Tech Outlook

Best stock ideas for 2015, along with a few reversals of 2014 ideas

This is J.P. Morgan tech team’s view on the best stock ideas and key themes for 2015 in eight key sub-sectors in the Asia Pacific tech sector. We also showcase our franchise reports and key calls, and take a look at how key segments performed in 2014 (please refer to pages 6-8 for details).

• Review of 2014: We identified key themes as “volume over value” and “revenge of the laggards” in our 2014 Tech Outlook Key component makers (especially semiconductor names) have outperformed their customers, and PC and Apple supply chains have shown decent share price performance YTD. Taiwan and Japan tech names have outperformed their Asian peers, while DM tech names have outperformed their EM peers across different sub-sectors.
• Key products/trends to watch for in 2015: The Year of the Goat will record less-than-double-digit unit growth across all major end markets and negative revenue growth, in our view. Therefore, we do not see any growth opportunities in key products which might reset investors’ expectations. Key products and discussion points are SEC’s GS6, Apple Watch, largerscreen iPads, Apple’s strategy on AP procurement, the UHD penetration rate, threats to Taiwan supply chains, Xiaomi’s business opportunity beyond China, In-Memory computing, and xEV development beyond Tesla.
• All about market share gains: Given decreasing addressable end markets and a slowing upgrade cycle along with a lack of technological hardware breakthrough, we expect industry leaders with superior cost structure to continue to gain market share. Contrary to conventional wisdom on the tech sector, we do not see the hardware space as a growth sector any more, which implies potential contraction in valuation multiples. As a result, we advise investors to be more selective and focus on market share gainers.
• Valuation and earnings visibility rather than growth: Although we could see some growth areas in auto and industrial-related components, new growth areas such as convergence devices are still far off, in our view. Most tech companies, except those in Japan, are thus likely to continue to depend on existing applications. Therefore, we recommend that investors focus on valuation, earnings visibility and, in particular, FCF.
• Key calls in tech sector: We believe component makers will continue to outperform brands/OEMs and Semiconductors (TSMC, SEC, Toshiba, SK hynix, and Inotera) remains a bright spot relative to other sub-sectors. In terms of our preference, we suggest a few reversals of our 2014 key calls: (1) SEC over TSMC; (2) Samsung supply chains over Apple supply chains; (3) Korea over Taiwan; and (4) NAND over DRAM. In other areas, we prefer Lenovo and Quanta in the PC space, and MPI and Taiwan LEDs in the LED space. In Japan tech, we like Sony, Nidec, and Disco but avoid NOK, Nikon, and JDI.

02 December 2014