Friday 29 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 4 - 10, 2016.

 

Tech stocks were battered recently and investors are starting to worry that the sector could be looking at its next bust cycle. However, fund managers believe the tech world offers many exciting opportunities.


New technology trends gaining traction

Richard Clode, fund manager of the Henderson Global Technology Fund, says while he likes established companies such as Apple and Alphabet, he plans to use the returns generated from some of these companies to invest in those that are riding new technology trends. The trends include the contactless payment card, keyless entry system for cars and electron-beam inspection for semiconductors.

The Henderson Global Technology Fund is the target fund of TA Global Technology Fund, which was launched in Malaysia by TA Investment Management Bhd in 2011. As at April 30, the feeder fund had

RM68.91 million under management and had generated returns of 3.81% and 56.51% over a one and three-year period respectively.

Clode has invested in Netherlands-based NXP Semiconductors, which is riding the theme of the contactless card and keyless entry. Hermes Microvision Inc, which is based and listed in Taiwan, is another company he is following closely for its development of electron-beam inspection.

“NXP Semiconductors was spun off from Philips Semiconductors and is listed in the US. Recently, it merged with Freescale Semiconductor to become one of the top five non-memory semiconductor companies. NXP is riding on a couple of themes, including the contactless card and keyless entry [system] for cars, which it is very strong at. The keyless system is an especially new area in the automotive industry, which will see automated driving become more common in the future,” says Clode.

“We think the company is very attractive. It is generating a lot of cash flow through share buybacks and we are hope that it will give out dividends for the next year.”

Contactless cards refer to debit or credit cards that allow consumers to make a limited amount of payment (€15 to €30 in Europe) by touching them to a reader without the need for a personal identification number or signature. These cards are gaining traction in the US and Europe as they speed up transactions.

The remote keyless entry system, such as the passive entry system developed by NXP Semiconductors, allows a car to recognise the driver and automatically unlocks the door as he approaches. The system can also lock the car, turn off the lights and enable the alarm when the driver leaves the car. Clode says this technology will be popular in the coming years as electronic and automated driving will one of the key trends in the future.

Clode says Hermes Microvision is another diamond in the rough. “The company is the leader in the electron-beam inspection space, and that is very rare for a tech company in Asia. When we find gems like this, we spend time with them as there is a great opportunity for us to invest.

“Historically, electron-beam inspection was used for R&D purposes, not mass production. What the company is trying to do now is get it to mass production. The defects in semiconductors are getting harder to detect optically, so electron-beam inspection could have huge potential in the future. That is what we are investing in — the long term.”

Tencent Holdings Ltd, which launched WeChat and Weibo, is another company Clode likes. It is one of the largest internet companies in Asia and only a quarter of its revenue is derived from advertising, compared with Facebook’s 90%. There is still room for Tencent to grow its advertising revenue, he says.

Visual Reality is another company that could take off in the future “if it is done well”, says Devan. “I can’t predict its earnings [once it takes off]. But it could be really big. It will take over the entertainment space — people will use it to watch movies and surf the web.

“It is like the tablet. Microsoft came out with its tablet and failed. But when Steve Jobs created the iPad, it worked. It is the same with virtual reality. If these guys [Oculus Rift, HTC and Sony] find the right formula to do it correctly, they could move into the TV space. But if they do it wrong, then it could be like Microsoft’s tablet. However, to invest in them right now would be a complete gamble.”

 

Malaysian players to benefit from global trends

 

On the local technology scene, Devan Linus Rajadurai, founder and chief investment officer of Malayan Traders Capital, says the companies here are mostly original equipment manufacturers that provide semiconductor parts for the big boys.

“Most of the so-called tech companies in Malaysia or Southeast Asia are manufacturers. If you want to get the whole value chain, you can only get it in the US or China. The opportunities for retail investors, however, are in the global tech companies listed in the US as China remains a protected market,” he says.

Richard Clode, fund manager of the Henderson Global Technology Fund, concurs with Devan, saying that tech companies in Asia are very focused on manufacturing electronic hardware. The key drivers of their earnings are usually the smartphone sales of the big boys such as Apple and Samsung.

“I think this is very much the case for Asian technology. There are generally personal computers and smartphone related. PCs are having a terrible time and the smartphone market is saturating — there is more competition and companies’ pricing power is under pressure. This is why we underweight Asian tech,” says Clode.

Meanwhile, a technology analyst with Hong Leong Investment Bank says although the global smartphone market has saturated, it is still growing. This provides a solid foundation for local tech companies to expand their business further.

Data provided by Gartner Inc, a US research and advisory firm that provides IT-related insights, shows that worldwide combined shipments for devices, including personal computers, tablets and mobile phones, are expected to reach 2.4 billion units this year. Global smartphone sales alone are estimated to reach 1.5 billion units, or 7% growth from last year.

Growing global trends such as automated driving will benefit local companies such as Malaysian Pacific Industries Bhd (MPI) and Unisem (M) Bhd, which manufacture microchips.

“I like MPI. More than 20% of its business is in the automotive sector, providing semiconductors and microchips for new technology such as keyless entry. I expect its next financial results to be strong,” says the analyst.

Kong Heng Siong, RHB Investment Bank’s equity analyst who covers the tech and gaming sectors, says local tech companies are currently not involved in global trends such as cloud services and contactless cards. However, the “smart car” trend could be more relevant to the local players.

“The smart car is about providing convenience to passengers. One of the examples is the tyre pressure monitoring system available in some luxury cars. We also expect to see greater adoption of sensors in the automotive industry [which will benefit these players],” he says.

The electronic tyre pressure monitoring system is designed to monitor the air pressure inside pneumatic tyres on various types of vehicles. It is aimed at helping car users better maintain their tyres to avoid accidents on the road.

Kong says RHB Investment is largely neutral on local tech companies over the near to medium term as Brexit could give rise to concerns about a potential slowdown in the overall semiconductor demand, which largely depends on the global economic outlook. “However, we expect all semiconductor players, such as MPI, Unisem, Globetronics and Inari Amertron, to benefit from these trends once they take off globally.”

 

Technology funds available to local investors

The TA Global Technology Fund is the only unit trust fund for local retail investors that invests in the global tech sector. The feeder fund feeds a minimum of 95% of its net asset value into the Henderson Global Technology Fund. 

The minimum initial investment amount for the TA Global Technology Fund is RM1,000. There is a 5.5% sales charge and an annual management fee of 1.8%. 

Local investors can also invest in global tech stocks through Malayan Traders Capital’s Absolute Return Fund. The fund has about RM100 million under management, 41% of which is invested in global tech companies.

However, the fund is only available to qualified investors with a minimum investment amount of RM500,000. The fund charges a 1% management fee and 20% performance fee on the profit above the high watermark of its net asset value. There is no sales charge. 

Qualified investors can also look at the Franklin US Opportunity Fund, a wholesale feeder fund that has 37% equity exposure to IT companies in the US. The fund has generated a cumulative return of 29.64% since its inception on May 23, 2013. There is a minimum initial investment amount of RM10,000, a 5% sales charge and an annual management fee of 1.75%.

 

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