The Semiconductor market, on the whole, has turned more upbeat on the sector, but given the recent run-up in tech stocks, CGSCIMB believes the market is of the view that the industry is on the verge of an inflection, with expectations of a strong recovery into 2H23F.
CGSCIMB, in its Sector Note release today (Aug 17 ) opines that a meaningful industry recovery may happen only in 2024F as the current inventory glut could take some time to reverse.
This is contributed by the exuberant capacity expansion undertaken by industry players over the past two years, combined with softening consumer sentiment, and further amplified by the U.S.-China semiconductor tussle.
“In our view, macro demand remains generally weak despite entering a seasonally stronger period in 2H23F with potential upside earnings surprises quite unlikely as the firm forecasts aggregate sector earnings to grow by 29% in CY24F, as we build in a recovery in demand-supply conditions following a relatively weak 2023F,” the firm said.
That said, CGSCIMB finds that the risk of further cuts to earnings expectations is still being overlooked, even with 1QCY23 results largely falling short of Bloomberg consensus expectations and unlikely to catch up given the weak macro environment alluded to above, in our view.
While CGSCIMB does not discount structural tailwinds from rising EV adoption, AI server spending and global 5G rollout, the firm thinks that the exposure of the Malaysian technology sector to these areas is not significant enough to warrant meaningful upward earnings revisions.
The ‘Made in China 2025’ and ‘China+1’ policies, while generally benefiting the local Malaysian players, are also being negatively impacted by the near-term US-China chip war.
CGSCIMB advises traders to be selective and maintains their Underweight stance on the tech sector, premised on elevated valuations despite building in fairly aggressive growth expectations, as the sector is trading at 26.0x rolling 12M forward P/E, which is well above the pre-pandemic average of 17x (individual stocks are trading at north of 30x).
The firm believes this likely already factors in expectations of a sharp recovery as soon as 2H23F.
Top sells cited are MPI and Unisem due to limited valuation support and potential for further earnings disappointments while the top pick is Genetec, premised on its sizeable exposure to the high-growth EV and energy storage space and more reasonable valuations.
CGSCIMB also downgrades Inari to Hold as they think current valuations adequately reflect its RF business recovery and earnings upside from new business avenues. Uchitec also provides the highest yield in the sector at 6-6.5% for FY23-25F given its solid FCF generation and sustained payouts exceeding 90%.
Industry upside risks are: 1) stronger-than-expected demand recovery, 2) NPIs translating into sizeable earnings upside, and 3) easing US-China chip war, CGSCIMB said.
