• US President Joe Biden announced tariff hikes on a range of China imports. This plan aims to protect American workers and businesses from China’s unfair trade practices. The changes are staggered to take effect from 2024 to 2026 as follows:
  
  (i) Tariff rate on semiconductors will increase from 25% to 50% by 2025,
  
  (ii) Tariff rate on electric vehicles will increase from 25% to 100% in 2024,
  
  (iii) Tariff rate on lithium-ion EV will increase from 7.5% to 25% in 2024,
  
  (iv) Tariff rate on lithium-ion non EV will increase from 7.5% to 25% in 2026,
  
  (v) Tarriff rate on battery parts will increase from 7.5% to 25% in 2024,
  
  (vi) Tarriff rate on solar cells (whether or not assembled into modules) will increase from 25% to 50% in 2024, and
  
  (vii) Tarriff rate on syringes and needles will increase from 0% to 50% in 2024.
   
• The advantages that we believe will take effect are more intense trade diversions to Malaysia, especially Chinese players that have US customers, together with more foreign direct investment (FDI) inflows to Malaysia for relocation and supply chain divergence.
• We believe that Vitrox (BUY; FV:RM9.00), Greatech (BUY; FV:RM5.67), Pentamaster (BUY; FV:RM5.50) and TT Vision (UNRATED) could be the beneficiaries being involved in the EV, solar, medical and semiconductor sectors.

• However, we expect some negative situation in the end-market which is likely to impact some of our local players. We believe end-products such as legacy chips, EV and solar panels could flood the market with oversupply as inventories eventually pile up. Hence, we are cautious on the oversupply of end-products that can cause a slower rate of replenishment in orders by Chinese customers.

• We also expect intensified competition among Chinese players that could lead to years of market consolidation. This will also affect our local players that are tapping into the Chinese market as they face more challenges such as declining market share and prices.

• Overall, we are positive on this development given the increased sourcing of components from Malaysia and longer term foreign direct investment flows which will further upgrade the entire supply chain and ecosystem development in the country.

• We maintain OVERWEIGHT in the sector based on a positive revenue recovery prospects of semiconductor players in 2024 backed by following:
  
  (i) The semiconductor sector has bottomed out from the technology downcycle with a slow pace of demand recovery.
  
  (ii) The adoption of advanced technologies for the automotive and consumer electronics segments with leading-edge chips and new features for equipment machines lead to expected improvement in demand for the semiconductor sector, and
  
  (iii) Trade diversion with the “China/Taiwan plus one” strategy, leveraging on the strength of multiple production hubs and more cost-effective supply chains that will benefit local players as MNCs divert their supply chains to Malaysia.

• Top picks are Inari (BUY; FV: RM3.86) as increased content requirements for RF filters drive its radio frequency (RF) earnings and margin resiliency, and Vitrox (BUY; FV: RM9.00) for its well-diversified revenue base and exposure to high- growth industries such as computing, telecommunication and automotive segments on prospects of recovery in the global semiconductor space.

• We also like Pentamaster (BUY; FV: RM5.50). Pentamaster’s recent share price weakness is likely due to slower replenishment in orderbooks impacted by the short-term automotive slowdown. Nevertheless, we see the company’s sales growth remaining resilient, riding on sectors such as automotive and medical segments that have growth prospects on the longer term uptrend.

• Key risks:
  
  (i) escalation of US-China technology war and geopolitical conflicts, which may impose further sanctions on advanced semiconductor chips and equipment, and
  
  (ii) concentration risk stemming from high reliance on key business segments. 

Source: AmInvest Research - 15 May 2024