Kenanga Research maintained NEUTRAL stance on the technology sector for its medium-term outlook, as it anticipated a gradual recovery in demand in the industry.
“There may be quarter-on-quarter (QoQ) improvement in subsequent quarterly earnings due to low base effect but we deem it premature to warrant a sector-wide upgrade.”
The research house said it do not expect the industry to start the year with a bang, given the seasonally soft first quarter for the sector, after the year-end peak demand period for consumer electronics and automotives in 4QCY23 (which has been slightly underwhelming given the weak global economy).
“We are also mindful of the scheduled plant shutdowns during the long Chinese New Year break, especially in China. As such, we only expect a meaningful recovery in the second half of 2024 (2HCY24),” it said in its Sector Update today (Jan 4).
However, the research house said that there have been green shoots of recovery from the YoY decline in monthly semiconductor sales gradually narrowing from high teens two quarters ago to low single digit in recent months.
It added World Semiconductor Trade Statistics (WSTS), which is a global semiconductor industry data aggregator and forecaster, projects global semiconductor sales to rise 13.1% in CY24 (from a 9.4% contraction estimated for CY23).
“(This will be) driven by increased demand for memory chips (up by 44.8%) and logic ICs (9.6%). Geographically, the Americas (demand expected to increase by 22.3% and Asia Pacific (demand expected to increase by 12%) are expected to lead the recovery in 2024, particularly Asia Pacific, which commands 53% of global sales.”
Meanwhile, it added, Semiconductor Industry Association’s (SIA) data showed month-over-month improvements in sales in July (2.3%), August (1.9%), and September 2023 (1.9%), culminating to a 6.3% QoQ rise in 3QCY23 sales, although the number still eased 4.5% YoY.
“All these point to a bottoming in the industry cycle.”
For the companies under its coverage, Kenanga said Malaysian Pacific Industries Bhd (MPI) (MP; TP: RM27.20), is one of the more resilient global outsourced semiconductor assembly and tests (OSATs) during challenging times and indicated a gradual earnings recovery from the bottom.
“However, the pace remains slow as customers hesitate to commit to large order replenishment, partly due to the industry’s shift to ‘just-in-time’ inventory management from the previous ‘just-in-case’ approach during the pandemic.
“Anticipating this, MPI foresees a delayed breakeven timeline for its China operation in Suzhou, now expected in April 2024 instead of November 2023.
Similarly, UNISEM (Unisem (M) Berhad) (UP; TP: RM2.00) fell short of its guidance twice in a row and anticipates meaningful momentum in the 2HCY24.
“Consequently, companies that recently expanded capacity and workforce are facing increased operating costs and reduced margins due to sub-optimal plant utilisation.
“Elevated electricity costs further contribute to these challenges, although the installation of a photovoltaic system is expected to partially cushion this impact over time,” it said.
On its top picks, Kenanga said it selectively favour stocks with more promising earnings outlook, such as INARI (Inari Amertron Berhad) (OP; TP: RM4.17), which has demonstrated a faster turnaround compared to its peers.
“This is evident in its sequential QoQ growth and the recovery of net margin to more than 20%, contrasting with low single-digit figures seen among peers.”
It added INARI positive outlook is supported by solid order visibility from Customer B, and it anticipates a 5% to 8% surge in radio frequency (RF) content per device.
“The increased RF utilisation rate, surpassing 90% from the recent 80%, indicates a robust performance in the upcoming quarter (despite smartphone supply chain that expected to be constrained and vendors are cautious in capacity planning).
“Despite this, the scenario indicates limited downside risk. In fact, the supply chain might need to respond promptly and increase production if the US smartphone market outperforms expectations even slightly.
“Hence, we anticipate favourable growth prospects for INARI in the current supply-demand dynamics,” it said.
It added: “We like INARI for being the closest proxy to 5G adoption, being highly responsive to the market demand and its significant expansion in China.”
Other than Inari, Kenanga’s other top picks are KGB (Kelington Group Bhd) (OP; TP: RM3.28) for its sizeable order book of RM1.5 billion, being a direct proxy to the front-end wafer fab expansion and strong foothold in multiple markets; and PIE (P.I.E Industrial Berhad) (OP; TP: RM3.80) for its ability to bring new customers into its fold with at least four of them starting to contribute in CY24, its comprehensive skillset and various competitive advantages it enjoys as a unit of Foxconn.
