Hong Leong Investment Bank has reiterated an “Overweight” recommendation on the electronics sector and remains optimistic that the outsourcing trend will persist with the combination of a trade war and WFH that will continue to benefit manufacturing players.
It said that despite some headwinds from prolonged supply chain disruptions, the lifting of restrictions domestically and abroad is expected to further improve demand conditions and support manufacturing activity in Malaysia.
The Investment Bank said that according to the Semiconductor Industry Association (SIA), in Oct 2021 global semiconductor sales gained 24.0% YoY to USD48.8billion.
It is said that Semiconductors or integrated circuits are usually not useful on a standalone basis instead almost all are eventually assembled into end-user products.
It said that on the back of this strong correlation, the EMS market is expected to remain robust, taking a cue from the strong YTD semiconductor market growth registered and we expect an even more upbeat prospect moving forward.
It said with the still frosty relations between US and China, companies continue to hedge their risks by diversifying the supply chain.
“From our channel checks, our local EMS players have been getting requests for quotations buoyed by increasing order diversions. We expect discussions to gather speed with borders reopening, and these should serve as growth catalysts over the longer term,” it said.
On stock Picks, HLIB said that it has Buy calls for both VSI (TP: RM1.78) and Uchi (TP: RM3.83) and maintaining a “Hold” call for PMM with an unchanged TP of RM25.70.
It said that its preferred pick for the sector is VSI given its healthy order outlook brought by the steady demand of consumer electronic products; and margin expansion from customer diversification efforts. “As the biggest EMS player in Malaysia with solid track record, we opine that VSI is a prime beneficiary from the intensifying trade diversion theme,” HLIB said.
