This article first appeared in The Edge Malaysia Weekly on December 11, 2023 - December 17, 2023

SOUTHEAST Asia is an important part of the global semiconductor ecosystem, thanks to its manufacturing capabilities. Undeniably, its significance is increasing, with the competition taking place between the world’s two largest economies, China and the US.

While a large part of the semi­conductor ecosystem has been driven by robust foreign direct investment (FDI) into Southeast Asian countries, there are also many local companies that have grown alongside the FDIs to become well-known names globally.

Among the stock exchanges in Southeast Asia, Bursa Malaysia has the most semiconductor and related companies listed on it.

“When compared to the region, the semiconductor sector in Malaysia is more established, with favourable policies and cost structure. For example, the Bayan Lepas Free Industrial Zone was set up many years ago, and there is a cost advantage in terms of land and labour, when compared to a country like Singapore,” explains Fortress Capital Asset Management CEO Thomas Yong.

“The semiconductor sector started with many multinational companies setting up factories here and, over the years, the supply chain has seen many local companies established.”

Valuations of Malaysian semiconductor stocks stand above those of their regional peers.

Fund managers say trapped liquidity in Malaysia, which is a result of investors having mandates to invest only in the country, is one reason that local semiconductor stocks trade at a higher price-earnings ratio (PER).

“These companies are small- to mid-cap stocks but provide growth that investors are looking for. As a large pool of institutional investors position into this sector, the valuation is elevated,” says Yong.

Areca Capital CEO Danny Wong agrees that trapped liquidity has helped support valuations, but he believes Malaysia’s semiconductor stocks deserve the higher PERs they receive than those of the region.

Semiconductor and related companies on Bursa boast an average trailing 12-months (TTM) PER of 55 times, with the PER ranging between 9 times for Elsoft Research Bhd to more than 200 times for Malaysia Pacific Industries Bhd.

In terms of forward 12-month PER, the outsourced semiconductor assembly and test (OSAT) players have the most expensive valuations, averaging at 62 times, while the electronic manufacturing services (EMS) sector has the cheapest valuation at an average of 12 times. As for the automatic test equipment (ATE) players, the average forward 12-month PER is 38 times.

In Singapore, semiconductor and related companies listed on the Singapore Exchange (SGX) average at a TTM PER of 18 times. SGX’s most traded semiconductor stocks — AEM Holdings Ltd and UMS Holdings Ltd — have a TTM PER of 16.26 times and 9.55 times respectively.

AEM, which provides semi­conductor and electronics test solutions, has a higher forward 12-month PER of 56 times. The company’s share price has declined 4.39% year to date, closing at S$3.27 last Thursday.

Meanwhile, UMS, which is in the business of providing equipment, manufacturing and engineering services to original equipment manufacturers of semiconductors and related products, has a forward PER of 19 times.

So far this year, UMS’s share price has risen 6.78% to S$1.23 last Thursday.

In Thailand, the TTM PER of its semiconductor and related industry stocks averages at 16.6 times and the forward 12-month PER stands at 24 times.

Notably, printed circuit boards are a key industry in Thailand, but most of these companies are privately owned. A noteworthy local company with a sizeable market capitalisation is Stock Exchange of Thailand-listed KCE Electronics PCL, which has a market cap of THB64.4 billion (RM8.54 billion). The company’s share price has risen 17% year to date and closed at THB54.75 last Thursday.

In the Philippines, the average TTM PER for the sector is 10 times, but the semiconductor industry is smaller than that of Malaysia, Singapore and Thailand.

Vietnam’s fast-growing semiconductor industry relies heavily on FDI, with MNCs such as Intel, Samsung and Amkor setting up factories in the country.

According to the most recent quarterly earnings announced by the sector, most semiconductor companies have yet to see year-on-year recovery in their earnings growth. Among those with a market cap of at least RM300 million, only four reported y-o-y growth in earnings and 11 companies experienced a contraction.

None of the EMS companies with a market cap of above RM300 million saw growth in y-o-y earnings.

Only one OSAT company — smaller player KESM Industries Bhd, which has a market cap of just under RM300 million — posted a y-o-y net profit for the first quarter ended Oct 31, 2023 (1QFY2024) of RM916,000, against a loss of RM1.54 million.

“This year would be the bottom for the semiconductor industry, as there is recovery in the mobile segment. [But] the pace of recovery is slow and has not been fully reflected this year,” says Areca Capital’s Wong.

Among the ATE companies, Pentamaster Corp Bhd and Greatech Technology Bhd are the only ones that registered a growth in net profit in the most recent financial quarter.

Pentamaster’s net profit grew 17% y-o-y to RM23.49 million, against revenue of RM180.74 million, for the third quarter ended Sept 30, 2023.

Analysts say Pentamaster’s management had disclosed that the current order book had slid 10% quarter on quarter to RM550 million as at 3QFY2023 from RM610 million, because of lower orders from the automotive segment.

In a report dated Nov 6, AmInvestment Research says: “In the short term, we are cautious on the automotive segment, as sentiment could be softer because of high inflation and interest rates being sustained for a longer cycle. These are likely to dampen potential consumer spending on electric vehicles (EVs), which have higher price points versus conventional marques.”

Nevertheless, the group’s medical segment will continue to see growth in subsequent quarters, which could partially offset the slowdown in other segments, says AmInvestment, which has a “neutral” call on the stock, with a fair value of RM5.50.

Greatech’s 3QFY2023 net profit grew 13.91% y-o-y to RM46.66 million and revenue rose 43.3% y-o-y to RM224.82 million.

The growth in revenue was driven mainly by its solar, e-mobility and life science segments, where solar remains the largest contributor, accounting for 82% of revenue.

PublicInvest Research says in a report dated Nov 21 that 59.7% of the group’s RM1.07 billion order book comes from its solar division, 29.7% comes from its e-mobility segment and 8.6% comes from its life science segment.

“YTD, the solar segment has surpassed the target of RM400 million, with an additional gain of RM77 million, while the e-mobility and life science segments have reached more than 78% of their targets. About 70% of the existing order book will materialise in FY2024F,” it says.

PublicInvest has a “neutral” call on the stock, with a target price of RM5.33.

D&O Green Technologies Bhd also registered growth in its 3QFY2023 net profit, up 15.81% y-o-y to RM18.24 million; revenue increased 7.8% y-o-y to RM271.95 million.

“3QFY2023 results surged 10-fold q-o-q, leading to expected stronger results in the final quarter on the back of encouraging global car sales, driven by the introduction of more new EV car models and various price cuts and rebates,” notes PublicInvest in its research note dated Nov 27.

The research house cut its FY2023 earnings forecast for the company by 24%, however, on the back of exceptionally higher costs in finance, electricity and labour.

“We leave forward estimates unchanged for the years ahead, as we expect these pressures to dissipate. ‘Maintain outperform’, with an unchanged target price of RM4.37, based on 35 times FY24 EPS,” adds PublicInvest.

Wong is positive about the outlook of the semiconductor industry, as he believes that China’s breakthroughs in its chip-making abilities will benefit Malaysian companies, given that some of the listed firms are aligned to China’s semiconductor industry.

Wong expects US-China competition to continue and for the world to be divided between both countries where technology is concerned.

“There will always be competition between the two nations. I believe it will benefit Malaysia, which has remained neutral to both sides,” he says. 

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