Kenanga Research & Investment

Technology - Mild Inventory Adjustments

Publish date: Fri, 07 Oct 2022, 09:06 AM

We keep our OVERWEIGHT rating on the technology sector. While inventory adjustments are currently on-going in the semiconductor sector, we hold the view that they will be mild as end-users adjust to the new norm of maintaining high inventory levels, having learnt the lessons the hard way during the chip shortage that is still fresh in their memory. Meanwhile, World Semiconductor Trade Statistics, a renowned data compiler and forecaster for the global semiconductor industry, still projects for the worldwide semiconductor market to grow by 13.9% and 4.6% in 2022 and 2023, respectively. We like INARI (OP; TP: RM3.45) as it is a proxy to the newly launched US smartphone that has attracted strong interest from consumers, and SKP (OP; TP: RM2.10) being the only meaningful proxy to a fast-growing premium brand for household and personal products.

A mild inventory adjustment cycle. We maintain our OVERWEIGHT stance on the technology sector heading into 4QCY22. While inventory adjustments are currently taking place with the likes of TSMC suggesting that it might continue into 1HCY23, the Taiwan-based semiconductor giant holds the view that the realignment period may be shorter as compared to previous cycles. In addition, our channel checks indicated that tech companies intend to continue maintaining a higher inventory level compared to past practices as they foresee a shallow dip which will be followed by an upcycle subsequently. This is evidenced by the commitment of local OSAT players such as UNISEM and MPI which are carrying on with their respective major capacity expansions in both China and Malaysia that are expected to come online between 2HCY23 and early 2024.

Global chip sales to climb 13.6% YoY. Global chip demand continued to climb as Semiconductor Industry Association (SIA) reported a 13.3% YoY increase in semiconductor sales for 2QCY22 to USD152.5b. The latest data in July continued to show growth at 7.3% YoY as the US market led with YoY gains of 20.9%, followed by Europe (+15.2%) and Japan (+13.1%) which offset the slowdown in China (-1.8%) due to the prolonged lockdowns. However, with easing restrictions in China, we remain sanguine on the sector as our view is also echoed by the World Semiconductor Trade Statistics (WSTS) which forecast a 13.6% and 4.6% YoY gain for 2022 and 2023, respectively.

The escalation in the US-China chip war on the heels of the passing of the USD52b CHIPS Act will likely benefit Malaysia which is seen as neutral ground. We understand that MNCs are beginning to relocate out of China and into Malaysia for chip packaging services. This trend is expected to be more prominent for US companies that received grants from the CHIPS Act. Meanwhile, China is showing no signs of slowing down from its aggressive push for technological superiority. Hence, companies such as INARI and MPI have adopted the "China for China; Malaysia for the West" strategy as they continue to expand their capacity in Kunshan and Suzhou, respectively, as well as their plants in Malaysia to benefit from both sides.

Latest US smartphone launch appears promising as the manufacturer kept its prices unchanged resulting in overwhelming pre-order traffic in China which crashed the tech giant’s website, according to the South China Morning Post. The exuberance has also been witnessed on alternative Chinese e-commerce sites such as which recorded more than 2m orders within 24 hours after pre-orders opened, exhibiting similar momentum as seen during last year’s launch. We attribute this phenomenon to the revenge spending behaviour among Chinese consumers given the prolonged lockdown. As such, we continue to like INARI (OP; TP: RM3.45) given its exposure to the US smartphone 5G radio frequency (RF) supply chain.

Source: Kenanga Research - 7 Oct 2022

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