KUALA LUMPUR (Jan 10): The US restriction of artificial intelligence (AI) chip exports may lead to a sector-wide slowdown, affecting the entire supply chain in the semiconductor industry, according to RHB Investment Bank.
The research house said companies producing semiconductor equipment, including Vitrox Corporation Bhd (KL:VITROX), Mi Technovation Bhd (KL:MI) and Pentamaster Corporation Bhd (KL:PENTA), as well as Frontken Corporation Bhd (KL:FRONTKN), which supports the largest fabrication plant, may experience slower sales.
Engineering support companies such as UWC Bhd (KL:UWC), SAM Engineering & Equipment (M) Bhd (KL:SAM), and Coraza Integrated Technology Bhd (KL:CORAZA) may also see reduced demand, it added.
RHB noted potential impacts on supply chains involved in the ecosystem of graphic processing units (GPUs) and central processing units.
It said Nationgate Holdings Bhd (KL:NATGATE) and PIE Industrial Bhd (KL:PIE) could also be impacted due to their AI-server assembly businesses.
The indirect impact on outsourced semiconductor assembly and test players like Malaysian Pacific Industries Bhd (KL:MPI) and Unisem (M) Bhd (KL:UNISEM) is minimal, as they are only exposed to certain power management chips used in servers, RHB said.
If the restriction is implemented, it could impact data centre expansion plans outside Tier 1 countries, including Malaysia, though most new AI data centres there are US-owned.
The current and planned capacities in Malaysia remain well below US thresholds, suggesting the impact will be more significant for Chinese developers using advanced AI chips.
On the contrary, TA Securities said the proposed new regulations have limited impact on local players.
The new ruling — expected to introduce a three-tier system of chip trade limitations — is likely to categorise most countries, including Malaysia, in the second tier of these restrictions.
"This tier would face limits on AI chip imports, though higher caps could be granted if they comply with certain US standards," TA Securities said in a note on Friday, adding that it remains neutral on the latest development.
TA Securities, which maintains an 'overweight' stance on the semiconductor sector, expressed optimism about the sector's prospects, driven by steady growth in global semiconductor sales.
The firm also highlighted that ongoing trade tensions between the US and China could create trade diversion opportunities for Malaysia under the China Plus One (China +1) strategy.
"Furthermore, the continued implementation of the National Semiconductor Strategy will help local players move up the value chain in the global semiconductor industry," it added.
The firm reiterated its 'buy' calls on Inari Amertron Bhd (KL:INARI) with a target price (TP) of RM4.10, Unisem with a RM3.62 TP, Malaysian Pacific Industries with a RM35.80 TP, and Elsoft Research Bhd (KL:ELSOFT) with a 50 sen TP.
TA Securities, however, flagged downside risks, including heightened geopolitical tensions disrupting economic growth and supply chains, weaker sales, a declining US dollar against the ringgit, and a sudden spike in commodity prices.
Two restriction levels: company and country, and their impact
US President Joe Biden's administration plans to impose new export restrictions on AI chips, targeting Nvidia's GPUs to limit technology access to adversarial nations like China and Russia.
These restrictions will create a tiered system: Tier 1 countries like Germany and Japan will have unrestricted access, Tier 2 countries will face import limits but can bypass them by adhering to US security standards, and Tier 3 countries, including China, will face near-total bans. The regulations also restrict the export of closed AI model weights to non-allied countries.
For Tier 2 countries, the US may set a low limit of 50,000 chips over two years, encouraging companies to apply for Validated End User status to bypass this limit. This would incentivise chip-owning companies providing services like GPU as a service to meet US security standards, while assemblers of AI-chip servers can still operate, albeit with stricter guidelines for buyers.
Kenanga Research said that in this context, it believes Nationgate, the only original equipment manufacturer (OEM) partner of Nvidia in Malaysia and a small OEM partner in the Asean region, will be minimally impacted by the GPU export quotas, as a significant portion of its business comes from Singapore and deliveries are made as per client requests.
"Additionally, Nationgate sells AI servers to Nvidia-approved cloud partners, which are likely already cleared by US authorities in our view," added Kenanga.
It said for illustrative purposes, every reduction of 500 GPU servers from its current 4,400 assumptions for FY2025 would lower its net profit by 6.6%.
Separately, YTL Power International Bhd (KL:YTLPOWR) is likely to experience minimal impact as well, in view of its priority access to Nvidia’s chips due to its cloud partner status.
"Inari, Nationgate, Kelington Group Bhd (KL:KGB) and PIE remain our top picks for the sector, given their earnings visibility and strong positioning to capitalise on the data centre fit-out phase and growing demand for AI-related infrastructure."
Among these, Inari and Nationgate are preferred for their higher capital upside and direct exposure to the AI demand cycle and the anticipated smartphone replacement cycle, making them standout performers during the ongoing semiconductor uptrend.