to spend more than 40% on AI servers is higher than last year’s level. This highlights a strong trend for AI investment in hyperscale cloud infrastructure, which could potentially boost demand for CPUs and GPUs. DELTA earns 30% of its revenue from the data center segment, especially major customers in the US, where there was strong demand in 2Q24 for the cloud infrastructure development.

DELTA outperforms its peers

The electronics sector shows an upside trend in 3Q24. HANA saw increased orders in the outsourced semiconductor assembly and test (OSAT) business, coupled with a continued recovery in the global smartphone market. The company however could be adversely affected by the stronger baht. KCE still struggled with improving production capacity for printed circuit boards (PCB), which could hamper its accelerating growth 3Q. We chose DELTA as the sector’s top pick due to an expected recovery in revenue from EV and Fan and Thermal segments in the second half. The stronger baht is likely to have less impact on DELTA’s gross profit margin (GPM) compared to the industry, as the company still has portions of inventory impairment reversals gradually being recognized. In 2H24, DELTA’s performance is expected to recover on the back of the AI trend, along with the automotive and data center segments. In FY25, DELTA is projected to show strong growth, mainly from the AI segment. We therefore believe DELTA is the most aligned with the AI trend. Since last year, DELTA has shown y-y earnings growth in every quarter.

Short-term positive impact from Fed, wait for weaker baht for long-term investment

The prospect of global monetary easing in 2025 could be a positive sentiment of the electronics sector. Typically, the yield on Thai and US government bonds has an inverse relationship with the ETRON Index. Electronics stocks may respond positively in the short term to the Fed, which is expected to lower interest rate in its meeting this week. However, in the long term, it is advisable to wait for the right moment when the baht shows a weaker trend again. Our rating for the electronics sector has been lowered to a ‘NEUTRAL’.

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