We maintain our NEUTRAL stance on the technology sector. CY23 is increasingly turning out to be a write-off with World Semiconductor Trade Statistic (WSTS) projecting global semiconductor sales to contract by 10.3% dampened by lacklustre demand for memory chips and sensors. While players have guided for a recovery in CY24, it is unlikely to turn out to be anything close to a V-shaped one. Thus far, only INARI (OP; TP: RM4.17) and MPI (MP; TP: RM24.05) have shown meaningful earnings turnaround and guided for better earnings ahead. Meanwhile, “just-in-time” inventory management seems to be back in vogue (vs. “just-in-case” during the pandemic era), reducing order visibility along the entire supply chain. As such, companies that have recently expanded capacity and workforce will have to cope with increased operating cost arising from sub-optimal plant utilisation. We like INARI as it is ahead of its peers in terms of pace of earnings recovery. We also continue to favour KGB (OP; TP: RM2.15) for its robust RM1.77b order book which will underpin its earnings visibility, and LGMS (OP; TP: RM1.32) which is in the highgrowth cybersecurity space.

CY23 a year to forget. We maintain our NEUTRAL stance on the technology sector. CY23 is increasingly turning out to be a write-off with World Semiconductor Trade Statistic (WSTS) projecting global semiconductor sales to contract by 10.3% dampened by lacklustre demand for memory chips (-6.3% YoY) and sensors (-35.2% YoY). Lending credence to the projection are Semiconductor Industry Association’s (SIA) data that showed MoM improvements in April (0.3%), May (1.7%) and June (1.7%), which led 2QCY23 sales higher by 4.7% QoQ, but still lower 17.3% YoY compared to 2QCY22.

Low order visibility. Our channel checks show that order visibility (especially from China) is still lacking among players, as customers are steering clear of inventory build-up, partly also because they are reverting to “just-in-time” inventory management (vs. “just-in-case” during the pandemic era). As such, companies that have recently expanded capacity and workforce will have to cope with increased operating cost and reduced margins arising from sub-optimal plant utilisation. Not helping either, is the rising electricity cost (which will be partially cushioned by the insourcing of electricity via the installation of photovoltaics system, but this takes time).

Worst is over, really? We reiterate that one should take the guidance for “the worst being over” by tech companies with a grain of salt still. While the guidance may hold true for selected names, it has been a moving target for the others, as reflected in further deterioration in their recent 2QCY23 results. However, the “worst is over” statement held true for MPI (MP; TP: RM24.05), which returned to the black vs. our quarterly loss forecast, as it was able to control cost, contain losses from its Suzhou plant in China and pushed back the completion, and hence depreciation charges from its new plant in Suxiang.

We also turned positive on INARI (OP; TP: RM4.17) given that the group reported sequential QoQ growth while margins recovered quicker than peers. INARI also guided for solid performance in the quarters ahead on firm order visibility from Customer B. This optimistic outlook is supported by a 5%-8% surge in radio frequency (RF) content per device, driven by expanded support for additional frequency bands in the upcoming smartphone. Consequently, INARI's RF utilisation rate has soared beyond 85%, a significant leap from the 65% reported in the recent 2QCY23. The group is confident that this trend will strengthen through 2HCY23. Interestingly, the current state of the smartphone supply chain is likely to be tight following eight consecutive quarters of YoY shipment decline globally. Vendors have also approached capacity planning with caution due to inventory rationalisation as well as overly conservative sentiment surrounding the latest US smartphone. However, this scenario suggests limited downside risk. In fact, the supply chain could potentially see the need to swiftly respond and scale up production if the US smartphone market performs even slightly better-than-expected. Therefore, we believe the current supply-demand dynamics bode well for INARI's growth prospects.

Source: Kenanga Research - 13 Oct 2023