TIME to be gung-ho on tech names now? Be selective, so cautioned UOB Kay Hian Research who observed that the Bursa Malaysia Technology Index has weakened by 40% since it downgraded the sector to “market weight” (from “overweight”) on Dec 8 last year.
Even as valuation appears more appealing, the research house urged investors to be selective as it sees downside risk on earnings which might not have been fully accounted for following empirical evidences on slower demand and prudent guidance from global tech giants and original equipment manufacturers (OEMs).
“Maintain ‘market weight’ on a cherry-picking approach to structural growth themes. Note that we have ascribed a lower valuation across all the tech/semiconductor names under our coverage,” shared analyst Desmond Chong in a technology sector update.
“Our strategy prescription is premised on stocks with reasonable valuations and good growth prospects stemming from (i) front-runners of trade diversion; and (ii) equipment/solution providers for next-generation technologies (ie electric vehicle [EV]/higher electrification, medical devices and renewable energy).”
On this note, UOB Kay Hian said it likes companies with strong order book backlog such as Greatech Technology Bhd, Pentamaster Corporation Bhd, Coraza Integrated Technology Bhd and SFP Tech Holdings Bhd for their unique value propositions, alpha growths and strong demand visibility.
“We also like VS Industry Bhd for its undemanding valuation vs superior growth profile,” noted the research house.
While most major categories of semiconductor products are expected to see high-teens year-on-year (yoy) growth in 2022, UOB Kay Hian Research said slower forecasts were pencilled in for 2023, particularly from the memory and sensor segments.
“We believe this could stem from the expectation of demand slowdown in the consumer electronics segment. Note that 1Q 2022 worldwide smartphone shipments declined 8.8% yoy and marked the third consecutive quarter of decline,” projected the research house.
“Additionally, Samsung which has the highest share of smartphone shipment in 1Q 2022 had reportedly temporarily halted new procurement orders in response to growing inventories while other major OEMs have also been rumoured to cut orders.”
While higher semiconductor content following the proliferation of EV and autonomous driving is still expected to drive growth (Gartner forecasts 19% global automobile semiconductor sales growth in 2022), headwinds could be seen from the consumer electronics segment stemming from the weakening demand and ongoing supply chain constraints (IDC forecasted -3.5% smartphone shipment growth in 2022).
“Contrary to the recent broad-industry news of demand slowdown, a cursory check on Bloomberg consensus forecast on local tech names suggests that the quantum of earnings revision is barely minimal over the past six months,” added UOB Kay Hian Research. – July 15, 2022
