Despite various trade concerns over the heightening trade tension, the year of 2025 is touted to be a time of technology breakthrough, which will see many opportunities to invest, innovate and develop. We believe Artificial Intelligence (AI) remains at the forefront of key topics as did cybersecurity, cloud computing, and robotics. We also gather that some local ATE makers have started receiving more inquiries in the last 2 months, although the outlook visibility remains short. In the local scene, data centre play continues to be in the limelight. Overall, we are selectively upbeat on the technology stocks, as certain segment like automotive is still facing a challenging outlook. Maintain Overweight on the sector, and our top picks are Cloudpoint and QES.

• Sales of China's EV cars set to dominate for the first time. Electric vehicle sales in China are set to eclipse the sale of traditional vehicles for the first time this year as domestic EV sales are projected to grow 20% YoY to more than 12m. The projections, which include sales for both pure EVs and plug-in hybrids, offer a stark contrast to the outlook for internal combustion engine vehicle sales, which are expected to fall by over 10% to less than 11m cars in the coming year. The EV sales in China have benefited from a mix of government subsidies and domestic competition pushing prices down. It has been boosted by a Beijing-led program that offers a subsidy of over USD2,800 to consumers, who trade in their internal combustion engine vehicle for an EV or hybrid. Meanwhile, competitive domestic manufacturers such as BYD have engaged in aggressive price-cutting strategies to incentivise consumer purchases.
• Automotive is set to witness 5 major developments. According to Techinsights, China will continue to assert its dominance in shaping global automotive trends. As the epicenter of innovation in vehicle architecture, the country's influence is reshaping how cars are designed and built worldwide. Secondly, the transition to sustainable mobility is gaining momentum. Battery electric vehicles are poised for significant growth, driven by stricter environmental regulations and consumer demand for greener alternatives. Thirdly, the adoption of Level 2 automated driving systems, offering features like lane centering and adaptive cruise control, is reaching a tipping point. These systems are becoming common vehicles across price ranges. Fourth, AI technologies are transforming in-vehicle experiences from voice assistants to advanced driver monitoring systems, AI making the cockpit smarter, safer, and more personalised. Lastly, the supply chain disruptions that defined the past few years are easing, as inventory levels stabilise, manufacturers and suppliers can refocus on innovation and strategic planning.
• Global semiconductor market poised to sustain solid growth. The World Semiconductor Trade Statistics (WSTS) organisation unveiled its latest projections last month, forecasting significant growth for the global semiconductor market in 2024 and 2025. WSTS revised its 2024 forecast upward, predicting a 19% YoY growth, with the global market value expected to reach USD627bn (RM2.8tln). This rebound is attributed to improved performance in the computing sector in the second and third quarters of 2024. Growth will be driven mainly by the memory and logic segments, projected to rise 81% and 16.8%, respectively. Categories such as discrete, optoelectronics, sensors, and analog semiconductors, however, are expected to decline. Regionally, the Americas and Asia-Pacific are set to lead, with growth rates of 38.9% and 17.5%, respectively, while Japan is forecast to see modest growth of 1.4%. Europe may face a decline of 6.7%. WSTS projects further growth of 11.2% in 2025, bringing the global semiconductor market to an estimated USD697bn. Logic and memory are expected to remain key drivers, collectively surpassing USD400bn, with YoY growth of 17% and 13%, respectively. Unlike 2024, all regions are forecast to grow in 2025. The Americas and Asia-Pacific are expected to maintain double-digit growth annually. We see attractive opportunities for investors in Southeast Asia to benefit from the growth and developments across the semiconductor value chain. These include direct investments in the back-end such as outsourced semiconductor assembly and test (OSAT) and also in adjacent segments.
• Mixed projections on the global smartphone sales outlook. According to TechInsights, global smartphone sales are expected to see 4% growth in 2025 and is expected to rebound and grow steadily through 2029. In contrast, International Data Corporation (IDC), expects a CAGR of 2.8% from 2023 to 2028, with growth slowing from 2024 onwards. IDC attributes this to factors such as increasing smartphone penetration, longer refresh cycles, and growing used smartphone markets. Apple is tipped to overtake Samsung as the world's largest smartphone player in 2025, led by i) Apple's pricing strategies, ii) product mix, and iii) favourable macroeconomic conditions.

