Semiconductor downcycle to extend for most of 2023

PETALING JAYA: The downcycle in the semiconductor sector is expected to continue for the most part of 2023, amid cooling demand from the computer, communications, and consumer markets, coupled with slowing global economic growth and inflationary pressures.

According to TA Research the industry had in the past decade observed four upcycles which ran from 20 to 32 months (average of 28 months), and three downcycles which lasted a shorter 13 to 16 months (average of 14 months).

The World Semiconductor Trade Statistics organisation in November forecast global semiconductor sales to have expanded by 4.4% to a new high of US$580.1bil (RM2.54 trillion) in 2022 and expects sales to decline by 4.1% to US$556.6bil (RM2.43 trillion) in 2023.

In terms of equipment billings, the Semi organisation projected global semiconductor manufacturing equipment sales to grow 5.9% to US$108.5bil (RM474.3bil) in 2022, marking the third consecutive year of record revenue.

Thereafter, sales are expected to contract by nearly 16% to US$91.2bil (RM398.6bil) in 2023 before staging a rebound in 2024 driven by both the front-end and back-end segments.

Robust spending is expected, despite anticipations for lower chip sales in 2023 amid cooling end-demand and inventory digestion, due to the semiconductor industry’s push to address medium to long term demand from the slew of emerging applications including 5G, artificial intelligence, high-performance computing, the Internet of Things, and vehicle electrification, among others.

Based on its estimated 2023 financial results, TA Research has “buy” calls on Malaysian Pacific Industries Bhd (MPI) with a target price (TP) of RM35.60 a share based on 25 times price-earnings (PE), as well as Inari Amertron Bhd with a TP of RM3 a share based on 29 times PE.

The research unit has “sell” calls on Unisem (M) Bhd with a TP of RM2.40 based on 20 times PE of estimated 2023 results, and Elsoft Research Bhd with a TP of 61 sen based on 23 times PE.

It upgraded Inari from “hold” to “buy” in view of its improved risk reward potential following recent share price weakness, sparked by revived concerns on Apple’s push to replace chips used in its devices with homegrown components.

The revived concerns follow news of Apple’s plans to replace Broadcom’s Wi-Fi and Bluetooth chips with an in-house design, although the research unit does not expect Inari to be affected given that its involvement within the supply chain is on radio frequency chips. TA Research continues to favour players that offer near-term resilience and mid-to-long term growth prospects, backed by their strong sales pipeline with exposure to secular trends, expansion plans, and robust balance sheet.

Its top pick is MPI due to the group’s automotive-centric strategy with the group capitalising on the promising prospects for content gains within vehicles, catalysed by the global transition to electric vehicles.

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