While we are Overweight on Malaysia Tech, high earnings expectations remain a risk. Consensus is projecting lofty 4Q24 earnings growth of +58% YoY (+87% QoQ). We advice investors to be selective and prefer stocks with a clear strategy & long-term vision and/or earnings certainty (via secured orders). Our top picks for the sector are Vitrox and V.S. Industry. By sub-segments, we find risk-reward most favourable for equipment makers, given their reasonable earnings estimates, recovering order book and supply chain relocation activities.

• High earnings expectations remain a risk. Consensus is projecting 4Q24 Malaysia Tech earnings growth of +58% YoY (+87% QoQ). Historically, fourth quarter earnings tend to be sequentially flattish. Growth assumptions are predicated on a normalisation of margins and ramp up of new products/customer contributions, which could disappoint if it takes longer than expected to materialise. The USD/MYR rate stabilised at RM4.40 (-1% QoQ) in 4Q24, following a 6% QoQ decline in the previous quarter.
• Estimates for equipment makers most reasonable. Order book for equipment makers have stabilised and in certain cases, resumed an upward growth trajectory. With certainty from the US elections, customer capex plans have resumed and we expect the segment to be a beneficiary of tariff driven supply chain relocation activities, supporting our BUY calls on Vitrox and Greatech. Relatively, earnings expectations for EMS (electronics manufacturing services), OSAT (outsourced semiconductor assembly and test) and precision engineering companies are much higher. Over fears of export controls, there could be potential risks of stockpiling, casting doubt on demand sustainability. OSAT companies are also dependent on smartphone shipments, where AI features have yet to boost revenues. In its 1QFY25 results, Apple reported its iPhone revenues declined 1% YoY.
• Companies that could surprise. Earnings for Kelington, SKP Resources, SFP Tech, Mi Technovation and Coraza, stand a good chance at beating expectations, in our view. We screen for companies that are forecasted to report a decline in 4Q24 earnings (vs. general expectations of sequentially flat earnings for the sector). To verify reasonableness, we also look through recent quarterly results and prospect statements, to ensure the companies are not on a declining trajectory.
• Overweight on Malaysia Tech. While expectations for the sector remains high, we believe there is value within the sector, given its relatively low holdings in investor portfolios and still positive long term structural prospects. As the AI (artificial intellingence) and DC (data centre) trade unwinds, interest could eventually return to the sector, as investors seek to rebalance their portfolio. Our top picks are Vitrox (BUY, TP: RM4.75) and V.S. Industry (BUY, TP: RM1.45), based on our preference for stocks with a clear strategy & long-term vision and/or earnings certainty.

Source: AmInvest Research - 6 Feb 2025