Semiconductor industry bottoming out... Since our last sector report in May, we continue to receive myriad of positive news on the semiconductor industry. From industry players (e.g. TSMC) to market research firms, calls for the bottoming out of global semiconductor sales and upward revision in their forecasts on better outlook have been rampant. For example, Chinese foundry provider SMIC last Monday raised its 2Q09 revenue guidance due to strong growth in its customer orders. In capital equipment spending, rises in the book-to-bill ratio for the North America and Japan semiconductor equipment sectors have also provided support on a probable recovery in the industry. While some industry watchers warn of a possible cooling off in 3Q09 and a W-shaped recovery, all have unanimously projected a positive, and often meaningful, growth in the semiconductor industry for 2010. We think that these developments are good indications of a sooner-than-expected recovery in the semiconductor industry and sustainable profitability among semiconductor companies.

Rebound in global semiconductor sales likely in 2010. In line with the better-than-expected 1Q09 IC sales and recent positive outlook, we also note that at least two industry watchers had raised their 2009 global semiconductor sales forecasts over the past one month. Gartner, for one, expects the 2009 industry revenue to fall to 22.4%, slightly better than its 24.1% decline projected in February. This is joined by estimates from World Semiconductor Trade Statistics (WSTS) and Semiconductor Industry Association (SIA), which were projected to hit a similar 21.3-21.6% decline. For 2010, both WSTS and SIA have projected worldwide semiconductor sales rebound, with growth of approximately 6.5-7.3%. More importantly, Asia Pacific is expected to continue to be the fastest growing region, increasing at 8.2% and potentially reaching sales of US$107.6b in 2010, according to WSTS.

Upgrade to NEUTRAL. As we look forward into 2010, we have also become more optimistic in our view of the semiconductor industry. While uncertainty is likely to remain high and visibility low, our checks with various companies suggest that any correction in orders, if it happens, is not likely to be as severe as during the Jan-Feb 2009 period. With a likely recovery in sight, we now upgrade the semiconductor sector to NEUTRAL from UNDERWEIGHT. Key risk to our sector rating include an exceedingly high unemployment rate that may hamper overall consumer spending and in turn growth in the semiconductor industry.