• Malaysia’s Outsourced Semiconductor Assembly and Test (OSAT) market value is expected to grow at a 5-year CAGR of 7.1% to USD1.58bn by 2028F, according to Mordor Intelligence.

• Growth is expected to be fueled by i) rising demand for advanced technologies such as artificial intelligence (AI) and Internet of Things (IoT), ii) increasing adoption of electric vehicles (EVs), iii) the proliferation of data centers, and iv) booming 5Gsmartphone sales driven by 5G network deployment globally.

• We are OVERWEIGHT on the sector, underpinned by rising demand for semiconductor products and strong government support through policies and strategic initiatives, focused on technological advancements and infrastructure development.

Revival of Semiconductor Upcycle. The World Semiconductor Trade Statistics (WSTS) raised its 2024 global semiconductor market sales forecast to USD611bn, up by 16% YoY from USD527bn (+9% YoY). Growth will be primarily driven by the Logic and Memory segments (refer to Table 3), resulting from robust demand for higher memory capacities, faster data processing, and advanced applications in smartphones, IoT devices, automotive electronics, cloud computing, and data centers. As such, we anticipate a promising FY24 prospect for Malaysia’s Outsourced Semiconductor Assembly and Testing (OSAT), supported by research from Mordor Intelligence, which forecasts Malaysia’s OSAT market value to grow at a 5-year CAGR of 7.1%, reaching USD1.58bn by 2028F from USD1.12bn in 2023. Growth is expected to be propelled by rising adoption of AI, IoT, and EVs, along with rapid advancements in data centers, and higher 5G- smartphones sales amidst global 5G network expansion. Moreover, in light of the ongoing US-China trade tensions and the adoption of "China Plus One" strategy, Malaysia is set to be a favorable alternative, considering its strong R&D capabilities and advanced infrastructure.

National Semiconductor Strategy (NSS): A Timely Booster. The government’s RM25bn initiative under the National Semiconductor Strategy (NSS), aims to boost semiconductor manufacturing by attracting foreign direct investment, enhancing local capabilities, and fostering innovation, is key in supporting the sector’s growth. According to the Malaysian Investment Development Authority (MIDA), approved foreign investments in manufacturing surged by +95% YoY in 2023, reaching RM128.4bn, with 64% directed towards the electrical and electronics (E&E) industry. By cultivating a supportive ecosystem for semiconductor manufacturing, the NSS is expected to significantly enhance Malaysia’s global competitiveness and drive growth in the technology sector.

IT Services to continue riding on economy recovery. IT Services companies are expected to benefit from post Covid recovery and government digitalisation efforts to enhance business efficiency and transparency. Malaysia’s passport issuance, for example has reached 3mn in 2023, surpassing pre-covid levels of circa 2 – 2.5mn. Demand is expected to stay strong with the extension of Malaysia-China visa-free travel agreement until 31 December 2025, benefitting Datasonic as the sole passport provider. Government's support for Malaysia-China single window system for cross-border trade also will benefit companies like MyEG, which is ready to onboard users for its Ztrade services. We view these developments positively as they foster innovation and expansion, thus contributing to the growth of Malaysia’s digital economy.

Sector call. We are OVERWEIGHT on technology sector, underpinned by rising demand for semiconductor products, supportive government policies and strategic initiatives, focused on technological advancements and infrastructure development. DNeX (TP: RM0.58), and MyEG (TP:RM1.21) emerge as our Top Picks.

Source: BIMB Securities Research - 17 Jul 2024