Semiconductor ETFs: A compelling long-term investment ... What are semiconductors all about • Semiconductor

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  • Page 1

    Semiconductor ETFs: A

    compelling long-term investment

    Tan De Jun

    Equity Analyst, Stocks and ETFs Research

  • Page 2

    Presentation outline

    • Introduction to the global semiconductor industry

    • Disruptive and emerging technologies that will drive

    semiconductor demand

    • Understanding the semiconductor cycle

    • Valuations

    • How ETF investors can participate in this long-term growth

    story

  • Page 4

    What are semiconductors all about

    • Semiconductor products are essential

    components of every electronic device.

    • Semiconductor products include: memory,

    microprocessors and integrated circuits.

    • Types of companies:

    – Pure Play Foundries: Companies that do not

    have any design capabilities as they focus only

    on the fabrication and testing of semiconductor

    products.

    – Fabless: Fabless companies are involved only in

    the design and sale of semiconductor products,

    while outsourcing the fabrication to foundries.

    – Integrated Device Manufacturers (IDMs): IDMs

    are companies that design, fabricate and sell

    semiconductor products.

  • Page 5

    US is the global leader in the semiconductor industry

    US 46%

    Korea 22%

    Japan 10%

    European Union

    9%

    Taiwan 6%

    China 5%

    Geographical Market Share Breakdown

    Communications 32.0%

    PCs 30.3%

    Consumer 13.6%

    Industrial 13.1%

    Automotive 11.0%

    End Use Segment Breakdown

    Source: Semiconductor Industry Association Source: Semiconductor Industry Association

    • The largest end use segment for semiconductor products is communications.

    • US based firms holds the largest market share at 46%, owing to their leading position in

    R&D.

  • Page 6

    Positive expectations for revenue growth

    • Between 2012-2018, semiconductor sales

    grew at CAGR of 8.1%, reaching a record

    high of USD 468 billion in 2018.

    • Global semiconductor sales is expected to

    cross the USD 500 billion mark by 2020.

    0

    100

    200

    300

    400

    500

    600

    2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

    Semiconductor Industry Revenue

    (USD Billions)

    Source: Bloomberg, iFAST Compilations, Gartner, Statista

    Data as of Jan 2019

  • Page 8

    Deployment of 5G networks

    • 5G is the fifth generation wireless networking technology which will eventually replace the

    existing 4G networks.

    • Advantages of 5G include: faster speeds, lower latency, greater connectivity among

    devices and more reliable connections.

    • 5G technology requires significant upgrades to various hardware, such as networking

    equipment and consumer electronics.

    5G Phone Expected Launch Date

    Samsung Galaxy S10 5G 1Q 2019

    Huawei Mate X 2Q 2019

    Xiaomi Mi Mix 3 5G 1Q 2019

    LG V50 ThinQ 1Q 2019

    Oppo 5G 3Q 2019

    Sony Xperia 5G 3Q 2019

    Source: Smartprix Source: Xiaomi

  • Page 9

    Deployment of 5G networks

    Source: Samsung

  • Page 10

    Rising smartphone penetration rates

    • Rising smartphone penetration rates and

    users should contribute to increased

    semiconductor demand.

    • China, India and Indonesia’s average

    smartphone penetration rate is only

    36.8%, compared to the developed

    markets average of 76.2%.

    • Growth in smartphone penetration rates is

    supported by trends such as Ecommerce

    and mobile payment services.

    Source: Newzoo, iFAST Compilations

    *Based on top 10 countries with the highest penetration rates

    Developed Countries* Penetration Rates (%)

    United Kingdom 82.2

    Netherlands 79.3

    Sweden 78.8

    Germany 78.8

    United States 77.0

    Belgium 76.6

    France 72.5

    Spain 72.1

    Canada 68.6

    Australia 67.6

    Developed Average* 76.2

    China, Indonesia, India 36.8

  • Page 11

    The Internet of Things

    • The internet of things (IOT) is an ecosystem of devices, all of which are connected to the

    internet and each other.

