WHILE Malaysia’s tech sector is still benefitting from a twin supply-demand shock alongside the supply chain reconfiguration, the industry risk-reward factor has become less compelling with valuations pricing in strong earnings expectations.
While semiconductor shipments reached all-time highs in 3Q 2021, UOB Kay Hian Research saw a moderation in growth since July (after peaking in June at >30%) with the latest growth of 24% year-on-year (yoy) in October.
“While one could attribute the moderation to supply chain disruptions (bottlenecks and shipment delays), the previous consecutive yoy growths peaked in the fifth to 18th month over the past 15 years while the current cycle’s consecutive yoy growth peaked in the 19th month before the moderation in the 18th month (July),” observed analyst Desmond Chong in a sector update.
“The latest product sales forecast for 2022 by the World Semiconductor Trade Statistics (WSTS) reaffirms this view.”
Nevertheless, global semiconductor sales are expected to accelerate by 10.1% yoy (revised up from 8.8%) even after the strong 25.1% yoy growth in 2021, according to WSTS. This reflects decent growth across all segments, led by memory (18.4%) followed by sensors (+6%) and logic (+8.7%).
With valuations pricing in strong earnings expectations as evident from strong share price performances across the board, UOB Kay Hian Research noted that the forward price-to-earnings (PE) ratio valuations of outsourced semiconductor assembly and test (OSAT) and semiconductor production equipment (SPE) players are trading close to +2SD (standard devation) to their five-year mean levels which are also near the previous peak valuations of between +2SD and +2.5SD.
“Tactically, we advocate that investors buy on weakness following the less compelling risk-reward industry valuations and strong earnings expectations as the precedent performance shows that stretched valuations do not last more than six months,” noted the research house.
“Meanwhile, with the stubbornly high inflation numbers (and hence, rising bond yields), high valuations could be eroded as investors typically turn more risk averse by rotating out of high-PE stocks amid increased inflation fears.”
As a whole, UOB Kay Hian Research maintained its “market weight” on the tech sector by advocating a cherry-picking approach for structural growth themes.
“Our strategy prescription is premised on stocks with lower PE to growth (PEG) ratios, good growth prospects alongside the respective bellwether position in its sub-segments,” suggested the research house.
“We like Inari Amerton Bhd and Greatech Technology Bhd for their unique value propositions and alpha growths as well as VS Industry Bhd for its undemanding valuation vs its superior growth profile.” – Dec 8, 2021
