KUALA LUMPUR (Jan 4): Kenanga Research holds a "neutral" position on the technology sector despite a projected global upturn with a 13.1% increase in global semiconductor sales, as the decreasing trend of contraction suggests a cycle bottom and meaningful recovery by the second half of 2024 (2H2024).
Kenanga in a noted on Thursday cited the Worldwide Semiconductor Trade Statistics forecast of a 13.1% growth in global semiconductor sales for 2024 led by memory chips and logic integrated circuits, especially in the Americas and Asia-Pacific.
It noted that recent data indicates a pattern of contraction in semiconductor sales, but this has been progressively decreasing, implying that the cycle is bottoming in the technology industry.
However, Kenanga still anticipates the first quarter of 2024 (1Q2024) to be seasonally slow, after peak demand periods in 4Q2023, while scheduled plant shutdowns during the Chinese New Year are also expected to affect the pace of recovery.
“As such, we believe a meaningful recovery will more likely take place in 2H2024,” it added.
Among Kenanga’s stock picks, Malaysian Pacific Industries Bhd (MPI) has demonstrated gradual earnings recovery. The research house has a "market perform" call on the stock, with a target price (TP) of RM27.20.
“However, the pace remains slow, as customers hesitate to commit to large order replenishment, partly due to the industry's shift to 'just-in-time' inventory management from the previous 'just-in-case' approach during the [Covid-19] pandemic.
"Anticipating this, MPI foresees a delayed break-even timeline for its Chinese operation in Suzhou, now expected in April 2024 instead of November 2023,” it said.
Similarly, the research house said Unisem (M) Bhd (underperform; TP: RM2) fell short of its guidance twice in a row, but it anticipates meaningful momentum in 2H2024.
Kenanga favours stocks like Inari Amertron Bhd (outperform; TP: RM4.17), which has demonstrated a faster turnaround compared to its peers.
“This is evident from its sequential quarter-on-quarter growth and the recovery of its net margin to over 20%, contrasting with low single-digit figures seen among its peers.
“Inari's positive outlook is supported by solid order visibility from Customer B, and it anticipates a 5%-8% surge in radio frequency content per device,” it said.
It added that despite constraints in the smartphone supply chain, chances of downside risk are limited, adding that if the US smartphone market exceeds expectations, it can lead to increased production and favourable growth.
Kenanga also named Kelington Group Bhd (outperform; TP: RM3.28) and PIE Industrial Bhd (outperform; TP: RM3.80) as other favourites, due to their adaptiveness to market demand, robust earning visibility, and diversified client bases.
Despite a structural shift towards electrification in the automotive semiconductor sector, Kenangan cautioned that high inflation and interest rates present as ongoing challenges.
The house said that while associations like the China Association of Automobile Manufacturers (CAAM) and European Automobile Manufacturers’ Association (ACEA) report stable car sales growth, signals of an early slowdown from Western customers may impact recovery, particularly in China. This has led Kenanga to adopt a cautious stance on automotive semiconductor companies like D&O Green Technologies Bhd (underperform; TP: RM2.30) and JHM Consolidation Bhd (market perform; TP: 70 sen).
Kenanga also noted that electronics manufacturing services players need a diversified portfolio to sustain growth, and companies with exposure to industrial products are expected to outperform those relying mainly on consumer electronics.
As such, the research house kept a positive outlook on PIE, which has added new customers, and expects new projects to contribute significantly once mass production begins in 2024.
Meanwhile, despite optimism about NationGate Holdings Bhd's (outperform; TP: RM1.70) long-term prospects, its immediate earnings may be unimpressive, due to a delay in a key customer's relocation from China to Malaysia, according to Kenanga.