Chip sector to shine bright in 2H
PETALING JAYA: Analysts expect the technology sector to post a better second half (2H24) financial performance underpinned by an expected recovery in the consumer electronics segment goods and increased content of semiconductors in products, helped by artificial intelligence (AI)-driven demand.

While Malaysia is known to be a key player in the global semiconductor supply chain, positioning itself at the sixth place of the largest global exporter for the electronic and electronics and semiconductor industry, listed local players posted weaker earnings in 2023 despite Big Tech posting record earnings and making sizeable investments in AI.

The local tech index, for instance, is lagging year-to-date with gains of 6% as compared to the benchmark FBM KLCI gains of 10%, with much of the gains in the tech index coming in the past 10 trading days helped by the improved investor sentiment and market momentum.

Tradeview Capital chief investment officer Nixon Wong said the underperformance is partly technology driven.

“Local tech companies are mainly on the production of mature tech nodes or non-AI-related products and the personal computer, smartphone and automotive markets that are still yet to recover – hence growth will likely come more in the third quarter (3Q) or 4Q.

“Furthermore, the developed markets are frontier markets leading the AI development, which is why our local companies are not benefiting much.

“Plus, the local sector’s valuation is at a historical average, which is not that attractive as compared to the frontier markets,” he said.

Prospects are, however, bright for the sector, more so with interest rates set to ease in developed markets in 2H24 as inflation eases to target levels.

Speaking with StarBiz, president of the Malaysia Semiconductor Industry Association Datuk Seri Wong Siew Hai attributed the decline in sector performance to softer demand brought on by lower demand of consumer goods and high inventory levels coming into 1H24.

However, he anticipated a brighter outlook for the semiconductor industry as it recovers by 2H24.

Wong’s confidence was backed by the World Semiconductor Trade Statistics prediction that the world semiconductor market would rebound by 13.1% in 2024 to reach US$596bil, and is projected to become a US$1 trillion market by 2030.

“The question is, will it come true? Even if the numbers do not reach US$1 trillion, let’s say US$900bil, it (growth) is still significant,” he said.

Nomura Asset Management Malaysia Sdn Bhd managing director Leslie Yap said there has always been interest in the semiconductor industry in the country.

However, he pointed out that semiconductors are not discussed as much as palm oil, oil and gas, and energy as well as other major industries in Malaysia.

“But with everyone now talking about AI and semiconductors globally, surely the Malaysian market will eventually follow. It is a very relevant sector, and we are the sixth-largest exporter globally. So, I think Malaysian investors should pay more attention to it,” he said.

“The point is you should know more about it, you should see the potential in it, and obviously if you’re investing, semiconductors should be where you put your money into because of the benefit from the growth,” he said.

Nomura Asset Management UK senior equity analyst Takeshi Kawamoto said the projection of US$1 trillion is sales by 2030 is “too low” and the numbers should be even higher.

“This prediction was made before Nvidia’s AI boom, so it should be bigger in my opinion,” he said during his sharing session at the Nomura breakfast conference series 2024.

Nvidia Corp, one of the largest graphics processing unit producers, has a market capitalisation of US$2.26 trillion, surpassing Amazon, as AI starts gaining traction.

That being said, Kawamoto expects semiconductor stocks to do well in 2024 and sustain growth into 2025 and 2026 driven by two main factors – productivity gains from generative AI and increase in semiconductors in products.

“Gross domestic product growth is calculated based on a couple of components, one being population and the other from productivity gains.

“I think ChatGPT and generative AI is going to move the needle on global growth,” he said.

Kawamoto pointed out that the United States has a pipeline of US$200bil of fab buildouts, which includes those that are being planned as the country wants to bring manufacturing back to the United States.

“So this is great for a lot of our companies because they will benefit from this build out in the United States,” he said.

He noted that other nations aspire to establish their own semiconductor value chain, which fuels the rapid growth and good stock price performance for capital semiconductor equipment companies.

Touching on investments, Malaysia has recorded a whopping RM329.5bil worth of investments in 2023 with 56% (RM85bil) directed towards the E&E sector.

According to Wong, the total investments of RM262.7bil posted from 2021 to 2023 was slightly more than the cumulated investments recorded in Malaysia for the past 30 years.

“What this shows is confidence in our country. This is due to the stability of the government, talented workforce and performance of the people of Malaysia for all the investors in the country. If they think we can’t deliver in the country they would not be here,” he said.

To gain from the potential growth, Wong said Malaysia should move up the value chain, especially in integrated circuit (IC) design, FDI related to wafer fab, advanced packaging, smart automation and advanced equipment.

“Malaysia has been in the semiconductor and E&E industry for 52 years now, and we have done very well to attract FDI’s to the country.

However we have only a handful which are deemed as global companies, where actually in the global world they (these companies) are small,” he said.

On that note, he stated that Malaysia needs to seek ways to develop and assist local players as global champions to “at least be big in Asia, if not the world”, and encourage them to keep growing.

On a separate note, Wong stated that “war on talents” is now evident within the semiconductor industry.

He said in order to achieve the US$1 trillion benchmark, Malaysia must have an E&E workforce of 300,000 people by 2030.

“That is (if we are) being very productive, if we are not productive, then we would need more than 300,000 (workforce).

This is so Malaysia can keep up and maintain its position as the sixth largest exporter in the world, and we have to ship RM1.2 trillion. So to do that we need to have the workers,” he said.

He said aside from instilling the importance of technical and vocational education and training (TVET) since school and introducing upskilling initiatives, he suggested that Malaysia should give the opportunities for international students, especially science, technology, engineering and math (STEM) graduates, to continue their career in Malaysia.

“So the question for Malaysia is what is the strategic plan in the manpower planning. I think we should seriously look into this strategy when many other countries are doing this, especially Singapore and the US,” he added.

That being said, Wong emphasised that Malaysia is serious about semiconductors, as a new strategic plan is being developed, efforts to move up the value chain, focusing on developing “homegrown global champions”, as well as the establishment of IC design parks.

Just recently, a strategic plan was announced by Prime Minister Datuk Seri Anwar Ibrahim on April 16 to ensure Malaysia remains as the chosen investment destination within the semiconductor industry.

Also involved in the development of the strategic plan, Wong said MSIA is currently in discussions with the government to look into plans to enhance the ecosystem and attract strategic investments to move up the value chain.
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Analysts expect the technology sector to post a better second half (2H24) financial performance underpinned by an expected recovery in the consumer electronics segment goods and increased content of semiconductors in products, helped by artificial intelligence (AI)-driven demand.