ROBUST macro indicators for the electrical & electronic (E&E) manufacturing sector growth, strong export trends to the US and European Union (EU) markets coupled with encouraging numbers from semiconductor sales will continue to provide a rosy outlook for electronic manufactures.
These factors provide Hong Leong Investment Bank (HLIB) Research optimism that the current outsourcing trend will persist with the combination of trade diversion and work from home (WFH) that will continue to benefit domestic manufacturing players.
“Other than top line expansion, we reckon potential margin upside from further vertical integration and production efficiency will drive earnings growth,” projected analyst Syifaa’ Mahsuri Ismail in a review of the electronics manufacturing sector.
Based on the April 2021 Industrial Production Index (IPI) data by the Department of Statistics, manufacturing production has been in expansionary mode for the past 11 months and having staged a commendable rebound of +68% year-on-year (yoy) driven by recovery and low base effect with E&E growing by +70.1% yoy.
Exports surged by +63% yoy in April with export to most major markets strengthening further. Triple digit growth was recorded to US (+128.6% yoy) and +58.6% yoy to the EU.
“Note that both of these regions are the main revenue contributors for VS Industry Bhd (the US contributed 33% of its FY2020 revenue) and Uchi Technologies Bhd (Europe dominates with 97% of FY2020 turnover),” justified HLIB Research.
“We have an “overweight” stance on the sector with VSI (“buy”; target price: RM1.77) as our top pick.”
In addition to strong correlation between the semiconductor sales and the electronic manufacturing sales (EMS) market, HLIB Research foresees sustainable demand for consumer electronics.
Citing a Deloitte survey, the research house said the COVID-19 pandemic has bolstered the use of gadgets in average American households to 25 connected devices, including laptops, smartphones, streaming devices, smart TVs, headphones and gaming consoles.
“With the still frosty relations between the US and China, many companies are continuing to hedge its risk by diversifying their supply chain,” observed HLIB Research.
“From our channel checks, our local EMS players have been getting numerous requests for quotations buoyed by increasing order diversions. Although still at early stage of discussions, these should serve as growth catalysts over the longer term.” – July 12, 2021
