KUALA LUMPUR (Dec 5): RHB Investment Bank Research (RHB IB) has maintained its “neutral” rating of the technology sector, and said that overall, guidance from chip-related companies is less bullish for the near term, but non-semiconductor players should see brighter prospects, with the main challenges being labour and material shortages, demand uncertainties, and geopolitical tensions.

In a note on Monday (Dec 5), the research house said that overall, the sector is still clouded by weakening demand for consumer products, as people have been affected by spiking and rampant inflation, geopolitical tensions, and the impact of China’s lockdowns and weaknesses in Europe.

It said the few bright spots lie in vehicle electrification, servers and high-performance computing related chips.

RHB IB said the sector’s third quarter of 2022 (3Q2022) aggregate core profit after tax and minority interests grew 5.6% year-on-year but contracted 2.6% quarter-on-quarter, with five out of eight companies reporting solid growth, with the significantly better numbers from Datasonic Group Bhd and CTOS Digital Bhd offsetting the weakness from outsourced semiconductor assembly and test players.

“We cut our sector earnings forecasts by 9.5%, mainly on revisions made for estimates for Inari Amertron Bhd and Malaysian Pacific Industries Bhd, as we expect the weakness to persist in 4Q2022, as the sector will likely continue to grapple with decelerating demand,” it said.

Top picks

RHB IB said CTOS Digital and Coraza Integrated Technology Bhd are its top picks.

The research house said that in 3Q2022, signs of a slowdown emerged among companies related to the chip segment, while non-semiconductor players did well.

“We believe 4Q2022 will be another uninspiring quarter, with a prolonged weakening in demand.

“Meanwhile, any inventory correction may only normalise in 2Q2023, but growth in certain sub-segments should be sustained.

“Sector valuations are now rather fair, given the potential earnings risks, albeit offset by a less hawkish tone from regulators in the near term,” it said.