Malaysian semiconductors players' latest quarterly results were largely mixed with growth of certain companies moderating, weighed by prolonged supply chain disruptions and the easing of consumer electronics demand from the pandemic high.  Outlook for the industry seems cloudy as well, since these challenges are not likely to ebb in the near term, in view of ongoing labour shortages domestically, coupled with fluid macroeconomic conditions and persistent geopolitical uncertainties.

By Owen Li

Malaysia's Semiconductor Outlook Turns Cloudy After Mixed 2Q Earnings_1

Bigger industry players like Inari Amertron Bhd, Vitrox Corp Bhd and Greatech Technology Bhd have faced a setback in terms of revenue growth in the second quarter (2Q2022), but most of the other notable semiconductor peers like Malaysian Pacific Industries Bhd (MPI), Unisem (M) Bhd, D&O Green Technologies Bhd and Pentamaster Corp Bhd were still able to deliver sales growth in the latest quarter.

Vitrox, Pentamaster see better prospects
Specifically, the outlook for Vitrox and Pentamaster should fare better than other industry peers due to their diversified customer base, said Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng. 
"Consumer electronics are showing clear signs of slowing down, but some [of the semiconductor players] are going into the automotive chip segment quite successfully. Like Vitrox, they are into EV (electric vehicles), medical and telecommunication infrastructure, quite diversified; Pentamaster, EV already account for half of their business now, it is a very good migration," he observed.
Vitrox is a vision-inspection equipment maker, while Pentamaster is a semiconductor equipment vendor and automation house.
For Inari, being the largest outsourced semiconductor assembly and test (OSAT) company in Malaysia, earnings performance should remain resilient despite having larger exposure to consumer electronics, particularly in the second half of this year (2H2022), following the launch of new iPhone this month, said an analyst who covers the local technology sector. Inari's key customer Broadcom Inc is a component supplier to Apple Inc.
"We expect Inari to be able to defend its margins given the larger scale, but the outlook for other OSAT players is quite challenging," said the analyst, who declined to be named.
While there are expectations that the US' CHIPS and Science Act of 2022 would accelerate trade diversion from China, Malaysian semiconductor players are still being held back by issues like labour shortages, the analyst pointed out.
"Although the CHIPs Act is targeting front-end players like TSMC (Taiwan Semiconductor Manufacturing Company Ltd) and Samsung, they will still need backend players like OSAT as well, but it will be hard for local companies to accommodate because we don't have enough workers," he said.

Building up of inventory amid slowdown in consumer spending
Fortress Capital Asset Management chief executive officer Thomas Yong noted that although guidance from management largely remained optimistic for the remainder of the year, the global semiconductor cycle is currently facing a slowdown with inventory building up, as consumer spending slows after the pent-up demand during the pandemic period.
"There are still some bright spots within the sector that are likely to continue to face high demand in the near- to medium term, such as EVs and renewable energy. 
"We might need to re-adjust the growth prospects of semiconductor companies, depending on which segments they are exposed to. Certainly, expectations of growth might need to be adjusted downwards for certain segments such as consumer electronics (computers, phones, etc), where demand was exceptionally high during the pandemic," he told when contacted.

In a research note on Monday (Sept 5), Kenanga Research Samuel Tan said OSAT companies like Unisem and MPI, which have operations in China, may see occasional challenges with prolonged lockdowns in the world's second-largest economy. "Unisem and MPI are expected to see moderating growth in the immediate term due to the prolonged lockdown in China. However, we learnt that workers are still able to operate in the plants by living on-site during the movement restriction period. "D&O and Inari's earnings results met expectations but we tweaked our earnings forecasts slightly lower (4% and 5% respectively) post-briefing, on the back of minor delays in their respective ramp-up of new capacity," he said.

It is worth noting that MPI, despite recording growth in both revenue and net profit for its fourth quarter ended June 30, 2022 (4QFY22), has cautioned investors in its quarterly report that the operating environment will remain challenging, arising from supply chain disruptions, inventory adjustment, inflation and manpower limitations. Fortress Capital's Yong said the prospects for semiconductor companies with exposure to 5G, EV and renewable energy are still intact, as these segments will continue to face high demand, given favourable government policies globally. 

"The reason that general sentiment has turned is really [a result of] equity markets' reaction to interest rate hikes and risk premium. Semiconductor and technology stocks have been trading at high valuations in the past two years. Hence, a derating in valuation given current macro environment is unavoidable," he said, adding that fundamentals for local semiconductor companies remain largely intact, despite softer equity prices.
Trading at a current price-to-earnings ratio of 22.6 times against a high of 38 times a year ago, the technology index on Bursa Malaysia has contracted 35% year to date.