THE standoff between the two economic giants that has only intensified since 2018 is causing the global technology supply chain to start crumbling.
The problem is a long time coming ever since US President Donald Trump waged war against China’s tech giant Huawei Technologies Co Ltd last year with an export blacklist and also banned American companies from doing business with the largest smartphone vendor.
Recently, Trump has also orchestrated a move to stop foreign chip producers using US technology to supply to Huawei without a licence.
Where it hurts Huawei the most is in its flagship Kirin processors that are developed by Huawei’s chip subsidiary HiSilicon with its largest supplier, Taiwan Semiconductor Manufacturing Company (TSMC).
After fulfilling all the outstanding orders for Huawei, which will go into the phone maker’s upcoming flagship - the Mate 40 - TSMC will no longer be allowed to supply to Huawei after being pressured by Washington.
All these developments are resulting in a changing technology landscape and Huawei is opening its own supply chain with the backing of the Chinese government.
This has put up an avenue for companies in Malaysia, particularly those in the semiconductor business.
Where this could have very well started was when JF Technology Bhd lost the patent infringement lawsuit filed by its American competitor Johnstec International Corp in the US.
The US Court of Appeals dismissed the appeal filed by the JF Technology’s subsidiary JF Microtechnology Sdn Bhd in July last year.“Our lawsuit that we fought for six years, slowed down our sales and we paid quite a huge sum.
“We defended our case on the US soil. We knew we did not infringe on anything but to fight an American company on American soil is tough,
“At the end of the day, we face the consequences. But I also have to thank the civil suit because it was through this that we caught Huawei’s eyes and they found that our product performed even better, ” managing director and chief executive officer Datuk Foong Wei Kuong tells StarBizweek.
JF Technology, which is in the business of high performance test socket manufacturing, became associated with Huawei in July last year, during the timeframe when the latter rolled out its spare tire plan.
It is no secret in the technology world that Huawei anticipated further disruptions from the US and was looking at establishing an alternative supply chain then.
Towards this end, JF TEchnology fitted the bill well.
Even since JF Technology became associated with Huawei, the group’s sales from China jumped from around 10% to around 34% currently, out of which approximately 15% is from Huawei.
Pentamaster Corp Bhd chairman CB Chuah says the protracting tensions between the US and China actually benefits Malaysian semiconductor players as firms from both countries are upping their ante to be more self sufficient as the supply chain changes.
“There are a lot of opportunities for Malaysian companies to supply the equipment.
“I think we’re seeing more orders coming from China for certain things but the only problem now is that travel restrictions are still in place due to the coronavirus (Covid-19), ” he says, adding that machines supplied by Pentamaster require onsite human support.
Being a bipartisan business, Chuah says opportunities are also aplenty in the US as Trump wants American manufacturers to move back to the US and the best way forward would be in the area of automation, which is Pentamaster’s expertise.
Globetronics Technology Bhd CEO Datuk Heng Huck Lee says the group is seeing new customers and new products that might move out of China.
“We are also working with potential new customers that are reducing their dependence on China’s supply chain.
“Malaysia continues to maintain a neutral policy to both countries and that helps local Malaysian companies to maintain the same.
“Globetronics is doing the same and will continue to support customers from both countries. So far so good for us, ” Heng says.
A technology equity analyst says things were very much different now as compared to a year ago when the market was expecting 5G to be deployed smoothly.
“US and China are going at each other and it’s going to be painful to watch especially when the US elections approach.
“In terms of the supply chain, it’s all haywired with many looking for alternatives to rebase their production and supply sources, ” he says.
Too high or just nice?
All these developments have brought about much interest to the sector on Bursa Malaysia, resulting in high valuations of semiconductor-related counters.
Judging from the rebound of the March 19 plunge, the Bursa Technology Index has risen 117.35%, way ahead of the benchmark FBM KLCI by 28.27%.
In terms of share price gains, the technology sector has been the second top performing group of companies after the glove stocks. Many of the investors buying into these tech stocks are banking on the potential upside that will come from the deployment of 5G.
Analysing the price to earnings ratio (PE) valuations of technology companies in Malaysia - especially those in the semiconductor supply chain - they are all at least 20 times and above.
Topping the list is global player Unisem (M) Bhd, whose share price of RM3.22 is trading at a historical PE of 2,205 times. However in Unisem’s case, the out of the ordinary historical multiple is due to one off kitchen sinking exercises that have taken place in the company. The stock now commands a more realistic forward PE of 25.8 times. The company is in the business of providing an integrated suite of packaging and test services.
