Sluggish growth seen for tech sector

PETALING JAYA: Growth may return to the beleaguered technology sector: but only sluggishly, according to one research house that sees the present downcycle for the sector as just the beginning.

In its report, AllianceDBS Research said it expected tech stock performance to remain sluggish in the near-term on negative news flow from the supply chain.

The tech industry has been struggling and this has seen valuations and market value of companies operating in it shrink after weaker profit warnings from the two major smartphone makers: Apple and Samsung.

Industry analysts said the next-generation smartphone launch would need to be more enticing with obvious upgrade features before the industry could return to a growth path.

“Smartphone hardware on the consumer’s end has greatly outpaced the speed of software advancements. Even if you have advanced hardware, there is no full appreciation of this higher capacity hardware speed since the software side has not really caught up with more obvious advanced features,” a tech industry observer pointed out.

“I believe the last meaningful ‘upgrade’ on the software side was when smartphones launched high-definition cameras, photos and screens that saw a visible upgrade where the user could see the difference when compared with previous-generation phones,” he added.

According to AllianceDBS Research, early supply chain rumours point to the probable launch of the triple-lens rear camera and upgraded TrueDepth camera for the next iPhone in the second half of this year.

“In our view, this might not feel ‘revolutionary’ to entice user upgrades, thus driving the replacement cycle longer. We believe the key issue remains the premium pricing for the iPhone, as Apple has been reluctant to lower prices,” AllianceDBS’ technology analyst Toh Woo Kim said.

“After two disappointing cycles and misguided expectations, we believe investors will require a lot more positive data to be convinced about any recovery for the next product cycle,” Toh added.

He noted that the current earnings downcycle for the industry is still in its early stages and this would play out through the first half of the year.

AllianceDBS said once this phase is over, it would turn more constructive and look out for stocks with potential re-rating catalysts.

The counters included INARI AMERTRON BHD for a potential recovery in the radio frequency segment and the new Osram business, Globetronics Technology Bhd for its robust growth in gesture sensors, and Malaysian Pacific Industries Bhd for an anticipated recovery in the automotive segment.

The local technology index was in the green yesterday, gaining 1.42% or 0.42 to 30.08 points at its close.

Key tech counters also sustained their recent gains and were climbing into their fourth or fifth day of its relief rally.

Inari, added four sen to RM1.45, KESM INDUSTRIES BHD gained 26 sen to RM8.60 and Vitrox Corp Bhd moved up 17 sen to RM6.07.

AllianceDBS noted that all Malaysian semiconductor companies had strong balance sheets with a net cash position.

It noted that this would help them sustain their business operations in the current industry downturn and maintain a decent dividend payout ratio.

Commenting on the World Semiconductor Trade Statistics (WSTS) November update, the research house expected a downside bias to semiconductor sales growth this year, unless the US-China trade tension eases off.

The WSTS, in its November update, had maintained its estimated global semi sales growth of 15.9% for 2018, but cut its 2019 growth forecast from 5.2% to 2.6%.

“The adjustment was across the board (not just for memory chips), indicating broad-based demand weakness amid the global economic slowdown,” the WSTS noted.

AllianceDBS noted that during the 2015 industry slowdown, the bellwether Philadelphia semiconductor sector index (SOX) corrected by 25% from peak to trough.

The research house said this downtrend lasted for about eight months: from June 2015 to February 2016, during which monthly semi sales growth turned negative between -3% and -7% from the previous year.

“After signs of a slowdown emerged from major semi equipment makers in September 2018, the SOX index started to correct and is now down by 24% from its peak. Similarly, stocks under our coverage have also declined by 21% to 43% respectively over the past three months,” it said.


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