PETALING JAYA: The outlook for the local tech sector is turning brighter following the materialisation of the de-rating led by US interest rate hikes, appealing valuations after rounds of selldowns as a consequence of the de-rating, as well as the tapering off of Federal Reserve hawkishness and China’s “zero-Covid” stringency, says UOB Kay Hian (UOBKH) Research.
The research outfit said the risk-reward trade-off and sector risk-on have improved after selldowns in the past year, coupled with sector cyclicality against the Bursa Malaysia Technology Index (BM Tech Index) suggesting that the index could be on the brink of an upswing again after 12 months of consolidation.
In a research note released yesterday, UOBKH Research analyst Desmond Chong said: “The past 15-year study on the relationship of the BM Tech Index and global semiconductor sales showed that the bottoming of the BM Tech Index happened between the second to seventh month – and on average 4.5 months – after the onset of global semiconductor year-on-year (y-o-y) sales contraction, while we are currently on the third month of y-o-y sales contraction according to data from October.
“This suggests that investors tend to look ahead to fundamental weaknesses with better visibility and capitalising on the up-turning point of long-term structural sector growth. We believe this cyclical pattern could repeat itself again this time.”
Chong acknowledged that earnings vulnerability remained a threat, as global personal computer and smartphone firms are reportedly still cutting component orders and scaling back expansion to the extent of downsizing, backed up by the International Data Corp forecast that smartphone shipments would shrink by 6.5% in 2022 and cut growth to 2.3% in 2023.
“However, our channel checks with the local outsourced semiconductor assembly and test and equipment makers suggest that the automobile, medical and renewable energy (RE)-related orders are still seeing resilient demand.
“Indeed, the semiconductor production equipment bellwethers shared that over one-third of order book backlogs is made up of these sub-segments which are still seeing healthy growth,” he affirmed.
UOBKH Research is estimating sales growth for local equipment makers to be at 8% and 24% for 2022 and 2023, respectively, underpinned by the ongoing investment cycle for electric and autonomous vehicles, as well as for the medical and RE sectors, which would outperform global benchmarks due to the US-China trade diversion and the entrenchment of manufacturing capabilities.
It added: “Meanwhile, order-book backlogs for most of the companies remain elevated at an all-time high but delivery remains a challenge due to supply chain disruptions.
“Nonetheless, these delays were usually timing issues rather than cancellations.”
The research unit said it was selectively ascribing a higher valuation to stocks with good growth prospects, made up of the “front-runners” of the trade diversion, and equipment or solution providers for next-generation technologies.
“We also like companies with strong order book backlogs such as Greatech Technology Bhd, Pentamaster Corp Bhd and Coraza Integrated Technology Bhd. We also favour V S Industry Bhd for its undemanding valuation vs superior growth profile,” Chong said.
Meanwhile, analyst Mohd Fakhrul Ashraq added two more stocks to UOBKH Research’s “buy” recommendation, namely, Versatile Creative Bhd and Opcom Holdings Bhd, with respective target prices of 61.5 sen and 93.5 sen.