Bursa’s tech sector gets downgraded as it enters a cold winter phase

RHB Research has downgraded Bursa Malaysia’s technology sector to “neutral” from “overweight” after factoring in the semiconductor sector’s weakening demand which is likely to persist notwithstanding the gains from strengthening of the greenback and growth in certain sub-segments.

The research house expects the US Federal Reserve’s extended hawkish pivot to continue dampening sentiment on equity valuation as a whole – more so for high-growth sectors like technology.

“Key events that may alter our view include a demand surge post China’s re-opening, softening of inflation, and a further slowdown in demand amid recession fears,” analyst Lee Meng Horng pointed out in a tech sector review.

“With the sector trading below its five-year mean, the potential derailing of forward earnings projections from various uncertainties in the global macroeconomic scene cannot be discounted should the slowdown of the semiconductor sector persist.”

RHB Research further expects the tech sector valuation to be capped by the rising bond yield amid the Fed’s hawkish interest rate outlook. Nevertheless, it expects the solid balance sheet position and strong US dollar would cushion the slowdown given all semiconductor-related players are net beneficiaries.

“The CHIPS and Science Act of 2022 may deepen the divergence of supply chains into the US vs China in the next decade (unless there is significant change in policies from both economic superpowers), potentially causing an overcapacity situation and cost escalation in the long run,” cautioned the research house.

“Fortunately, Malaysia – a neutral ground in Southeast Asia – stands to benefit from supply chain and relocation efforts by multinational corporations (MNCs) to diversify out of China.”

Moving forward, RHB Research recommended investors to seek names with exposure to front-end players as the outlook remains solid, hence benefiting engineering support services players.

“Orders for chips related to automotive, server, and high performance computing remains solid, benefiting players that focus on these sub-segments as weaknesses are prevalent in consumer products, smartphones, and Internet of Things (IoT) devices where inventory correction is taking place.”

Top pick by the research house includes (i) Malaysian Pacific Industries Bhd (MPI) for its exposure to automotive industry and electric vehicle (EV), capacity expansion, and adoption of new advance packaging technology; and (ii) CTOS Digital Bhd  for its domestic-focused profile, leading position and prospects mirroring growing demand for various digital solutions and analytical insights.

For small cap, RHB Research likes Coraza Integrated Technology Bhd which is expected to benefit from robust orders and exposure to front-end equipment players. – Oct 12, 2022

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