We maintain our NEUTRAL rating on the technology sector as we anticipate the on-going industry inventory adjustment to extend into 2QCY23. We gathered from players under our coverage that there has not been a major boost in chip demand on the heels of the recent China’s reopening which will remain over the medium term. World Semiconductor Trade Statistics (WSTS) projects global chip demand to fall by 4.1%, following a disappointing 3.3% growth in 2022 (vs. an expectation of 4.4%). As a maturing technology, the outlook for smart phones will remain bleak as new models would likely incorporate only minor incremental upgrades while the replacement cycle lengthens. Not helping either is the volatile demand for automotive semiconductors as car manufacturers rationalise their inventories amidst economic uncertainties. That said, we selectively prefer players with strong earnings visibility, i.e. KGB (OP; TP: RM1.92), LGMS (OP; TP: RM1.50), and PIE (OP; TP: RM4.05).

We maintain our NEUTRAL call on the technology sector owing to prolonged industry inventory adjustments. WSTS projects a contraction of 4.1% in 2023 as chip demand will continue to be dampened by weaker demand, particularly for consumer electronics, due to high interest rate and inflation. This comes as 2022 global semiconductor sales growth of 3.3% fell short of WSTS’s estimate of 4.4% owing to significant slowdown in 2HCY22.

Global chip demand has continued to contract since its first YoY decline in September 2022. Subsequently in December 2022, sales in the US turned negative for the first time with a 6.1% YoY decline, joining China and Asia Pacific markets in the negative growth trajectory. Although the announcement of China reopening its borders in January 2023 lifted overall sentiment then, it had actually provided little boost to the underlying demand. This is evident by the muted demand in January 2023 (-18.5% YoY) as reported by the Semiconductor Industry Association (SIA) across US (-12.4%), Europe (+0.9%) and Japan (+0.7%), China (-31.6%) and Asia Pacific (-19.5%). Hence, the exuberance in KLTEC index earlier in 2023, where it rallied c.10%, was short-lived and later deteriorated into a c.12% decline.

Following an uninspiring 4QCY22 results during which the much-anticipated year-end demand boost failed to materialise, many players such as D&O (UP; TP: RM3.51), MPI (UP; TP: RM20.00) and UNISEM (MP; TP: RM3.10) guided for an underwhelming 1HCY23 outlook as China’s reopening has yet to translate into meaningful recovery. Not helping either is the high interest rates and inflation that led to downbeat order forecasts from customers. To prevent further margin erosion, MPI has opted to delay the completion of its second plant in Suzhou by three months. Meanwhile, JHM (MP; TP: RM0.80) also indicated that it will continue to put its Batu Kawan expansion on hold.

On smart phones, in the absence of a year-end shopping spree, the 4QCY22 global device shipment declined 20% YoY. The prospects are expected to remain cloudy owing to: (i) the smartphone market entering its seasonal low cycle in 1QCY23, (ii) waning consumer interest to upgrade as the smart phone technology approaches the mature stage, and (iii) beginning of ASP decline after a rapid increase in the last few years from $334 in 2019 to $415 in 2022. Therefore, the International Data Corporation (IDC) in early Mar 2023 had revised its 2023 global smartphone shipment forecast from a 2.8% growth to a contraction of 1.1%. We also maintain our neutral view on INARI (MP; TP: RM2.60) given its large exposure (c.60% of group revenue) to the smart phone radio frequency (RF) business. While the group managed to sustain its revenue by delivering more legacy RF models as a measure to cushion the underwhelming demand for the latest model, this was at the expense of margins. Meanwhile, its venture into new products as well as the ramp-up in its China’s operations will not be quick enough to cushion the immediate weakness.

Source: Kenanga Research - 5 Apr 2023