Visible upturn for semiconductors
11 Nov 2023
IT is known that the semiconductor industry operates in cycles, with upturns occurring during periods of heightened demand, causing supply shortages and driving prices higher, fostering revenue growth.
Conversely, during downcycles, the industry faces challenges as demand wanes, leading to adjustments and strategic exercises to navigate through periods of reduced activity.
Recognising the ingrained cyclical nature of the industry, the downturns present unique challenges.
Yet, these periods are met with strategic resilience as companies leverage innovation and efficiency.
Currently, in the semiconductor industry, there is ongoing excitement as it navigates a downcycle, hinting at the anticipation of a robust bounce back.
Amidst this backdrop, analysts acknowledge a visible recovery within the semiconductor industry.
However, even as the industry shows signs of rebound, a sense of caution prevails among experts.
Despite positive indicators, analysts are maintaining a neutral stance on the sector, awaiting better indications.
The consensus points to a more optimistic perspective, with a better upside expected only in the latter half of 2024 (2H24).
Kenanga Research analyst Samuel Tan says while there are indications that certain companies are consolidating, the recovery is not as convincing as the market would prefer.
Lack of demand
He, who specialises in technology stocks, says that one key factor hindering the recovery is the lack of demand from end customers compared to the pre-pandemic period.
Tan, who has a “neutral” stance on the sector, notes that despite a slight recovery, the industry is still in the process of bottoming out the downcycle, and he believes it is nearing its conclusion.
“Ground reports suggest the anticipation of a major upswing, particularly towards 2H24,” he tells Starbizweek.
Another analyst, Kenneth Leong of Apex Securities Research, asserts that the semiconductor industry is in a more favourable position compared to a year ago, citing a steady increase in global semiconductor sales for the seventh consecutive month, reaching Us$44.9bil in September.
While anticipating improved 2H23 results for the technology sector compared to 1H23, Leong remains cautious due to the sector’s relatively high valuation and the ambiguity surrounding the timing of a full recovery.
Leong maintains a “neutral” stance on the technology sector, emphasising continuous monitoring of global central banks’ interest rate decisions and awaiting further signs of a meaningful recovery within the sector.
For the third quarter of 2023 (3Q23), global sales saw a 6.3% quarter-on-quarter increase, totalling Us$134.7bil.
“We see signs of inventory replenishment which boosted sales of semiconductors in recent months as the semiconductor inventory glut eases,” he notes.
Commenting on this matter, Malaysia Semiconductor Industry Association president Datuk Seri Wong Siew Hai says that inventory levels are decreasing and hence, he is anticipating a return to normal business operations.
“A clearer picture is expected to emerge in the first quarter, with the hope that conditions will improve by the second quarter,” he tells Starbizweek.
He also notes that many companies are currently focused on austerity measures, cost reduction, and minimising unnecessary expenses due to relatively low demand.
He says that due to an austerity drive, companies are intensifying efforts in cost-saving and automation and hence, progress to elevate them to the next level remains stagnant.
Talent war
Anticipating challenges ahead, Wong sees the potential resurgence of a talent war, as between 10% and 20% of Malaysians are leaving the country.
However, amid these challenges, the country continues to attract significant investments, he adds.
Intel Corp is set to invest over Us$7bil in constructing a new chip-packaging and testing factory in Malaysia.
Additionally, Infineon Technologies AG has announced a substantial expansion of its Kulim facility, aiming to establish the world’s largest 200-millimetre silicon carbide power fabrication plant, with an additional investment of up to €5bil.
The influx of investments also means the country has to gear up for additional headcount.
The increased investments, coupled with the United States Plus One, China Plus One and Taiwan Plus One strategies, puts Malaysia on a favourable front, Wong says.
However, he acknowledges the persistent talent issue should be addressed to fully capitalise on the potential advantages offered by these developments.
“All these factors are likely to contribute to a rising demand for workers and talent. Currently, with low demand, there’s a temporary pause in talent, akin to a momentary mull,” he adds.
Moreover, he highlights that the global semiconductor industry is poised to become a trillion-dollar industry by 2030.
He urges the government to prepare for that growth and figure out how to attract talent.
Wong acknowledges the government’s initiative in Budget 2024 with the introduction of the Long Term Social Visit Pass, allowing foreign students to work in Malaysia upon graduation, although specific details have not been specified.
This measure is seen as a potential solution to the talent shortages that the country is facing.
To further address the issue, he urges the government to attract foreign fresh graduates.
Responding to concerns about whether such policies might deprive Malaysians of job opportunities, Wong says: “Reflecting on historical instances in nations like the United States, Singapore and Australia, we observe that such initiatives ultimately create more job opportunities.”
Meanwhile, Bloomberg Intelligence technology sector senior industry analyst Steven Tseng suggests that leading semiconductor companies diversifying their production capacity to new regions and countries can help tech supply chains hedge their bets.
This approach includes clearing new paths to emerging growth markets.
“Several such destinations for supply chain relocation – particularly India and South-east Asia – are widely considered to harbour favourable economic outlooks for the foreseeable future, boding well for their tech product demand,” he notes in a report on the technology sector.
He notes that the gradual shift in electronic manufacturing’s production capacity could introduce higher structural costs into its supply chain.
Navigating these increased costs associated with the supply chain shift may pose a challenge, he adds.
However, Tseng says the access to promising end-markets is expected to yield long-term benefits, potentially offsetting the challenges posed by the higher costs associated with the shift in the supply chain.
“Tech production’s slow decoupling from China may bring higher costs as the electronics manufacturing services (EMS) sector rewires its supply chains. Inefficiency, and few local components amplify its woes.
“Yet, relocation could boost the EMS supply chain’s resilience, positioning it better to meet burgeoning demand from South-east Asia and India,” he notes.
Top picks
On the local front, Kenanga Research’s Tan has named Inari Amertron Bhd and Kelington Group Bhd as his top picks within the sector.
He says Inari is showing signs of recovery quicker than its peers, with margins reaching optimum levels despite facing the same challenges as the rest of the players.
On Kellington, Tan justifies that the group possesses an order book of Rm1.8bil and a tender book of Rm2.3bil, providing earnings visibility.
Apex Securities’ Leong, on the other hand, identifies QES Group Bhd and Frontken Corp Bhd as his top picks within the sector.
He explains that QES, due to its diversification of customer segments beyond heavy reliance on the semiconductor industry, has positioned itself to mitigate risks during the semiconductor downturn and gain resilience in fluctuating markets compared to its peers.
Regarding Frontken, he anticipates improving production volumes in the near future, mainly driven by advancements in artificial intelligence and electric vehicle technology.
“The group will also be implementing price adjustments in response to higher raw material prices.
“Additionally, with a greater contribution from Plant 2, which commenced operations in the first quarter of 2023 and mainly produces advanced nodes (five nanometers or nm, 3nm) commanding better average selling prices, an improved utilisation rate is expected in the coming months,” he says.
Source: The Star
