Thursday, 13 Oct 2022
FILE PHOTO: Semiconductor chips are seen on a circuit board of a computer in this illustration picture taken February 25, 2022. REUTERS/Florence Lo/Illustration
PETALING JAYA: The semiconductor sector is experiencing lower demand with an intensified inventory correction underway mainly for consumer products and the process will likely be prolonged.
The sector is also impacted by rampant inflation, geopolitical tensions, China’s lockdowns and Europe’s economic weakness, said RHB Research.
Global semiconductor sales growth reached an inflection point in August, ending 30 months of consecutive growth, the research house said in a report.
It said the United States’ CHIPS and Science Act of 2022 may deepen the divergence of supply chains into the US versus China in the next decade unless there is significant change in policies from both economic superpowers.
This could potentially cause an overcapacity situation and cost escalation in the long run.
As Malaysia is on a neutral ground in South-East Asia, it stands to benefit from supply chain and relocation efforts by multinational corporations to diversify out of China, the research house said.
RHB Research said the tech sector was trading below its five-year mean.
The potential derailing of forward earnings projections from various uncertainties in the global macroeconomic scene cannot be discounted, should the slowdown of the semiconductor sector persist.
It believes sector valuation will be capped by the rising bond yields amid the US Federal Reserve’s hawkish interest rate outlook.
Still, the solid balance sheet position and strong US dollar should cushion the slowdown as all semiconductor-related players are net beneficiaries, it said.
For the front-end players, the outlook remains solid as they benefit from engineering support services players.
“Orders for chips related to automotive, servers and high-performance computing remain solid, thereby benefitting players that focus on these sub-segments,” it said.
Weaknesses are prevalent in consumer products, smartphones and Internet of Things devices, where an inventory correction is taking place, it added.
RHB Research’s top pick for the tech sector is Malaysian Pacific Industries
Bhd for its exposure to automotive industry and electric vehicles, capacity expansion and adoption of new Advanced Packaging technology.
It also liked CTOS Digital Bhd for its domestic focused profile, leading position and prospects mirroring growing demand for various digital solutions and analytical insights.
For the small-cap stocks, the research house’s top pick is Coraza Integrated Technology Bhd, which is expected to benefit from robust orders and exposure to front-end equipment players.
RHB Research said it was a solid second-quarter 2022 with sector aggregate core profit after tax and minority interest up 23% year-on-year and 7.7% quarter-on-quarter.
This was so as most outsourced semiconductor assembly and test players were still posting healthy double-digit growth year-on-year, albeit at a moderate pace, but supported by higher loading and margin expansion, underpinned by robust demand and certain supply chain bottlenecks.
Datasonic Group Bhd and GHL Systems Bhd results, were, however, disappointed.
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