• Maintain OVERWEIGHT; Top Picks: Inari Amertron (INRI) and Malaysian Pacific Industries (MPI). While we expected value stocks to take the front seat in 2022 amid an economic recovery and rotational plays in a rising rate environment and persistently high inflation, the steep de-rating of growth (technology) stocks to a level unseen since 2019 was a surprise – since sector fundamentals remain sound. This presents a great opportunity for investors to buy into quality technology stocks, backed by structural growth catalysts, favourable FX rates, and sensible valuations.

• Prolonged semiconductor upcycle. The semiconductor industry is expected to reach USD613.5bn in value, sustaining the growth (+10.4%) into 2022, ie a third consecutive year of growth, according to World Semiconductor Trade Statistics (WSTS). The strong 4Q21 numbers (+8.3% QoQ, 30.9% YoY) from the top 10 foundries are expected to continue into 1H22, leading the growth for the semiconductor sector, although supply chain bottlenecks and the appreciation in ASP are likely to persist, potentially prolonging this upcycle.

• Limited impact from Russo-Ukraine crisis for now as Russia is not a major semiconductor producer, and accounts for just <0.1% of the USD556bn global semiconductor chip market. However, the majority of the world’s semiconductor-grade neon (critical for lasers used to make chips), does come from Ukraine. Russia accounts for 30-40% of global palladium supply – this is mainly used by automakers in catalytic converters. Should the tension be prolonged and the current inventory of major fabrications be exhausted, these may exacerbate the tight supply of chips.

• The dust has settled. The US Fed’s hawkish tone alluded to another six rate hikes after the 25bps increase last week, but the dust has settled and the market is pricing in the aggressive expectations. Any fewer rate hikes than six would be a positive to the market – if the high inflation scenario is contained. Our in-house economist is rulling out a stagflation event risk and expects the current UST10YR and MGS10YR yields to peak around 2-2.2% and 3.65- 3.75%, which are stil relatively lower than 2018-2019 levels.

• Undemanding valuation. The steep correction of the KLTEC index (-24% YTD) has sent the sector valuation to a compelling better risk-reward level at 25x P/E (5-year mean). Note that the current sector valuation has de-rated to 2019 levels despite the lower growth on offer, interest rate, MGS10YR and UST10YR. Meanwhile, the NASDAQ and SOX indexes are still a tad above 2019 levels, given the robust outlook and upcycle of the semiconductor sector.

• Strategy. This current dip presents a great opportunity for investors to position into quality technology names with a competitive edge and structural growth, at sensible valuations. The capacity bottlenecks and strong output from the foundries will continue to spur growth for the outsourced semiconductor assembly and test (OSAT) players, with sustained earnings growth going into 1H22. On a cautious note, margin pressure from higher material prices, compliance costs and slower demand would be key points to watch out for. Domestically, an export-oriented and apolitical sector such as technology will be in favour, amid political uncertainty and a strong USD.

• Downside risks: Smartphone sales softening, MYR strengthening vs USD, inventory adjustments, weak electronic product/gadget demand (subdued consumer sentiment), and higher-than-expected inflation.

Source: RHB Securities Research - 21 Mar 2022