Still, other tech stocks still command high PEs. Test socket specialist JF Technology Bhd has a PE of 164.55 times while Malaysia’s largest independent burn-in and test services provider KESM Industries Bhd is trading at a PE of 64.44 times.
Comparing this to the holy grail of tech stocks that is the FAANG (Facebook, Amazon, Apple, Netflix and Google), the five giants are only trading at an average PE of 61.06 times.
Leading the pack is undoubtedly Amazon.com Inc, trading at US$3,161.02 per unit at a PE of 121.5 times. It is no wonder why Jeff Bezos is the world’s first centi-billionaire and is still the richest man on Earth.
A senior analyst from a local research house opines that Malaysia’s tech sector PE is too expensive for an unpredictable expected growth. “I can hardly believe that institutional investors can stomach such valuations, ” he tells StarBizweek.
To justify his thoughts, he points out that Hong Kong-listed Cowell E Holdings Inc, which derives 90% of its revenue from Apple, is trading at only six times PE.
The firm manufactures the front facing camera module for Apple’s iPhones and they have about 40% wallet share for iPhone.
“Ex cash, they only have a PE of two times. Our tech valuations are just off the charts, ” he adds.
Kenanga Research tech analyst Samuel Tan has an opposing view, saying that some companies were of sound valuations. “Given that the market is forward looking with the expectation of 5G to provide multi-year growth, just like the 3G to 4G transition cycle, the premium valuation on certain counters is valid, ” he says. The research house had recently initiated coverage on JHM Consolidation Bhd and Inari Amertron Bhd, which Tan believes are largely overlooked.
He has “outperform” ratings on both counters, with target prices of RM2 and RM2.50 respectively.
“With both counters having direct exposure to 5G and trading at a discount to peers, we believe they provide exciting upside, ” says Tan.
Another analyst concurs with Tan’s views. He reasons that any tech counter with a PE of 30 times is reasonably priced while those valued at 15 times or lower are just a bargain. “You can’t be comparing tech stocks with other stocks where the general rule of thumb is a PE of 20 and below.
“The upside in the tech sector is huge. You might think this could be another dot com bubble but when 5G is fully implemented globally, it will be massive.
“Just compare Toyota and Tesla. Toyota sold 10.74 million cars last year while Tesla only sold 367,500 but look at the stark difference in share prices and valuations, ” he says. New York Stock Exchange-listed Toyota Motor Corp last traded at US$135.64 with a PE of 9.94 times while Nasdaq-listed Tesla Inc was at US$1,621, with a whopping PE of 834.14 times. Tesla’s investors are banking on the future growth of electric vehicles and the company’s leading technology position.
Copyright issues and patent
Another factor when it comes to China would be the issues on copyrights and patents, of which China was notoriously known as a “copycat nation” years back, but it has now evolved into becoming a trendsetter in many fields, especially technology. Foong says that the China today is very different from the China of the yesteryears, as the nation is now the one that files the most patents in the world.
“They want to be recognised for that. They are submitting the most number of patents in the global stage and they want to be recognised as a global player.
“The government plays a lot of emphasis on this, ” he says.
In the industry, JF Technology is one of the companies with the highest ownership of patents, says Foong. The group filed over 60 patents and has about 30 granted, making it one of the most aggressive in the area of test sockets.
The 5G play
The race among semiconductor players for all these is so that they can be in the forefront of the 5G play when the boom comes.
Foong notes that 4G gave rise to many companies such as the FAANG and the much awaited 5G will develop many new industry players, which will be a totally different kind. “Together with the internet of things (IoT), machine learning, artificial intelligence (AI) and all that will come in when 5G is deployed. All these are endless possibilities.
“JF Technology plays in this space and we’re riding on the 5G era.
“The semiconductor supply chain on a whole will be beneficiaries of 5G. Whether you are an Outsourced Semiconductor Assembly and Test (OSAT) or tester maker, it’s going to drive a lot of volume, ” says Foong.
Heng says Globetronics is working with a customer from Europe on a 5G related chip but thinks it remains to be seen if the world will settle and agree on a common technology platform for 5G. “But most of our current sensors will continue to be adopted for all smart devices. So, we continue to develop and will be launching a wider range of new sensors, ” he says.
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