Following profit-taking activities that lasted almost a week, we expect to see a resurgence of interest in local technology companies as valuations become more attractive. As we gather more positive guidance from respective management, we expect to see better financial performance in the second quarter, followed by strong momentum in the second half. However, more volatility is also expected in tech stocks ahead of the US presidential election and the timing of interest rate cuts. The unveiling of Nvidia’s latest Blackwell GPUs coupled with the fast expansion of large language models, it is expected to bring transformation to almost every industry and open up more new areas for local technology companies. Maintain Overweight on the sector with Inari Amertron, D&O Technologies and QES Group our top picks.

• An update on the local semiconductor sentiment. Following our channel checks, we gather that the majority of local technology companies are expecting stronger QoQ results in the second quarter, and expect to see stronger momentum in the 2H. Local OSAT players would probably be the first to see a strong recovery as they stand to benefit from the upcoming launches of AI-featured smartphones and PCs, which also coincide with the replacement cycle for gadgets. Meanwhile, ATE makers can only see short-term visibility as end customers are still cautious about spending. This will result in a shorter lead time for local equipment makers, as they have to start fabrication works immediately once their customers have received a firm order. Some have started to ramp up inventory to prepare for the short notice.

• Second Trump win is positive for the Malaysian semiconductor industry. We think it would be a boon for the Malaysian semiconductor industry if Donald Trump secures a second presidential term, as intensified geopolitical tension would push more semiconductor players to relocate to Malaysia given our neutral position in the region, while also being backed by the strong semiconductor supply chain coupled with cost advantages. To mitigate the potential risk of trade sanctions, we gather that more semiconductor customers plan to adopt the China + 1 and Taiwan + 1 policies by setting up a new footprint elsewhere. Under the Trump government, we believe more restrictions will be imposed on US customers who source equipment from China, and also a steep rise in tariffs, which will make China’s imports more expensive. To mitigate those potential risks, US-China business partners will relocate their production lines and orders to a third country. Local players could benefit from the rising orders and technological transfers from these MNCs.

• Steepest semiconductor sales growth since April 2022. According to the Semiconductor Industry Association, global semiconductor industry sales hit USD49.1bn in May, an increase of 4.1% MoM and 19.3% YoY. It is also the sharpest growth since April 2022 and the 7th consecutive monthly growth, indicating the strong semiconductor momentum is underway. The strong sales figure in May was also the highest since June 2022. For the first 5 months of 2024, global semiconductor sales rose 17% YoY to USD236bn, bolstered by strong demand from the US (+43%), China (+24.2%) and Asia Pacific (+13.8%), partially offset by Japan (-5.8%) and Europe (-9.6%).

• India is gaining traction. We gather that some local OSAT and ATE players are also considering setting up footprint in India to tap into a new market as more global semiconductor giants are building fabrication plants and chip centres there, driven by the need to diversify supply chains beyond China and Taiwan. Substantial government subsidies in India is also helping.

• Automotive lighting will be concentrated on Personalisation, Communication Display, Driver Assistance and Safety upgrades in the future. According to TrendForce 2024, global automakers have faced strong pressure from market competition and softer demand. To differentiate their products, automakers have placed high concentration on advanced features in the adoption of i) ADB Headlights, ii) Mini LED Tail Lights, iii) Grille Lamps, iv) Ambient Lights, v) Mini LED Automotive Displays and vi) Head-up Displays (HUD). The automotive lighting market is likely to grow to USD37.4bn in 2024, with the market value of headlights accounting for more than 60%. Meanwhile, the automotive LED market is expected to register USD3.44bn in sales. Analysis reveals that the global LED headlight penetration rate for conventional passenger cars reached 72% in 2023, while the global LED headlight penetration rate for electric vehicles hit a whopping 94%. Both are expected to grow to 75% and 96% in 2024, respectively. D&O, the world’s 4th largest automotive LED maker, is set to benefit from the growing demand for headlamp and ambient lighting.

• AI hype fuels global semiconductor capacity expansion. To keep pace with the strong demand for AI chips, the global semiconductor manufacturing capacity is expected to grow by 6% in 2024 and 7% in 2025, reaching a record capacity of 33.7m wafers per month (8-inch equivalent). Leading-edge capacity for 5nm nodes and below is expected to rise 13% in 2024, driven by generative artificial intelligence (AI) for data centres, inference and leading-edge devices. To cope with increasing power efficiency, chipmakers, including Intel, Samsung and TSMC are poised to start production of 2nm Gate-All-Around (GAA) chips, boosting total leading-edge capacity growth by 17% in 2025. 
  
  Despite the potential risk of overcapacity, China continues aggressive investment in its capacity expansion to mitigate the impact of export controls. China’s chipmakers are expected to register a 14%-15% capacity growth in 2024-2025 to reach 10.1m wafer per month (wpm) in 2025 - nearly a third of the industry capacity. Major foundry suppliers, including Huahong Group, Nexchip, Sien Integrated and SMIC as well as DRAM maker CXMT, are investing heavily to expand the region’s semiconductor manufacturing capacity. 
  
  Taiwan is projected to rank second in 2025 at 5.8m wpm, up 4% YoY, while South Korea is projected to take the third spot next year, expanding capacity by 7% to 5.4m wpm. Japan, the US, Europe and Southeast Asia are expected to grow by 3-5%. Fueled largely by Intel’s establishment of its foundry business and China’s capacity expansion, the foundry segment is projected to increase capacity by 11% in 2024 and 10% in 2025. 
  
