PETALING JAYA: The key bottleneck faced by Penang-based technology companies is capacity constraints rather than demand.
This is affecting the sector’s near-term growth, according to Phillip Capital Research.
The research house recently met 10 companies during its Penang trip, including firms in segments like metal fabrication, aluminium processing, test equipment, engineering support services, environmental technology and electronics manufacturing services.
Elaborating on supply constraints, it said long equipment and material lead times are limiting production ramp-ups and order fulfilment.
Computer Numerical Control (CNC) machines typically require six to 18 months, while raw materials take five to seven months to procure.
Companies are bringing forward machine orders and capital expenditure, qualifying alternative suppliers and building material buffers, although shortages in power supplies, alloy and copper components persist.
In some cases, overseas suppliers cannot meet full order quantities, leaving local technology companies unable to fulfil outstanding orders.
“On labour costs, we see limited nearterm impact from the minimum wage hike, as operators are generally paid above the minimum wage and higher volumes and pricing adjustments should help offset incremental costs.”
Phillip Capital Research said growth visibility has strengthened across the sector, with most companies reporting improving demand trends and expanding customer pipelines.
Order books and purchase orders are at or near record levels, with delivery schedules extending through 2027 and, in some cases, into 2028.
“Demand is underpinned by four key drivers: artificial intelligence chip and advanced packaging programmes, data centre buildout, wafer fabrication equipment (WFE) capacity expansion coupled with the relocation of front-end equipment manufacturing into Malaysia.
“High utilisation rates, ranging from 60% to 70% at less-utilised facilities to near-full capacity at others, with several companies already running second shifts, reflecting strong current demand.”
Overall, Phillip Capital Research has reiterated its “neutral” stance on the technology sector.
Although order books have strengthened and management remains confident about demand, it pointed out that near-term earnings remain subject to supply constraints, slower capacity ramp-ups and initial margin dilution from new capital expenditure.
For sector picks, it prefers companies with direct artificial intelligence and data centre exposure with clear earnings visibility.
“Our preferred picks are Frontken Corp Bhd
for its unique frontend semiconductor exposure and direct linkage to TSMC, and UWC Bhd for its strengthening order book visibility and rising exposure to front-end (FE) semiconductor opportunities.
“Key risks: global economic slowdown, rising input costs, US dollar-ringgit depreciation, and reescalation of the United States and Iran conflict disrupting global supply chains.”
On UWC, Phillip Capital Research said its appointment as the first Asian contract manufacturer for a new US WFE customer relocating production to Asia marks a potentially significant growth opportunity.
Initial involvement includes deposition and wafer inspection equipment, with first shipments scheduled for March 2027 and volumes projected to reach 10 to 15 units per quarter after capacity expansion.
Early customer support includes RM40mil materials and RM10mil test equipment consigned to UWC.
“We see this as an opportunity for UWC to move into more complex, higher-value WFE manufacturing, with execution and localisation key to realising the earnings potential.”
UWC has an outstanding order book of RM350mil, 90% of which is semiconductor-related.
FE offers the stronger growth outlook, with management targeting a 70% to 80% mix within three years, versus 45% currently.
