Thursday 28 Mar 2024
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This article first appeared in Capital, The Edge Malaysia Weekly on December 27, 2021 - January 2, 2022

SHAREHOLDERS of semiconductor and semiconductor-related companies listed on Bursa Malaysia have reason to rejoice this year following the recent rallies in their share price.

After the June-to-August rally last year, many technology stocks continued their ascent in 2021 to hit fresh all-time highs. The tech stocks’ spectacular performance was largely overshadowed by the rubber glove mania amid the Covid-19 pandemic, even though the tech rally was relatively steady over the past two years compared with the glove stocks’ roller-coaster ride.

The fifth generation of cellular network (5G), green technology, artificial intelligence (AI) and the Internet of Things (IoT) continue to drive the demand for tech and hence, semiconductors. But it was the excitement over electric vehicles (EVs), coupled with the global semiconductor shortage that worsened in early 2021, that fuelled the tech rally.

Malaysia plays an important role in the global semiconductor supply chain, with about 7% of total global semiconductor trade flowing through the country.

Covid-19 lockdowns and travel restrictions saw consumers stuck at home, spending more on smartphones, smart devices, smart TVs, computers and laptops. The overwhelming demand created a global chip shortage that benefitted semiconductor players.

Meanwhile, the high demand from the automotive and EV segments is mainly driven by future expectation of environmentally friendly vehicles and the new programmes pushed to encourage consumers to buy battery-powered vehicles.

The Bursa Malaysia Technology Index had risen 36% year to date (YTD) to close at 94.01 points on Dec 22 — near its all-time high of 100.86 that it recorded on Nov 2. The majority of semiconductor-related counters on Bursa climbed between 20% and 125% during that period (see table).

The stocks of Malaysian outsourced assembly and test (OSAT) companies saw an average return of 20% for the year to Dec 22, while those of automated test equipment (ATE) manufacturers gained 44% during the period. OSAT players like Unisem (M) Bhd, Inari Amertron Bhd and Malaysian Pacific Industries Bhd (MPI) had gained between 26% and 91% YTD.

As for ATE stocks, smaller firms such as QES Group Bhd, Aemulus Holdings Bhd and VisDynamics Holdings Bhd have outperformed their bigger peers such as Greatech Technology Bhd, ViTrox Corp Bhd and Pentamaster Corp Bhd.

So, how would the captains of the local tech industry summarise the year for the semiconductor sector? What would be the new main themes in 2022? What is their advice to investors who are looking at tech stocks?

Higher ASPs

Dagang NeXchange Bhd (DNeX) group managing director Tan Sri Syed Zainal Abidin Syed Mohamed Tahir says the financial performance of many local tech equipment makers and OSAT vendors has been remarkable this year, mainly due to elevated orders from semiconductor leaders across the globe.

Syed Zainal, who is also executive chairman of SilTerra Malaysia Sdn Bhd, notes that DNeX’s acquisition of SilTerra in 2021 was timely as it enabled the group to capitalise on the robust demand for semiconductor chips.

“We managed to turn SilTerra into a profitable entity, due to the increase in average selling prices (ASPs) of semiconductor wafers and shipment volumes as well as cost and product mix optimisation. The production capacity of SilTerra is now fully utilised, which provides greater economies of scale and cost efficiency,” he tells The Edge.

Syed Zainal believes local tech firms, including SilTerra, are well poised to ride the growth trajectory. In fact, he reveals, SilTerra has already received many enquiries for its products, which are related to these advanced technologies.

Globetronics Technology Bhd chief operating officer Heng Charng Yee points out that 2021 presented both opportunities and challenges for the local tech industry. Volatile forecasts with tight material deliveries and pandemic-related containment measures exacerbated tech manufacturing costs.

“Amid the high level of activities stabilising lines and supply chains, our Industry 4.0 (Fourth Industrial Revolution) initiatives remain a strong focus. We believe automation and intelligent quality monitoring are the sustainable direction to address the labour shortage issues that are currently plaguing Malaysia,” she tells The Edge.

She adds that the pandemic has triggered an acceleration of digitisation adoption, translating to increased demand for communications, networking, memory and smart devices.

“Globetronics has a balanced portfolio of consumer products and we have benefitted from this demand as well. The US-China trade war triggered supply chain assessments, with increased interest in Asean. We are experiencing increased interest, which we think will translate into expanded customer bases and portfolios in the next three years,” says Heng.

She concedes that labour shortages and human rights issues have been at the forefront of manufacturing companies’ minds of late and believes this issue will further drive automation to reduce the dependence on foreign workers. “On our part, one of the focus areas in the implementation of IR4.0 is not only reducing dependence on foreign workers, but also improving manufacturing performance through the elimination of manual tasks and better output through big data analytics,” she says.

ViTrox Corp Bhd co-founder, executive director and executive vice-president Steven Siaw Kok Tong concurs, noting that 2021 has been a turbulent and challenging journey, yet an exciting and breathtaking one.

