PETALING JAYA: External economic conditions are stoking concerns about the future of the semiconductor industry but analysts are still calling a “buy” on compelling companies which offer longer-term prospects.
In its report on the sector, TA Research said lingering macroeconomic headwinds have added to recession worries and downside risk to chip sales.
“In view of this, we have taken the opportunity to trim our semiconductor sector stocks’ – which mainly comprises outsourced semiconductor assembly and test providers Inari Amertron Bhd
, Malaysian Pacific Industries Bhd (MPI) and Unisem Bhd – 2022 and 2023 revenue and earnings estimates,” it said.
However, corresponding to the earnings revisions, it has maintained its recommendations of “buy” on Inari and MPI and has downgraded its recommendation on Unisem from “buy” to “hold” given its reduced risk-reward potential.
“All in all, we downgrade our stance on the semiconductor sector to ‘neutral’,” it said.
TA Research said it continued to favour players which offered near-term resilience and mid-to-long term growth prospects, backed by their robust sales pipeline with exposure to secular trends, expansion roadmap and robust balance sheet.
“Our top pick is MPI, which we like for its automotive-centric strategy as it seeks to capitalise on the promising prospects for content gains within vehicles, catalysed by the global transition to electric vehicles (EVs) and autonomous driving, among others,” it said.
Citing information from the World Semiconductor Trade Statistics (WSTS), CGS-CIMB Research said that in August, WSTS revised downward its 2022/2023 global semiconductor sales growth forecasts to 13.9% and 4.6% versus 16.3% and 5.1% in June, respectively, mainly due to a reduction in memory prices.
“While most industry research groups still expect positive semiconductor sales growth in 2022, most project an average of 4% year-on-year decline for semiconductor industry sales in 2023, mainly due to an anticipation of a slowdown in the global economy and inventory correction.
“Moreover, we expect softer quarter-on-quarter (q-o-q) industry sales in the third quarter of 2022 (3Q22) due to the weak guidance from 15 global semiconductor chip manufacturers (ex-memory) – on average, they project a tepid 1% sequential sales growth in 3Q22,” it said.
The research house said it also expected the Malaysian semiconductor sector – automated test equipment (ATE) and outsourced semiconductor assembly and test (OSAT) firms – to register a q-o-q decline of 5% in sales and 8% in net profit on aggregate in 3Q22.
This is due to a slowdown in consumer electronics demand, especially for mobile and tablets, and the impact of China’s zero-Covid policy which continues to disrupt supply chains and customers’ qualification processes.
In the same report, CGS-CIMB Research said it was downgrading the Malaysian semiconductor sector from “overweight” to “neutral” in view of the weaker industry demand and sluggish earnings prospects over the next six to 12 months.
“Malaysian OSAT and ATE sectors trade at 19 times and 23 times 2023 price-to-earnings.
“Inari is our sector top pick for Malaysian OSAT due to its higher exposure to the premium smartphone segment and better order visibility from key customer Broadcom.
“Moreover, we see potential commercialisation of new projects like transceiver modules and high-power light-emitting diodes going into automotive and industrial applications as potential catalysts,” said the research house.
It has downgraded Unisem from an “add” to “hold” with a lower target price in view of a sluggish earnings outlook in 2023 and weaker sentiment in the tech sector.
“Despite the softer demand outlook, we believe Unisem stands to benefit from its customers’ diversification plan under the China Plus One strategy beyond the next 12 months in light of the ongoing trade war.”
In its report, MIDF Research also said its top pick for the technology sector was Inari, given that the group’s future as Malaysia’s OSAT remains intact.
It is slightly more positive on the entire technology sector, saying that although the industry was still under pressure from rate hikes and other macroeconomic challenges, it remained “positive” on the sector since the demand for 5G, artificial intelligence and EV-related products and services still strong, and these are the essential enablers to ignite the digital economy globally.
“The semiconductor industry is significantly reliant on developing technologies for computational power.
“As a result, we maintain our positive stance on this sector due to its sturdy mid-to-long term outlook in combination with the expanding acceptance and integration of smart technologies, which encompass a wide range of industries and applications,” said the research house.
