KUALA LUMPUR (Aug 17): Ahead of corporations announcing their second-quarter (2Q) earnings, analysts have mixed expectations, as some are optimistic about a steady performance, and others projecting continued weakness from the preceding quarter.

Areca Capital Sdn Bhd chief executive officer Danny Wong expects persistent weakness in 2Q earnings, mainly due to the looming threat of China's economic slowdown and its far-reaching implications.

“We expect that 2Q will not see any much improvement from 1Q. There were still weaknesses in 2Q, mostly because of China’s slowdown, which we think will be prolonged into the second half of the year,” Wong told The Edge.

On the other hand, Rakuten Trade Sdn Bhd head of research Kenny Yee expects 2Q earnings to be little different from the previous preceding quarter, as there were no significant changes within the current economic environment.

“Usually, in 2Q, there will be not much excitement, and I think [2Q earnings] will be maintained [from the previous quarter]. Overall this year, we are still expecting some decent earnings growth for corporates,” Yee said.

While 2Q earnings may provide some hints as to how corporates may perform in the second half of the year, analysts do not expect the impact on market sentiment to be as pronounced for the rest of the year.

“There will be some effect from the 2Q earnings, since our market has been trading at a very low valuation already, and we have been seeing a consistent inflow of foreign funds over the past few weeks.

“But if some of the earnings come within expectations, that will be a bonus, but I don't think they will play a major part in determining the market direction,” said Yee.

Wong said several sectors might have experienced lower earnings in 2Q as compared to 1Q, as companies were grappling with a weakening ringgit. Even export-oriented companies could see weaker quarterly earnings despite the weaker ringgit, as economic conditions outside of Malaysia remained soft, hurting demand.

"Those companies that are affected by the currency rate might not do well. Some exporters will also be affected — despite the [weaker] ringgit — due to weaknesses elsewhere that affect imports from other countries,” he said.

Among the closely-watched sectors in the unfolding narrative are technology-related companies, especially those in semiconductors.

“We think that global demand for semiconductors is still recovering, and will only fully recover in 3Q or 4Q,” said Wong.

Meanwhile, Yee said the “technology sector faced some headwinds in 2Q, especially those in the chip manufacturing activity”.

However, he said automakers may not be affected, because of high consumer demand aided by the launch of new models.

Some semiconductor companies have released their 2Q results, including ViTrox Corp Bhd, which saw lower profit and revenue year-on-year (y-o-y), amid still languishing customer demand.

ACE-Market-listed SFP Tech Holdings Bhd, on the other hand, bucked the trend, after it recorded higher profit and revenue y-o-y, which were driven by higher revenue and lower expenses, due to the absence of non-recurring initial public offering costs incurred in 2Q.

Analysts view the plantation sector as a “dark horse” due to its potential upward earnings, on the back of steady crude palm oil (CPO) prices. In 1Q, plantation companies delivered lower profits due to lower CPO prices.

“I think the dark horse could be the plantation sector, because CPO [prices] should remain elevated for the rest of this year,” said Yee.

Wong said there were initial concerns over lower CPO prices, which turned worrisome for plantation companies in 1Q.

“Previously, we were worried about the plantation sector, because of lower CPO prices, but CPO prices have regained their momentum, so the risk [for CPO prices] to go down is very low now, so we are slightly positive on plantations," he said.

Plantation companies that have released their 2Q results for this year so far are United Plantations Bhd, Chin Teck Plantations Bhd, Cepatwawasan Group Bhd and Harn Len Corp Bhd.

Most posted improved quarterly earnings, with Chin Teck's significant improvement supported by higher average CPO selling prices, and better sales volumes of fresh fruit bunches and palm kernel.

Banks remain a top sector pick as they are projected to continue on their growth trajectory, riding on rising interest rates. Wong noted that they would "continue doing well in 2Q".

Kenanga Research's recent strategy note shows that it also remains bullish on banks, given their value play and earnings resilience. Apart from banks, it observed that telecommunications companies are also poised for further rerating as and when the roll-out of the market-driven dual network 5G model is firmed up.