Malaysia’s technology sector is entering the early stages of a new growth cycle, supported by improving order visibility, rising demand from artificial intelligence (AI)-related applications and strengthening industry fundamentals, according to HLIB Research.
The brokerage said the first-quarter 2026 earnings season provided further evidence that a broader semiconductor upcycle is taking shape, with leading indicators improving ahead of reported earnings.
HLIB Research maintained its “Overweight” call on the sector, citing structural growth drivers ranging from AI infrastructure investments and semiconductor supply chain diversification to increased localisation of global semiconductor equipment manufacturing in Malaysia.
Signs of Recovery Emerging
The research house noted that earnings performance across the sector improved compared with the previous quarter.
Within HLIB Research’s coverage universe, three companies missed expectations, four met forecasts and one exceeded estimates during the quarter, compared with four misses, three in-line results and one beat in the preceding quarter.
Across a broader universe of 19 technology companies, results also improved, with seven misses, nine in-line performances and three earnings beats.
Most of the earnings disappointments were concentrated among electronics manufacturing services (EMS) companies, while the remaining shortfalls came from Inari Amertron Berhad and SAM Engineering & Equipment (M) Berhad.
Inari’s performance continued to be weighed down by weakness in its radio frequency (RF) segment, while SAM Engineering faced lower aerospace revenue and higher startup costs. However, management guidance from both companies pointed to stronger demand and improved earnings momentum in the second half of 2026.
Companies that outperformed expectations included ViTrox Corporation Berhad, Mi Technovation Berhad and Northeast Group Berhad.
Ringgit Strength No Longer Major Concern
HLIB Research said recent earnings results reinforced its view that foreign exchange movements are becoming less significant for technology companies as the industry enters a stronger growth phase.
While a firmer ringgit has weighed on earnings translations, companies benefiting from robust revenue growth, larger scale and stronger operating leverage have generally been able to absorb the currency impact.
The brokerage believes investors are increasingly focusing on demand trends and earnings growth rather than currency fluctuations.
Valuations Have Re-Rated, But Growth Story Remains Intact
The technology sector has enjoyed a strong rally in 2026, with the Kuala Lumpur Technology Index (KLTEC) gaining approximately 30% year-to-date.
Many technology counters have posted gains ranging from 7% to more than 120%, resulting in forward price-to-earnings valuations approaching the upper end of historical trading ranges.
Despite the sharp re-rating, HLIB Research argued that current valuations remain justified given improving industry fundamentals.
Precision engineering companies are benefiting from a global wafer fabrication equipment (WFE) upcycle, supported by capacity expansion initiatives from major semiconductor equipment manufacturers and growing localisation of global supply chains in Malaysia.
Meanwhile, outsourced semiconductor assembly and test (OSAT) companies continue to benefit from China+1 diversification strategies, a recovery in analogue semiconductor demand and increasing power semiconductor requirements associated with AI-driven data centre investments.
Earnings Upgrades Yet to Fully Materialise
The research house believes the market has yet to fully reflect the earnings upside potential across much of the sector.
Consensus earnings revisions for 2027 remain relatively modest despite improving business conditions.
HLIB Research expects further upgrades for several companies under its coverage, particularly Inari, where it anticipates stronger recovery in the RF segment and accelerating growth in datacom photonics products during the second half of the year.
For Unisem (M) Berhad, the brokerage believes consensus forecasts have not fully incorporated production ramp-ups by key customers and improving pricing trends among analogue semiconductor manufacturers.
ViTrox also continues to offer potential earnings upside through improved product mix and firmer pricing.
Meanwhile, UWC Berhad is expected to benefit from stronger-than-anticipated customer orders and additional customer wins within the semiconductor front-end equipment segment.
AI Investments Continue to Support Sector Outlook
Looking ahead, HLIB Research remains constructive on the sector’s prospects for the second half of 2026.
The brokerage highlighted continued AI infrastructure spending by major US hyperscalers, alongside significant fundraising activity across the broader AI ecosystem involving companies such as OpenAI, Anthropic and SpaceX.
These investments are expected to drive demand for semiconductors, testing equipment, precision engineering components and supporting technologies throughout the supply chain.
However, the research house cautioned that a resurgence of inflationary pressures in the United States remains a key macroeconomic risk.
A more hawkish stance from the Federal Reserve could tighten financial conditions and potentially affect technology sector valuations and AI-related capital expenditure plans.
Structural Growth Themes Remain in Place
HLIB Research said the four major themes underpinning its positive sector outlook remain firmly intact.
These include increasing China+1 relocation activities benefiting OSAT players, deeper localisation of global semiconductor equipment manufacturers in Malaysia, rising optical and power semiconductor demand driven by AI data centres, and improving prospects for chip giant Intel Corporation.
The brokerage’s preferred technology stocks are ITMAX System Berhad, UWC Berhad, Frontken Corporation Berhad and Unisem (M) Berhad.
According to HLIB Research, the sector is now transitioning from a valuation re-rating phase into an earnings upgrade cycle, suggesting that the technology upcycle may still have room to run despite the strong share price performance seen so far this year.
