• Still O/W. We believe sector earnings will trend upwards in 4Q24 and 1H25 on a stronger USD vs the MYR, and stable loading factors - with potential upside from some urgent order deliveries due to the impending tariff hike on China imports by the US. The sector is trading at a compelling 20-25x 2025F P/E (at its 5-year historical mean) against a 39% growth for the same period, during which, a more meaningful and broad-based pick-up in orders is likely.
• Recovery is intact. Semiconductor Industry Association (SIA) lifted its world semiconductor sales forecasts for the third time in a row, now expecting 19% YoY growth (to USD626.9bn) in 2024 and a 11.2% YoY spike this year. A broad-based recovery is expected in 2025, with growth from all segments. Early recovery indications in the automated test equipment (ATE) space and traction in the front-end semiconductor space bolster our expectations of a sustained sector recovery, supported by technology advancements and the replacement cycle. SEMI expects test, assembly & packaging equipment sales to grow by 7.4% and 10% in 2024 and to further accelerate in 2025.
• Position for a broad-based recovery. The sector is under-owned after the steep sell-down since 2H24. And is likely to return to an accumulation mode, supported by attractive valuations vs an expectation of a broad-based pick-up in FY25 - fuelled by the recovery in demand and favourable FX movements. The tone of technology companies' management teams point to shorter earnings visibility, but we expect to see stronger orders going into FY25, coupled with some urgent orders. Various new opportunities and clientele gained from likely circumstances related to the potential tariff hike, as well as the China Plus One and Taiwan Plus One strategies, are among the positives.
• The diverging of the PHLX Semiconductor Index's (SOX) and KLTEC's performances imply that the KLTEC has more legs to catch up - judging from the SOX's earnings growth expectation (FY25F: 34%) and the correlation of these indices (Figure 7). The start of the US Federal Funds Rate cut should benefit the valuations of high-growth sectors like technology. Meanwhile, the potential curbing of artificial intelligence (AI)-related chip exports may directly affect only a few local names in the supply chains of GPU and CPU servers. Hence, the direct impact on KLTEC is limited and the local tech supply chains are insignificant in the global AI supply chain.
• Top Picks. We like Malaysian Pacific Industries (MPI) for its exposure in the recovery of the semiconductor space, China exposure, and commencement of new programmes/customers. CTOS Digital (CTOS) is our pick in the domestic-centric space, premised on the digitalisation trend as well as its financial technology exposure. In the smaller-cap space, we like Coraza Integrated Technology (CORAZA) for its earnings rebound on strong revenue growth. Datasonic (DSON) should benefit from sustained strong demand for its solutions, while its ASP hike should continue to buoy earnings.
• Downside risks: Softening smartphone sales, favourable FX movement, strong consumer demand; obsolescence of technology, and intensifying geopolitical conflicts.

Source: RHB Research - 15 Jan 2025