Below are highlights from our bi-weekly sector update (click here for the full report). This time we highlight developments in the technology sector, with special reference to Asian technology. Continued growth in electronic exports in China, Taiwan and Singapore suggests that pessimism in the Asian technology sector may be overdone. Also, tech giants such as Intel and Apple have begun to report better than expected profits. Intel in particular, is indicative of the broad health of the tech sector. The chip giant cut production last year in response to its rising inventory. This caused the industry to brace itself for a slowdown. Yet the demand for electronic goods continues to grow, along with the demand for the semiconductor chips that Intel makes. We think these developments do have significant repercussions for the technology sector.

ASIAN TECH

Building China's Technology Base

Compared to 2001, China is exporting a larger proportion of technology-related products overseas. The proportion of exports from 'Hi-New-Technology Products' increased from 17.4% (as at Jan 2001) to 30.5% as at Nov 2004. Mechanical and electronic products as a proportion of total exports also expanded. It rose from 44% (as at Jan 2001) to 56.6% as at Nov 2004. From the chart below, we can see a measured and gradual pace of growth in the proportion of technology related products due for shipment. That is a plus for China.

Currently, China is pictured very much as a country with abundance of low cost labour, which in turn attracts investments in manufacturing. However, if China increasingly moves towards creating infrastructure ready for exporting value-added high technology products, that might reap additional benefits for tech-related companies in China. According to a report dated 11 Jan 2005 by Bloomberg, Shan Qing Jiang, the deputy director of the commerce ministry's technology division, said that the state has interest in building 10 high-technology domestic companies, each capable of exporting US$5 billion worth of goods on an annual basis.

Singapore 2004 GDP Growth Driven By Surging Exports

The Singapore economy grew by 5.4% year-on-year in the quarter ended December 2004, according to the Department of Statistics. For 2004, the rise in exports has been a major driver of growth in the Singapore economy. The strong growth was driven by two kinds of exports. The first one would be the gain in electronic exports and the second is the expansion of pharmaceutical exports. For the first 11 months of 2004, on a year-on-year basis, electronic exports grew 15.4% and pharmaceutical exports grew 16.2%.

The proportion of electronics as an export component had increased since the tech bubble in 2000. As at Dec 2004, the proportion of electronic exports is about 54%. Ever since the tech bubble, there has been a steady improvement in electronic exports. There was a downward trend in electronic exports from Singapore after the tech euphoria ended in 2000, but since then growth in electronic exports has recovered and is currently experiencing an upward trend.

Exports From Taiwan Rose Slower Than Expected

Taiwan's shipments grew by 6.2% year-on-year in November 2004, according to the Ministry of Finance in Taipei. Although growth in export orders was high at about 30% for 2004, exports growth itself is on a decelerating trend. Growth in export orders typically signals the demand for exports for the next 3 months. Thus, a rise in export orders is actually positive for Taiwan. We might expect shipments to accelerate once export orders are met in the next quarter.

As at October 2004, electronic exports took up 25% or a quarter of the value of shipments from Taiwan. Most recently, as at December 2004 electronic exports from Taiwan grew 7.4% year-on-year. Concurrently however, export orders continue to be strong. As a large part of export orders would be made up of electronics exports, we expect stronger growth of electronic exports in the next half of 2005.

Conclusion

Taiwanese exports have been growing strongly since the middle of 2002. Export orders is an indicator of the growth of exports in the next 3 months. Export orders being a forward-looking indicator is still growing strongly. Electronics exports have also experienced some form of deceleration in growth in the second half of 2004. However, we think that there may be over-pessimism in the technology sector in terms of demand for technological products. Taiwan is the home to two of the largest semiconductor foundries in Asia (UMC and TSMC), if there is a turnaround for the demand for global technology exports, there is a strong likelihood that Taiwan would be one of the first countries in Asia to benefit.

According to Bloomberg, the estimated price earnings for the TWSE is currently at about 13 times for 2005. The average price earnings since 1996 till 13th January 2005 is about 25 times. The PE ranges from 7.9X to over 50X, this is a rather large valuations range as it includes the period of the technology bubble which technology companies experienced high valuations due to the euphoria on technology stocks. On the basis of estimated valuations, we see that the Taiwanese stock market looks attractive. We do not have any recommended Taiwan funds but we carry Fidelity Taiwan USD and OCBC Taiwan.

GLOBAL TECH

Intel announces 4Q04 sales of $9.6 billion, above the range forecasted in Dec 2004

Intel, whose semiconductors power more than 80% of the world's PCs, announced strong 4Q04 results. Its 4Q04 net income was at $2.1 billion, up 11% sequentially and down 2% year-on-year. In terms of sales, Intel had forecast sales of $9.3 billion to $9.5 billion in 4Q04, but sales hit $9.6 billion as sales of chips for laptops and server computers were stronger than expected. Intel was able to reduce inventories by $559 million during the quarter, or 18%. Current inventories of $2.6 billion are slightly lower than what the company considers optimal, said CFO Bryant. According to Bryant, the company put the brakes on production a little too hard and there were some customers that did not get as much product as they wanted. For the year, Intel achieved revenue of $34.2 billion, up 13.5% from 2003 and higher than the previous record of $33.7 billion set in 2000. Net income of $7.5 billion was up 33% from $5.6 billion in 2003. Earnings per share were $1.16, up 36% from $0.85 in 2003. Intel expects sales to be $8.8 billion to $9.4 billion in 1Q05, an increase of 9-16% year-on-year.

Apple's last quarter profits quadruple to $295 millions

The popularity of the iPod as a consumer electronic product has benefited Apple's sales. Sales of iPod surged to $1.21 billion from $256 million a year earlier. The players made up 35% of total sales, compare with 13% a year earlier. Since the product was introduced in 2001, 10 million iPods have been sold. Apple has been relying on the "iPod halo effect" to boost the sales of other Apple products, including the iMacs.

Conclusion

What we have seen after the end of the tech bubble days is that companies have generally been cautious in their business approach. When indicators seem to suggest a slowdown in the tech industry, they respond quickly by reducing utilization or production levels. We believe this is far from being a negative factor, as it means that inventory levels are kept in check.

Intel's story in 2004 reflects this cautious approach. Intel's 4Q04 results show that when their inventories hit $3.2 billion last year, they responded quickly by reducing production. This made the industry assume that the tech sector was in for a slowdown. But we have seen that new orders for computers and electronic products continue to increase in the US. For the 3 months from Sept-Nov 2004, orders rose 9% year-on-year.

Thus, is this belief of a downturn in the tech sector justified? We believe not, as end demand continues to remain strong and shows no signs of slowing down. The pessimism in 2004 with regard to concerns like the peaking of the semiconductor industry has been factored in prices, as reflected in the performance of a number of tech funds last year. We expect that the tech sector will continue to do well, as reflected in our attractive outlook for sector, and it will have positive pass-through effects on the economies, which are reliant on the tech sector's growth. These countries will include Taiwan and Singapore, where exports of tech make up about 23% and 54% of their total exports respectively in 2004. In terms of valuation, the tech sector as represented by the Nasdaq 100 from the period of May 1993 to Dec 2004 was between 9.3x to 123.4x - it currently stands at 33.3x as of 31 Dec 2004.