In this briefing:
- Forecasting the Semiconductor Market
- Crunch Time for Aussie Housing
- Healius (HLS AU): An Unattractive Bid
- Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign.
This is the time of year that Objective Analysis releases its semiconductor forecast. This post is based upon a video posted on the WeSRCH website that explains the Objective Analysis 2019 semiconductor forecast.
Although accurate semiconductor forecasts are straightforward to produce, the consistently-accurate methodology spelled out in this Insight is rarely used.
The forecast predicts that the downturn that the industry is currently entering will be longer than most, with profits eluding chip companies until 2022.
- Australia is in uncharted territory. House prices in the two largest cities (Sydney and Melbourne) fell by 10% last year and similar declines look likely in 2019 unless financial conditions suddenly ease. The RBA remains on the sidelines beating the positive drum that the next move in policy being more likely up than down. We are more cautious and think there are too many downside risks to housing and global growth to provide such positive guidance.
- The economy shrugged off the decline in Sydney and Melbourne house prices last year due mainly to a backdrop of strong employment growth. The same strong gains in employment are likely to be elusive this year as the global economy slows and this leaves Australia vulnerable. Its high level of household debt means offshore and not domestic shocks are the Achilles heel, particularly shocks emanating from China.
- We estimate that the macro-prudential measures taken by the regulator (The Australian Prudential Regulatory Authority) combined with the reaction of the Banks to the Banking Royal Commission hearings have been equivalent to an additional 150bp increase in the average mortgage rate on top of the 15bp delivered by the Banks to recover the increase in short-term funding costs. The regulator has now withdrawn all of its speed limits on lending, but it is forcing the Banks to retain tough lending standards introduced while the caps were in place. Without some reprieve on lending standards or mortgage rates, further price declines in Sydney and Melbourne seem likely.
- Stay underweight Banks and Residential Property for now. New owner-occupier loan growth is in free fall consistent with the fall in prices and mortgage rates, but it is still well above cyclical troughs seen during the expansion of the past 33 years – further declines seem likely.
- MGR and SGP are most exposed in Property, while CBA and WBC are the most exposed Banks to stress in the home loan market. The Banks are not only implementing tougher lending standard, but also ambitious cost-out programs and this along with low arrears will help to offset some of the risks from housing. Furthermore, valuations are supportive and the hurdle to earnings growth is low.
Healius (HLS AU), formerly known as Primary Health Care (PRY AU), is a leading Australian owner of GP clinics and pathology centres. On 3 January 2018, Healius received an unsolicited and highly conditional proposal from Jangho Group Co Ltd A (601886 CH) for A$3.25 cash per share.
We believe that Jangho’s bid is opportunistic and unattractive. Also, if Jangho puts in an improved bid, getting regulatory blessing will be an uphill task.
The Semiconductor Industry Association (SIA) just announced that worldwide sales of semiconductors reached $41.4 billion for the month of November 2018, an increase of 9.8% YoY, but down 1.1% MoM, the first such decline since February 2018. While the decline is modest and total 2018 total semiconductor sales are on track to reach ~$470 billion for a YoY increase of 15.7%, any decline in what should be peak holiday season is not a good sign.
Semiconductor sales historically track Wafer Fab Equipment (WFE) sales with a roughly six month time lag. North American WFE sales have been declining each month for the past six months meaning that this latest semiconductor MoM sales decline is right on schedule.
Leveraging a decade’s worth of historical data, we analyse two key questions that are likely on every investors mind. Firstly,for how long should we expect semiconductor sales to continue their decline. Secondly, how steep should we expect that decline to be?