KUALA LUMPUR (Sept 13): RHB Investment Bank Research (RHB IB) has maintained its “neutral” rating of the technology sector, and said news of the iPhone ban in China and the lack of novelty excitement for the iPhone 15 may spell headwinds for sales volumes, especially in China (likely exacerbated by patriotic sensibilities and Huawei’s comeback).
In a sector update on Wednesday, the research house said it stays cautious about the overall chip sector, on a protracted slowdown and high valuations.
“We prefer domestic-focused names, given the relatively stable demand, and advocate a beta play to track the global chip sector run-up.
“Also, look out for thematic play of potential beneficiaries of Huawei’s supply chain,” it said.
RHB IB said the second-quarter results for the sector were mostly in line, following some pre-emptive earnings estimate cuts earlier.
Nonetheless, it said three out of nine companies missed expectations — Unisem (M) Bhd, JHM Consolidation Bhd, and Coraza Integrated Technology Bhd — due to slower demand and the loss of economies of scale, coupled with higher input cost.
Meanwhile, it said Malaysian Pacific Industries Bhd came in above expectations on better margins, boosted by a strong US dollar.
The research house said the market is now aggressively pricing in high growth prospects for 2024 and potential new customer wins, with Bursa Malaysia's Technology Index trading at 25 times price-earnings versus an estimated 27.1% growth in 2024, after the recent round of cuts in consensus earnings forecasts.
However, it said investor sentiment had improved on potential new opportunities and clientele, amid expectations that US tightening of monetary policy is close to peaking.
“We note the sector’s unappealing valuations, as a full-blown recovery remains some way off, and some stocks’ valuations are still well above pre-pandemic levels.
“Solid balance sheets and the sturdy US dollar should help provide some level of cushion,” it said.
RHB IB said it likes CTOS Digital Bhd for its domestic-focused business, leading position, and growth prospects for its digital solutions and financial technology.
“Among smaller caps, we like Datasonic Group Bhd, as we expect sustained strong demand for its solutions in national security projects and potential new project wins.
“For semiconductor exposure, we recommend a beta play in Inari Amertron Bhd as a proxy to the industry, given its strong liquidity and relatively large market capitalisation.
“Sector upside/downside risks: i) stronger/softer consumer demand; ii) favourable/unfavourable foreign exchange rates; iii) obsolescence of technology; iv) new customer wins/loss of clients; and v) improving/intensifying geopolitical tensions,” it said.