Navigating rough waters
- We expect sector earnings to decline qoq and yoy in 3Q22F, and a softer demand outlook for 2023F amidst the slowdown in global economy.
- We project sector earnings growth of 5-10% in 2022-23F (slower vs. 45% in 2021) due to weaker demand outlook, albeit cushioned by favourable forex.
- We downgrade Malaysian semiconductor sector from Overweight to Neutral.
Weaker semiconductor demand outlook in 2H22F and 2023F
World Semiconductor Trade Statistics (WSTS) in Aug 22 revised down its 2022F/2023F global semiconductor sales growth forecasts to 13.9%/4.6% (vs. 16.3%/5.1% in Jun 2022), mainly due to reduction in memory prices. While most industry research groups still expect positive semiconductor sales growth in 2022F, most industry research group project an average of 4% yoy decline in semiconductor industry sales in 2023F mainly due to anticipation of a slowdown in global economy and inventory correction. Moreover, we expect softer qoq industry sales in 3Q22F due to weak guidance from the 15 global semiconductor chip manufacturers (ex-memory) – on average they project tepid 1% sequential sales growth in 3Q22F.
Expecting lower qoq sector sales and net profit in 3Q22F
We also expect the Malaysian semiconductor sector – automated test equipment (ATE) and outsourced semiconductor assembly & test (OSAT) – to register qoq decline of 5% in sales and 8% in net profit on aggregate in 3Q22F, due to slowdown in consumer electronics demand especially for mobile and tablets, and impact from China’s zero Covid policy which continues to disrupt supply chains and customers’ qualification processes.
Projecting tepid sector earnings growth in 2022-23F
We expect the sector to deliver net profit growth of 10% in 2022F (lower vs. 2021’s 45%) and 5% in 2023F due to softer industry demand amidst a weaker global economy outlook. We expect growth to be driven by 1) favourable forex movement following ringgit’s depreciation against the US dollar (-11.7% YTD); and 2) structural growth driver such as rising adoption of silicon carbide (SiC) and gallium nitride (GaN). However, we still see a key downside risk to sector earnings in view of longer-than-expected semiconductor inventory digestion and global recession.
Facing industry cyclicality with strong balance sheets
Malaysian OSAT and ATE players under our coverage have experienced 25-68% decline in their share price YTD. We believe the pullback in share prices YTD is reflective of the global demand uncertainty going into 2023F and poor sentiment for the global tech sector amidst a rising interest rate environment and inflationary cost pressure. Nevertheless, these players have strong balance sheets to face the near-term headwinds; all seven ATE and OSAT companies we cover have a net cash position as at end-Jun 2022.
Downgrade semiconductor sector from Overweight to Neutral
We downgrade the Malaysian semiconductor sector from Overweight to Neutral in view of the weaker industry demand and sluggish earnings prospects over the next 6-12 months. Malaysian OSAT and ATE sectors trade at 19x and 23x CY23F P/E, about 1 s.d. below their 5-year historical mean P/E of 23x and 31x, respectively. Inari is our sector top pick for Malaysian OSAT due to its higher exposure to the premium smartphone segment and better order visibility from key customer Broadcom. Moreover, we see potential commercialisation of new projects like SOM, transceiver module and high-power LED going into automotive and industrial application as potential catalysts. Meanwhile, we downgrade Unisem from an Add to Hold with a lower RM2.60 TP in view of a sluggish earnings outlook in 2023F and weaker sentiment in tech sector. Despite the softer demand outlook, we think Unisem stands to benefit from its customers’ diversification plan under China Plus One strategy beyond the next 12 months in light of the ongoing trade war.