RHB Investment Research Reports

Technology - Bracing for a Long Cold Winter

Publish date: Mon, 16 Jan 2023, 11:12 AM
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An official blog in I3investor to publish research reports provided by RHB Research team.

All materials published here are prepared by RHB Investment Bank Bhd. For latest offers on RHB Invest trading products and news, please refer to: http://www.rhbinvest.com

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  • Keep NEUTRAL, Top Picks: CTOS Digital (CTOS) and Coraza Integrated Technology (CORAZA). We believe the semiconductor market will remain in the doldrums in 1H23, as inventory correction takes place amid demand uncertainty. Non-semiconductor counters should see relatively brighter prospects given the domestic-focused business and full reopening of borders. Sector valuation is rather fair, at its 5-year mean, capped by elevated bond yields and quantitative tightening cycle. Still, derailed earnings remain likely.
  • Slowdown to persist. An inflection of a slowdown for the semiconductor has emerged since Aug 2022 and from the 3Q22 results and outlook guidance. While the reopening of China could spur demand, the weakness is expected to carry through in the coming quarters amid weakening demand and inventory corrections. In fact, some of the major foundries showed sequential weakness as 2H is typically seasonally stronger. Notably, WSTS recently lowered its forecasts for the second time in a row, cutting its 2022F and 2023F growth by -8.4% and -16.0% to USD580.1bn and USD556.6bn and predicting global semiconductor sales at a 4.1% contraction for 2023.
  • The tech “Cold War”. With protectionism and self-sufficiency as the remedies for major economic superpowers in the semiconductor industry, a further divergence in the supply chain will continue to take place. This could potentially cause overcapacity in the long run and drive up prices for electronics devices, given the loss of manufacturing efficiencies and higher production costs. Malaysia, being a neutral ground in South-East Asia, stands to gain from the supply chain and relocation efforts by multinational corporations to diversify out of China.
  • Outlook. Overall guidance from chip-related companies is less bullish for the near term, clouded by the worsening macroeconomic outlook and low consumer confidence – a few bright spots lie in vehicle electrification and high-performance computing-related chips. Non-semiconductor players should see brighter prospects, given the domestic-focused business and full reopening of borders. The main challenges are labour and material shortages, demand uncertainties, and geopolitical tensions. Still, their solid balance sheets and relatively healthy USD/MYR (despite our in-house forecasts of the MYR strengthening) should cushion exporters from the demand slowdown.
  • Sector valuation is now fair, at its 5-year mean of 21x-22x, given the potential earnings risks – albeit – offset by slowing inflation pressure and being at the tail-end of the rate hike cycle. We advocate investors to seek names with exposure to front-end players, beneficiaries of the trade diversion and certain engineering support services players. CTOS may stand to benefit from the rotational play out from the slowdown of semiconductor names for its leading position and growth prospects – on the higher demand for its various digital solutions, analytical insights, and exposure to fintech. We also like CORAZA for its exposure to front-end equipment and robust demand for engineering services in Penang, expansion plans and healthy orderbook.
  • Upside/downside risks: i) Strengthening/softening smartphone sales, ii) favourable/unfavourable FX movements, iii) strong/weak consumer demand, iv) obsolescence of technology, and v) intensifying geopolitical conflicts. The sector’s ESG scores range from 2.9 to 3.3, with no major ESG risk concerns.

Source: RHB Research - 16 Jan 2023

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