KUALA LUMPUR (July 2): The semiconductor upcycle has broadened beyond artificial intelligence (AI) to lift the entire supply chain, giving Malaysian players a foundation for durable growth — and analysts still see room for further earnings upside, even after a sharp rally in the first half of the year.
"Having identified these early signs in April (especially for analog semi), we upgraded the sector to 'overweight' back then. While the KLTEC (Bursa Malaysia Technology) Index has rallied 34% in 1H2026 (first half of 2026), we believe the breadth and duration of this earnings cycle still have further room to run," said Hong Leong Investment Bank (HLIB) in a note on Thursday.
While HLIB maintained its 'overweight' stance on the broader local tech space, Kenanga held a 'neutral' call due to near-term multiple expansion risks, though it proactively raised its valuation benchmarks to better reflect stronger earnings durability and longer growth runways.
Both research houses identified front-end wafer fab equipment names and dominant back-end outsourced semiconductor assembly and test (OSAT) players as key beneficiaries of this broad tech upcycle.
Kenanga named Kelington Group Bhd (KL:KGB), Frontken Corp Bhd (KL:FRONTKN), and UWC Bhd (KL:UWC) as its top picks. Meanwhile, HLIB highlighted UWC, Inari Amertron Bhd (KL:INARI), and Unisem (M) Bhd (KL:UNISEM) as its preferred hardware picks.
The World Semiconductor Trade Statistics (WSTS) sharply upgraded its forecasts to project global chip sales surging 90% year-on-year to US$1.51 trillion (RM6.17 trillion) in 2026, and expanding another 27% to approximately US$1.9 trillion in 2027.
WSTS expects the massive 2026 expansion to be overwhelmingly led by the memory segment, which is projected to rise around 250% to over US$800 billion on insatiable high-bandwidth memory demand, while logic sales are forecast to grow 37%.
"The current cycle is anchored by the capital-intensive build-out of AI computing infrastructure," Kenanga said, noting that growth is being driven less by device unit volumes and more by substantially higher semiconductor content and surging average selling prices within AI platforms.
"As the analog semi cycle now appears to be inflecting upward, this provides an additional earnings tailwind on top of the structural drivers already in place," HLIB added, pointing to a second round of synchronised price hikes implemented by global players like Texas Instruments and Infineon as an indication of tightening back-end capacity.
To capitalise on these shifts, Malaysian OSATs are rapidly scaling. Unisem's customer volumes at its Gopeng facility are expected to ramp up materially from the second quarter of 2026 (2Q2026), driving the Malaysian operations to a breakeven level, while the group plans for Gopeng Phase 2 to incorporate advanced wafer bumping capacity.
Concurrently, Malaysian Pacific Industries Bhd (KL:MPI) is leveraging its recently acquired 251,000 sq ft facility in Bangkok to provide critical capacity expansion.
In the front-end space, global equipment giants are actively deepening local supply chains.
Lam Research is progressively expanding its manufacturing footprint with a second facility in Kulim coming online by the end of 2026, while Applied Materials is actively sourcing suppliers in Penang to back its regional operations.
This has driven unprecedented visibility, with major customers sharing rolling eight-quarter capacity forecasts.
Consequently, regional front-end spending expectations have been ratcheted up to US$140 billion-US$150 billion for 2026, and US$190 billion-US$200 billion for 2027.
Beyond hardware, structural opportunities are gaining traction in advanced packaging and optical connectivity.
The establishment of the Malaysia Advanced Packaging Consortium, comprising players like SkyeChip Bhd (KL:SKYECHIP), Inari Amertron and Pentamaster Corp Bhd (KL:PENTA), outlines a localised technology roadmap targeting pilot validation in 2026 and 2.5D packaging by 2028.
In the optical segment, HLIB expects persistent supply constraints to drive strong earnings momentum for Inari Amertron through its partnership with Broadcom's optical division, as well as for specialised tier-2 suppliers.
However, Kenanga warned that an exceptionally strong 2Q2026 stock rally has elevated valuation multiples, creating near-term mean reversion and profit-taking risks.
Other broader macro risks include tighter central bank policies, policy transitions at the US Federal Reserve, delays in non-AI commercial monetisation, and persistent inflationary cost pressures across consumer-facing electronic manufacturing services layers.