• Record High Global Semiconductor Sales in October 2024 Amid Tech Boom. The global semiconductor market continues to thrive, with October 2024 sales hitting an all-time high of USD57bn (+22% YoY), bringing YTD global semiconductor sales to USD503bn (+19% YoY). This has prompted the World Semiconductor Trade Statistics (WSTS) to revise its 2024 sales forecast upward to USD627bn, from the initial forecast of USD611bn; reflecting a robust 19% YoY growth. Growth drivers include surging demand in Logic (+17% YoY) and Memory (+81% YoY) segments, spurred by the need for higher memory capacities, faster data processing, and advanced applications in smartphones, IoT devices, automotive electronics, cloud computing, and data centers.

• Global Semiconductor Sales Growth Momentum to Continue in 2025. Looking ahead to 2025, WSTS projects the global semiconductor sales growth momentum to continue, albeit at a slower pace of 11% YoY growth to USD697bn. This growth bodes well for the US, with its semiconductor sales are anticipated to achieve the highest growth among the rest, further driving the reshoring of market share back to the country. Nonetheless, persistent challenges stemming from protectionist policies remain a significant concern, reminiscent of 2018 when the global semiconductor supply chain faced major disruptions, resulting in volatile input costs during the US-China trade war.

• NSS and NIMP 2030; Good Policies but May Not Yield Immediate Benefits for The OSATs Players. Malaysia’s electric and electronic (E&E) manufacturing sales remain steady, but the country has yet to fully capitalize on the semiconductor upcycle at par with its global peers, in our view. Malaysia’s position within the tech boom is still ambiguous due to its focus on less lucrative downstream activities, such as Outsourced Semiconductor Assembly and Test (OSAT) and Electronic Manufacturing Services (EMS), as compared to high-value upstream segments like Integrated Circuit (IC) design and wafer fabrications, which were dominated by the US, Taiwan, and South Korea. Nevertheless, we applaud the government’s initiatives in bridging this gap, by introducing national policies like the National Semiconductor Strategy (NSS) and the New Industrial Master Plan 2030 (NIMP 2030). Backed by RM25bn fiscal support, NSS aims to attract Foreign Direct Investments (FDIs), enhance local capabilities, and drive innovation, while NIMP 2030 targets a 6.5% annual manufacturing GDP growth, potentially adding RM587.5bn to GDP by 2030, positioning Malaysia as a competitive player in the global semiconductor ecosystem. But we believe execution risks remain, as these policies may not yield immediate benefits for the OSATs players, having its main focus on the upstream businesses. We view that bridging policy ambitions with industry needs is crucial, to ensure downstream players are integrated into the value chain and contribute to sustainable growth.

• Growing Challenges for Malaysian OSATs Players. Local OSATs players are likely to encounter intensifying challenges in the near term, particularly with Trump’s re-election, which could lead to an escalation of trade tensions. Trump has proposed imposing a 60% tariff on Chinese-origin imports, along with broader tariff increases of 10–20% on all foreign-made products. This could reignite the supply chain disruptions seen during the 2018 trade war, which has destabilized global manufacturing and squeezed margins across industries. Adding to these external pressures, the OSAT industry continues to grapple with China's sluggish economic recovery and ongoing price wars, which may exacerbate pricing and margin constraints. Domestically, rising operational costs compound the issue, no thanks to the recent increase in minimum wage to RM1,700 from RM1,500, mandatory EPF contributions for foreign workers, and the rollout of a multi-levy mechanism. These dynamics are expected to further compress profitability for OSATs players in an already competitive landscape. Above all, while the “China +1” strategy may benefit Malaysia by attracting new investments, we believe these challenges could ultimately undermine those benefits.

• IT Services Thriving Amid Economic Recovery and Digitalization. We view Malaysia’s IT services sector as a beneficiary from post-COVID economic recovery and the government’s push for digitalization in enhancing business efficiency and transparency. Passport issuance for instance, has reached 2.47mn as of November 2024, surpassing the pre-COVID levels of approximately 2.3mn, partly driven by the Malaysia-China bilateral agreement in extending visa-free travel until December 2025. Datasonic Group Berhad (Dsonic), as the sole provider of Malaysian passports, stands to benefit significantly from this trend, solidifying its market leadership in this niche market. Though the Letter of Award for the passport contract is yet to be awarded, we believe that Dsonic will continue to become the frontrunner, given the company’s strong track record of excellent service delivery, consistently meeting the government’s standards. 
  
  Additionally, the Malaysian government’s endorsement of the Malaysia-China Single Window system for cross-border trade is set to create new opportunities for MyEG Services Berhad (MyEG), through its Ztrade services, a blockchain-based platform designed to streamline and enhance trade processes between countries. Supportive government policies and initiatives focusing on technological advancements, infrastructure development, and digitalization have created a conducive environment for innovation and growth. Moreover, Malaysia’s strong emphasis in developing its digital economy under initiatives like the MyDIGITAL blueprint and National Digital Economy Plan ensures continued support for the IT services sector.
   
• Diversification Beyond Malaysia; A Key Growth Driver. Beyond domestic opportunities, Malaysian IT services players are increasingly diversifying into international markets, driving their long-term growth potential. Dsonic managed to secure its first overseas epassport project in Burkina-Faso, a West Africa country, reducing its reliance on domestic projects, while positioning itself as a global player in secured identification solutions. MyEG on the other hand, is expanding its presence in China and the Philippines, leveraging its blockchain technology, Zetrix for trade facilitation and other governmentrelated services. These international expansions not only diversify revenue streams but also mitigate reliance on the Malaysian market, in our view. With rising global demand for digital solutions and robust government support for the IT sector, companies like Dsonic and MyEG are well-positioned to thrive both locally and globally, ensuring sustained growth and resilience in the coming years.
   
• Contrasting Prospects; Resilient IT Services and Challenging OSATs. In conclusion, while Malaysia’s IT services sector continues to thrive on digitalization efforts and international expansion, the near-term outlook for OSATs players appears more challenging. Rising operational costs, intensifying competition, and potential geopolitical disruptions pose significant hurdles. The prospect of renewed trade tensions, slower economic recovery in China, and ongoing price wars could exacerbate pricing pressures and weigh on margins. As Malaysia navigates these headwinds, we believe the IT services sub-sector offers more resilient growth prospects, driven by robust government support and global expansion initiatives, while the manufacturing segment, particularly OSATs, faces an uphill battle.

• Maintain NEUTRAL on Technology sector. We reiterate our NEUTRAL stance on the sector, while maintaining an OVERWEIGHT call on the IT services sub-sector. Our selective BUY recommendations include MyEG (TP: RM1.44), and Dsonic (TP: RM0.63) from the IT services segment, alongside MPI (TP: RM37.74), and DNeX (TP: RM0.52) from the E&E manufacturing-related business, as we believe these companies are wellpositioned to navigate near-term challenges while capitalizing on long-term growth opportunities.

Source: BIMB Securities Research - 2 Jan 2025