This article first appeared in The Edge Malaysia Weekly on June 28, 2021 - July 4, 2021

PERSISTENT bullishness on US tech stocks has boosted hopes that similar good fortune will rub off on local players in the sector. At the very least, investors are keeping their fingers crossed that share prices will stay elevated even though the market is gravitating towards stocks perceived as likely to benefit in a recovery scenario.

The technology-weighted Nasdaq Composite Index rallied to an all-time high last week and Microsoft Corp surged to become the second most valuable tech firm in the US after Apple Inc with a market value of US$2 trillion (RM8.3 trillion). This could boost local tech stocks, which have been tracking their US peers closely, analysts say.

“Looking at the chart, the Nasdaq is still in a healthy trend. It is still a valid uptrend if the demand is there. The Malaysian market is lagging a bit because of the (current) lockdown and market sentiment. But with the herd immunity target (reached), it will be positive for the technology sector,” Kenanga Research’s technology analyst Samuel Tan tells The Edge.

With a year-to-date rise of 15.45%, Bursa Malaysia’s Technology Index has outperformed the benchmark FBM KLCI Index’s 3.8% drop. Returns from local technology stocks are also superior to the 11.73% gain in the Nasdaq Composite Index.

Based on his engagement with tech firms, Tan believes the fundamental demand for semiconductors remains robust even though share price gains are unlikely to match first-quarter returns.

“Many people think valuations are high, but I highly doubt that valuations will go back to the previous levels. The current valuations are very much here to stay. Any drop in the share prices is a good opportunity to accumulate.

“Unlike other sectors, the down-cycle for technology stocks is not very long and yet it has become shorter. July might be a better month for the stock market,” says Tan, whose top picks are Inari Amertron Bhd and D&O Green Technologies Bhd.

Based on the consensus target prices of RM3.98 and RM5.36, their potential upside is 25.6% and 8.7%, respectively.

“For Inari, it will benefit from the 5G adoption in smartphones and that will be a multi-year story. iPhone launched its first 5G phone last year and its market share shot up back to first place in 1Q. So, I think there will be a continuity in the smartphone replacement cycle for a lot of people.

“I expect a record earnings year for D&O (which produces light-emitting diodes or LEDs, and other semiconductors for the automotive industry) as its orders are now up to the end of 3Q, with China and Europe being its main customers,” says Tan.

He has also initiated coverage on GHL Systems Bhd, which is poised for exciting growth because of the urgent need for digital payment adoption by merchants still highly reliant on cash-based transactions.

“With the Asean Payment Connectivity initiative in place, GHL stands to benefit greatly when borders reopen as it has more than 383,600 touchpoints across Asean in place to facilitate cross-border transactions,” he said in a June 24 note.

As the global chip shortage has not shown any signs of easing and is expected to persist throughout the second half, PublicInvest Research is maintaining an “overweight” call on the technology sector.

“The chip shortage will also spur growth for outsourced semiconductor assembly and test (services providers, or OSATs) like Inari, as the stronger chip demand will increase the need for assembly and testing services. Automated testing equipment makers like Mi Technovation Bhd will also benefit from the increased chip demand as OSATs would need to invest in more equipment to cope with more assembly and testing activities.

“This year, we will also see the wide adoption of smart LED, which is a bundle of integrated circuit and LEDs for (i) surface touch sensing; (ii) AI, speech recognition; and (iii) well-being, motion therapy functions. So far, only D&O’s Dominant and Osram have ventured into smart LED development,” it said in a June 23 note.

However, the research house cautions that the technology sector, which has the highest valuation of FY2021-22 price-earnings ratio (PER) of 30 to 35 times, is most vulnerable to inflation jitters and the risk of rising interest rates as its cost of capital is higher compared with other sectors.

“In short, the interest rate risk will pressure technology valuations, though the sector is enjoying one of the best cycles, driven by the 5G digital transformation,” it explains.

PublicInvest Research’s top picks are D&O and Greatech Technology Bhd, premised on strong catalysts from the higher adoption of automotive LEDs in new car models, improving global shares, digital transformation in the automotive industry and structural change in the automotive sector.

On the other hand, AmResearch is less bullish on the sector as it believes that multi-year growth riding on positive prospects has been fairly priced in. Although “neutral” on the sector, the research house has a “buy” call on Globetronics Technology Bhd, with a target price of RM2.84.

“We believe the stock is undervalued at its current share price and that investors should take advantage of the recent price correction to accumulate the stock. The group’s positive prospects arise from: (i) its strength in smart sensors (about 60% of total group revenue) with new-generation sensor demand expected to drive growth ahead; (ii) ramp-up in laser automotive headlamps to boost its LED/SSL (solid-state lighting) segment; and (iii) potential opportunities from the US-China trade war that could lead to customer diversification and revenue enhancement,” it wrote in a June 22 note.

Overall, local technology stocks still have upside of as much as 50% for Mi Technovation, followed by UWC Bhd (+35.4%) and Frontken Corp Bhd (+31.7%), according to Bloomberg consensus.

The World Semiconductor Trade Statistics projected a 19.7% growth this year for the sector to US$527 billion, followed by an 8.8% growth in 2022 to US$573 billion. The 2021 forecast was revised upwards from its earlier forecast of US$469 billion.

The Semiconductor Industry Association recorded US$41.9 billion in sales for April 2021, representing a 2% month-on-month increase and a 22% rise year on year, underpinned by strong global demand and sales.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.