This is also boosted by the proliferation of emerging technologies such as 5G, artificial intelligence, cloud computing, Internet of Things and robotics during the Covid-19 pandemic, according to TA Securities Research.
Within the sector, the research house favours outsourced assembly and test providers, namely Inari Amertron Bhd, Unisem (M) Bhd and Malaysian Pacific Industries Bhd (MPI), for their strong sales pipeline and earnings growth prospects, which are backed by their expansion plans and robust net cash positions.
TA Securities reiterated its “overweight” stance on the semiconductor sector with “buy” calls on Inari (target price: RM4.55; 42 times price-earnings or PE); Unisem (target price: RM5.85; 35 times PE), MPI (target price: RM64.15; 35 times PE), and Elsoft Research Bhd (target price: RM1.25; 35 times PE).
It did note, however, that there are downside risks for the sector. These include a prolonged Covid-19 pandemic weighing on economic growth, sentiment and supply chains, as well as a heightened trade war, weaker-than-expected sales and a weakening of the US dollar against the ringgit.
TA Securities pointed out that global semiconductor sales in October climbed further 1.1% month-on-month and 24% year-on-year (y-o-y) to a successive record high of US$48.8bil (RM206bil).
“Notably, this also marked 21 consecutive months of y-o-y growth for global semiconductor sales,” said the research unit.
Year-to-date, global chip sales have increased 24.8% y-o-y to US$449.7bil (RM1.9 trillion).
This tracks the World Semiconductor Trade Statistics’ latest forecast for global semiconductor sales in 2021 to grow 25.6% y-o-y to a new all-time high of US$553bil (RM2.34 trillion).
Billings in October marched higher 0.6% month-on-month and 41.3% y-o-y to US$3.74bil (RM15.8bil).
On a year-to-date basis, billings are up 43.5% y-o-y to US$35.14bil (RM148.4bil), leaping further from 2020’s record high of US$29.8bil (RM125.9bil).
Meanwhile, UOB Kay Hian Research (UOBKH) has downgraded the technology sector to “market weight” on a cherry-picking approach for structural growth themes.
Following the strong share price outperformances across technology names (84% higher in 2020 and 43% higher in 2021), UOBKH sees less compelling risk-reward valuation profiles, with forward PE valuations for outsourced semiconductor assembly and test (OSAT) and semiconductor production equipment names trading at two standard deviation (SD)/3SD above their five-year mean levels and price/earnings-to-growth of over one times.
Meanwhile, industry indicators are also showing signs of growth moderation.
UOBKH said for smartphone-related bellwether OSATs (such as Inari and Globetronics Technology Bhd), it expects earnings momentum to sustain into 2022, riding on the higher content package following 5G smartphone launches and automobile electrification.
The research unit has Inari as its top pick, as the group is benefitting from the low-hanging fruit of the long overdue refreshment cycle, which will see a three-year net profit compounded annual growth rate of 37% from financial years 2020 to 2023.