Review of 1HCY24

In 1H2024, the technology sector generally had a good run, with the Bursa Malaysia Technology Index rebounding strongly, up by 21.1% YTD. The robust performance of the technology index was primarily fueled by a solid recovery in global semiconductor demand and growing optimism about the conclusion of the Fed’s aggressive rate hike cycle.

Furthermore, the improved sentiment in the technology sector was partly driven by positive news stemming from Prime Minister Anwar Ibrahim's newly launched national semiconductor strategy. The YTD share price performance of the technology stocks under our universe was generally strong, led by SKP (+45.6%), MPI (+41.7%), UNISEM (+26.8%), INARI (+24.8%), CORAZA (+24.4%), REXIT (+10.5%), and ELSOFT (+2.9%). Meanwhile, the technology stocks under our universe also started to see demand recovery, with most reporting more robust QoQ revenue growth in 1Q24.

Going into 2H2024, we highlight three major factors potentially influencing the sector’s earnings and/or share price performance:

1. A New Upcycle

2. Opportunities from China Plus One Strategy

3. End of Rate Hike Cycle

Bursa Malaysia Technology Index Up by 21.1% YTD

1. A New Upcycle

Looking ahead, we expect the global semiconductor to continue its upward trajectory by posting solid sales growth in 2H2024. According to the Semiconductor Industry Association, global semiconductor sales in April stood at USD46.4bn (+1.1% MoM, +15.8% YoY) versus March 2024’s of USD45.9bn. This marked YoY sales recovery for the 6th consecutive month, while the sales in April increased on a MoM basis for the first time this year. This further confirms that the global semiconductor market is in recovery mode. The decent YoY improvement was mainly driven by Americas (+32.4% YoY), China (+23.4% YoY), and Asia Pacific/All Other (+11.1% YoY).

Meanwhile, The World Semiconductor Trade Statistics (WSTS) organisation has recently revised its forecast upwards for global semiconductor sales, with 2024 now at USD611.0bn (+16.0% YoY) as compared with a previous forecast of USD588.4bn (+13.1% YoY). The strong growth will be supported by robust double-digit growth from memory and logic categories. On top of that, the Malaysia Semiconductor Industry Association remains confident that the demand will further pick up in 2H2024. Overall, we foresee the demand recovery catalysed by the continued proliferation of secular trends, including artificial intelligence, big data, cloud computing, the Internet of Things, robotics, and vehicle electrification.

2. Opportunities From China Plus One Strategy

We believe the ongoing US-China trade tension will continue presenting excellent opportunities to Malaysian semiconductor players. The recent tariff rate increase from 25% to 50% on certain semiconductor imports from China has further prompted various companies to diversify their operations to other countries. We foresee Malaysia becoming a popular destination due to its politically neutral and non-aligned stance. On top of that, the semiconductor industry in Malaysia has built up a very strong ecosystem over the years. With supportive government policies, Malaysia has great potential to become the next global tech hub.

Attesting to this, several big multinational companies have either set up or expanded their operations in Malaysia, particularly in Penang, over the past few years. This includes American chip giant Micron, European semiconductor firms AMS Osram and Infineon, as well as Suzhou-based Fengshi Metal Technology. Additionally, our channel checks with local semiconductor companies indicate that an increasing number of orders are being diverted to Malaysia.

On the other hand, Prime Minister Anwar Ibrahim had recently unveiled the National Semiconductor Strategy (NSS) during his keynote address at the launch of Semiconductor Southeast Asia 2024. The NSS will involve 3 phases with five headline targets. Phase 1 will leverage the existing semiconductor industry’s expertise and capabilities to support modernising outsourced semiconductor assembly and testing. Meanwhile, Phase 2 will mainly focus on advanced chip design, fabrication and testing. Phase 3 will focus on supporting the development of Malaysian semiconductor design, advanced packaging and manufacturing equipment.

