• Maintain OVERWEIGHT. 3Q24 sector results were mixed, with four out of the nine companies under our coverage missing estimates (on slower-thanexpected revenue growth, margin pressure and FX impact) while the other five chalked in-line numbers. 4Q24 earnings should improve, on favourable FX rates and stable loading factors, with potential upside from some urgent delivery of orders due to impending tariff hikes to be imposed by the US . The sector is trading at a compelling c.20-25x CY25F P/E (at its 5-year historical mean) against a growth expectation of 39%.

• 3Q results round-up. The sector’s aggregate core PATAMI pointed to a 12.7% contraction in 9M24 vs a growth of 7.1% YoY in 1H24, mainly dragged by unfavourable FX impact despite stronger revenue and loadings for some customers. In fact, four companies reported higher YoY earnings growth, even though sector net profit growth decelerated by 15.6% YoY in 3Q24, mainly dragged by the FX impact. Post results reviews, we cut our aggregated earnings forecast for the sector by 9.1%. We pencilled in a sector earnings growth expectation of 39.2% YoY for FY25, as we now anticipate a stronger year on the back of a recovery in the semiconductor space.

• Position for a broad-based recovery. The Bursa Malaysia Technology Index (KLTEC) is bottoming out, after taking a huge dive over the past months due to the weaker-than-expected sector recovery, strengthening of MYR against USD, the potential imposition of tariffs or sanctions from the US, and the overall risk-off sentiment. We continue to observe a constructive YoY revenue growth trend in 3Q24 on the back of a gradual recovery. The tone of technology companies’ management teams point to shorter earnings visibility, but we can expect to see stronger orders going into FY25. This would be premised on a volume recovery due to various new opportunities and clientele gained from plausible circumstances related to China Plus One and Taiwan Plus One. As such, the sector could be under-owned after the steep sell-down since August and market is likely to return to an accumulation mode after settling down for the expectation and guidance on FX impact, supported by attractive valuations and the expectation of a broad-based pick-up in FY25 – fuelled by the recovery in demand and replacement cycle.

• Sector Top Picks. We like Malaysian Pacific Industries for its exposure in the semiconductor space (ie it will ride on the recovery of the chip sector), the demand recovery in China, as well as the commencement of new programmes/customers. CTOS Digital would be our pick in the domesticcentric space, premised on the digitalisation trend as well as the company’s exposure to the financial technology or fintech segment. In the smaller-cap space, we like Coraza Integrated Technology for its earnings rebound on strong revenue growth. Datasonic should benefit from sustained strong demand for its solutions, while its ASP hike should continue to buoy earnings.

• Downside risks: i) Softening smartphone sales, ii) favourable FX movements, iii) strong consumer demand; iv) obsolescence of technology, and v) intensifying geopolitical conflicts.

Source: RHB Securities Research - 9 Dec 2024