• During 3Q24 results season, companies in the Outsourced Semiconductor Assembly and Testing (OSAT) sub-sector trailed behind our expectations, prompting us to cut our full year earnings forecast; Inari and MPI. In contrast, the IT Services companies delivered in line earnings, reflecting stability.

• We remain upbeat about the IT Services, supported by rising global demand for IT solutions and successful business diversification beyond Malaysia. For instance, MyEG is solidifying its presence in China and the Philippines through its blockchain technology, while Dsonic managed to secure its first overseas epassport project in West Africa, reducing reliance on local projects, in our view.

• However, we are less optimistic on OSATs sub sector near term outlook due to intensified headwinds from weaker global electronics demand, escalating USChina trade war, and China’s subdued market recovery. Competitive pricing pressures in the region have further squeezed margins for key players.

• We downgrade our stance on the Technology sector to NEUTRAL (from OVERWEIGHT). Yet, our selective top picks include: MyEG (TP: RM1.43), Dsonic (TP: RM0.63), MPI (TP: RM37.74) and DNeX (TP: RM0.52).

IT Services Remain Resilient, OSATs Struggling

The recently concluded quarter results revealed a stark contrast within the technology sector. IT services companies delivered solid performance, with earnings came in largely within expectations, underpinned by rising demand for digital solutions from both local and worldwide nations. Conversely, OSATs players fell short and underperformed due to weak global electronics demand, pricing pressures from competitive Chinese players, and a softer USDMYR during the reporting quarter. Substantial unrealised forex losses were reported, stemming from sharp depreciation in USDMYR (from 4.70 to 4.15), although these are non-cash adjustments and should not be overemphasized. However, if this weaker USDMYR environment persists, it could potentially turn into real threats for the sector.

More Challenging Environment for OSATs

We believe OSATs players will face growing hurdles in the near term, reminiscent of the 2018 US-China trade war, when global semiconductor supply chains were significantly disrupted, leading to a 12% YoY decline in 2019 global semiconductor sales as reported by Gartner, Inc. A potential escalation of trade tensions following Trump’s re-election could similarly increase supply chain disruptions and amplify pricing pressures. Coupled with China’s slower economic recovery and continued price wars, these dynamics are expected to weigh heavily on OSAT margins. Domestically, operating costs are rising, with the increase in minimum wage, mandatory EPF contributions for foreign workers, and a multi-levy mechanism, further squeezing profitability in an already challenging business environment.

Downgrade to NEUTRAL Call on Technology

Given these factors, we downgrade our call to NEUTRAL from OVERWEIGHT, while maintaining our optimistic view on the IT Services sub sector. Our selective top pick includes: MyEG (TP: RM1.43) and Dsonic (TP: RM0.63) from IT Services, as well as MPI (TP: RM37.74) and DNeX (TP: RM0.52) from manufacturing, which we believe can withstand near term challenges while seizing long term opportunities.

Source: BIMB Securities Research - 2 Dec 2024