Kenanga Research has maintained its “overweight” stance on the technology sector.
PETALING JAYA: Malaysian semiconductor players are on the cusp of a new upcycle, with their earnings momentum poised to pick up strongly in the second half of 2024 (2H24).
Kenanga Research, which maintained its “overweight” stance on the technology sector, said the seasonally weak first quarter of 2024 (1Q24) is “behind the sector”.
“We sense optimism among Malaysian players – which are mostly at the back-end – from their tone during their recent post-1Q24 result briefings as the recovery in the semiconductor sector that started early this year trickles down the value chain.”
Kenanga Research noted that the World Semiconductor Trade Statistics (WSTS) had raised its projection for global semiconductor sales in 2024 to 16%, driven by strong demand for memory and logic integrated circuits.
Geographically, WSTS upgraded their sales growth forecasts for the Americas (25% from 22%) and Asia Pacific (18% from 12%). These two regions will lead the recovery in 2024, accounting for about 27% and about 56% of total global sales, respectively
Following six consecutive months of year-on-year growth in semiconductor sales, notably from November 2023 to April 2024, local players have guided for improving order visibility in coming quarters, according to Kenanga Research.
“This is consistent with our view of a recovery in 2H24.”
Within the outsourced semiconductor assembly and test (OSAT) segment, Kenanga Research continued to favour Inari Amertron Bhd
as a laggard play.
“Over the immediate term, it will be buoyed by the upcoming new US smartphone launch featuring artificial intelligence (AI) functionality.
“We also expect strong sales amid a new replacement cycle for smartphones (most users last bought a new phone two to three years ago during the pandemic).
“Meanwhile, its strategy of ‘China for China; Penang for the West’ will reduce its customer concentration risk.
“Selling predominantly to the West at present, Inari will sell to China more significantly via its 54.5%-owned China-based Yiwu Semiconductor International Corp, which is building a 500,000 sq ft plant in Yiwu, to be operational by mid-2024,” it said.Another top pick in the OSAT segment was Kelington Group Bhd, which the research house said was a key proxy to the front-end wafer fab expansion.
The expansion is likely to pick up more aggressively in the 2H24.
“The group continues to see a higher proportion of high purity gas solution jobs in its pipeline, making up about 78% of its RM1.25bil outstanding order book.”
Kenanga Research also highlighted that the worst is over for automotive semiconductor inventory correction.
“We understand that while the worst is over, automotive semiconductor makers are still navigating the inventory correction that started a few quarters ago.
“Among the challenges is a soft electric vehicle (EV) market globally as potential EV buyers are now mostly made up of single-car owners who put a lot of consideration on the range the car can travel on a full charge, versus mostly multiple-car owners previously,” it said.
The research house added that the electronics manufacturing services segment gets a shot in the arm from artificial intelligence-related products.
“Companies with diversified portfolios and substantial exposure to industrial products have proven to outperform peers that are heavily reliant on consumer electronics as their primary revenue driver.”
As for the software segment, Kenanga Research said there are opportunities in the cybersecurity space.
LGMS Bhd, which is another top pick of Kenanga Research within the technology sector, is a good proxy to the growing cybersecurity awareness in Malaysia on the heels of the enactments of Cybersecurity Bill 2024.
“Once the bill is enforced (pending royal assent), company directors may face personal liability for offenses if found negligent in their cybersecurity preparedness.
“LGMS has timely launched its Star Sentry product in anticipation of the upcoming demand wave,” it said.
