Bottoming out, 2HCY24 should look better. We maintain our NEUTRAL stance on the technology sector. Global semiconductor industry data aggregator and forecaster WSTS projects global semiconductor sales to rise 13.1% in CY24, driven by a rebound in memory chips (+44.8%) and logic ICs (9.6%). Geographically, the Americas (+22.3%) and Asia Pacific (+12%) are expected to lead the recovery in 2024, particularly Asia Pacific, which commands c.53% of global sales.

We notice that the YoY decline in semiconductor sales has been gradually shrinking from high teens two quarters ago to low single digits in recent months. Similarly, WSTS moderated its contraction forecast of global semiconductor sales in CY23 to 9.4% in Nov 2023, from 10.3% in Jun 2023. Meanwhile, Semiconductor Industry Association’s (SIA) data showed month over-month improvements in sales in Jul (2.3%), Aug (1.9%), and Sep 2023 (1.9%), culminating to a 6.3% QoQ rise in 3QCY23 sales, although the number still eased 4.5% YoY. All these point to a bottoming in the industry cycle. However, we do not expect the industry to start the year with a bang given an expected seasonally slow 1QCY24, after the year-end peak demand period for consumer electronics and automotives in 4QCY23 (which has been slightly underwhelming given the weak global economy). We are also mindful of the scheduled plant shutdowns during the long Chinese New Year break, especially in China. As such, we believe a meaningful recovery will more likely take place in 2HCY24.

Within our coverage universe, MPI (MP; TP: RM27.20), as one of the more resilient OSATs during challenging times, indicates a gradual earnings recovery from the bottom. However, the pace remains slow as customers hesitate to commit to large order replenishment, partly due to the industry's shift to "just-in-time" inventory management from the previous "just-in case" approach during the pandemic. Anticipating this, MPI foresees a delayed breakeven timeline for its China operation in Suzhou, now expected in April 2024 instead of November 2023. Similarly, UNISEM (UP; TP: RM2.00) fell short of its guidance twice in a row and anticipates meaningful momentum in the 2HCY24. Consequently, companies that recently expanded capacity and workforce are facing increased operating costs and reduced margins due to sub-optimal plant utilisation. Elevated electricity costs further contribute to these challenges, although the installation of a photovoltaic system is expected to partially cushion this impact over time.

Currently, we favour stocks like INARI which has demonstrated a faster turnaround compared to its peers. This is evident in its sequential QoQ growth and the recovery of net margin to >20%, contrasting with low single-digit figures seen among peers. INARI's positive outlook is supported by solid order visibility from Customer B, and it anticipates a 5%-8% surge in radio frequency (RF) content per device. The increased RF utilisation rate, surpassing 90% from the recent 80%, indicates a robust performance in the upcoming quarter. Fascinatingly, the present condition of the smartphone supply chain is expected to be constrained, given eight consecutive quarters of YoY shipment decline globally. Vendors are cautious in capacity planning, considering inventory rationalisation and a conservative sentiment surrounding the latest US smartphone. Despite this, the scenario indicates limited downside risk. In fact, the supply chain might need to respond promptly and increase production if the US smartphone market outperforms expectations even slightly. Hence, we anticipate favourable growth prospects for INARI in the current supply-demand dynamics.

Source: Kenanga Research - 4 Jan 2024