Investment Highlights

• 3QCY23 results largely within expectations. Out of 7 companies under our active coverage, 5 reported within-expected results and 2 below. ViTrox Corp’s (VITROX) (BUY; FV: RM8.60) earnings were below expectation, primarily attributed to lower demand from its machine vision system (MVS) and automated board inspection (ABI) segments amid soft global economic growth and slower recovery in the semiconductor industry. Malaysian Pacific Industries’ (MPI) (HOLD, FV: RM2) results also disappointed due to lower-than-expected sales from Asian and European regions. The results of the remaining 5 companies - Globetronics (HOLD, FV: RM1.36), Inari Amertron (Inari) (BUY, FV: RM3.53), Pentamaster Corporation (Pentamaster) (HOLD, FV: RM5.50), CTOS Digital (CTOS) (BUY; FV:RM1.80) and Infomina (HOLD; FV:RM1.82) - met our and consensus expectations.

• The sector’s 3QCY23 earnings improved significantly by 65% QoQ from outsourced semiconductor assembly and test (OSAT) and automated test equipment (ATE) players, thanks to improvement in consumer electronics demand on new smartphone launches and higher contribution from Pentamaster’s factory automated solution for its medical segment. IT support and services segment increased marginally by 1% QoQ due to CTOS recognising better growth from key accounts and commercial business segments in Malaysia, mostly offset by the decline in Infomina’s earnings.

• Consumer electronics segment remains soft despite a bumper 3QCY23 driven by new smartphone launches. According to Canalys’ data, global smartphone shipments improved by 14% QoQ, mainly attributed to the launch of new smartphone models (Exhibit 4). Rising demand for new smartphone features in US and China brands supported bumper earnings in 3QCY23, and we expect a spillover effect into 4QCY23. However, global smartphone shipment is still on a downcycle as shipments slid marginally by 1% in 3Q23. We believe the consumer electronics segment will remain soft with a slow recovery in 2024F. This is weighed down by phlegmatic consumer sentiments and a slow replacement cycle for inventories.

• Automotive segment on short-term pause while long-term prospects remain intact. In the near term, the automotive industry faces challenges such as lower demand, price wars among car manufacturers and high borrowing costs, especially in the US and Europe. According to SNE Research, battery electric vehicle (BEV) sales slid 5% MoM in US and 3% MoM in Europe in September 2023 (Exhibit 5). Hence, we expect a continuation of the trend with a marginal decline in 4QCY23.
  However, China's automotive market appears to be thriving due to price advantages, new models and government support. Based on SNE Research, China’s battery electric vehicle (BEV) sales increased 16% QoQ and 6% MoM in September 2023 (Exhibit 5), prompting technology players to expand operations in the country.
  Despite short-term hurdles, optimism prevails for the automotive sector, particularly in electric vehicles (EVs). Long-term prospects remain strong, driven by the increasing adoption of vehicle electrification and autonomous driving. Although we expect moderate growth in 2024F due to slower plant expansions by multinational corporations, the long-term trajectory remains intact.

• Orderbooks and volume loadings remain soft in the near term with limited longer-term order visibility. Channel checks on companies’ order book indicate that replenishment rates remain soft, with clouded order visibility amid a slow recovery in the industry. We understand that the slow replenishment in order books is due to continuous inventory destocking, especially in the consumer electronics segment, and being cautious in orders against the backdrop of uncertain market conditions. The outlook remains cautious as we anticipate clearer order visibility in 1HCY24 and a more substantial recovery in 2HCY24.

• We maintain our NEUTRAL recommendation on the sector as near-term earnings prospects could be capped by a slowdown of global economic growth. Furthermore, the impact from a slight slowdown in automotive sales will be reflected in the upcoming 4QCY23 results, which pose further downside earnings risks. We also expect a short spillover effect on new smartphone sales into 4QCY23, which could benefit Inari. Any positive rerating of the sector will depend on signs of faster-than-expected demand recovery in the semiconductor and consumer electronics segments.

• Key risks: (i) escalation of US-China technology war and geopolitical conflicts, and (ii) concentration risk stemming from high reliance on limited key segments.

Source: AmInvest Research - 8 Dec 2023