    • These devices will be able to share information with each other, helping us live our lives

    more efficiently.

    • By 2025, there will be approximately 75 billion connected devices in the world, all of which

    would require some form of semiconductors.

    0

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    2 0

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    2 0

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    Number of Connected Devices (Billions)

    Source: StatistaSource: iotleague.com

  • Page 13

    Semiconductor industry cycle

    -60%

    -40%

    -20%

    0%

    20%

    40%

    60%

    80%

    1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

    Semiconductor Sales Growth (Year-On-Year)

    -11%

    Source: Bloomberg

    Data as of 30 Apr 2019

  • Page 14

    Time

    S e m

    ic o n

    d u

    c to

    r D

    e m

    a n

    d

    Selling

    opportunity

    Buying

    opportunity

    Production level

    End user demand

    Recession

    The inventory cycle

    Oversupply

    phase Undersupply

    phase

    Correction

    phase

  • Page 15

    The case of Nvidia

    0

    200

    400

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    1000

    1200

    1400

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    2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

    In v e

    n to

    ri e

    s ( U

    S D

    m ill

    io n

    s )

    S h

    a re

    P ri

    c e

    ( U

    S D

    )

    NVDIA's Share Price vs Inventory

    Last Price Inventories

    Source: Bloomberg

    Data as of 30 Apr 2019

  • Page 16

    5

    10

    15

    20

    25

    30

    35

    40

    45

    1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

    U S

    D (

    b ill

    io n

    s )

    Semiconductor Monthly Sales

    -44%

    -37%

    Slowdown in end user demand

    Source: Bloomberg, SIA

    Data as of 30 Apr 2019

  • Page 18

    Further upside still available

    Source: Bloomberg

    Data as of 30 Apr 2019

    12

    13

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    18

    19

    500

    700

    900

    1100

    1300

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    2300

    2013 2014 2015 2016 2017 2018 2019

    F o

    rw a

    rd P

    E

    P ri

    c e

    MVSMHTR Index

    Price Forward PE Ratio

  • Page 19

    Consensus estimates may be overly bearish

    Year Earnings Per

    Share

    Estimated

    Earnings

    Growth (%)

    Forward PE Potential

    Upside (%)

    2019E 131.6 0 16.9 6.6

    2020E 145.6 10.6 15.3 18.0

    2021E 170.1 16.9 13.1 37.4

    Source: Bloomberg, iFAST Compilations

  • Page 20

    Earnings revisions are usually late

    0

    20

    40

    60

    80

    100

    120 SOX Index Earnings Revisions

    Down cycle

    Source: Bloomberg

    Data as of 30 Apr 2019

    Down cycle Upcycle Upcycle

  • Page 21

    Base case scenario

    Year

    *Adjusted

    Earnings Per

    Share

    Estimated

    Earnings

    Growth (%)

    Forward PE Potential

    Upside (%)

    2019E 131.6 0 16.9 6.6

    2020E 174.7 32.7 12.7 41.5

    2021E 204.1 16.8 10.9 65.3

    Source: Bloomberg, iFAST Compilations

    *Earnings are adjusted by 20%

  • Page 22

    Best case scenario

    Year

    *Adjusted

    Earnings Per

    Share

    Estimated

    Earnings

    Growth (%)

    Forward PE Potential

    Upside (%)

    2019E 131.6 0 16.9 6.6

    2020E 203.8 54.9 10.9 65.1

    2021E 238.1 16.8 9.3 92.9

    Source: Bloomberg, iFAST Compilations

    *Earnings are adjusted by 40%

  • Page 23

    Share prices are driven by earnings

    Source: Bloomberg

    Data as of 30 Apr 2019

    -20

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    2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

    E P

    S

    In d

    e x

    SOX Index vs EPS

    Index EPS

  • Page 25

    Why ETFs are suitable for