• Global economic recovery a positive
• But downside risks remain
• Venture Corp our preferred pick for 2014

Economic recovery to boost prospects, but fragility remains

The prospects of the cyclical tech sector are strongly intertwined with the global macroeconomic trends and outlook. Looking ahead to 2014, most of the major economies are expected to deliver growth at a faster pace as compared to 2013, with the exception of Japan and China, based on projections from IMF. Global semiconductor sales, overall IT spending and the revenue of major EMS/ODM players are expected to experience positive growth in 2014. Notwithstanding this optimistic outlook, we believe uncertainties and downside risks remain. This may continue to affect business and consumer sentiment and thus end user demand, resulting in cloudy earnings visibility for major tech companies and their suppliers.

Maintain NEUTRAL

In light of the aforementioned factors, we maintain our NEUTRAL rating on the tech sector. Over the longer-term, we are still positive on the sector, as technology will continue to play an integral role in business processes and people’s lifestyle. Spending on IT will trend up more robustly once the global economy recovers on a firmer footing.

Venture Corp our new top pick in tech sector

Under our coverage, ECS Holding’s share price has appreciated 37.5% since we highlighted it as our top tech sector pick on 15 Jul 2013, strongly outperforming the STI’s 5.5% decline during the same period. We now downgrade ECS from buy to SELL, with an unchanged fair value estimate of S$0.585, as we believe its share price has outrun its fundamentals, while margin pressure remains a concern for 2014. With this downgrade, we replace ECS with Venture Corp (VMS) as our new top pick in the sector. We like VMS [BUY; FV: S$8.50] for its diverse customer base, strong balance sheet and sustainable dividend yield (FY13F: 6.7%).

Source: OCBC Research - 13 Feb 2014