After seeing a slowdown for the last two years, we finally see some positive indications from the personal computer (PC) and smartphone segments. Coupled with the strong momentum in electrical vehicle (EV) growth, we expect to see Malaysian technology companies’ earnings bottoming out in 4Q and recover gradually. Generally, inventories have bounced back to healthy levels. We suggest investors relook at Malaysian technology stocks following the recent share price retracement due to volatile stock market conditions. Reiterate Overweight, with our top pick being Inari Amertron.

• US tightens exports of more AI chips. The US government has unveiled a new set of restrictions on more advanced artificial intelligence (AI) chip exports to China this week. It also plans to expand the list of semiconductor manufacturing equipment subject to US restrictions. Beyond the previously reported tightening measures on AI chips and equipment exports, these new regulations are specifically designed to control access to computing power, which will slow down the country’s AI development. It also includes expanded guidelines for chip control, which may reduce communication speeds, called an interconnect, among AI chips. Slower communication could increase the complexity and cost of AI development, particularly when many chips need to be connected for training large AI models. The ultimate agenda is to tighten the grip over the sale of graphic chips and advanced chip manufacturing equipment for AI applications to China’s technology companies.

• Advanced packaging in high demand. The growth in demand for advanced semiconductor processes due to generative AI applications has spurred greater demand for the more advanced 3D packaging chip configurations as the number of chip stacking layers is increasing. Leading semiconductor firms like TSMC, Samsung and Intel are emphasizing advanced packaging technology’s importance in i) boosting chip performance, ii) conserving space, iii) reducing power usage and iv) minimizing latency. The industry estimates that production capacity will reach 12,000-14,000 wafers in 2023 and double to over 30,000 wafers in 2024. Information from equipment industry sources reveal that the orders for advanced packaging equipment by semiconductor assembly and testing (OSAT) players and foundries are quite encouraging.

• Global semiconductor sales show a gradual recovery. According to Semiconductor Industry Association (SIA), global semiconductor industry sales totaled USD44bn in Aug 2023, an uptick of 1.9% MoM but down 6.8% YoY. The Aug’s figures mark the 6th consecutive monthly gain, demonstrating a slow and steady improvement in market demand. Regionally, MoM sales growth was seen in the US (+4.6%), China (+2%) and Asia Pacific (+1.2%) but slight decrease in Japan (-0.4%) and Europe (-1.1%).

• Global fabricators’ equipment spending is expected to recover in 2024. SEMI expects global fabricators’ equipment spending for front-end facilities to decline 15% YoY to USD84bn from a record high of US99.5bn in 2022 before rebounding 15% YoY to USD97bn in 2024. Softening chip demand and elevated inventory of consumer and mobile devices contribute to the 2023 decline. Meanwhile, the growth in 2024 will be partly driven by the end of the semiconductor inventory correction this year and strengthening demand for semiconductors in the high performance computing (HPC) and memory segments. The trend suggests the semiconductor industry is turning the corner and on the path back to robust growth, driven by healthy chip demand. The foundry segment is expected to lead the semiconductor expansion in 2023 with USD49bn in investment, 1% growth and USD51.5bn in spending in 2024, a 5% increase as investment continues in leading-edge and mature process nodes. Memory-based spending is forecast to stage a strong comeback in 2024 with a 65% increase to USD27bn after a 46% decline in 2023. Microprocessor Unit is expected to remain flat in 2023 and increase 16% YoY to USD9bn in 2024.

Source: PublicInvest Research - 23 Oct 2023