KUALA LUMPUR: The recovery of global semiconductor demand is expected to remain challenging given China, with its commanding market share, has no clear resolution to its epidemic and supply chain challenges in 2023.
Kenanga Research, which maintained its "neutral" recommendation on the technology sector, said China has seen slowing demand due to Covid-related restrictions.
"Global chip demand slowed as Semiconductor Industry Association (SIA) reported its first year-on-year (y-o-y) sales decline of 3% for the month of September since the boom in Feb 2020.
"Growth recorded by the US (+11.5%), Europe (+12.4%) and Japan (+5.6%) were offset by lower sales in China (-14.4%) and Asia Pacific (-7.7%)," said Kenanga in a sector update.
The World Semiconductor Trade Statistics subsequently turned more bearish on growth in 2023, projecting a 4.1% contraction due to the prolonged supply-chain disruptions in China as well as a steeper inventory adjustment cycle.
Given the challenges, Apple Inc has warned of longer-than-expected delivery time for its latest smartphone model in the upcoming festive season.
Its supplier, Foxconn, whose assembly facility in Zhengshou is responsible for most iPhone 14 production, is facing production delays due to the imposed restrictions in the provincial capital.
Among Malaysian players, Kenanga said Inari Amertron Bhd
(MP; TP: RM2.85) will likely face dampened growth given that about 60% of its revenue comes from the smartphone radio frequency segment.
"While Inari has switched its strategy to focus on more legacy models, it may still likely struggle against the waning consumer demand for premium purchases as 9MCY22 sales of the US smartphone brand has declined -2.2% y-o-y (versus 9MCY22 global smartphone shipment of -14%)," said Kenanga.
Malaysian Pacific Industries Bhd (MPI) (market perform, TP: RM25) and Unisem (M) Bhd ((market perform, TP: RM2.75), both with a significant presence in China, have warned of the challenging operating environment
Kenanga said MPI’s Suzhou plant has seen its utilisation rate fall from above 90% two quarters ago to about 40% (versus a 70% break-even level) in its recent quarter owing to supply chain disruption, higher cost incurred to adhere to the lockdown restrictions as well as lower consumer demand for electronics.
MPI reiterated that the softness will likely extend into the next two quarters which is aligned with the guidance of global peers that expects the inventory adjustment to last till 1HCY23.
Meanwhile, automotive-centric players such as D&O Green Technologies Bhd (market perform, TP: RM3.51) have indicated its seasonally stronger 4Q may not materialise as car manufacturers are prioritising clearing off existing built-up inventory and toned down order forecasts for the next two quarters.
LED manufacturer JHM Consolidated Bhd (market perform, TP: 90 sen) also reiterated the sentiment, said Kenanga.
Semiconductor companies, however, communicated to Kenanga that they remain upbeat on the long-term prospects of the industry due to new technology-driven goods and services such as 5G connectivity and electric vehicles, which are still at their infancy.
"This is especially true for the infrastructures that support and facilitate these products, such as cellular base stations, EV charging stations and data centres.
"Therefore, semiconductor players are still carrying out plant expansions for future usage despite the immediate turbulence," said the research firm.
It added that Kelington Bhd remains an excellent proxy to the trend and safe harbour during this challenging period given its strong earnings visibility backed by a RM1.6bil order book while tender book remained elevated at RM1.7bil.
Meanwhile, it said LGMS Bhd is a good proxy to recession-proof cybersecurity service, which is expected to grow alongside the expansion of the digital economy.
