RHB Investment Research Reports

Technology - Recovery Gaining Momentum; Stay OVERWEIGHT

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Publish date: Mon, 15 Jul 2024, 09:59 AM
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An official blog in I3investor to publish research reports provided by RHB Research team.

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  • Stay OVERWEIGHT; Top Picks: Malaysian Pacific Industries (MPI), Pentamaster Corporation (PENTA) and CTOS Digital (CTOS). The Bursa Malaysia Technology Index has been trending up, aligning with our nonconsensus thesis of bottomed-out earnings and positioning to the new semiconductor upcycle earlier. Still, agile trading strategies to navigate changing market dynamics are essential from high expectations and uneven pace of recovery across segments. Sector valuation is now at c.27-29x CY24F P/E (c. +1SD above the 5-year mean). We see opportunities emerging in the small- to mid-cap space, with a slow 1H24 already factored in.
  • 1Q24 results were mixed. Two of the nine companies reported strongerthan-expected results: MPI and Datasonic Group (DSON), mainly on higherthan-expected margins and orders for the latter. Meanwhile, there were five underperformers, primarily due to softer topline from project delays and margin compression. Despite this, aggregate core PATAMI grew by 28.6% YoY amid the recovery of the semiconductor space. Post results review, we cut FY24F earnings by 3.2%, mainly for Inari Amertron (INRI) and Unisem (M).
  • New upcycle. Global semiconductor sales compiled by Semiconductor Industry Association, still shows sustained recovery, with a 16% growth for 2024F and 12.5% in 2025. This new upcycle is currently supported by the logic integrated circuits (ICs), especially in the AI server-related space and power management integrated circuits or PMIC, recovery in the smartphone and memory spaces, and China as a whole. Also, early recovery indication in the automatic test equipment (ATE) space and traction in the front-end semiconductor space, bolster our belief in sector recovery gaining pace in 2H24 and broad sector recovery in 2025 as the replacement cycle intensifies. For the non-semiconductor, growth prospects from data centres (DCs), infrastructure spending, IT refresh and upgrade and the expansion of the digital economy should see sustained strong demand and project roll-out.
  • Sector earnings will likely continue showing YoY and HoH increase in 2H24, keeping the sector’s interest strong. The market anticipates robust growth expectation (+97%) for FY24 from a low base, and driven by sector recovery expectations. We observe a more optimistic tone from guidance – albeit uneven, with players citing volume recovery especially in China, various new opportunities and clientele from the China Plus One strategy, and One Plus China Strategy, as various Chinese firms diversify away from their China base.
  • New industry development. While the recent US tariff hikes may cause certain supply chain disruption, we see Malaysia as a net beneficiary of this escalation. Additionally, the National Semiconductor Strategy (NSS) announced by the Malaysian Government, with an allocation of MYR25bn, promises increased domestic direct investment (DDIs) and FDIs. This strategy aims to enhance more collaboration, move up the value chain and support the sector’s long-term structural growth domestically.
  • Downside risks: Softer consumer demand, unfavourable FX, obsolescence of technology, loss of clients/contract, and intensifying geopolitical tensions.

Source: RHB Securities Research - 15 Jul 2024

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