FILE PHOTO: Semiconductor chips are seen on a printed circuit board in this illustration picture taken February 17, 2023. REUTERS/Florence Lo/Illustration
PETALING JAYA: The prospects of the US Federal Reserve being at the end of its interest rate hiking cycle and revamp of Alibaba Group Holding Ltd have made tech sector stocks attractive but analysts are cautious and expect signs of recovery only in the second half of the year.
They said non-semiconductor players are likely to have better prospects on the back of stable domestic-focused business and the full reopening of borders.
Tradeview Capital chief investment officer Nixon Wong said cost pressures and global geopolitical risks would continue to elevate the risk for earnings to derail further among chip players.
However, the weakening of the ringgit would provide some earnings buffer for tech companies.
“On a valuation perspective, the local tech sector is trading at a five-year average price to earnings ratio, which seems fair but has not reached to an attractive or cheap level compared with the glove sector, whereby valuation was trading at long term trough level at one point before the recent stock price recovery,” he told StarBiz.
Unlike the investors in the glove sector that take average selling prices of gloves as an indicator of potential downcycle bottoming, tech investors look at the industry’s inventory levels to ascertain the end of the downcycle, according to Fortress Capital Asset Management Sdn Bhd chief executive officer Thomas Yong.
“As of the fourth quarter in 2022 (4Q22), the semiconductor inventory day remains elevated at 132 days, well above the historical average of 85 days.
“Additionally, downstream channel and original equipment manufacturers’ inventory days are 23 days higher than usual,” he said.
Nevertheless, the share prices of tech stocks have risen above their lows six to nine months ago despite relatively weak fundamentals, Yong added.
“This indicates that investors are anticipating a strong recovery in 2H23, which is currently the consensus view for the semiconductor industry.
“However, if data points suggest a less significant rebound in 2H23, such as a slower or weaker than expected industry recovery, the market may see a wave of expectation readjustments,” he said.
Wong said a more reasonable investment strategy is for investors to start gaining on any potential weakness in tech counters near 2H23 or post local earnings reporting season in May.
“This will coincide with consensus projection on rate hike cycle peaking following the Fed meeting in May.
“We may see some recovery in the already weakened tech sector in the short term, as the Fed is expected to slow down or cut rate hikes, after its meeting in May.
“However if inflation stays stubbornly high, this will call for higher and more interest rate hikes which will not bode well with the overall growth sector, capping the upside potential.
“We would prefer tech stocks that have exposure in the automotive, data centres, servers, software, and artificial intelligence sectors which may see relatively stable business growth than consumer-electronic related companies,” he said.
RHB Research’s top tech picks include CTOS Digital Bhd
, Unisem Group, and JHM Consolidation Bhd.
The research house, which lowered its earnings estimates for the tech sector by 3.1%, stated the industry’s aggregate net profit for 4Q22 contracted by 7% year-on-year and was flattish on a quarter-on-quarter basis.
“We have a mixture of hits and misses, with better-than-expected performance coming from Datasonic Group, Globetronics Technology and Coraza Integrated Technology while Malaysian Pacific Industries underperformed.
“We advise investors to seek names with resilient earnings profiles and an eye for growth at undemanding valuation.
“Exposure to automotive, servers, and high-performance computing is preferred given the relatively stable demand while monitoring for signs of bottoming out,” said the research house in a recent report.
The recovery of the semiconductor sector will potentially be delayed given new export regulations imposed by the United States on China restricting the supply of advanced chips and equipment, RHB Research added.