  Meanwhile, the rapid adoption of high bandwidth memory (HBM) to meet rising demand for faster processors required by AI servers is powering unprecedented capacity growth in the memory sector, leading to DRAM capacity annual growth of 9% in 2024 and 2025. The rise of AI applications in edge devices is expected to increase DRAM content in mainstream smartphones from 8GB to 12GB while laptops using AI assistants will require at least 16GB of DRAM.

• SiC industry is in a phase of rapid growth amid intense competition. According to TrendForce, Silicon Carbide (SiC) power had maintained its strong momentum in 2023, driven by the application of BEVs. The top 5 suppliers accounted for 91.9% of total sales. ST led the pack with a 32.6% market share, while Onsemi rose from 4th place in 2022 to second place. Despite seeing stronger demand from AI servers, SiC power devices are expected to experience a significant slowdown this year amid weakening industrial demand and a slowdown in BEV sales. 
  
  Overall, the SiC industry is in a phase of rapid growth amid intense competition, where economies of scale is highly critical. Currently, more than 10 companies worldwide are investing in the construction of 8-inch SiC wafer plants. As the market continues to expand, competition in the SIC field is expected to be more competitive. Local OSAT and ATE players, who have high exposure to the automotive industry, might experience a delay in orders as the EU and US car makers are pulling a break in EV development due to lacklustre sales for the existing BEV models.

• Smartphone market. Based on preliminary data from the International Data Corp (IDC), global smartphone shipments increased 6.5% YoY to 285.4m units in the second quarter of 2024. Although this marks the fourth consecutive quarter of shipment growth and builds momentum towards the expected recovery this year, demand has yet to come in fully and remains challenged in many regions. We see increasing competition amongst the top 5 leaders and a polarization of price bands. As Apple and Samsung both continue to push for high-end versions and benefit the most from the ongoing premiumization trend, many leading Chinese smartphone makers are penetrating into the low-end segment in an attempt to capture volume share amidst weak demand. As a result, the share of mid-range devices is not encouraging. Samsung captured the top position in 2Q 2024 with an 18.9% share of shipments, led by a strategic focus on its flagship phones and a strong AI feature. Apple came in second with a 15.8% share, led by improved performance in China and other key regions. Xiaomi came in third with a 14.8% market share. As competition picks up, it is expected to be an interesting 2H with a tight race among the leading smartphone players. There will be more Gen AI smartphone models to be launched soon, which could potentially be the next key growth driver after 5G and foldables. Overall, global smartphone shipment is expected to recover by 4% to 1.21bn units in 2024, with the growth continuing by 2.3% in 2025 followed by low single-digit growth through 2028. It is projected that 17% of smartphone shipments (about 200m units) will support generative AI before hitting 70% by 2028.

• Personal computer (PC) market. According to preliminary results by Gartner Inc, worldwide PC (notebooks and desktops) shipments in the 2Q of 2024 totaled 60.6m units, an increase of 1.9% YoY. It also marks the third consecutive quarterly growth for the PC market. On the back of 7.8% sequential growth on a QoQ basis, it indicates that the PC inventory is back to a normalized level while there is no major supply chain issue. There were no changes in the top six vendor rankings compared to the 2Q of 2023. All top six vendors except Dell registered positive growth on a YoY basis (refer to Figure 6). The US PC market saw the highest shipment volume since 3Q 2024, with over 18m PCs shipped, registering 3.4% YoY growth. Europe, the Middle East and the African market also registered their third consecutive quarter of growth, up 4.8% YoY. However, the Asian market declined 2.2% YoY, mainly dragged by the weak demand from China and partially cushioned by growth in other Asian markets. 
  
  As a key highlight, the PC industry has been making significant efforts to promote the AI PC category, a device with a Neural Processing Unit (NPU). Last month, the first Arm-based Windows AI PC was released and it is expected to push PC sales in the coming months. Overall, the PC market is expected to remain flat at 260m units in 2024. Weakness in China continues to persist and is not expected to recover until 2025. Despite the hype around AI PCs, the replacement cycle remains the key growth driver for volume, especially in the commercial segment as IT departments refresh their aging devices and prepare for the end of support of Windows 10 in Oct 2025. About 25% of the total shipments are forecasted to be AI-enabled in 2024 and more than 66% will be AIenabled by 2028.

• EU tariffs act as catalyst for China’s automakers. The EU has initiated provisional countervailing duties on China-made Battery Electric Vehicles (BEVs) as of 4th July, 2024. The previous EU tariff on China’s vehicles was 10%. This means the tariff on BEVs exported from China increases to between 27.4% and 47.6%. European and American automakers are also affected. Investigations will continue until 2nd Nov 2024, allowing time for negotiations between China and the EU, responses and independent review requests from stakeholders and the influence of EU member states’ positions on final measures. Therefore, there is still room for discussion regarding the EU’s tariff position on China’s BEVs. According to TrendForce analysis, the EU’s tariff hike will impact several aspects. One is the acceleration of overseas plant construction and supply chain layout by China’s automakers to avoid the tariff. As the EU’s measures target only BEVs but exclude Plug-In Hybrid Electric Vehicles (PHEVs), China’s automakers who hold advantages in PHEVs technology and costs could offer more PHEV models given the resurgence in PHEV demand in the European market. The market share of Chinese brands in the EU BEV market is expected to expand from 8.2% in 2023 to 10% this year.

Source: PublicInvest Research - 29 Jul 2024