Semiconductor Sell-off, Opportunity or Threat?

To those who hold AEM or UMS, the past few days must have really tested you as an investor. AEM has declined by 49% along with UMS which has declined 42% from the high a couple of months back. Here are the respective charts below, ouch!

Today, I loaded up on more shares of AEM at $1.05 and I am looking to add more to UMS. Why am I still bullish on semiconductor sales? Here are the main reasons why I am still bullish on semiconductors. 

Semiconductor 2018 Industry Trend 

The business of AEM and UMS is definitely linked to the Semiconductor industry. More specifically, they both provide equipment for Semiconductors ranging from testing, components manufacturing, and even precision machining services. Therefore, let's dig deeper into the semiconductor business.

According to the World Semiconductor Trade Statistics ("WSTS"), global semiconductor monthly revenues grew 20.2% yoy to USD 8.16bn for April 2018. This is pretty impressive, but more importantly, can the growth be sustained?

WSTS expects the world semiconductor market to grow in 2018 and 2019 to USD 463bn and USD 484bn respectively. For 2018, this represents growth of 12.4%. This reflects expected growth in all major categories, with an extraordinary growth from Memory at 26.5% followed by Analog ICs with 9.5%. In 2018, all geographical regions are expected to grow. For 2019, all major product categories and regions are forecasted to grow with the overall market up 4.4%, with Sensors contributing the highest growth followed by Optoelectronics and Analog ICs.  (Source)

Basically, growth has been above average, but going forward, is expected to taper off to a level which I personally find still pretty decent.

Attractive Yield

The dividend yield for AEM and UMS as of 19 June 2018 is 2.56% and 5.82% respectively (According to SGX), which I find to be decent. Both businesses are not highly leveraged. As of 31 March 2018, AEM had SGD 0.4mn of Debt which is 0.6% of Total Capital, while UMS has SGD 20.3mn of Debt which represents 8.2% of the Total Capital. Both companies are also in a positive financial position with an absence of Net Debt.

Cheap Valuation

Something is considered cheap or expensive only relative to what it is being compared to. I have used the universe of listed stocks which are classified as Semiconductor Equipment in their industry classification. I also removed those with negative net income in order to compare their PE (Price/ Earnings) ratio. I am using a basket of 418 stocks as my basis (UMS and AEM included).

The average PE is 25.9x with the median being 16.5x. Both UMS and AEM currently have PE ratios of 8.47x and 8.79x respectively. I like the margin of safety, the median is about twice the PE!

Conclusion

Both UMS and AEM are considered cheaper than it's global peers and has decent dividend yields. Put that together with an industry that is expected to see double-digit gains in 2018, I decided to add more into my AEM position (Will be looking to enter UMS as well). The margins of safety is there. Of course, if you are planning to hold this for a week/month, chances are it might not be worth the risk as the sentiments are pretty bearish. But in my eyes, I see opportunity. I will come back to review this post perhaps towards the end of the year for some rebalancing. 

Until then, happy investing.

Cheers.