Chip sector upcycle intact
10 Oct 2024
The domestic semiconductor sector remains on track for recovery despite facing short-term headwinds, particularly due to unfavourable foreign exchange (forex) rates, with the ringgit strengthening against the US dollar.
According to RHB Research, the new semiconductor upcycle is in its early stages, citing gradual increase in demand.
“We believe sector demand is showing early phases of recovery, and expect it to gain pace into 2025 with stronger growth visibility,” the brokerage wrote in its report yesterday.
However, it conceded that sector headwinds on unfavourable forex could temporarily derail the recovery, with earnings of semiconductor players likely to be reduced by 1% to 3% for every 1% strengthening of the ringgit against the US dollar.
“Still, it may be partially hedged by their US dollar purchases – typically 40% to 50% of cost of goods sold (for outsourced semiconductor assembly and test or Osat) and 20% to 40% (equipment makers and those with foreign borrowings),” RHB Research said.
“We believe the primary earnings drivers are volume loading and margin compression stemming from negative forex movements that can be passed on to customers via renegotiation, revised quotation, and engineering and process efficiency,” it added. RHB Research maintained its “overweight” stance on the technology sector.
“We advocate investors with a medium-term view to be nimble and build positions amid steep share price corrections to attractive levels,” it said.
RHB Research noted that the Semiconductor Industry Association had recently revised its forecast upward, projecting sales to reach US$611.2bil this year, reflecting a 16% increase with a further 12.5% growth anticipated in 2025.
“This uneven recovery is currently supported by the logic and memory chips, thanks to the boom in artificial intelligence (AI)-related servers and equipment. Going into 2025, a broad-base recovery with growth from all segments is expected,” it said.
“Also, early recovery indications in the automated test equipment space, along with traction in the front-end semiconductor space, bolsters our belief for a sustained sector recovery that is expected to gain pace into 2025 – where the replacement cycle intensifies,” it added.
While the second-quarter ended June 30, 2024 results for the sector were largely a miss, the aggregate core profit after tax and minority interest sustained the year-on-year growth at 11.6% on stronger revenue amid the recovery of the semiconductor space, RHB Research noted.
RHB Research noted that the sector’s valuation was attractive, at only 20-22 times forward earnings, which is around its five-year historical mean.
The brokerage’s top picks are Malaysian Pacific Industries Bhd, Pentamaster Corp Bhd and CTOS Digital Bhd.
Meanwhile, CIMB Research also reiterated its “overweight” stance on the Malaysian technology sector. It recently hosted a panel session on Malaysia’s National Semiconductor Strategy (NSS) policy, featuring expert speakers from across the Malaysian semiconductor value chain.
The discussion covered government initiatives, such as potential RM25bil in fiscal support, aimed at boosting local semiconductor manufacturing, research and development, and advanced packaging capabilities.
CIMB Research noted that panelists at the event emphasised industry collaboration, technology transfer, and the development of a robust talent pipeline to strengthen Malaysia’s semiconductor ecosystem.
“The panellists agreed on the importance of local back-end Osat players remaining competitive and reinvesting their profits to develop advanced packaging platforms.”
Source: The Star
