Investment Highlights

• Mixed results for 4Q2021. Earnings results for technology counters under our coverage were mixed for 4QCY21 with 2 above, 2 within and 1 below expectations. Pentamaster Corp’s earnings came in 23% below our forecast and 12% lower than consensus amid logistics and material disruptions.
  Stronger than our expectations, Globetronics Technology’s earnings were driven by healthier product mix while ViTrox Corporation benefitted from improved cost control as well as the appreciating US dollar.
  Meanwhile, Inari Amertron and MPI’s results were within our expectations. Despite the ongoing supply chain disruption and material shortages, both companies improved their PBT margin YoY with Inari up 3.8% points to 28% while MPI climbed 1.3% points to 19%. These propelled the core profits of Inari by 33% YoY and MPI by 65% YoY.

• Rising interest rate vs. chip demand. Malaysia’s technology sector has mirrored the Nasdaq’s performance, which has slipped 13% since the beginning of the year amid expectations of rising interest rates due to worsening inflationary pressures. This is the aftermath of the pandemic which created supply bottlenecks while monetary policies such as raising interest rates have limited impact in easing these disruptions.
  On the other hand, semiconductor demand remains robust. According to the Semiconductor Industry Association (SIA), the industry sold 1.15tril chips (up 10% YoY) in 2021, totalling US$555.9bil (up 27% YoY). Global sales for January 2022 continue to be strong with a 27% YoY growth. This is led by sales in Americas which grew 40%, followed by Europe 29% (Exhibit 4). As such, we remain optimistic on the industry, supported by resilient semiconductor demand from the adoption of 5G network infrastructure and devices; vehicle electrification and autonomous driving; and the increasing application of Internet of Things (IoT) among businesses and consumers.

• Minimal Russia-Ukraine war impact. We view the Russian military assault on Ukraine as having minimal impact on the local technology sector. Based on World Semiconductor Trade Statistics (WSTS), Russia is not a significant direct consumer of semiconductors, accounting for less than 0.1% of global chip purchases. In addition, the global nature of the semiconductor industry is supported by a diverse set of suppliers for key materials, hence posing neither a significant nor immediate supply chain risk from the invasion. Therefore, we are of the view that the war, which resulted in sanctions on Russia, will have an insignificant impact to global semiconductor demand.

• We reiterate our OVERWEIGHT stance on the technology sector and believe investors should seize the recent sell-off as an opportunity to accumulate companies with strong fundamentals. Our top picks are:
  • MPI: We continue to like MPI for its core strength in investing in the right technology at the right time. MPI is set to benefit from: (i) its early move to produce silicon carbide and gallium nitride power products with applications in electric vehicles, servers, renewable energy and consumer gadgets; (ii) continuous investments in automation for cost optimisation; and (iii) its strong net cash position of RM865mil as at Dec 2021 (11% of market capitalization), which allows for strategic investments, M&A opportunities and greenfield expansions.
  • Inari: We remain upbeat on Inari’s prospects as a proxy to the rapid growth of 5G telecommunications technology through its radio frequency (RF) business, which is set to benefit from the expected increase in demand for 5G smartphones. The group’s bright earnings outlook arises from: (i) the resilience of its RF earnings due to higher chip complexity in 5G phones; (ii) net cash of RM2bil as at Dec 2021, which translates to 17% of its market cap; and (iii) its continuous efforts to enhance and diversify revenue streams by joint-venturing into outsourced semiconductor assembly and test manufacturing in China.
• Risks to the sector stem from:
  • Persistent supply chain disruptions;
  • Resurgence of new Covid-19 variants and the efficacy of existing vaccines towards the variants; and
  • Weaker-than-expected sales due to customers cutting back on production on the back of supply shortages, as well as margin compression from higher material costs and logistics cost, with the latter being further exacerbated by the Russia-Ukraine conflict.

Source: AmInvest Research - 7 Mar 2022