Published March 10, 2009

Tech sector may have hit rock bottom: Citigroup

By WINSTON CHAI

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AFTER a brutal clobbering, Citigroup believes there are early signs that the worse may soon be over for the beleaguered technology sector. But despite the upbeat prognosis, the firm says the strong Singapore dollar and lingering competitive pressures could undermine the performance of local high-tech firms even if the sector gets on its feet.

Recovery mode: Korea's export data, which is widely considered to be a pace-setter for Asian exports as a whole, is showing signs of a sustained rebound

Initial indicators that the battered industry could be showing signs of bottoming out or stabilising can be found in a set of recently-released economic statistics for Singapore and two key regional markets, Citigroup explained.

Most notably, Korea's export data, which is widely considered to be a pace-setter for Asian exports as a whole, is showing signs of a sustained rebound. Exports for the high-tech sector in particular have narrowed their decline from 41.9 per cent in December last year to 30.5 per cent in the January-February period.

In dollar terms, Korean tech exports have increased from US$4.7 billion last December to US$5.4 billion in January and US$5.8 billion last month.

'High-tech sectors that had shown steep declines in Q408 were no longer declining, or even showing a decent recovery,' Citigroup said in a market report released yesterday.

Similarly, China's PMI (purchasing manager's index) also improved in February, particularly its 10-point increase in its new export orders index from 33.7 to 43.4. While not directly tied to the technology sector, Citigroup said these are 'tentative' signs that demand could be steadying after much volatility and this could in turn have a positive spillover effect on high-tech companies there.

And while Singapore's electronics industry is still shrinking, the sector's PMI has inched upwards by 0.2 points from January to 43.8 last month. Citigroup said the Republic's export orders sub-index has also increased 2.4 points to 41.5 in February. PMI readings above 50 imply growth while those below that points to a contraction.

Besides these macroeconomic indicators, the company added there are also signs that the pain is slowly easing at the company level.

Firms such as electronics circuit board maker Nan Ya PCB has started reporting sales improvement recently, while chipmaker TSMC is being lifted by orders from the communications and display segments. The memory sector, which has been plagued by a prolonged downturn due to a supply glut, may have already taken the first step towards recovery, Citigroup said in the report.

Even though these signs are encouraging, Citigroup said it is still too early to call for a rebound in Singapore's tech sector, although near-term stability is a possible outcome.

This is because demand from the US, a key destination for electronics exports, is still uncertain. In addition, the strong Singapore dollar will also impair the performance of the country's tech companies compared to their regional counterparts from markets such as Korea, which has seen its currency depreciate substantially against the greenback.

'The significant KRW REER (Korean won real effective exchange rate) depreciation has allowed Korean companies to better weather the downturn versus global peers, whilst the opposite is probably true for Singapore-based manufacturers,' Citigroup noted.

'Even in the event of a recovery, we think that Singapore's electronics sector will continue to be hobbled by structural hollowing-out pressures. These pressures will be accelerated by the recession, as a fall in export revenues will force companies to focus on cost-cutting to preserve dwindling margins,' it added.