BIMB Securities has kept its “neutral” call on the semiconductor sector.
PETALING JAYA: BIMB Securities has a “cautious” stand on local outsourced semiconductor assembly and test (Osat) companies outlook due to mounting challenges including the escalating US-China trade war, rising operating costs and prolonged competitive pricing pressures that could further compress margins.
With the Nasdaq in a correction phase and the reciprocal tariffs by Washington set to take force in April, Bursa Malaysia’s tech index is near five-year lows on risk-off sentiment among investors.
Local Osat companies are also continuing to struggle in the fourth quarter of 2024 (4Q24) due to their limited exposure to the artificial intelligence or AI-based chip segment, which drove the growth in the semiconductor sales in 2024.
In addition, the major concern for the semiconductor sector is it may now be seeing early signs of a weaker demand cycle as global sales in January declined on a month-on-month (m-o-m) basis by 1.7% despite growing by 17.9% year-on-year (y-o-y) to US$56.5bil.
“This marked the second consecutive monthly decline and may raise concern about a potential peak in the semiconductor upcycle.
“We attribute this as seasonal weakness, since January typically sees weaker m-o-m growth, given the high-base effect from year-end inventory build-up,” the research house said in a sector report.
Using past data as reference, the BIMB Securities noted a tech full-cycle spans around three to four years, with peaks occurring within the second or third year.
It added the current cycle began in 2023 and a peak could be formed sometime between 2025 and 2026 which coincides with the ongoing US-China trade tensions that could lead to global supply chain disruptions, rising operational costs, higher inflationary pressures, and a potential slowdown in end-demand.
The research house noted Malaysia’s recent strategic partnership with UK-based chip design firm Arm Holdings Ltd to move up the value chain could help solidify Malaysia’s role as a key hub in the global chip market just as Sino-US tensions start to rise again.
“Malaysia’s partnership with Arm signals a long-term commitment to deepening its semiconductor capabilities and establishing itself as a leading semiconductor design and production center in the region.
“Although we expect a positive spillover effect across the semiconductor value chain including the Osat players, it could only be seen over the longer run,” it added.
Despite the downside risks, BIMB Securities has kept its “neutral” call on the sector but has adjusted its valuation methodology to capture a more normalised semiconductor cycle.
“We believe this framework better reflects the sector’s cyclical nature and incorporates a more conservative downside risk assessment,” it stated.
