PETALING JAYA: The technology sector is in for a challenging period as it is expected to show signs of weakness in the near term in view of slower demand, according to analysts.
However, the sub-segments of the sector may see some growth moving forward amid headwinds.
RHB Research said the fourth quarter of this year would be uninspiring due to the prolonged weakening in demand.
Any inventory correction may only normalise in the second quarter of next year, but growth in certain sub-segments should be sustained, it said.
The research house said the guidance from the chip-related companies is less bullish for the near term, but the non-semiconductor players should see brighter prospects, with the main challenges being labour and material shortages, demand uncertainties, and geopolitical tensions.
The sector is still clouded by weakening demand for consumer products as people have been affected by inflation, geopolitical tensions, the impact of China’s Covid-19 lockdowns and weaknesses in Europe.
The few bright spots include vehicle electrification, servers, and high-performance computing-related chips, it added.
Sector valuations should be capped by rising bond yields and the quantitative tightening cycle.
Apart from this, the research house said firms being unable to meet their earnings projections due to multiple uncertainties should not be discounted.
“That said, their solid balance sheets and the strong US dollar should cushion exporters from feeling the pain of the demand slowdown.
“We like companies with exposure to front-end players, automotive and high-performance computing, as their outlook remains relatively stable.
“We like CTOS Digital Bhd for its leading position and growth prospects – on the higher demand for its various digital solutions, analytical insights, and exposure to fintech.
“We also like Coraza Integrated Technology Bhd for the robust demand for front-end equipment and the electrical and electronics ecosystem in Penang. It is on a solid growth path, and powered by a robust orderbook,” RHB said.
The sector’s third quarter aggregate core profit after tax and minority interest grew 5.6% year-on-year but contracted 2.6% quarter-on-quarter, with five out of eight companies reporting solid growth – the significantly better numbers from Datasonic Group Bhd and CTOS offset the weakness from the outsourced semiconductor assembly and test players.
RHB cut the sector earnings forecasts by 9.5%, mainly on the revisions made on estimates for Inari Amertron Bhd and Malaysian Pacific Industries Bhd as it expects the weakness to persist in the fourth quarter, as the sector would likely continue to grapple with decelerating demand.
The research house, which is maintaining its “neutral” call on the sector, said among the upside and downside risks are the strengthening or softening of smartphone sales, foreign exchange movements and consumer demand.
Meanwhile, Kenanga Research is downgrading its call on the technology sector to “neutral” from “overweight.”
The research house said this is based on the overall third quarter disappointing results for companies under its universe due to the ongoing inventory correction amidst growing concern of economic uncertainty.
“We learnt that the automotive sector is beginning to show early signs of softening as customers are lowering orders in favour of clearing off their existing built-up inventory.
This is expected to disrupt D&O Green Technologies Bhd’s upcoming fourth quarter which is typically the group’s bumper period.