CGS remains neutral on the technology sector, with Genetec, Mi Technovation and Uchi being the top picks

KUALA LUMPUR (July 12): CGS International has maintained a “neutral” rating on the technology sector after a visit to Penang revealed that technology firms are steadily increasing production in high-growth areas.

In a sector update Friday, CGS said the assessment was driven by its expectation of de-risking earnings as the industry outlook improves. The chamber also noted immediate signs of a potential growth cycle for the semiconductor industry.

However, valuations are relatively challenging, with the KLTEC index currently trading at 33 times its 12-month forward price-to-earnings (P/E), according to CGS.

This was despite strong sector earnings per share (EPS) growth in CY2024F (forecast calendar year 2024)/2025F, which was 25%/18%, respectively.

Genetec Technology Bhd (KL:GENETEC) (target price/base price: RM3.60, close at RM2.36), Mi Technovation Bhd (KL:MI) (base price RM2.90, close at RM2.67) and Uchi Technologies Bhd (KL:UCHITEC) (base price RM4.71, close at RM3.97) were among CGS’ top sector picks, with Mi Technovation offering attractive growth at reasonable valuations and Uchi offering a dividend yield of 7-8%.

CGS noted that the new National Semiconductor Strategy (NSS) could provide 25 billion ringgit in fiscal support, which will benefit local semiconductor players with greater incentives and faster spillover from increased foreign direct investment and the China+1 strategy.

“More encouragingly, it could help to generally upskill the local workforce, especially in IC design and advanced packaging, thanks to significant investment from key electronics component manufacturers such as Intel, Texas Instruments and Infineon.

“The Malaysian government has also committed to establishing a new IC design park in Selangor, after partnering with key partners such as ARM Ltd, Phison Malaysia, SkyeChip and Shenzhen Semiconductor Industry Association,” the chamber added.

In its key conclusions, the Chamber noted a positive outlook on the overall business direction for 2H2024F (2H2024, forecast) and 2025F, which is attributed to the continued broad-based order recovery momentum, forays into new areas of business diversification, as well as rising foreign direct investment (FDI) in the local electrical and electronics (E&E) sector.

CGS also highlighted Malaysia’s position as a neutral territory between the US and China, which benefits local technology players as they address market needs.

It is also worth noting the increased share of local technology companies in the front-end semiconductor market in the integrated circuit design process, as well as in the supply of equipment and components.

Meanwhile, risks to the sector included stronger-than-expected broad-based demand, continued weakness in the ringgit against the US dollar and strong spillover effects from China+1 and artificial intelligence (AI).

Downside risks in the sector included weakening demand, a lack of new project execution and the growing US-China chip war.