Strong US$ a mixed blessing to semiconductor players

• Ringgit to average between 4.00 and 4.50 against the US$in 2017
• US policy, Brexit, lower oil prices have led to a weaker ringgit

THE strong performance of the US dollar in tandem with a weak ringgit is benefiting Malaysian technology firms, particularly those from the semiconductor space, say analysts.

A technology analyst with a local investment bank told Digital News Asia via phone that in general, the impact of the strong US dollar on local tech companies is positive.

“As most of them are export-oriented, their revenues are in US$. When you compare their costs, generally, half are in US$ and the rest in ringgit. Most of them will benefit because their cost structure is the same,” the analyst explained, citing Globetronics Technology Bhd, Unisem (M) Bhd and Inari Amertron Bhd as some of the beneficiaries of the strong US dollar.

Kristina Fong (pic right), head of research at local ratings agency RAM Ratings noted that the ringgit depreciated against the US dollar by 6.7% in 2016, less pronounced than the 19.3% experienced in 2015.

“This depreciation has been driven by both the weakening of the ringgit in tandem with the strengthening of the US$.  In the last couple of years, ringgit weakness has mainly been driven by external events including plunging oil prices and foreign investor expectations about the magnitude and timing of the Fed policy tightening,” she told Digital News Asia via e-mail.

According to Fong, last year saw two unexpected and significant global events which contributed to increased ringgit volatility, namely the UK’s decision for Brexit and president-elect Donald Trump’s win in the US elections.

“That said, all these factors remain conduits of uncertainty in the coming year and will thus create continued volatility in the ringgit value.

“Of note, the first half of 2017 will most likely see a weaker ringgit compared to the second half of the year as a few of these major event uncertainties will be unwound. 

“The first of such will be the start of President Trump’s 100 days in office where he is expected to announce most of his key policy pillars on trade, foreign policy and domestic affairs.  March will see the initiation of the process for the UK’s exit from the EU and April will also mark the month for the tightly fought and closely watched French Presidential election,” she explained.

As expectations of how these uncertainties play out will largely shape the direction of financial and forex markets, Fong believes there is likely to be an elevated level of volatility and downward pressure on the ringgit in the first half of the year as investors flock to safe haven assets on the back of risk aversion. She also shared that RAM Ratings expects the average value of the USD/RM for 2017 to range between 4.00 and 4.50.

“That said, the extent to which tech companies will be affected by such trends will largely depend on the currency that business is conducted in. If most transactions are conducted using US$, then there is a natural ‘hedge’ to the currency volatility,” Fong said.

Heng Huck Lee (pic, right), chief executive officer of Globetronics, said the impact has been slightly positive to the company.

“While the majority of our sales is in US$, we also attempt to procure the relevant cost of goods sold in US$ as well to create a natural hedge for our company. In this way, we have minimal volatility and disruption to our businesses regardless of which way the US$ goes. After netting off purchases, we are still slightly long US$ so we will benefit from realised or unrealised exchange in our books,” he told Digital News Asia via e-mail.

He explained that Globetronics is quite different from other exporters that have most of their sales in US$ but majority cost exposure in ringgit, where they benefit a lot more from the strong US$.

“In terms of the trend, it is quite difficult to predict, but I would say it should be a strong US$ for at least the next six months until US policy becomes clearer.”

Heng shared that there are also some negatives due to the strong US$. “Where we are expected to spend a fairly big amount of capital expenditure (capex) in 1H 2017, the recent Bank Negara Malaysia requirement for exporters to auto convert their excess US$ (into ringgit) has resulted in us having insufficient US$ to fund the capex and we had to do a combination of ringgit conversion and US$ financing to cater for this.”

Commenting on the outlook for the semiconductor industry, he noted that it is challenging with many consolidations and acquisitions, with smaller players taken out to form fewer and bigger players in the industry.

“While things remain tough for those in the disk drive industry (e.g. Western Digital and Seagate), there are opportunities still for component makers for the smart devices as well as those having exposure to cloud, Internet of Things and automotive.

“For ourselves, we are expecting to see growth this year as we have new sensor components that will be incorporated into the latest smartphones and we are also making inroads with our LED division, seeing new products coming from consumer electronics and automotive. This would require new capex investments as I mentioned earlier, and we expect to see a strong recovery in our loadings starting 2H 2017,” he concluded.

 
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