“The semiconductor and electronics industries experienced unprecedented demand brought about by the rapid digital transformation and adoption, as well as pent-up demand from the reopening of economies in the post-Covid-19 era. Organisations that were well prepared and well positioned with the right products, solutions and services were able to capitalise on this strong demand in 2021,” he tells The Edge.

QES Group Bhd co-founder, managing director and president Chew Ne Weng says the group has been expanding rapidly in 2021 in both its manufacturing and distribution businesses to capture the rising demand.

“We are renovating our newly acquired Hicom-Glenmarie, Shah Alam factory in Selangor, and aim to move in by March next year. We also entered into a joint venture (JV) with US-based Applied Engineering Inc to move up the value chain within semiconductor, medical technology and robotic automation,” he adds.

The JV company, Applied Engineering Technology (M) Sdn Bhd, plans to move into a rented detached factory located in Batu Kawan Industrial Park in Penang by next month.

“QES is well positioned, with infrastructure in place across Asean, to ride the IR4.0 and factory automation-related demand. Besides Asean, we will have China as a huge market for QES semiconductor equipment to work on,” says Chew.

Are tech stocks expensive?

A quick compilation shows that the OSAT stocks are currently trading at historical price-earnings ratios (PERs) of between 21 and 37 times, while the PERs of most ATE counters are trading even higher at 20 to 70 times.

Opinions are divided over whether the rally in tech stocks still has legs and, more importantly, whether the shares are expensive in terms of their valuations.

Syed Zainal is of the view that investors should be looking at companies that possess superior technological advantage and distinct intellectual properties. This translates into high barriers of entry and the power to command high pricing.

“When identifying technology companies with good growth potential, look for those with solutions that can be easily scaled up, which address a large target market. As the technology industry is extremely competitive and dynamic, there is always a potential risk of losing major customers due to obsolete offerings and the inability to catch up with the fast-growing technological trends,” he says.

Globetronics corporate director Ng Kok Yu says valuations have always been a subjective matter. There were times over the many tech cycles when the company was doing well, but the PERs attached to the tech sector were low as it was not deemed an exciting industry.

“Looking at the last three to five years, tech has been in favour again in terms of being essential, in bringing about all the new technologies. As we get the world, as well as machines, to be more interconnected, the demand for electronic components will continue to remain strong and necessary, as evidenced by the global chip shortage,” he remarks.

In essence, says Ng, the tech sector has somewhat transformed from a cyclical industry decades ago to what will be necessary components today, to power new technological trends such as the internet, AI and electronic payments.

“I think the important thing for investors is to determine whether the company they are investing in is in the right sector and has the right technology currently, as well as the ability to invest and evolve into new trends to stay relevant. They should invest in the company’s fundamentals and future direction, not so much by looking at the valuation,” he adds.

Siaw agrees that valuations are relative and subject to situational expectations and anticipation of future growth, whereas risk is inherent and inevitable in all forms of investments. Therefore, productive and resilient investments should be approached with a “long game” mindset and not on an ad-hoc or speculative basis.

“Investors need to be wary of potential downside risks caused by heavy business dependence on specific customers, geographical segments, products and end-use applications. Therefore, for prudent investment decisions in this segment, it is vital to separate the wheat from the chaff by applying proper due diligence on the companies to invest,” he says.

Chew concedes that most locally listed tech and semiconductor companies are trading at high valuations. But he insists that the sector still has huge potential based on the continuation of both the global chip shortage and the US-China trade war, on top of the rise in demand due to the push for digitalisation.

“Naturally, there will be dips here and there but generally, the market for tech and semiconductor stocks will be on an upward trend over three to five years. I think there will be risk if the current issues of rising costs and supply chain issues trigger a major spike in inflation rates,” Chew cautions.

Tech trends in 2022

DNeX’s Syed Zainal believes demand for semiconductor chips will remain elevated going into 2022 on the back of major technological shifts occurring around the globe such as the 5G network transition, IR4.0, rapid adoption of EVs, renewable energy and healthcare.

“These macro trends will persist in the coming years, not only in 2022. And these will provide vast business opportunities to the local tech and semiconductor companies, which will help fortify Malaysia’s standing in the global electrical and electronics (E&E) industry,” he says.

Globetronics’ Ng predicts that some of the themes from 2021, such as EV, will continue in 2022. “This will be in tandem with the global ESG (environmental, social and corporate governance) drive and the reduction of emissions to prevent the potentially catastrophic climate change effect we have got ourselves into, with renewable energy and carbon reduction technologies to be in play,” he says.

ViTrox’s Siaw foresees the challenges faced in 2021, such as capacity constraints, supply chain disruptions, logistics bottlenecks, workforce shortages and hyper-inflation, are likely to continue in 2022, although they are expected to improve from the second half of next year.

QES’ Chew believes 5G, IoT and IR4.0 have yet to proliferate in many countries. Therefore, he expects rising demand for tech and semiconductors by the end of 2022, when these factors start to come through, especially in the industrial sector.

“We think we should be able to travel to China by the middle of 2022 and start aggressively building our brand name there. Next year could also see some M&A (merger and acquisition) activities within the tech and semiconductor industry, especially among ATE players, listed or non-listed,” he says.

 

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