Malaysian tech sector still have legs to ride semiconductor upcycle

By iFAST Research Team


MALAYSIAN tech stocks have been on a tear year-to-date with the Bursa Technology Index (KLTEC) up 19.5% – extending its strong run from 2020 – which saw the index rallied by an astounding 86.6%, easily outperforming the benchmark KLCI Index along the way.

The tech sector is dominated by semiconductor-related companies where 10 out of the top 11 names of the Bursa Technology Index are involved in certain parts of the semiconductor value chain. Combined, the 10 companies contribute towards about 70% of the total market capitalisation of the Malaysian tech sector.

Fortunes of the tech sector

The semiconductor supply chain involves many different steps and procedures. The semiconductor supply chain starts with higher end integrated circuit (IC) design, IC Manufacturing, IC Assembly & Test before getting placed into electronics and electrical products through electronics manufacturing services (EMS).

Malaysian semiconductor companies are typically at the mid to lower end of the semiconductor value chain such as providing outsourced services and testing (OSAT) for multinationals like Broadcom, Osram, etc or provide equipment or parts for other semiconductor companies or are involved in EMS.

Hence, the fortunes of Malaysian tech sector are highly correlated to global demand for semiconductors. From 2014 to 2020, global semiconductor sales grew by 78%, an equivalent to a compound annual growth rate (CAGR) of 8.6% per annum.

During the same period, Bursa Technology Index rose at 361% (24.4% p.a.) on the back of strong 179% growth in earnings (15.7% p.a.).

Going forward, their growth will continue to be highly dependent on the global outlook and demand for semiconductors which we think will continue to be robust due to a few reasons.

Benefitting from COVID-19

Even though the industry was negatively impacted by COVID-19 during the earlier part of 2020, the pandemic did not derail its recovery; it merely delayed it. After a slight dip in the first half of last year, global semiconductor sales bounced back strongly, notching a gain of 7.7% year-over-year (yoy) in 4Q 2020.

By end-2020, worldwide semiconductor market sales were US$440 bil in 2020 – an increase of 6.8% yoy growth from 2019, according to World Semiconductor Trade Statistics (WSTS). In fact, the finalised number exceeded the previous forecast of US$433 bil estimated in December 2020.

The latest numbers reflect the growth in all major product categories except optoelectronics and discrete semiconductors. The largest growth contributors are logic with 11.1%, followed by sensors (10.7%) and memory (10.4%).

In 2020, the America’s region produced a very strong 21.3% growth but the Europe showed a market decrease of 5.8%, while Japan and Asia Pacific had a single digit positive growth-rate.

We believe that COVID-19 is going to have a positive impact on the semiconductor industry in the long run with the push towards digitalisation and the adoption of new technologies supporting chip demand.

Going forward, WSTS upgraded the forecast for worldwide semiconductor market sales to hit US$488 bil in 2021 or 11.2% yoy growth. The numbers are updated from the previous estimate of US$452 bil and 5.1% yoy growth respectively to truly reflect the better than anticipated demand.

In particular, double-digit growth rates are expected for all geographical regions.

Chip demand buoyed by digitalisation push

As the backbone of all electronic products, the importance of semiconductors and the companies that produce them cannot be understated especially as technology is going to play a much bigger role in our lives than ever before.

As the backbone of all electronic products, semiconductors will be one of the most important sectors of our future economy in which technology is expected to play a much greater role than before.

Right now, the industry is experiencing an unprecedented boom that could possibly be bigger and longer than the preceding one in the years following the dot-com bubble.

Across 2020, businesses have stepped up their digital transformation efforts, accelerating the adoption of digital solutions such as cloud computing, e-commerce, and digital marketing, not only as a response to the pandemic but also as a way to remain competitive in an increasingly digitalised world.

Cloud computing

As demand for digital services skyrockets, cloud service providers such as Amazon have spent billions of dollars each year building new data centres with the bulk of the money used to purchase server chips.

Since 2015, the number of data centres worldwide has increased significantly with nearly 40 new hyperscale data centres being built in the first half of 2020 alone. Looking ahead, cloud service providers already have plans to build close to 200 new data centres over the next couple of years, spelling good news for data centre chipmakers.

Aside from cloud computing, the launch of 5G is another factor that will contribute positively to the demand for semiconductors. With 5G, users can expect to see significant improvements in network speeds and latency, making the overall user experience more enjoyable.

However, before we can enjoy these benefits, hardware such as smartphones and other telecommunication equipment, will have to be upgraded to be 5G-ready. The mass adoption of 5G will mark the beginning of a new hardware upgrade cycle, one that is expected to last for several years.

On average, the silicon content of a 5G smartphone is roughly 30% to 40% higher compared to 4G. This – combined with the fact that 5G chips tend to command higher prices – should benefit chipmakers in the years to come as smartphone manufacturers expand their 5G product portfolio.

We expect this strong global growth to trickle down positively onto local semiconductor companies. Local semiconductor companies have already been increasing capacity to cater to the strong demand and thus are well placed to capture the growth.

Hence, we are expecting earnings for Malaysian tech sector to grow by 31.8%, 17.7% and 12.5% in 2021, 2022 and 2023 respectively.

Based on 2023 earnings, the price to earnings ratio of the tech sector is at 28.7 times which is not exactly considered cheap.

Although valuations seem expensive at the moment, we encourage investors to take a long-term view on the semiconductor industry given the strong upcycle in the semiconductor demand which we believe would continue in next decade driven by rapid digitalisation and adoption of new technologies such as cloud computing and 5G. – April 5, 2021


iFAST Capital Sdn Bhd provides a comprehensive range of services such as assisting in dealing, investment administration, research support, IT services and backroom functions to financial planners.

The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.

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