PERHAPS 2017 can be summed up as the year where tech stocks dominated. Strong global spending aside, the emergence of e-commerce and the Internet of Things (IoT) along with the launch of the Digital Trade Free Zone created excitement and the prospects of better earnings.
Thus, while the traditional technology stocks such as Unisem (M) Bhd, Globetronics Technology Bhd and Inari Amertron Bhd were the initial movers, second-liner and upcoming semiconductor companies were soon dominating the headlines.
Integrated electronics manufacturing services provider VS Industry Bhd is perhaps one of the main stars. It is up 129% on a one-year basis and at its current price of RM3.13 trading at a price earnings ratio (PER) of 23 times.
VS Industry’s growth has been supported by strong quarterly earnings and mergers and acquisitions throughout the year.
Other non-traditional stocks that have moved included Palette Multimedia Bhd, Excel Force MSC Bhd and PUC Bhd. Then, there is IoT – which has seen companies such as Green Packet Bhd and Key Asic Bhd starting to rise.
With the tech index having almost doubled on a year-to-date basis, it isn’t surprising that the average PER of the tech stocks are now around 24 times.
Are these valuations really supported by earnings and solid growth?
During the recent reporting season, test equipment manufacturers for the semiconductor sector such as Vitrox Corp Bhd, Pentamaster Corp Bhd and Aemulus Holdings Bhd reported strong earnings. Their significantly better results were due to strong demand for their products.
While Globetronics’ third-quarter results were below expectations, many analysts still maintained their “buy” call.
UOB Kay Hian Research says that sensor products are expected to further boost the company’s results for its upcoming fourth quarter ending Dec 31.
What is common among these players is a ramp-up in their production. Globetronics is increasing its production volume for light sensors.
“Globetronics’ light sensor monthly production volume was only at eight million units when it started mass production in June, and it has progressively ramped it up to 11 million units in July, 21 million units in August and 30 million units in September,” says UOB Kay Hian.
Vitrox is investing RM130mil to expand its operations this and next year in view of the growing demand for its test equipment and systems.
The group has experienced nine consecutive quarters of growth since the first quarter of 2015.
Analysts say that the new areas within the semiconductor industry are the automotive and telecommunications infrastructure industries, and they have created new growth catalysts for the tech stocks.
Remi Olu-Pitan, who is the fund manager of the UK multi-asset portfolios for Schroders, feels that the tech rally will continue as technology spending will increase for a while more.
“Growth is strong, healthy and robust. Previously, what we had was an assumption that growth would improve. But what we are seeing now is the hard data; factual evidence that people are buying and selling. So, we are seeing trade. Trade is taking place, and that is good,” she says.
She says that emerging-market equities are benefiting from the type of growth that is happening in the developed markets.
“I would say that developed markets’ growth prior to 2016 was really lonely. It was very much isolated to the United States. And it was really a growth that benefited US-focused companies.
“From mid-2016, we’ve had a broader synchronised growth that has benefited everyone else. Emerging-market equities benefit from global growth, and particularly when the growth involves equipment spending. So, that’s good for tech,” she says.
On another catalyst for the tech sector, Olu-Pitan says Trump’s tax reform plan could give it a boost.
“Now, I would say that the United States has ‘tax reform fatigue’ because we have been talking about it for so long. But I hope it comes true. If it’s credible, what you could get is an increase in capital spending in the United States. So, more capital spending means corporates investing in capital expenditure, and that trickles down to emerging markets. That’s the kind of spending emerging markets like.”
On a fundamental note, Rajiv Biswas, Asia-Pacific chief economist for IHS Markit, says that the Malaysian gross domestic product (GDP) growth soared by 6.2% year-on-year (y-o-y) in the third quarter of 2017, and this was led by technology industries, notably the strong electronics output of semiconductors and integrated circuits, as well as rapid growth in the information and communications industries, boosted by the buoyant momentum in data communications, computer services and information services.
“Stronger growth in the manufacturing sector was a key factor underpinning the improvement in the GDP growth momentum, with manufacturing growth up 7% y-o-y in the third quarter of 2017, compared with a 6% pace in the second quarter.
“A key driver for the rapid growth in manufacturing was the robust growth of electrical, electronic and optical products, which rose by 8.7% y-o-y in the third quarter of 2017. Robust global demand for electronics continued to underpin growth in this segment, with a rising output of semiconductors, integrated circuits and communications equipment.
“Strong exports of electronics were an important factor supporting the growth of exports, which rose by 11.8% in the third quarter, compared with 9.6% in the second quarter,” he says.