CGS-CIMB Research said the capacity expansion undertaken by industry players, coupled with a decline in customer confidence, could continue to weigh on the sector’s outlook. — Reuters
PETALING JAYA: The semiconductor industry is likely to experience a recovery in 2024 as the current inventory glut may take more time to reverse, according to CGS-CIMB Research.
Given the current surge in tech stocks’ share prices, investors are anticipating a rebound through the second half of 2023.
However, CGS-CIMB Research said the capacity expansion undertaken by industry players, coupled with a decline in customer confidence, could continue to weigh on the sector’s outlook.
“In our view, the macro demand remains generally weak despite entering a seasonally stronger period in the second half of 2023,” said the research house in a report on the industry.
CGS-CIMB Research projects aggregate tech sector earnings to increase by 29% in 2024 while the elevated projections for 2023 could see a correction on below par earnings from local tech firms.
The research house said the risk of further cuts to earnings expectation is being overlooked.
“The first quarter of 2023 results largely fell short of Bloomberg consensus expectations and unlikely to catch up given the weak macro environment,” said CGS-CIMB Research.
According to the research house, the outlook for the semiconductor industry remained challenging amid an ongoing inventory glut, as consumer sentiment in key markets such as the United States and China remained weak.
This is evident by the declining consumer electronics shipment numbers for products like smartphones and personal computers and declining growth rates in global semiconductor sales.
“Local tech companies expect the weakness to extend towards the end of 2023, given the lack of demand visibility within the broader semiconductor space,” said CGS-CIMB Research.
The research house has maintained an “underweight” call on the tech sector, premised on elevated valuations despite building in fairly aggressive growth expectations, as the sector is trading at 26 times rolling 12 months forward price-to-earnings ratio.
Its top pick for the sector is Genetec Technology Bhd
based on its sizeable exposure to the high-growth electric vehicle and energy storage space sectors and reasonable valuations.
CGS-CIMB Research has an “add” call on the company with a target price of RM3.63 per share.
It has downgraded Inari Amertron Bhd to a “hold” due to its current valuation adequately reflecting its radio frequency business recovery and earnings upside from new business avenues.
It added that Uchi Technologies Bhd provides the highest yield in the sector, at 6% to 6.5% for financial year 2023 to 2025, given its solid free cash flow generation and sustained payouts exceeding 90%.
