We recently observed some signs of stabilisation in the electronics supply chain. One, Taiwan chipmakers such as TSMC and UMC have recently raised their 1Q09 revenue forecasts and just last week, recalled all workers asked to go on unpaid leave following stronger-than-expected white goods demand in China due to the success of the PRC government’s rural stimulus package. Two, PC OEMs and distributors in the US were reported to be re-ordering after inventory was cut to bare bones by mid-March.

On the back of this, US tech stocks have risen sharply in recent weeks. Since early March, the Philadelphia Semiconductor Index has risen 24%, while the Nasdaq rose 21%. Bellweather stocks Intel and AMD have also surged by 29% and 50% respectively.

Early cyclicals such as technology tend to outperform in the early, more tentative stage of a recovery. Despite our recent cut in forecasts, we favor Venture as the only liquid way to play this latest trend. The recent strength in orders is likely due to channel restocking after manufacturers overdid inventory cuts more so than a widespread recovery in end-demand but any further strength will immediately benefit manufacturers and risk for earnings, which have been slashed, could shift to the upside. Further, unlike other companies, Venture tends to pay a fixed dividend of 50 cents a share rather than peg it to a ratio of earnings. We believe this dividend is defensible and yield is surprisingly good at almost 11%. Book value stripped of goodwill and remaining CDO exposure of $4.01 also provides good near-term support.

On another front, the Chinese has also bought cars in record numbers recently (Feb sales +25% yoy) after the sales tax was halved and RMB5b set aside as vehicle purchase subsidies for farmers. As a result, China has now overtaken the US as the world’s biggest auto market. In addition, Beijing is encouraging its 14 domestic automakers to merge to 10. It suggested the biggest auto producers – FAW, Dongfeng, SAIC and Chang’an Auto – should take the lead.

Management reports that its auto business in China is already benefiting from the strong vehicle sales in China. In addition, it has new parts for car seat, battery covers, etc. General Motors recently raised its forecast of its China sales from <3% to 5-10%. Similarly, Armstrong now expects its auto sales to grow 5-7% in 2009 vs no growth previously. HDD has also picked up in Mar due to greater allocation as a competitor failed to qualify for three parts. In addition, Armstrong is a supplier to both FAW and SAIC which have been tapped by the central PRC government to lead the industry consolidation. Any acquisitions of smaller auto makers by either FAW or SAIC should benefit Armstrong.