RHB Investment Research Reports

Technology - Entering a Cold Winter; Downgrade to NEUTRAL

Publish date: Wed, 12 Oct 2022, 12:47 PM
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An official blog in I3investor to publish research reports provided by RHB Research team.

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  • Downgrade to NEUTRAL from Overweight, as we factor in the semiconductor sector’s weakening demand, which is likely to persist, notwithstanding the gains from the strengthening USD, and growth in certain sub-segments. The US Federal Reserve’s (US Fed) extended hawkish pivot will continue to dampen sentiment on equity valuation as a whole, more so for high-growth sectors like technology. Key events that may alter our view include a demand surge post China’s reopening, softening of inflation, and a further slowdown in demand amid recession fears.
  • A solid 2Q22, with sector aggregate core PATAMI up 23% YoY and 7.7% QoQ, as most OSAT players were still posting healthy double-digit growth YoY, albeit at a moderate pace, supported by higher loading and margin expansion – underpinned by robust demand and certain supply chain bottlenecks. Disappointments came from Datasonic and GHL Systems.
  • An inflection point. Major semiconductor giants have guided for prolonged weakness beyond 3Q as the weakening in demand and inventory correction intensified (especially for consumer products), largely affected by rampant inflation, geopolitical tensions, China’s lockdowns, and weaknesses in Europe. Global semiconductor sales growth also reached an inflection point in Aug 2022, ending 30 months of consecutive growth.
  • The CHIPS and Science Act of 2022 may deepen the divergence of supply chains into the US vs China in the next decade (unless there is significant change in policies from both economic superpowers), potentially causing an overcapacity situation and cost escalation in the long run. Fortunately, Malaysia – a neutral ground in South-East Asia – stands to benefit from supply chain and relocation efforts by multi-national corps to diversify out of China.
  • D/G NEUTRAL. With the sector trading below its 5-year mean, the potential derailing of forward earnings projections from various uncertainties in the global macroeconomic scene cannot be discounted, should the slowdown of the semiconductor sector persist. We believe sector valuation will be capped by the rising bond yield amid the US Federal Reserve’s hawkish interest rate outlook. Still, the solid balance sheet position and strong USD should cushion the slowdown, as all semiconductor-related players are net beneficiaries.
  • Strategy. Seek names with exposure to front-end players, as the outlook remains solid, benefiting engineering support services players. Orders for chips related to automotive, server, and high performance computing remains solid, benefiting players that focus on these sub-segments, as weaknesses are prevalent in consumer products, smartphones, and Internet of Things (IoT) devices, where inventory correction is taking place.
  • Top Picks. i) Malaysian Pacific Industries – exposure to automotive industry (and EV), capacity expansion, and adoption of new advance packaging technology; ii) CTOS Digital – domestic focused profile, leading position and prospects mirroring growing demand for various digital solutions and analytical insights. Small cap: Coraza Integrated Technology – to benefit from robust orders and exposure to front-end equipment players.
  • Upside/downside risks: i) Strengthening/softening smartphone sales, ii) favourable/unfavourable FX movement, iii) strong/weak consumer demand, iv) obsolescence of technology, and v) intensifying geopolitical conflicts.

Source: RHB Research - 12 Oct 2022

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