Lumpy growth forecast for tech sector this year

PETALING JAYA: The local technology sector is expected to see an uneven earnings recovery this year with growth skewed towards front-end exposed names as better proxies to the growth in artificial intelligence (AI) compared with back-end-tech companies, analysts say.

Maybank Investment Bank Research (Maybank IB Research) said AI and data centres remain the primary growth drivers this year, supported by capital expenditure (capex) by operators of big data centres.

“We prefer front-end tech companies with direct leverage to AI-driven wafer-fabrication expansion, while automotive-exposed names face downside risk amid global electric vehicle incentive rollbacks leading to potential oversupply. Frontken Corp Bhd serves as a key proxy to AI and data centre exposure,” the research house said.

Maybank IB Research noted demand for bespoke application specific integrated circuits, commonly referred to as Asics, is rising as big data centre operators such as Google seek cost-efficient, workload-specific solutions, particularly for AI inference, which could offer superior economics relative to general-purpose graphics processing unit (GPUs) supplied by Nvidia.

“Last year, US data centre operators continued to revise capex upwards despite tariff and macro uncertainties, underscoring the structural resilience of AI and data centre investment for this year.

“That said, investor focus is increasingly shifting towards monetisation and profitability, as spending gradually pivots away from pure model training towards deployment and inference-driven workloads in AI,” the research house said.

Maybank IB Research said the legacy sectors such as automotive and consumer electronics, meanwhile, would continue to face downside risks this year, despite recent signs of stabilisation.

Potential tightness in memory chip supply poses an additional downside risk for smartphones and personal computers.

“Within the domestic semiconductor ecosystem, exposure to AI and data centres appears limited across most local outsourced semiconductor assembly and test (Osat) companies, and automated test equipment/factory automation solutions players, constraining their ability to meaningfully participate in this growth cycle,” the research house said.

Maybank IB Research added that while players such as Pentamaster Corp Bhd have begun rolling out new technology platforms to address AI and data centre-related opportunities, it believes these initiatives are unlikely to provide significant AI-related revenue contributions this year to most companies, given the longer qualification and gestation periods associated with advanced platforms.

Maybank IB Research maintained a “neutral” call on the semiconductor industry with top tech buys being Frontken and Northeast Group Bhd.

Meanwhile, Hong Leong Investment Bank Research (HLIB Research) said there are selective bright spots for the local tech sector this year, with several of these positive trends already emerging last year, and are expected to become more prominent this year.

The research house said there are four compelling themes for the sector with the first being local Osat players being uniquely positioned to capture further gains from ongoing supply chain relocation .

“Secondly, high-end semiconductor capital equipment players are actively expanding their presence in Malaysia, benefiting the local supply chain. Thirdly, optical and power semiconductors, as essential AI-enablers, are set to take centre stage. Finally, Intel’s anticipated resurgence adds excitement to the semiconductor ecosystem in Penang,” the research house said.

HLIB Research said it has started to see tangible outcomes from the first phase of Malaysia’s National Semiconductor Strategy.

Several major foreign and domestic investments over the past few years, notably from Lam Research Corp, Infineon, and Intel, are coming to fruition, with early spillover benefits emerging across the local semiconductor ecosystem.

“As these investments more clearly showcase Malaysia’s manufacturing strength and execution capability, attracting major investment inflows is expected to become easier and faster going forward,” the research house said.

Meanwhile, Rakuten Trade head of equity sales Vincent Lau said there are no expected wildcards for the local semiconductor sector and that the sector is expected to register high single-digit growth this year.

Lau said the main headwind for the sector is the ringgit’s strength against the US dollar. However, he also noted that much of the input costs of companies are denominated in the US dollar, hence the impact is still manageable.

“Tech companies are not like glove makers which do not have input costs denominated in US dollar.

“Tech firms need to purchase assembly and testing equipment for instance, and these machines and inputs are not produced locally and are priced in US dollar.

This is why I remain slightly more positive. While some may argue earnings could come under pressure, I think the overall impact should be muted,” he said.