Semiconductor chips are seen on a printed circuit board in this illustration picture taken February 17, 2023. REUTERS/Florence Lo/Illustration
PETALING JAYA: The outlook for the technology (tech) sector appears increasingly cautious heading into 2026, even as investors anticipate greater stability after a volatile year.
The third quarter of financial year 2025 (3Q25) earnings cycle had already indicated that the sector’s earlier momentum had dissipated.
According to Hong Leong Investment Bank (HLIB) Research, the 3Q25 reporting season for Malaysian technology and electronics manufacturing services (EMS) companies showed broad-based weakness with earnings momentum stalling across the sector.
“Of the 15 companies under review, nine missed consensus expectations, four were in line, and only two delivered beats,” the research house said, noting that the trend marked a deterioration from the prior quarter.
HLIB Research said the 3Q25 results reflected mounting economic pressures.
“We believe this outcome clearly demonstrates that macro headwinds we flagged earlier in the year are now becoming more visibly evident in corporate earnings.”
These headwinds included a weaker US dollar, tariff-related disruptions, and insufficient exposure to artificial intelligence-driven demand, all of which weighed on revenues and profitability.
HLIB Research reiterated its “neutral” stance on the sector, recommending investors to stay selective.
It continued to favour domestic-facing names and highlighted ITMax System Bhd
as its top pick, maintaining a “buy” rating with a target price (TP) of RM5.71.
In the hardware segment, the research house kept its preference for companies linked to foundries and front-end equipment, reiterating “buy” calls on Frontken Corp Bhd (TP RM4.95) and UWC Bhd (TP RM4.20).
Reflecting on the earlier rally, HLIB Research said: “In hindsight, the 2Q25 season in August marked a near-perfect alignment of supportive factors – decent corporate earnings, more tariff clarity, and optimism around artificial intelligence (AI) created a rising-tide dynamic that lifted the entire sector.”
The research house added that the latest season broke that stride, saying, “Weak results, combined with a noticeably less upbeat narrative around AI, have shifted investor sentiment from broad-based optimism to a more selective risk-off stance.”
Guidance from corporates had also softened, with it noting that 4Q25 or the first half of financial year 2026 (1H26) looked more like a transition period before a more material recovery in 2H26.
Among individual companies, Malaysia Pacific Industries Bhd and Unisem Bhd delivered solid revenue growth backed by demand from customers such as Infineon Technologies and Monolithic Power Systems.
Their performances reinforced Malaysia’s reputation as a neutral and strategically positioned manufacturing hub benefitting from the China Plus One diversification wave.
Unisem’s margin shortfall was attributed to execution issues expected to improve over subsequent quarters.
Inari Amertron Bhd’s weaker showing was tied to radio-frequency allocation losses despite stable underlying demand from a major US smartphone customer.
Equipment makers produced a mixed set of results.
Vitrox Corp Bhd and MI Technovation Bhd were the only firms to exceed expectations, supported by sustained demand from electronics manufacturing services clients and strong investment into advanced packaging across outsourced semiconductor assembly and test providers and integrated device manufacturers.
Most peers missed forecasts amid softer orders and slower project execution, with margins hurt by foreign exchange effects, start-up expenses and higher effective tax rates.
Electronics manufacturing services players also faced a tough quarter, with several reporting markedly weaker revenue contributions from key customers despite reduced expectations heading into the results season.
