We believe the data center and smartphone leveraged plays are shifting into more exciting stages. Following a 12-18 month data center construction phase, we anticipate the fit-out phase to begin in 4QCY24–1HCY25, providing a key opportunity for PIE (TP: RM6.35, OP), NATGATE (TP: RM2.30, OP), and INARI (TP: RM4.05, OP) to leverage on the rising AI infrastructure. Meanwhile, Generative AI smartphones - which shift user interactions from touch to voice are expected to grow more than 3-fold in 2024 and by another 73% in 2025. However, near-term headwinds are still lingering in the automotive semiconductor segment due to recent tariff hikes on Chinese EVs. All told, the sharp decline in the Bursa Malaysia Technology Index presents a buying opportunity for quality tech stocks. Taking over coverage, our top picks for the quarter - INARI, PIE, NATGATE, and KGB (TP: RM4.16, OP) are well-positioned, with strong earnings visibility and exposure to high-growth segments like AI-related infrastructure.

Strong growth in the global semiconductor market. The global semiconductor market is forecasted to experience robust growth in CY24 and CY25. As of July 2024, global semiconductor sales surged by 18.7% YoY, reaching USD 51.3b. Growth has been driven by strong demand in the Americas, China, and Asia Pacific, though Japan and Europe saw slight declines. Looking forward, the World Semiconductor Trade Statistics (WSTS) expects the global semiconductor market to grow by 16% in 2024, with Logic and Memory leading the charge, where a 12.5% growth is projected for CY25, reaching USD687b.

Data center boom: A key opportunity for Tech players. Malaysia’s data center sector is expected to expand significantly, with IT capacity increasing from 500MW to over 3,000MW. AI servers alone are estimated at RM97.8b, offering significant opportunities for local tech players. Following a 12-18 month data center construction phase, we ancipate the fit-out phase to beging in 4QCY24-1HCY25. Companies like PIE, NATGATE, and INARI are positioned to benefit from this growth. PIE has secured a major server switcher customer, while NATGATE aims to deliver 1,000 AI servers by year-end. INARI is ramping up production of 800G optical transceivers to meet increasing demand for faster data transfers in data centers.

Smartphone market gains momentum with AI. The global smartphone market grew by 6.5% YoY in 2QCY24, reaching 285.4m units. While Apple and Samsung continue to dominate the premium segment, Chinese manufacturers are focusing on the mid-and-low-end market to capture volume. Looking ahead, Generative AI smartphones, which shifting interactions from touch to voice as voice assistants become more intelligent and personalized, are expected to be the next major growth driver, with shipments projected to grow by 364% in 2024. By 2028, the market is expected to reach 912m units, with a CAGR of 78% from 2023 to 2028, according to IDC.

Automotive semiconductor growth amid tariff challenges. The automotive semiconductor segment is set for long-term growth, driven by the rise of EVs, ADAS, and autonomous driving technologies. However, recent tariff hikes on Chinese EVs, (100% in the U.S. (effective 1 August 2024) and 27.4%-48.1% in the EU (effective later in 2024)) may disrupt supply chains. Malaysia’s neutral stance in the trade conflict could position it as an alternative production hub, though the stickiness of the automotive supply chain, due to lengthy validation processes, may delay the impact on local players like MPI (TP: RM38.80, OP) and D&O (TP: RM2.64, OP).

Rationalizing earnings estimates and recommendations. Taking over coverage, we have updated our earnings estimates for several companies for recent developments. OPPSTAR (TP: RM0.82, MP) saw a significant revision downward due to delays in securing new foundry contracts and rising labor costs. INARI and MPI also had their estimates lowered due to margin compression and supply chain risks. On the other hand, KGB saw an upward revision due to stronger-than-expected order book growth, reflecting more optimism in the company (please refer to exhibits 11 & 31 for details).

INARI, PIE, NATGATE and KGB are our top picks for the sector. The Bursa Malaysia Technology Index has declined 14.4% in the past month, underperforming the FBM KLCI, which gained 0.7%. This has brought the sector’s YTD performance to -5.2%, no thanks to a pullback in AI-related optimism, disappointing earnings from local tech firms, and a stronger MYR. Despite these challenges, the recent price dip offers a great buying opportunity for quality tech stocks. Our top picks for the quarter are INARI, PIE, NATGATE, and KGB. These companies stand out with clear earnings visibility and are well-positioned to capitalize on the data center Fit-Out Phase and growing demand for AI-related infrastructure, making them strong contenders for outperformance as the sector rebounds.

Anticipating robust growth in year 2024 and 2025. According to the Semiconductor Industry Association (SMI), global semiconductor sales grew 18.7% YoY in July 2024, reaching USD51.3b. This marks the fourth consecutive month of growth, as tracked by the World Semiconductor Trade Statistics (WSTS), which represents 99% of U.S. semiconductor revenue and nearly two-thirds of non-U.S. chip firms. The strong annual growth was driven by robust sales in the Americas (up 40.1%), China (up 19.5%), and Asia Pacific/All Other regions (up 16.7%). However, this was partially offset by declines in Japan (- 0.8%) and Europe (-12.0%).

WSTS has revised its 2024 forecast in June, now expecting the global semiconductor market to grow by 16% YoY to US$611b, driven by stronger performance in computing markets. For 2024, growth will be led by Logic (up 10.7%) and Memory (up 76.8%), while other segments like Discrete, Optoelectronics, Sensors, and Analog are expected to see slight declines.

In 2025, the market is projected to grow 12.5%, reaching USD687b, with Memory and Logic continuing to drive growth, both surpassing USD200b. Other segments are expected to grow modestly. Regionally, the Americas and Asia Pacific are expected to see strong growth in 2025 (25.1% and 17.5%, respectively), while Europe will have minimal growth (0.5%), and Japan may see a slight decline (-1.1%).

Source: Kenanga Research - 19 Sept 2024