PETALING JAYA: Not all is doom and gloom for the local technology sector as it looks to bounce back this year, says UOB Kay Hian (UOBKH) Research.
This is given that Bursa Malaysia Technology Index (BM Tech Index) is on the verge of an upswing after being in a consolidation phase, said the research house in its latest report.
On top of a better risk-reward profile, UOBKH Research noted its empirical research on the sector cyclicality against the BM Tech Index suggests that the index could be on the brink of an upswing again after 12 months of consolidation.
“The study on the relationship of BM Tech Index and global semiconductor sales over the past 15 years showed that the bottoming of BM Tech Index happened between the second to seventh month (average of 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 (Oct 22 data).
“This suggests that investors tend to look ahead of fundamental weaknesses with better visibility and capitalising on the upturning point of long-term structural sector growth. We believe this cyclical pattern could repeat itself again,” it added.
Furthermore, conditions for turning more bullish on the sector are in a constellation, especially after rounds of de-rating alongside appealing valuations.
Additionally, the trio of Federal Reserve (Fed) hawkishness, stringency of China’s zero-Covid-19 restrictions and supply chain disruptions is peaking, setting a base for this cyclical sector to outperform again in 2023, the research house said.
The global PC and smartphone giants are still reportedly cutting component orders and scaling back expansion to the extent of downsizing, UOBKH Research said.
The International Data Corporation forecast a 6.5% drop in smartphone shipment growth in 2022 and cut growth to 2.3% in 2023.
Its channel checks with the local outsourced semiconductor assembly and test (OSAT) and equipment makers suggest that orders related to electric vehicle (EV) automobile, medical and renewable energy (RE) are still seeing resilient demand, it added.
The research house maintained an “overweight” call on the sector with a cherry-picking approach to structural growth themes.
UOBKH Research had previously ascribed a more conservative valuation across all the technology and semiconductor names under its coverage.
It is now selectively ascribing a higher valuation on stocks with good growth prospects stemming from front-runners of trade diversion and equipment and solution providers for next-generation technologies such as EV and higher electrification, medical devices and RE.Meanwhile, Hong Leong Investment Bank (HLIB) Research noted the Bursa Malaysia Technology Index had underperformed the FBM KLCI in 2022 with a 34% fall compared with a 5% slide recorded by the broader index.
It is also anticipating the industry’s average growth to shrink by 4% in 2023, backed by a forecast from World Semiconductor Trade statistics.
“A major sector wide de-rating on the back of a hawkish Fed was coupled with unsatisfactory financial results impacted by waning demand, inventory adjustment and geopolitical conflicts,” the research house said in a recent note.
