KUALA LUMPUR (Jan 8): Local technology stocks are expected to see a double-digit compounded earnings growth till 2026, amid increased investments in artificial intelligence (AI), said CIMB Securities.

The technology sector's revenue is projected to grow at an average annual rate of 13% from 2025 to 2026, compared with 1% in 2024, driven by a rebound in semiconductor industry demand, supply chain diversification to Asean, and inventory replenishment, the research house said.

Automated test equipment (ATE) is expected to lead with a 41% year-on-year profit growth in 2025, followed by outsourced semiconductor assembly and test (OSAT) at 26% and electronics manufacturing services (EMS) at 23%.

"We project the Malaysian technology sector to achieve a three-year (2023 to 2026) core net profit compound annual growth rate of 17%," CIMB Securities said in a note on Wednesday.

The research house, however, believes the OSAT and EMS segments are likely to outperform the ATE segment in the first half of 2025, as the semiconductor and electrical and electronics (E&E) supply chains are expected to focus on increasing capacity utilisation and digesting existing capacity before entering a new expansion cycle.

CIMB Securities, maintaining its 'overweight' stance on the tech sector, said its top picks include Malaysian Pacific Industries Bhd (KL:MPI), Genetec Technology Bhd (KL:GENETEC) and VS Industry Bhd (KL:VS).

It likes MPI for its exposure to the OSAT sector, which could benefit from higher capital expenditure by cloud service providers driven by generative AI and a recovery in the server market.

For Genetec, the research house expects the stock to benefit from growth in electric vehicle (EV) assembly and components manufacturing, driven by a leading North American EV client.

"In the EMS segment, we like VSI as a proxy for supply chain diversification, owing to its growing manufacturing footprint across Southeast Asia and margin-accretive potential from its vertical integration initiatives," CIMB Securities noted.

CIMB also highlighted downside risks, including delays in semiconductor demand recovery, insufficient National Semiconductor Strategy (NSS) funding, geopolitical tensions, labour shortages and the appreciation of the ringgit against the US dollar.