   

• Chip giants doubling down on investment in China. Despite the heightening geopolitical tensions in recent years, which have increased market uncertainty, prompting many semiconductor companies to seek more resilient supply chains, interestingly, "Made in China" has emerged as a strategy for tapping into the Chinese market, with several European and American semiconductor giants ramping up their investments there due to the immense appeal of China's New Energy Vehicle (NEV) market. As the largest NEV market in the world, China is becoming increasingly significant to major chip manufacturers like Infineon, STMicroelectronics, and NXP amid a slowdown in the European EV market. Two key strategies being adopted in China are the shift toward localised chip production in China and strengthening partnerships with Chinese companies.
• New PC replacement cycle is looming. The personal computing (PC) market is on track to register a growth of 3.8% to 403.5m units in 2024, marking the first year of recovery since 2022. It is anticipated to see another growth of 4.3% this year, driven by more new launches of AI PCs (which are defined as PCs that come equipped with specialised neural processing units) and commercial upgrades from Windows 10 to Windows 11. AI PCs are expected to make up 19% of total PC sales in 2024, and this figure is expected to triple and hit 60% by 2027. Various projections show that PC vendors could potentially sell up to 205m AI PCs in 2028, or 4x more than in 2024. Meanwhile, in less than 10 months, Microsoft plans to end support for Windows 10, potentially rendering up to 400m computers obsolete overnight. According to Statcounter, Windows is currently used on over 72% of computers worldwide. However, the most surprising insight comes from the market shares of the two main Windows editions still officially supported by Microsoft. As of Nov 2024, Windows 10's market share increased from 60.9% to 61.8%. Meanwhile, Windows 11's market share saw a marginal drop to 34.9%. Given the slower-than-expected Windows 11 adoption, we expect a strong pick-up in commercial demand for PCs in the coming months as more companies are rushing to replace their PCs in preparation for the end of support for Windows 10.
• Global semiconductor equipment sales momentum set to sustain. The world semiconductor manufacturing equipment are anticipated to reach a record level of USD113bn in 2024, up 6.5% YoY. It is projected to register new records of USD121bn in 2025 and USD139bn in 2026, led by both the front-end and back-end segments. Following two years of contraction, the back-end equipment segment saw a strong recovery in the second half of 2024 as sales of semiconductor test equipment are projected to increase 13.8% to USD7.1bn in 2024 while assembly and packaging equipment sales are expected to rise 22.6% to USD4.9bn. Furthermore, the back-end segment growth is expected to accelerate, with test equipment sales surging 14.7% in 2025 and 18.6% in 2026, respectively, while assembly and packaging sales are forecast to grow 16% in 2025 followed by 23.5% in 2026. The key growth drivers are the increasing complexity of semiconductor devices for high-performance computing and the demand recovery in the mobile, automotive, and industrial markets. Meanwhile, China, Taiwan, and Korea are expected to remain the top three destinations for equipment spending through 2026. China is tipped to maintain its top position as the region's equipment spending continues to remain resilient despite various trade sanctions imposed by the US. Equipment spending for most regions is expected to fall in 2024 before rebounding in 2025. China is expected to see a contraction in 2025 following significant investments over the past three years.

   

• Malaysia's data centre set to boom. Malaysia is poised for significant data centre growth this year, fueled by substantial investments from major technology companies. According to the Malaysia Digital Economy Corporation, Malaysia, which is sitting at the forefront of the region's data centre growth, has seen total investments of RM99bn in the last 2 years with another RM149bn in the pipeline. Currently, Malaysia has 54 operational data centres with a live IT capacity of 504.8MW. Johor leads in IT capacity, followed by the Klang Valley, and with Sarawak, Negeri Sembilan and Kedah emerging as upcoming data centre locations. It is also worth noting that Johor will be the first state to hit 1GW when the supply under-construction and committed become operational in the future. According to Knight Frank Malaysia's report, Malaysia has 61 upcoming new data centres offering IT capacity of 1,313MW. In Asia-Pacific, current data centre capacity exceeds 10,500MW and is expected to more than double to 24,800MW by 2028, spurred by increasing adoption of cloud computing and AI. Singapore currently has more than 70 data centres with a total capacity of 1.4GW. But Malaysian government's recent approval of a total data centre capacity of 4GW makes the country Asean's top data centre hub. Meanwhile, McKinsey & Co estimates that the global demand for data centre capacity could rise at an annual rate of between 19% and 22% from 2023 to 2030 to reach annual demand of 171GW and 219GW globally. We see positive inflows for the various industries in Malaysia following a sharp increase in data centre investments. Data centres are a critical component in powering the growing digital economy, and Malaysia can specialize in data services, particularly those related to generative AI, which have applications across various industries like healthcare and services, leading to improved service quality and innovative solutions. This will help the country to broaden beyond semiconductor and gain from the technology transfer from big tech companies. The data centre engineering and facilities management solution industry in Malaysia grew from RM3.9bn in 2020 to RM8.3bn in 2023, at a CAGR of 28.5%. Moving forward, Providence estimates that the data centre engineering and facilities management solution industry in Malaysia will grow from RM10.7bn in 2024 to RM17.7bn in 2026, registering a CAGR of 28.6%.

Source: PublicInvest Research - 6 Jan 2025