KUALA LUMPUR: RHB Research suggests investors start investing in the early stages of the emerging semiconductor upturn since demand and industry profitability have peaked.
The research firm attributes this upturn to the clearing of inventory adjustments and higher demand, especially in China, in the smartphone and artificial intelligence (AI) sectors.
"Our domestic Automated Test Equipment (ATEs) and Outsourced Semiconductor Assembly and Test (OSATs) sectors, which often follow the trend later, are set for a rebound in the second half of 2024 (2H24)," said the bank-backed research firm.
Additionally, it is anticipated that these sectors will continue to grow throughout fiscal year 2025 (FY25).
"Valuation measures are anticipated to improve due to clearer growth prospects.
"We identify opportunities primarily in the small- to mid-cap segment, as the market has already priced in a slow start to the first half of 2024 (1H24)," it added.
RHB Research stated that early indications of recovery in the ATE sector, combined with advancements in the front-end semiconductor industry, strengthen its belief in an ongoing sectoral resurgence, anticipated to gain momentum in the latter part of 2024.
"The sector's earnings have hit their lowest point, but we anticipate a year-over-year (YoY) improvement based on various indicators and recent thorough channel checks.
"Despite consecutive lacklustre quarters, the upward trend of KLTEC and recalibration of street expectations support this outlook, with many investors maintaining their positions in the technology sector despite delays in recovery," it added.
However, RHB Research noted that earnings performance may vary across segments, necessitating agile trading strategies to adapt to changing market conditions.
"As the sector's recovery gains momentum and aligns with global semiconductor players, we anticipate an improvement in valuation metrics.
"Additionally, a potential rate cut cycle by the US Federal Reserve later this year could further support valuation improvement, potentially leading to sector re-rating upon better order visibility and growth guidance in upcoming briefings," it added.
As a result, the bank has raised its rating for the sector from 'Neutral' to 'Overweight' and has selected Malaysian Pacific Industries Bhd (MPI), Unisem (M) Group, and CTOS Digital (CTOS) as its preferred choices.
"MPI and Unisem are positioned as the leading choices to capitalise on the sector's recovery due to their involvement in the increasing demand for power management integrated circuits (ICs) and various end applications.
"Furthermore, the revival of China's semiconductor industry after two underperforming years is expected to enhance their utilisation rates and economies of scale at their current facilities in China," said RHB Research.
It was noted that both companies are poised to gain from the US-China trade tensions, as their facilities in Malaysia serve as a neutral ground, and from China's self-reliance policies.