KUALA LUMPUR: The near-term outlook for Malaysia's semiconductor sector remains lacklustre, weighed down by weak end-market demand and poor factory utilisation rates, according to MIDF Research.
Following the recently concluded first quarter earnings season, the firm said most outsourced semiconductor assembly and test (OSAT) companies under its coverage delivered disappointing financial performances.
Maintaining its "neutral' stance on the technology sector, MIDF Research said the unfavourable utilisation rate led to the OSAT companies under its coverage posting appalling earnings performance.
This, it said, has resulted in two downgrades in stock recommendations, namely D&O Green Technologies Bhd and Unisem (M) Bhd to "Trading Sell" and "Sell", respectively.
Meanwhile, Inari Amertron Bhd has been upgraded to "Neutra" from "Trading Sell" previously, given the limited downside risk and relatively better earnings resiliency as compared to its peers.
MIDF Research expects the earnings for the second quarter to remain relatively stagnant on a sequential basis, given the lack of positive development.
"We foresee a more gradual pace of recovery in the second half of this year to make up for the lacklustre first half.
"This is in tandem with the World Semiconductor Trade Statistics (WSTS) forecast for 2025, whereby not all segments are expected to show growth," the firm said.
The WSTS has maintained its forecast of 11.2 per cent year-on-year (YoY) growth for the global semiconductor market in 2025.
For 2024, global semiconductor sales reached US$630 million, slightly above the WSTS forecast by 0.5 per cent.
As a result, the 2025 market value is now expected to be US$700.9 million, up by 0.5 per cent.
WSTS said growth will mainly be driven by the logic and memory segments, supported by demand for artificial intelligence, cloud infrastructure and advanced consumer electronics.
MIDF Research said artificial intelligence (AI) remains the only clear catalyst at this juncture.
Meanwhile, the firm continues to see challenges from the smartphone and automotive markets, which is expected to weigh on the performance of the local semiconductor companies.
MIDF Research noted that the International Data Corporation (IDC) is now expecting the worldwide smartphone market to grow marginally this year by 0.6 per cent YoY to 1.24 billion units from 2.3 per cent previously in the February 2025 forecast.
This is in view of high uncertainty, tariff volatility and microeconomic challenges such as inflation and unemployment across many regions leading to a slowdown in consumer spending.
Moreover, IDC is expecting low single-digit growth until 2029 with a five-year compound annual growth rate of 1.4 per cent due to increasing smartphone penetration, lengthening refresh cycles and cannibalisation from used smartphones.
The growth for 2025 will be primarily coming from China at 3.0 per cent YoY due to the subsidies.
"We do not discount the possibility that the effect of the subsidies could be temporary, as we view that demand to be driven by innovation rather than the subsidies. This is also on top of the economic concerns," MIDF Research said.
Meanwhile, Apple is expected to contract by 1.9 per cent YoY in 2025, which the firm said could hinge on the upcoming iPhone 17 launch.
"Demand should disappoint if there are only minimal upgrades seen as compared to the iPhone 16 and/or there is a price increase across the various models," it added.
Chin said additional cost pressures may also arise from the upcoming revision of electricity tariffs, scheduled for July, which could affect companies' medium- to long-term planning.