2Q09 results mostly below expectations due to one-off items. Four out of eight (50%) of the tech companies under our coverage had reported their 2Q09 results. Of these four companies, all registered sequential growth in both their revenue and bottom line, driven by seasonality and an improvement in business conditions. However, most of the results we observewere also dragged down by one-off items. Valuetronics (VHL), for example, had suffered a significant HK$9.5m allowance for doubtful debts, hence resulting in a 74.3% YoY drop in its net profit. As for WesTech Electronics (WTE), it was hit by restructuring charges. As a result, while the normalized earnings (which excluded these one-off items) of these companies fell largely within our expectations, we note that only one company, Chartered Semiconductor, reported earnings that exceeded our estimates; the rest of them all produced lower-than-expected results. We have eased our fullyear earnings estimates accordingly to account for these one-off items and, in some, for weaker-than-expected sales.

Sentiments in most market segments remain cautious. Despite the pickup in demand and positive indicators of a probable sustainable recovery in the electronics industry over the past few months, sentiments in most market segments have remained predominantly cautious. Most companies now agree that 2H09 would continue to be challenging, and that a sequentialgrowth in the coming half-year, as anticipated by them, is likely to be mild. In addition, they also expect to contend with issues such as demand pattern uncertainty, currency exchange rate fluctuations, price pressures and possible unwanted liabilities from major customers. As such, they are stepping up their vigilance on all fronts and keeping a close watch on any developments in the electronics sector that may negatively affect them.

Upside looks capped; maintain UNDERWEIGHT. In spite of the cautious tone set by the companies, tech stocks have made a dramatic recovery since the March 2009, far outpacing their expected earnings growth and bringing their valuations close to, if not, back at pre-crisis levels. While we think that most of these companies have the capacity and financial strength to ride on further market uncertain (with fundamentals and cash position still healthy), any further upsides in their share prices seem to be capped. As such, we maintain our UNDERWEIGHT rating on the technology sector. Separately, we reiterate our BUY rating on VHL (FV: S$0.17), HOLD rating for Z-OBEE (FV: S$0.07) and SELL rating for Chartered (FV: S$1.46) and WTE (FV: NA).