Overall, we are optimistic about the NSS as it will help Malaysia move up the value chain in the global semiconductor industry. The latest government initiatives, including fiscal support of at least RM25bn, are expected to bolster local semiconductor sentiment and incentivise industry players to expedite their efforts in upgrading and upskilling. According to the media, the RM25bn fiscal support includes RM5bn of tax foregone over five years, RM2bn for existing capital grants and RM1.3bn for the human resources development fund. Other key investments include RM2bn for the Semiconductor Industrial Park, RM1.6bn for the advanced packaging centre, and RM2bn for the National Energy Transition Facility and Green Technology Financing Scheme. In addition, the government intends to allocate some funds for strategic investments, high-impact projects, and training incentives.

3. End of Rate Hike Cycle

There is a glimpse of optimism that the Fed’s rate hike cycle could be nearing its peak or end. Based on the latest Fed’s guidance, the first-rate cut could occur at the end of 2024. Ultimately, the decision on the interest rate cut will depend on inflation, economic growth, and labour market data. We believe the possibility of ensuing rate cuts could reinvigorate appetite and sentiment in growth sectors, including technology, where the valuation is typically more sensitive to the interest rate.

Recommendation

In all, we reiterate our Overweight stance on the technology sector. Generally, we expect the sentiment of the technology sector in Malaysia to improve further, underpinned by an anticipated recovery in the global demand for semiconductors and increasing trade diversion opportunities thanks to the China Plus One strategy. Additionally, the potential end of the rate hike cycle in the US will bode well for the technology sector’s valuations.

Our top picks are INARI and SKP. For INARI, we remain upbeat about the group’s outlook, which is backed by the healthy earnings contribution from the radio frequency segment. Besides, we are excited about the latest progress update on the new project focusing on testing and packaging AIrelated products. Additionally, we believe the new plant in China will become the next earnings driver as it stands a good chance to capitalise on the solid

growth of the semiconductor industry in China. We have a Buy recommendation on INARI with a target price of RM4.30. Our valuation is based on a P/E multiple of 33x against its CY25 EPS, which is about +1 standard deviation above its mean P/E.

For SKP, we take this opportunity to upgrade the target P/E multiple from 12x to 15x, as the group is expected to benefit from the China Plus One Strategy. The group is seeing better order visibility from its key customers because of inventory replenishment and demand recovery. On top of that, the group has been receiving numerous business inquiries from new customers for backend assembly services as well. Consequently, we revised the target price of SKP higher from RM1.15 to RM1.43 based on 15.0x CY25 EPS. Upgrade the stock from Hold to Buy.

On the other hand, we downgraded the target P/E multiple of REXIT from 14x to 12x, as we are still waiting for guidance on the new business direction from the new owners following the founder's and largest shareholder's exit early this year. With that, we tweaked the target price of REXIT lower from RM1.26 to RM1.03 based on 12.0x CY25 EPS. Downgrade the stock from Buy to Hold.

Meanwhile, the primary key beneficiaries of NSS include OSAT players such as MPI (TP: RM41.10), UNISEM (TP: RM4.37), and GTRONIC (Consensus TP: RM1.29). KESM (Consensus TP: RM7.04), being the most prominent independent burn-in and test service provider in Malaysia, is expected to benefit from the increasing semiconductor activities.

Apart from that, test and inspection equipment players such as ELSOFT (TP: RM0.575), VITROX (Consensus TP: RM3.60), PENTA (Consensus TP: RM5.43), QES (Consensus TP: RM0.86), MI (Consensus TP: RM2.59), TTVHB (Consensus TP: RM1.50), AEMULUS (Not Rated), MMSV (Not Rated), and VIS (Not Rated) are expected to benefit from the NSS as well.

For the fab player, we have DNEX (Consensus TP: RM0.50) via the exposure in SilTerra. On the other hand, for chip design players, there are two listed companies, which are OPPSTAR (Consensus TP: RM1.68) and KEYASIC (Not Rated).

Additionally, engineering firms that produce components and precision parts, such as SFPTECH (Consensus TP: RM0.81), JFTECH (Not Rated), and FPGROUP (Not Rated), will benefit from NSS.

Key sector risks include: i) heightened geopolitical tensions weighing on economic growth and disrupting supply chains, ii) weaker-than-expected sales, and iii) weakening of the USD against the Ringgit.

Source: TA Research - 2 Jul 2024