• Maintain OVERWEIGHT. The US plans to increase the tariff rate from 25% to 50% by 2025 on semiconductor imports from China. We anticipate minimal to no impact on our local companies due to the existing targeted tariffs in place since 2019, and the total value of affected goods is relatively modest. In fact, we view the intensified trade war between the two major economies as a net positive for the Malaysian semiconductor sector. This is evident in the growth of Foreign Direct Investment (FDI) and spillover effect to local companies stemming from supply chain divergence and relocation.

• The US plans to hike tariffs from 25% to 50% by 2025 on semiconductor imports from China, targeting strategic sectors ie electric vehicles, batteries, semiconductors, solar cells, medical products, steel, aluminium, critical minerals, and ship-to-shore cranes. Notably, these tariffs were initially imposed in 2019 on USD300bn worth of goods during the Trump administration, and this escalation is not entirely unexpected. Since the onset of the US-China trade war five years ago, significant supply chain relocations and divergences have occurred, making the semiconductor supply chain more resilient in addressing such challenges.

• Malaysia the neutral ground. As companies around the world look for an alternative to China to mitigate geopolitical risks – a strategy dubbed as “China Plus One” has benefitted Malaysia given its robust semiconductor ecosystem, supportive infrastructure, and wide array of talent pools. Chinese suppliers serving major US multinational corporations have also begun partnering with local Malaysian companies to establish plants in Malaysia to continue supplying their US-based customers. Additionally, by switching to a neutral country like Malaysia, some products or materials may avoid US tariffs imposed on China. This situation also opens doors for Malaysia-based companies, particularly in the automatic test equipment (ATE) sub-segment, as Chinese companies shift away from US-based suppliers.

• Companies with plants in China. Three OSATs – Inari Amertron, Malaysian Pacific Industries, and Unisem (M) have exposures through their plants in Kunshan and Yiwu, Suzhou, and Chengdu. However, we expect the impact to be minimal (if any) as their customers are mainly catering for the non-US market, and various programme transfers have taken place since the trade war started five years ago. In fact, this development could accelerate and intensify the project/programme transfer or relocation, benefitting the companies in the mid-term.

• Downside risks: Softer consumer demand, unfavourable FX, obsolescence of technology, loss of clients/contract, and intensifying geopolitical tensions.

Source: RHB Securities Research - 15 May 2024